STATEMENT OF ADDITIONAL INFORMATION |
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FRANKLIN TAX-FREE TRUST |
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July 1, 2024 |
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Class | |||||
A |
A1 |
C |
R6 |
Advisor | |
Franklin Arizona Tax-Free Income Fund |
FAZQX |
FTAZX |
FAZIX |
FAZRX |
FAZZX |
Franklin Colorado Tax-Free Income Fund |
FCOQX |
FRCOX |
FCOIX |
FKTLX |
FCOZX |
Franklin Connecticut Tax-Free Income Fund |
FQCTX |
FXCTX |
FCTIX |
FCTQX |
FCNZX |
Franklin Michigan Tax-Free Income Fund |
FMQTX |
FTTMX |
FRMTX |
FKTNX |
FMTFX |
Franklin Minnesota Tax-Free Income Fund |
FMNQX |
FMINX |
FMNIX |
FKTDX |
FMNZX |
Franklin Ohio Tax-Free Income Fund |
FOHQX |
FTOIX |
FOITX |
FKTOX |
FROZX |
Franklin Oregon Tax-Free Income Fund |
FOFQX |
FRORX |
FORIX |
FOFRX |
FOFZX |
Franklin Pennsylvania Tax-Free Income Fund |
FPAQX |
FRPAX |
FRPTX |
FRPRX |
FPFZX |
This Statement of Additional Information (SAI) is not a prospectus. It contains information in addition to the information in the Funds' (hereafter “the Fund”) prospectus. The Fund's prospectus, dated July 1, 2024, which we may amend from time to time, contains the basic information you should know before investing in the Fund. You should read this SAI together with the Fund's prospectus.
For a free copy of the current prospectus or annual report, contact your investment representative or call (800) DIAL BEN/342-5236.
Contents
Mutual funds, annuities, and other investment products: • are not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency of the U.S. government; • are not deposits or obligations of, or guaranteed or endorsed by, any bank; and • are subject to investment risks, including the possible loss of principal. | ||
P.O. Box 997152 Sacramento, CA 95899-7152 (800) DIAL BEN® /342-5236 |
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TF3 SAI 07/24 |
The following information provided with respect to the Fund is in addition to that included in the Fund’s prospectus.
In addition to the main types of investments and strategies undertaken by the Fund as described in the prospectus, the Fund also may invest in other types of instruments and engage in and pursue other investment strategies, which are described in this SAI. Investments and investment strategies with respect to the Fund are discussed in greater detail in the section below entitled "Glossary of Investments, Techniques, Strategies and Their Risks."
Generally, the policies and restrictions discussed in this SAI and in the prospectus apply when the Fund makes an investment. In most cases, the Fund is not required to sell an investment because circumstances change and the investment no longer meets one or more of the Fund's policies or restrictions. If a percentage restriction or limitation is met at the time of investment, a later increase or decrease in the percentage due to a change in the value of portfolio investments will not be considered a violation of the restriction or limitation, with the exception of the Fund's limitations on borrowing and illiquid securities as described herein or unless otherwise noted herein.
Incidental to the Fund’s other investment activities, including in connection with a bankruptcy, restructuring, workout, or other extraordinary events concerning a particular investment the Fund owns, the Fund may receive securities (including convertible securities, warrants and rights), real estate or other investments that the Fund normally would not, or could not, buy. If this happens, the Fund may, although it is not required to, sell such investments as soon as practicable while seeking to maximize the return to shareholders.
The Fund has adopted certain investment restrictions as fundamental and non-fundamental policies. A fundamental policy may only be changed if the change is approved by (i) more than 50% of the Fund's outstanding shares or (ii) 67% or more of the Fund's shares present at a shareholder meeting if more than 50% of the Fund's outstanding shares are represented at the meeting in person or by proxy, whichever is less. A non-fundamental policy may be changed without the approval of shareholders.
For more information about the restrictions of the Investment Company Act of 1940 (1940 Act) on the Fund with respect to borrowing and senior securities, see “Glossary of Investments, Techniques, Strategies and Their Risks - Borrowing” below.
Fundamental Investment Policies
Each of the Michigan Fund’s, Minnesota Fund’s and Ohio Fund’s investment goal is to provide investors with as high a level of income exempt from federal income taxes as is consistent with prudent investment management and the preservation of shareholders’ capital. Each such Fund also tries to provide a maximum level of income exempt from personal income taxes, if any, for resident shareholders of that Fund’s state.
Each of the Arizona Fund's, Colorado Fund's, Connecticut Fund's, Oregon Fund's and Pennsylvania Fund's investment goal is to provide investors with as high a level of income exempt from federal income taxes and from personal income taxes, if any, for resident shareholders of that Fund's state as is consistent with prudent investment management and the preservation of shareholders' capital.
Under normal market conditions, the Fund invests at least 80% of its assets in securities whose interest is free from federal income taxes, including the federal alternative minimum tax. The Fund applies this test to its net assets, except for the Michigan Fund, Minnesota Fund, and Ohio Fund, each of which applies this test to its total assets. In addition, under normal market conditions, each Fund invests at least 80% of its total assets in securities that pay interest free from the personal income taxes, if any, of that Fund's state.
The Fund may not:
1. Borrow money, except to the extent permitted by the 1940 Act, or any rules, exemptions or interpretations thereunder that may be adopted, granted or issued by the U.S. Securities and Exchange Commission (SEC).
2. Act as an underwriter, except to the extent the Fund may be deemed to be an underwriter when disposing of securities it owns or when selling its own shares.
3. Make loans if, as a result, more than 33 1/3% of its total assets would be lent to other persons, including other investment companies to the extent permitted by the 1940 Act or any rules, exemptions or interpretations thereunder that may be adopted, granted or issued by the SEC. This limitation does not apply to (i) the lending of portfolio securities, (ii) the purchase of debt securities, other debt instruments, loan participations and/or engaging in direct corporate loans in accordance with its investment goals and policies, and (iii) repurchase agreements to the extent the entry into a repurchase agreement is deemed to be a loan.
4. Purchase or sell real estate unless acquired as a result of ownership of securities or other instruments and provided that this restriction does not prevent the Fund from (i) purchasing or selling securities or instruments secured by real estate or interests therein, securities or instruments representing interests in real estate or securities or instruments of issuers that invest, deal or otherwise engage in transactions in real estate or interests therein, and (ii) making, purchasing or selling real estate mortgage loans.
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5. (each Fund, except Ohio Fund:) Purchase or sell commodities, except to the extent permitted by the 1940 Act or any rules, exemptions or interpretations thereunder that may be adopted, granted or issued by the SEC.
6. (Ohio Fund:) Purchase or sell physical commodities, unless acquired as a result of ownership of securities or other instruments and provided that this restriction does not prevent the Fund from (i) engaging in transactions involving currencies and futures contracts and options thereon or (ii) investing in securities or other instruments that are secured by physical commodities.
7. Issue senior securities, except to the extent permitted by the 1940 Act or any rules, exemptions or interpretations thereunder that may be adopted, granted or issued by the SEC.
8. Invest more than 25% of the Fund's net assets in securities of issuers in any one industry (other than securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities or securities of other investment companies).1
9.(each Fund, except the Connecticut Fund:) Purchase the securities of any one issuer (other than the U.S. government or any of its agencies or instrumentalities or securities of other investment companies, whether registered or excluded from registration under Section 3(c) of the 1940 Act) if immediately after such investment (i) more than 5% of the value of the Fund’s total assets would be invested in such issuer or (ii) more than 10% of the outstanding voting securities of such issuer would be owned by the Fund, except that up to 25% of the value of the Fund’s total assets may be invested without regard to such 5% and 10% limitations.
1. Although not part of the Fund's fundamental investment restriction, consistent with SEC Staff interpretations and guidance, governments or their political subdivisions that issue tax-exempt municipal securities are not considered by the Fund to be members of any industry.
Non-Fundamental Investment Policies
Municipal securities issued by a state or that state's counties, municipalities, authorities, agencies, or other subdivisions, as well as qualifying municipal securities issued by U.S. territories such as Guam, Puerto Rico, the Mariana Islands or the U.S. Virgin Islands, generally pay interest free from federal income tax and from state personal income taxes, if any, for residents of that state.
The Fund tries to invest all of its assets in tax-free municipal securities. The issuer's bond counsel generally gives the issuer an opinion on the tax-exempt status of a municipal security when the security is issued.
Some states may require the Fund to invest a certain amount of its assets in securities of that state, or in securities that are otherwise tax-free under the laws of that state, in order for any portion of the Fund's distributions to be free from the state's personal income taxes. If the Fund's state requires this, the Fund will try to invest its assets as required so that its distributions will be free from personal income taxes for resident shareholders of the Fund's state.
The Connecticut Fund is non-diversified, which means that it generally invests a greater proportion of its assets in the securities of one or more issuers.
Additional Strategies
The Fund may invest in insured municipal securities. Because of its historical investment policy of investing in insured municipal securities, each of the Michigan, Minnesota and Ohio Fund's portfolio may consist to a large extent of insured municipal securities.
Glossary of Investments, Techniques, Strategies and Their Risks
Certain words or phrases may be used in descriptions of Fund investment policies and strategies to give investors a general sense of the Fund's levels of investment. They are broadly identified with, but not limited to, the following percentages of Fund total assets:
“small portion” |
less than 10% |
“portion” |
10% to 25% |
“significant” |
25% to 50% |
“substantial” |
50% to 66% |
“primary” |
66% to 80% |
“predominant” |
80% or more |
If the Fund intends to limit particular investments or strategies to no more than specific percentages of Fund assets, the prospectus or SAI will clearly identify such limitations. The percentages above are not limitations unless specifically stated as such in the Fund's prospectus or elsewhere in this SAI.
The Fund may invest in securities that are rated by various rating agencies such as Moody's Investors Service (Moody's) and S&P® Global Ratings (S&P®), as well as securities that are unrated.
The value of your shares in the Fund will increase as the value of the investments owned by the Fund increases and will decrease as the value of the Fund's investments decreases. In this way, you participate in any change in the value of the investments owned by the Fund. In addition to the factors that affect the value of any particular investment that the Fund owns, the value of the Fund's shares may also change with movement in the investment markets as a whole.
The following is a description of various types of securities, instruments and techniques that may be purchased and/or used by the Fund. Other types of municipal securities or strategies, not specifically described below, may become available or attractive that are similar to those described
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below and in which the Fund also may invest, if consistent with its investment goal and policies.
Municipal securities general description Municipal securities are issued by a state or that state's counties, municipalities, authorities, agencies, or other subdivisions, as well as by the District of Columbia. These municipal securities generally pay interest free from federal income tax and from state personal income taxes, if any, for residents of that state. In addition, U.S. territories such as Puerto Rico, Guam, the Mariana Islands or the U.S. Virgin Islands also issue qualifying municipal securities that generally pay interest free from federal income tax and from state personal income taxes. Generally for all municipal securities, the issuer pays a fixed, floating or variable rate of interest, and must repay the amount borrowed (the “principal”) at maturity. Municipal securities are issued to raise money for a variety of public or private purposes, including financing state or local government, specific projects or public facilities. Municipal securities generally are classified as general or revenue obligations.
The value of the municipal securities may be highly sensitive to events affecting the fiscal stability of the municipalities, agencies, authorities and other instrumentalities that issue securities. In particular, economic, legislative, regulatory or political developments affecting the ability of the issuers to pay interest or repay principal may significantly affect the value of the Fund's investments. These developments can include or arise from, for example, insolvency of an issuer, uncertainties related to the tax status of municipal securities, tax base erosion, state or federal constitutional limits on tax increases or other actions, budget deficits and other financial difficulties, or changes in the credit ratings assigned to municipal issuers.
There could be a limited market for certain municipal securities, and the Fund could face illiquidity risks. Information about the financial condition of an issuer of municipal bonds may not be as extensive as that which is made available by corporations for their publicly-traded securities. The absence or inaccuracy of such information may impact the investment manager’s evaluation of credit and valuation risk.
From time to time, proposals have been introduced before Congress to restrict or eliminate the federal income tax exemption for interest on municipal bonds. Also, from time to time, proposals have been introduced before state and local legislatures to restrict or eliminate the state and local income tax exemption for interest on municipal bonds. Similar proposals may be introduced in the future. There is a substantial lack of clarity around both the timing and the details of any such tax reform and the impact of any potential tax reform. If any such proposal were enacted, it might restrict or eliminate the ability of the Fund to achieve its investment goals. Prospective investors should consult their own tax advisors regarding potential changes in tax laws.
General obligation bonds. Issuers of general obligation bonds include states, counties, cities, towns and regional districts. The proceeds of these obligations are used to fund a wide range of public projects, including construction or improvement of schools, highways and roads. The basic security behind general obligation bonds is the issuer's pledge of its full faith, credit and taxing power for the payment of principal and interest. The taxes that can be levied for the payment of debt service may be limited or unlimited as to the rate or amount of special assessments.
Revenue bonds. The full faith, credit and taxing power of the issuer do not secure revenue bonds. Instead, the principal security for a revenue bond generally is the net revenue derived from a particular facility, group of facilities, or, in some cases, the proceeds of a special excise tax or other specific revenue source. Revenue bonds are issued to finance a wide variety of capital projects, including: electric, gas, water and sewer systems; highways, bridges and tunnels; port and airport facilities; colleges and universities; and hospitals. The principal security behind these bonds may vary. For example, housing finance authorities have a wide range of security, including partially or fully insured mortgages, rent subsidized and/or collateralized mortgages, and/or the net revenues from housing or other public projects. Many bonds provide additional security in the form of a debt service reserve fund that may be used to make principal and interest payments. Some authorities have further security in the form of state assurances (although without obligation) to make up deficiencies in the debt service reserve fund. As a result, an investment in revenue obligations is subject to greater risk of delay or non-payment if revenue does not accrue as expected or if other conditions are not met for reasons outside the control of the Fund. Conversely, if revenue accrues more quickly than anticipated, the Fund may receive payment before expected and have difficulty re-investing the proceeds on equally favorable terms.
Anticipation notes Anticipation notes are issued to provide interim financing of various municipal needs in anticipation of the receipt of other sources of money for repayment of the notes.
Bond anticipation notes are normally issued to provide interim financing until a long-term bond financing can be arranged which provides the money for the repayment of the notes.
Construction loan notes are issued to provide construction financing for specific projects. Frequently, these notes are redeemed with funds obtained from the Federal Housing Administration.
Revenue anticipation notes are issued in expectation of the receipt of revenue sources, other than tax receipts, such as anticipated revenues from a source such as turnpike tolls.
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Tax anticipation notes are issued to finance the short-term working capital needs of municipalities in anticipation of the receipt of various seasonal tax revenues that are used to repay the notes. They are usually general obligations of the issuer and are secured by the taxing power for the payment of principal and interest.
Bank obligations Bank obligations include fixed, floating or variable rate certificates of deposit (CDs), letters of credit, time and savings deposits, bank notes and bankers' acceptances. CDs are negotiable certificates issued against funds deposited in a commercial bank for a definite period of time and earning a specified return. Time deposits are non-negotiable deposits that are held in a banking institution for a specified period of time at a stated interest rate. Savings deposits are deposits that do not have a specified maturity and may be withdrawn by the depositor at any time. Bankers' acceptances are negotiable drafts or bills of exchange normally drawn by an importer or exporter to pay for specific merchandise. When a bank “accepts” a bankers' acceptance, the bank, in effect, unconditionally agrees to pay the face value of the instrument upon maturity. The full amount of the Fund's investment in time and savings deposits or CDs may not be guaranteed against losses resulting from the default of the commercial or savings bank or other institution insured by the Federal Deposit Insurance Corporation (FDIC).
Bank obligations are exempt from registration with the SEC if issued by U.S. banks or foreign branches of U.S. banks. As a result, the Fund will not receive the same investor protections when investing in bank obligations as opposed to registered securities. Bank notes and other unsecured bank obligations are not guaranteed by the FDIC, so the Fund will be exposed to the credit risk of the bank or institution. In the event of liquidation, bank notes and unsecured bank obligations generally rank behind time deposits, savings deposits and CDs, resulting in a greater potential for losses to the Fund.
The Fund’s investments in bank obligations may be negatively impacted if adverse economic conditions prevail in the banking industry (such as substantial losses on loans, increases in non-performing assets and charge-offs and declines in total deposits). The activities of U.S. banks and most foreign banks are subject to comprehensive regulations which, in the case of U.S. regulations, have undergone substantial changes in the past decade. The enactment of new legislation or regulations, as well as changes in interpretation and enforcement of current laws, may affect the manner of operations and profitability of domestic and foreign banks. Significant developments in the U.S. banking industry have included increased competition from other types of financial institutions, increased acquisition activity and geographic expansion. Banks may be particularly susceptible to certain economic factors, such as interest rate changes and adverse developments in the market for real estate. Fiscal and monetary policy and general economic cycles can affect the availability and cost of funds, loan demand and asset quality and thereby impact the earnings and financial conditions of banks.
Borrowing The 1940 Act and the SEC's current rules, exemptions and interpretations thereunder, permit the Fund to borrow up to one-third of the value of its total assets (including the amount borrowed, but less all liabilities and indebtedness not represented by senior securities) from banks. The Fund is required to maintain continuous asset coverage of at least 300% with respect to such borrowings and to reduce the amount of its borrowings (within three days excluding Sundays and holidays) to restore such coverage if it should decline to less than 300% due to market fluctuations or otherwise. In the event that the Fund is required to reduce its borrowings, it may have to sell portfolio holdings, even if such sale of the Fund's holdings would be disadvantageous from an investment standpoint.
If the Fund makes additional investments while borrowings are outstanding, this may be considered a form of leverage. Leveraging by means of borrowing may exaggerate the effect of any increase or decrease in the value of portfolio securities on the Fund's net asset value, and money borrowed will be subject to interest and other costs (which may include commitment fees and/or the cost of maintaining minimum average balances), which may or may not exceed the income or gains received from the securities purchased with borrowed funds.
In addition to borrowings that are subject to 300% asset coverage and are considered by the SEC to be permitted “senior securities,” the Fund is also permitted under the 1940 Act to borrow for temporary purposes in an amount not exceeding 5% of the value of its total assets at the time when the loan is made. A loan will be presumed to be for temporary purposes if it is repaid within 60 days and is not extended or renewed.
Callable securities Callable securities give the issuer the right to redeem the security on a given date or dates (known as the call dates) prior to maturity. In return, the call feature is factored into the price of the debt security, and callable debt securities typically offer a higher yield than comparable non-callable securities. Certain securities may be called only in whole (the entire security is redeemed), while others may be called in part (a portion of the total face value is redeemed) and possibly from time to time as determined by the issuer. There is no guarantee that the Fund will receive higher yields or a call premium on an investment in callable securities.
The period of time between the time of issue and the first call date, known as call protection, varies from security to security. Call protection provides the investor holding the security with assurance that the security will not be called before a specified date. As a result, securities with call protection generally cost more than similar securities without call protection. Call protection will make a callable security
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more similar to a long-term debt security, resulting in an associated increase in the callable security's interest rate sensitivity.
Documentation for callable securities usually requires that investors be notified of a call within a prescribed period of time. If a security is called, the Fund will receive the principal amount and accrued interest, and may receive a small additional payment as a call premium. Issuers are more likely to exercise call options in periods when interest rates are below the rate at which the original security was issued, because the issuer can issue new securities with lower interest payments. Callable securities are subject to the risks of other debt securities in general, including prepayment risk, especially in falling interest rate environments.
Commercial paper Commercial paper is an unsecured, short-term loan to a corporation, typically for financing accounts receivable and inventory with maturities of up to 270 days. The Fund may invest in taxable commercial paper only for temporary defensive purposes.
Convertible zero-coupon and step coupon bonds Convertible zero-coupon securities have no coupon until a predetermined date, at which time they convert to a specified coupon security. Zero-coupon bonds tend to react more sharply to changes in interest rates than traditional bonds.
Cybersecurity 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 Fund is 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 Fund 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 Fund’s 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 Fund’s websites (i.e., efforts to make network services unavailable to intended users). Recently, geopolitical tensions may have increased the scale and sophistication of deliberate cybersecurity attacks, particularly those from nation-states or from entities with nation-state backing. In addition, authorized persons could inadvertently or intentionally release confidential or proprietary information stored on the Fund’s systems.
Cybersecurity incidents affecting the Fund’s investment manager and other service providers to the Fund or its shareholders (including, but not limited to, sub-advisors, 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 Fund and its shareholders, interference with the Fund’s ability to calculate its net asset value, impediments to trading, the inability of Fund shareholders to transact business and the Fund to process transactions (including fulfillment of purchases and redemptions), violations of applicable privacy and other laws (including the release of private shareholder 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 Fund invests, counterparties with which the Fund 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. In addition, substantial costs may be incurred in order to safeguard against and reduce the risk of any cybersecurity incidents in the future. In addition to administrative, technological and procedural safeguards, the Fund’s investment manager has established business continuity plans in the event of, and risk management systems to prevent or reduce the impact of, such cybersecurity incidents. However, there are inherent limitations in such plans and systems, including the possibility that certain risks have not been identified, as well as the rapid development of new threats. Furthermore, the Fund cannot control the cybersecurity plans and systems put in place by its service providers or any other third parties whose operations may affect the Fund and its shareholders. The Fund and its shareholders could be negatively impacted as a result.
Because technology is frequently changing, new ways to carry out cyber attacks are always developing. Therefore, there is a chance that some risks have not been identified or prepared for, or that an attack may not be detected, which puts limitations on the Fund's ability to plan for or respond to a cyber attack. Like other funds and business enterprises, the Fund, the investment manager and their service providers are subject to the risk of cyber incidents occurring from time to time.
Defaulted debt securities If the issuer of a debt security in the Fund's portfolio defaults, the Fund may have unrealized losses on the security, which may lower the Fund's net asset value. Defaulted securities tend to lose much of their value before they default. Thus, the Fund's net asset value may be adversely affected before an issuer defaults. The Fund may
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incur additional expenses if it tries to recover principal or interest payments on a defaulted security. Defaulted debt securities often are illiquid.
The Fund may not buy defaulted debt securities. However, the Fund is not required to sell a debt security that has defaulted if the investment manager believes it is advantageous to continue holding the security.
Illiquid securities Generally, an “illiquid security” or “illiquid investment” is any investment that the Fund reasonably expects cannot be sold or disposed of in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investment. Illiquid investments generally include investments for which no market exists or which are legally restricted as to their transfer (such as those issued pursuant to an exemption from the registration requirements of the federal securities laws). Restricted securities are generally sold in privately negotiated transactions, pursuant to an exemption from registration under the Securities Act of 1933, as amended (1933 Act). If registration of a security previously acquired in a private transaction is required, the Fund, as the holder of the security, may be obligated to pay all or part of the registration expense and a considerable period may elapse between the time it decides to seek registration and the time it will be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the Fund might obtain a less favorable price than prevailed when it decided to seek registration of the security. To the extent it is determined that there is a liquid institutional or other market for certain restricted securities, the Fund would consider them to be liquid securities. An example is a restricted security that may be freely transferred among qualified institutional buyers pursuant to Rule 144A under the 1933 Act, and for which a liquid institutional market has developed. Rule 144A securities may be subject, however, to a greater possibility of becoming illiquid than securities that have been registered with the SEC.
The following factors may be taken into account in determining whether a restricted security is properly considered a liquid security: (i) the frequency of trades and quotes for the security; (ii) the number of dealers willing to buy or sell the security and the number of other potential buyers; (iii) any dealer undertakings to make a market in the security; and (iv) the nature of the security and of the marketplace trades (e.g., any demand, put or tender features, the method of soliciting offers, the mechanics and other requirements for transfer, and the ability to assign or offset the rights and obligations of the security). The nature of the security and its trading includes the time needed to sell the security, the method of soliciting offers to purchase or sell the security, and the mechanics of transferring the security including the role of parties such as foreign or U.S. custodians, subcustodians, currency exchange brokers, and depositories.
The sale of illiquid investments often requires more time and results in higher brokerage charges or dealer discounts and other selling expenses than the sale of investments eligible for trading on national securities exchanges or in the over-the-counter (OTC) markets. Illiquid investments often sell at a price lower than similar investments that are not subject to restrictions on resale.
The risk to the Fund in holding illiquid investments is that they may be more difficult to sell if the Fund wants to dispose of the investment in response to adverse developments or in order to raise money for redemptions or other investment opportunities. Illiquid trading conditions may also make it more difficult for the Fund to realize an investment's fair value.
The Fund may also be unable to achieve its desired level of exposure to a certain investment, issuer, or sector due to overall limitations on its ability to invest in illiquid investments and the difficulty in purchasing such investments.
If illiquid investments exceed 15% of the Fund’s net assets after the time of purchase, the Fund will take steps to reduce its holdings of illiquid investments to or below 15% of its net assets within a reasonable period of time, and will notify the Trust’s board of trustees and make the required filings with the SEC in accordance with Rule 22e-4 under the 1940 Act. Because illiquid investments may not be readily marketable, the portfolio managers and/or investment personnel may not be able to dispose of them in a timely manner. As a result, the Fund may be forced to hold illiquid investments while their price depreciates. Depreciation in the price of illiquid investments may cause the net asset value of a Fund to decline.
Insurance The Fund may also invest in insured municipal securities. Normally, the underlying rating of an insured security is one of the top three ratings of Fitch, Moody's or S&P. An insurer may insure municipal securities that are rated below the top three ratings or that are unrated if the securities otherwise meet the insurer's quality standards.
The Fund will only enter into a contract to buy an insured municipal security if either permanent insurance or an irrevocable commitment to insure the municipal security by a qualified municipal bond insurer is in place. The insurance feature guarantees the scheduled payment of principal and interest, but does not guarantee (i) the market value of the insured municipal security, (ii) the value of the Fund's shares, or (iii) the Fund's distributions.
Types of insurance. There are three types of insurance: new issue, secondary and portfolio. A new issue insurance policy is purchased by the issuer when the security is issued. A secondary insurance policy may be purchased by the Fund after a security is issued. With both new issue and secondary policies, the insurance continues in force for the life of the security and, thus, may increase the credit rating of the
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security, as well as its resale value. However, in response to market conditions rating agencies have lowered their ratings on some municipal bond insurers below BBB or withdrawn ratings. In such cases the insurance is providing little or no enhancement of credit or resale value to the municipal security and the security's rating will reflect the higher of the insurer rating or the underlying rating of the security.
The Fund may buy a secondary insurance policy at any time if the investment manager believes the insurance would be in the best interest of the Fund. The Fund is likely to buy a secondary insurance policy if, in the investment manager's opinion, the Fund could sell a security at a price that exceeds the current value of the security, without insurance, plus the cost of the insurance. The purchase of a secondary policy, if available, may enable the Fund to sell a defaulted security at a price similar to that of comparable securities that are not in default. The Fund would value a defaulted security covered by a secondary insurance policy at its market value.
The Fund also may buy a portfolio insurance policy. Unlike new issue and secondary insurance, which continue in force for the life of the security, portfolio insurance only covers securities while they are held by the Fund. If the Fund sells a security covered by portfolio insurance, the insurance protection on that security ends and, thus, cannot affect the resale value of the security. As a result, the Fund may continue to hold any security insured under a portfolio insurance policy that is in default or in significant risk of default and, absent any unusual or unforeseen circumstances as a result of the portfolio insurance policy, would likely value the defaulted security, or security for which there is a significant risk of default, at the same price as comparable securities that are not in default. While a defaulted security is held in the Fund's portfolio, the Fund continues to pay the insurance premium on the security but also collects interest payments from the insurer and retains the right to collect the full amount of principal from the insurer when the security comes due.
The insurance premium the Fund pays for a portfolio insurance policy is a Fund expense. The premium is payable monthly and is adjusted for purchases and sales of covered securities during the month. If the Fund fails to pay its premium, the insurer may take action against the Fund to recover any premium payments that are due. The insurer may not change premium rates for securities covered by a portfolio insurance policy, regardless of the issuer's ability or willingness to meet its obligations.
Qualified municipal bond insurers. Insurance policies may be issued by a qualified municipal bond insurer. The bond insurance industry is a regulated industry. Any bond insurer must be licensed in each state in order to write financial guarantees in that jurisdiction. Regulations vary from state to state. Most regulators, however, require minimum standards of solvency and limitations on leverage and investment of assets. Regulators also place restrictions on the amount an insurer can guarantee in relation to the insurer's capital base. Neither the Fund nor the investment manager makes any representations as to the ability of any insurance company to meet its obligation to the Fund if called upon to do so.
If an insurer is called upon to pay the principal or interest on an insured security that is due for payment but that has not been paid by the issuer, the terms of payment would be governed by the provisions of the insurance policy. After payment, the insurer becomes the owner of the security, appurtenant coupon, or right to payment of principal or interest on the security and is fully subrogated to all of the Fund's rights with respect to the security, including the right to payment. The insurer's rights to the security or to payment of principal or interest are limited, however, to the amount the insurer has paid.
State regulators have from time to time required municipal bond insurers to suspend claims payments on outstanding insurance in force. Certain municipal bond insurers have withdrawn from the market. These circumstances have led to a decrease in the supply of insured municipal securities and a consolidation among municipal bond insurers concentrating the insurance company credit risk on securities in the Fund's portfolio amongst fewer municipal bond insurers. Due to this consolidation, events involving one or more municipal bond insurers could have a significant adverse effect on the value of the securities insured by the insurer and on the municipal markets as a whole.
Interfund lending program Pursuant to an exemptive order granted by the SEC (Lending Order), the Fund has the ability to lend money to, and borrow money from, other Franklin Templeton funds for temporary purposes (Interfund Lending Program) pursuant to a master interfund lending agreement (Interfund Loan). Lending and borrowing through the Interfund Lending Program provides the borrowing fund with a lower interest rate than it would have paid if it borrowed money from a bank, and provides the lending fund with an alternative short-term investment with a higher rate of return than other available short-term investments. All Interfund Loans would consist only of uninvested cash reserves that the lending fund otherwise would invest in short-term repurchase agreements or other short-term instruments. The Fund may only participate in the Interfund Lending Program to the extent permitted by its investment goal(s), policies and restrictions and only subject to meeting the conditions of the Lending Order.
The limitations of the Interfund Lending Program are described below and these and the other conditions of the Lending Order permitting interfund lending are designed to minimize the risks associated with interfund lending for both the lending and borrowing fund. However, no borrowing or lending activity is without risk. When a fund borrows money from another fund under the Interfund Lending Program, there
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is a risk that the Interfund Loan could be called on one business day’s notice, in which case the borrowing fund may have to utilize a line of credit, which would likely involve higher rates, seek an Interfund Loan from another fund, or liquidate portfolio securities if no lending sources are available to meet its liquidity needs. Interfund Loans are subject to the risk that the borrowing fund could be unable to repay the loan when due, and a delay in repayment could result in a lost opportunity by the lending fund or force the lending fund to borrow or liquidate securities to meet its liquidity needs.
Under the Interfund Lending Program, the Fund may borrow on an unsecured basis through the Interfund Lending Program if its outstanding borrowings from all sources immediately after the borrowing total 10% or less of its total assets, provided that if the Fund has a secured loan outstanding from any other lender, including but not limited to another fund, the Fund’s Interfund Loan will be secured on at least an equal priority basis with at least an equivalent percentage of collateral to loan value as any outstanding loan that requires collateral. If the Fund’s total outstanding borrowings immediately after an Interfund Loan exceed 10% of its total assets, the Fund may borrow through the Interfund Lending Program on a secured basis only. The Fund may not borrow under the Interfund Lending Program or from any other source if its total outstanding borrowings immediately after such borrowing would be more than 33 1/3% of its total assets or any lower threshold provided for by the Fund’s investment restrictions.
If the Fund has outstanding bank borrowings, any Interfund Loans to the Fund would: (a) be at an interest rate equal to or lower than that of any outstanding bank loan, (b) be secured at least on an equal priority basis with at least an equivalent percentage of collateral to loan value as any outstanding bank loan that requires collateral, (c) have a maturity no longer than any outstanding bank loan (and in any event not over seven days), and (d) provide that, if an event of default by the Fund occurs under any agreement evidencing an outstanding bank loan to the Fund, that event of default will automatically (without need for action or notice by the lending fund) constitute an immediate event of default under the interfund lending agreement, entitling the lending fund to call the Interfund Loan (and exercise all rights with respect to any collateral), and that such call would be made if the lending bank exercises its right to call its loan under its agreement with the borrowing fund.
In addition, no fund may lend to another fund through the Interfund Lending Program if the loan would cause the lending fund’s aggregate outstanding loans through the Interfund Lending Program to exceed 15% of its current net assets at the time of the loan. A fund’s Interfund Loans to any one fund shall not exceed 5% of the lending fund’s net assets. The duration of Interfund Loans will be limited to the time required to obtain cash sufficient to repay such Interfund Loan, either through the sale of portfolio securities or the net sales of the fund’s shares, but in no event more than seven days, and for purposes of this condition, loans effected within seven days of each other will be treated as separate loan transactions. Each Interfund Loan may be called on one business day’s notice by a lending fund and may be repaid on any day by a borrowing fund.
Investment company securities The Fund may invest in other investment companies to the extent permitted by the 1940 Act, SEC rules thereunder and exemptions thereto. With respect to funds in which the Fund may invest, Section 12(d)(1)(A) of the 1940 Act requires that, as determined immediately after a purchase is made, (i) not more than 5% of the value of the Fund’s total assets will be invested in the securities of any one investment company, (ii) not more than 10% of the value of the Fund’s total assets will be invested in securities of investment companies as a group, and (iii) not more than 3% of the outstanding voting stock of any one investment company will be owned by the Fund. The Fund will limit its investments in funds in accordance with the Section 12(d)(1)(A) limitations set forth above, except to the extent that any rules, regulations or no-action or exemptive relief under the 1940 Act permits the Fund’s investments to exceed such limits. For example, Rule 12d1-4 permits the Fund to invest in other investment companies beyond the statutory limits, subject to certain conditions. Among other conditions, the Rule prohibits a fund from acquiring control of another investment company (other than an investment company in the same group of investment companies), including by acquiring more than 25% of its voting securities. In addition, the Rule imposes certain voting requirements when a fund's ownership of another investment company exceeds particular thresholds. If shares of a fund are acquired by another investment company, the “acquired” fund may not purchase or otherwise acquire the securities of an investment company or private fund if immediately after such purchase or acquisition, the securities of investment companies and private funds owned by that acquired fund have an aggregate value in excess of 10% of the value of the total assets of the fund, subject to certain exceptions. These restrictions may limit the Fund's ability to invest in other investment companies to the extent desired. In addition, other unaffiliated investment companies may impose other investment limitations or redemption restrictions which may also limit the Fund's flexibility with respect to making investments in those unaffiliated investment companies. To the extent that the Fund invests in another investment company, because other investment companies pay advisory, administrative and service fees that are borne indirectly by investors, such as the Fund, there may be duplication of investment management and other fees. The Fund may also invest its cash balances in affiliated money market funds to the extent permitted by its investment policies and rules and exemptions granted under the 1940 Act.
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Mandatory tender (mandatory put) municipal securities Mandatory tender (mandatory put) municipal securities may be sold with a requirement that a holder of a security surrender the security to the issuer or its agent for cash at a date prior to the stated maturity. On the predetermined tender date, the holder receives principal and accrued interest.
Maturity Municipal securities are issued with a specific maturity date--the date when the issuer must repay the amount borrowed. Maturities typically range from less than one year (short term) to 30 years (long term). In general, securities with longer maturities are more sensitive to interest rate changes, although they may provide higher yields.
Municipal lease obligations Municipal lease obligations generally are issued to support a government's infrastructure by financing or refinancing equipment or property acquisitions or the construction, expansion or rehabilitation of public facilities. In such transactions, equipment or property is leased to a state or local government, which, in turn, pays lease payments to the lessor consisting of interest and principal payments on the obligations. Municipal lease obligations differ from other municipal securities because each year the lessee's governing body must appropriate (set aside) the money to make the lease payments. If the money is not appropriated, the issuer or the lessee typically can end the lease without penalty. If the lease is cancelled, investors who own the municipal lease obligations may not be paid.
The Fund may also gain exposure to municipal lease obligations through certificates of participation, which represent a proportionate interest in the payments under a specified lease or leases.
Because annual appropriations are required to make lease payments, municipal lease obligations generally are not subject to constitutional limitations on the issuance of debt, and may allow an issuer to increase government liabilities beyond constitutional debt limits. When faced with increasingly tight budgets, local governments have more discretion to curtail lease payments under a municipal lease obligation than they do to curtail payments on other municipal securities. If not enough money is appropriated to make the lease payments, the leased property may be repossessed as security for holders of the municipal lease obligations. If this happens, there is no assurance that the property's private sector or re-leasing value will be enough to make all outstanding payments on the municipal lease obligations or that the payments will continue to be tax-free.
While cancellation risk is inherent to municipal lease obligations, the Fund believes that this risk may be reduced, although not eliminated, by its policies on the credit quality of municipal securities in which it may invest.
Refunded bonds The issuer of a refunded bond (also known as pre-refunded or escrow-secured bonds) “pre-refunds” the bond by setting aside in advance all or a portion of the amount to be paid to the bondholders when the bond is called. Generally, an issuer uses the proceeds from a new bond issue to buy high-grade, interest-bearing debt securities, including direct obligations of the U.S. government, which are then deposited in an irrevocable escrow account held by a trustee bank to secure all future payments of principal and interest on the refunded bonds. Because refunded bonds still bear the same interest rate as when they were originally issued and are of very high credit quality, their market value may increase. However, as the refunded bond approaches its call or ultimate maturity date, the bond’s market value will tend to fall to its call or par price. Under 2017 legislation commonly known as the Tax Cuts and Jobs Act (“TCJA”), interest paid on a bond issued after December 31, 2017 to advance refund another bond is subject to federal income tax.
Stripped securities Stripped securities are debt securities that have been transformed from a principal amount with periodic interest coupons into a series of zero coupon bonds, each with a different maturity date corresponding to one of the payment dates for interest coupon payments or the redemption date for the principal amount. Stripped securities are subject to all the risks applicable to zero coupon bonds as well as certain additional risks.
Like zero coupon bonds, stripped securities do not provide for periodic payments of interest prior to maturity. Rather they are offered at a discount from their face amount that will be paid at maturity. This results in the security being subject to greater fluctuations in response to changing interest rates than interest-paying securities of similar maturities.
Tax-exempt commercial paper Tax-exempt commercial paper typically represents an unsecured short-term obligation (270 days or less) issued by a municipality.
Tax-exempt or qualified private activity and industrial development revenue bonds Tax-exempt industrial development revenue and other similar bonds are part of a category of securities sometimes known as tax-exempt or qualified private activity bonds. These bonds are typically issued by or on behalf of public authorities to finance various privately operated facilities which are expected to benefit the municipality and its residents, such as business, manufacturing, housing, sports and pollution control, as well as public facilities such as airports, mass transit systems, ports and parking. The payment of principal and interest is solely dependent on the ability of the facility's user to meet its financial obligations and the pledge, if any, of the facility or other property as security for payment. As a result, these bonds may involve a greater degree of corporate credit risk than other municipal securities.
Temporary investments When the investment manager believes market or economic conditions are unfavorable for investors, the investment manager may invest up to 100% of the Fund's assets in temporary defensive investments,
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including cash, cash equivalents or other high quality short-term investments, such as short-term debt instruments, including U.S. government securities, high grade commercial paper, repurchase agreements, negotiable certificates of deposit, non-negotiable fixed time deposits, bankers acceptances, variable rate demand notes, and other money market equivalents. To the extent allowed by exemptions from and rules under the 1940 Act and the Fund's other investment policies and restrictions, the investment manager also may invest the Fund's assets in shares of one or more money market funds managed by the investment manager or its affiliates. Unfavorable market or economic conditions may include excessive volatility or a prolonged general decline in the securities markets, the securities in which the Fund normally invests, or the economies of the states and territories where the Fund invests. Temporary defensive investments can and do experience defaults. The likelihood of default on a temporary defensive investment may increase in the market or economic conditions which are likely to trigger the Fund's investment therein.
Temporary defensive investments generally may include securities that pay taxable interest, including (i) for the state Funds, municipal securities issued by a state or local government other than the Fund's state; (ii) high quality commercial paper; or (iii) securities issued by or guaranteed by the full faith and credit of the U.S. government. The Fund also may invest all of its assets in municipal securities issued by a U.S. territory such as Guam, Puerto Rico, the Mariana Islands or the U.S. Virgin Islands. The investment manager also may invest in these types of securities or hold cash when securities meeting the Fund's investment criteria are unavailable or to maintain liquidity. When the Fund's assets are invested in temporary investments, the Fund may not be able to achieve its investment goal.
Unrated debt securities Not all debt securities or their issuers are rated by rating agencies, sometimes due to the size of or manner of the securities offering, the decision by one or more rating agencies not to rate certain securities or issuers as a matter of policy, or the unwillingness or inability of the issuer to provide the prerequisite information and fees to the rating agencies. Some debt securities markets may have a disproportionately large number of unrated issuers.
In evaluating unrated securities, the investment manager may consider, among other things, the issuer's financial resources, its sensitivity to economic conditions and trends, its operating history, the quality of the issuer's management and regulatory matters. Although unrated debt securities may be considered to be of investment grade quality, issuers typically pay a higher interest rate on unrated than on investment grade rated debt securities. Less information is typically available to the market on unrated securities and obligors, which may increase the potential for credit and valuation risk.
Investment grade debt securities Investment grade debt securities are securities that are rated at the time of purchase in the top four ratings categories by one or more independent rating organizations such as S&P (rated BBB- or better) or Moody’s (rated Baa3 or higher) or, if unrated, are determined to be of comparable quality by the Fund’s investment manager. Generally, a higher rating indicates the rating agency’s opinion that there is less risk of default of obligations thereunder including timely repayment of principal and payment of interest. Debt securities in the lowest investment grade category may have speculative characteristics and more closely resemble high-yield debt securities than investment-grade debt securities. Lower-rated securities may be subject to all the risks applicable to high-yield debt securities and changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than is the case with higher grade debt securities.
A number of risks associated with rating agencies apply to the purchase or sale of investment grade debt securities.
U.S. government securities U.S. government securities include obligations of, or securities guaranteed by, the U.S. federal government, its agencies, instrumentalities or sponsored enterprises. Some U.S. government securities are supported by the full faith and credit of the U.S. government. These include U.S. Treasury obligations and securities issued by the Government National Mortgage Association (GNMA). A second category of U.S. government securities are those supported by the right of the agency, instrumentality or sponsored enterprise to borrow from the U.S. government to meet its obligations. These include securities issued by Federal Home Loan Banks.
A third category of U.S. government securities are those supported by only the credit of the issuing agency, instrumentality or sponsored enterprise. These include securities issued by the Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC). In the event of a default, an investor like the Fund would only have legal recourse to the issuer, not the U.S. government. Although the U.S. government has provided support for these securities in the past, there can be no assurance that it will do so in the future. The U.S. government has also made available additional guarantees for limited periods to stabilize or restore a market in the wake of an economic, political or natural crisis. Such guarantees, and the economic opportunities they present, are likely to be temporary and cannot be relied upon by the Fund. Any downgrade of the credit rating of the securities issued by the U.S. government may result in a downgrade of securities issued by its agencies or instrumentalities, including government-sponsored entities.
Variable or floating rate securities The Fund may invest in variable or floating rate securities, including variable rate
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demand notes, municipal inflation protected securities, index-based floating rate securities, and auction rate securities, which have interest rates that change either at specific intervals from daily up to semiannually, or whenever a benchmark rate changes. The interest rate adjustments are designed to help stabilize the security's price or maintain a fixed spread to a predetermined benchmark. While this feature may protect against a decline in the security's market price when interest rates or benchmark rates rise, it lowers the Fund's income when interest rates or benchmark rates fall. Of course, the Fund's income from its variable and floating rate investments also may increase if interest rates rise.
Variable or floating rate securities may include a demand feature, which may be unconditional. The demand feature allows the holder to demand prepayment of the principal amount before maturity, generally on one to 30 days' notice. The holder receives the principal amount plus any accrued interest either from the issuer or by drawing on a bank letter of credit, a guarantee or insurance issued with respect to the security. The Fund generally uses variable or floating rate securities as short-term investments while waiting for long-term investment opportunities.
Movements in the relevant index or benchmark on which adjustments are based will affect the interest paid on these securities and, therefore, the current income earned by the Fund and the securities' market value. The degree of volatility in the market value of the variable rate securities held by the Fund will generally increase along with the length of time between adjustments, the degree of volatility in the applicable index, benchmark or base lending rate and whether the index, benchmark or base lending rate to which it resets or floats approximates short-term or other prevailing interest rates. It will also be a function of the maximum increase or decrease of the interest rate adjustment on any one adjustment date, in any one year, and over the life of the security.
The income earned by the Fund and distributed to shareholders will generally increase or decrease along with movements in the relevant index, benchmark or base lending rate. Thus the Fund's income will be more unpredictable than the income earned on similar investments with a fixed rate of interest.
When-issued transactions Municipal securities may be offered on a “when-issued” basis. When so offered, the price, which is generally expressed in yield terms, is fixed at the time the commitment to buy is made, but delivery and payment take place at a later date. During the time between purchase and settlement, no payment is made by the Fund to the issuer and no interest accrues to the Fund. If the other party to the transaction fails to deliver or pay for the security, the Fund could miss a favorable price or yield opportunity, or could experience a loss.
When the Fund makes the commitment to buy a municipal security on a when-issued basis, it records the transaction and includes the value of the security in the calculation of its net asset value. The Fund does not believe that its net asset value or income will be negatively affected by its purchase of municipal securities on a when-issued basis. The Fund will not engage in when-issued transactions for investment leverage purposes.
Although the Fund generally will buy municipal securities on a when-issued basis with the intention of acquiring the securities, it may sell the securities before the settlement date if it is considered advisable. If assets of the Fund are held in cash pending the settlement of a purchase of securities, the Fund will not earn income on those assets. When-issued transactions also are subject to the risk that a counterparty may become bankrupt or otherwise fail to perform its obligations due to financial difficulties, including making payments to the Fund. The Fund may obtain no or only limited recovery in a bankruptcy or other organizational proceedings, and any recovery may be significantly delayed.
Zero coupon and deferred interest securities Zero coupon or deferred interest bonds are debt securities that make no periodic interest payments until maturity or a specified date when the securities begin paying current interest (cash payment date). Zero coupon and deferred interest bonds generally are issued and traded at a discount from their face amount or par value.
The original discount on zero coupon or deferred interest bonds approximates the total amount of interest the bonds will accumulate over the period until maturity or the first cash payment date and compounds at a rate of interest reflecting the market rate of the security at the time of issuance. The discount varies depending on the time remaining until maturity or the cash payment date, as well as prevailing interest rates, liquidity of the market for the security, and the perceived credit quality of the issuer. The discount, in the absence of financial difficulties of the issuer, typically decreases as the final maturity or cash payment date approaches. The discount typically increases as interest rates rise, the market becomes less liquid or the creditworthiness of the issuer deteriorates.
For accounting and federal tax purposes, holders of bonds issued at a discount, such as the Fund, are deemed to receive interest income over the life of the bonds even though the bonds do not pay out cash to their holders before maturity or the cash payment date. That income is distributable to Fund shareholders even though no cash is received by the Fund at the time of accrual, which may require the liquidation of other portfolio securities to satisfy the Fund's distribution obligations.
Because investors receive no cash prior to the maturity or cash payment date, an investment in debt securities issued at a discount generally has a greater potential for complete loss
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of principal and/or return than an investment in debt securities that make periodic interest payments. Such investments are more vulnerable to the creditworthiness of the issuer and any other parties upon which performance relies.
The following is a description of the general risks associated with the Fund's investments in municipal securities.
Credit quality All things being equal, the lower a security's credit quality, the higher the risk and the higher the yield the security generally must pay as compensation to investors for the higher risk.
A security's credit quality depends on the issuer's ability to pay interest on the security and, ultimately, to repay the principal. Independent rating agencies, such as Moody's and S&P, often rate municipal securities based on their analysis of the issuer's credit quality. Most rating agencies use a descending alphabet scale to rate long-term securities, and a descending numerical scale to rate short-term securities. Securities in the top four long term ratings categories (or comparable short-term rated or unrated securities) are “investment grade,” although securities in the fourth highest rating category may have some speculative features. These ratings are described at the end of this SAI under “Description of Ratings.” Lower-rated securities may be subject to all the risks applicable to high-yield debt securities and changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than is the case with higher grade debt securities.
A number of risks associated with rating agencies apply to the purchase or sale of investment grade debt securities.
An insurance company, bank or other foreign or domestic entity may provide credit support for a municipal security and enhance its credit quality. For example, some municipal securities are insured, which means they are covered by an insurance policy that guarantees the timely payment of principal and interest. Other municipal securities may be backed by letters of credit, guarantees, or escrow or trust accounts that contain high quality securities, including securities backed by the full faith and credit of the U.S. government to secure the payment of principal and interest.
Any limitations on the credit quality of the securities the Fund may buy generally are applied when the Fund makes an investment so that the Fund is not required to sell a security because of a later change in circumstances.
In addition to considering ratings in its selection of the Fund's portfolio securities, the investment manager may consider, among other things, information about the financial history and condition of the issuer, revenue and expense prospects and, in the case of revenue bonds, the financial history and condition of the source of revenue to service the bonds. Securities that depend on the credit of the U.S. government are regarded as having the same or equivalent rating as U.S. government securities.
Credit Debt securities are subject to the risk of an issuer's (or other party's) failure or inability to meet its obligations under the security. Multiple parties may have obligations under a debt security. An issuer or borrower may fail to pay principal and interest when due. A guarantor, insurer or credit support provider may fail to provide the agreed upon protection. A counterparty to a transaction may fail to perform its side of the bargain. An intermediary or agent interposed between the investor and other parties may fail to perform the terms of its service. Also, performance under a debt security may be linked to the obligations of other persons who may fail to meet their obligations. The credit risk associated with a debt security could increase to the extent that the Fund's ability to benefit fully from its investment in the security depends on the performance by multiple parties of their respective contractual or other obligations. The market value of a debt security is also affected by the market's perception of the creditworthiness of the issuer.
The Fund may incur substantial losses on debt securities that are inaccurately perceived to present a different amount of credit risk than they actually do by the market, the investment manager or the rating agencies. Credit risk is generally greater where less information is publicly available, where fewer covenants safeguard the investors' interests, where collateral may be impaired or inadequate, where little legal redress or regulatory protection is available, or where a party's ability to meet obligations is speculative. Additionally, any inaccuracy in the information used by the Fund to evaluate credit risk may affect the value of securities held by the Fund.
Obligations under debt securities held by the Fund may never be satisfied or, if satisfied, only satisfied in part.
A change in the credit rating of any one or more of the municipal bond insurers that insure securities in the Fund's portfolio may affect the value of the securities they insure, the Fund's share price and Fund performance. The Fund might also be adversely impacted by the inability of an insurer to meet its insurance obligations.
Debt securities ratings The investment manager performs its own independent investment analysis of securities being considered for the Fund's portfolio, which includes consideration of, among other things, the issuer's financial resources, its sensitivity to economic conditions and trends, its operating history, the quality of the issuer's management and regulatory matters. The investment manager also considers the ratings assigned by various investment services and independent rating agencies, such as Moody's and S&P, that publish ratings based upon their assessment of the relative creditworthiness of the rated debt securities. Generally, a lower rating indicates higher credit risk. Higher
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yields are ordinarily available from debt securities in the lower rating categories. These ratings are described at the end of this SAI under “Description of Ratings.”
Using credit ratings to evaluate debt securities can involve certain risks. For example, ratings assigned by the rating agencies are based upon an analysis completed at the time of the rating of the obligor's ability to pay interest and repay principal. Rating agencies typically rely to a large extent on historical data which may not accurately represent present or future circumstances. Ratings do not purport to reflect the risk of fluctuations in market value of the debt security and are not absolute standards of quality and only express the rating agency's current opinion of an obligor's overall financial capacity to pay its financial obligations. A credit rating is not a statement of fact or a recommendation to purchase, sell or hold a debt obligation. Also, credit quality can change suddenly and unexpectedly, and credit ratings may not reflect the issuer's current financial condition or events since the security was last rated. Rating agencies may have a financial interest in generating business, including from the arranger or issuer of the security that normally pays for that rating, and providing a low rating might affect the rating agency's prospects for future business. While rating agencies have policies and procedures to address this potential conflict of interest, there is a risk that these policies will fail to prevent a conflict of interest from impacting the rating.
Extension The market value of some debt securities may be adversely affected when bond calls or prepayments on underlying assets are less or slower than anticipated. This risk is extension risk. Extension risk may result from, for example, rising interest rates or unexpected developments in the markets for the underlying assets. As a consequence, the security's effective maturity will be extended, resulting in an increase in interest rate sensitivity to that of a longer-term instrument. Extension risk generally increases as interest rates rise. This is because, in a rising interest rate environment, the rate of prepayment and exercise of call or buy-back rights generally falls and the rate of default and delayed payment generally rises. When the maturity of an investment is extended in a rising interest rate environment, a below-market interest rate is usually locked-in and the value of the security reduced. This risk is greater for fixed-rate than variable-rate debt securities.
Focus Because each Fund predominantly invests in the municipal securities of its state, its performance is closely tied to the performance of issuers of municipal securities in its state. See “State and U.S. Territory Risks” below.
The greater the Fund’s exposure to any single type of investment – including investment in a given sector, region, issuer, or type of security – the greater the losses the Fund may experience upon any single economic, business, political, regulatory, or other occurrence.
The Fund may invest more than 25% of its assets in municipal securities that finance similar types of projects, such as utilities, hospitals, higher education and transportation. A change that affects one project, such as proposed legislation on the financing of the project, a shortage of the materials needed for the project, or a declining need for the project, would likely affect all similar projects, thereby increasing market risk.
Income Income risk is the risk that the Fund's income will decline during periods of falling interest rates, when the Fund experiences defaults on debt securities it holds or when the Fund realizes a loss upon a sale of a debt security. The Fund's income declines when interest rates fall because, as the Fund's higher-yielding debt securities mature, are prepaid or are sold, the Fund may have to re-invest the proceeds in debt securities that have lower interest rates. The amount and rate of distributions that the Fund's shareholders receive are affected by the income that the Fund receives from its portfolio holdings. If the income is reduced, distributions by the Fund to shareholders may be less.
Fluctuations in income paid to the Fund are generally greater for variable rate debt securities. The Fund may be deemed to receive taxable income on certain securities which pay no cash payments until maturity, such as zero-coupon securities. The Fund may be required to sell portfolio securities that it would otherwise continue to hold in order to obtain sufficient cash to make the distribution to shareholders required for U.S. tax purposes.
Inflation The market price of debt securities generally falls as inflation increases because the purchasing power of the future income and repaid principal is expected to be worth less when received by the Fund. Debt securities that pay a fixed rather than variable interest rate are especially vulnerable to inflation risk because variable-rate debt securities may be able to participate, over the long term, in rising interest rates which have historically corresponded with long-term inflationary trends.
Inside information The investment manager (through its representatives or otherwise) may receive information that restricts the investment manager's ability to cause the Fund to buy or sell securities of an issuer for substantial periods of time when the Fund otherwise could realize profit or avoid loss. This may adversely affect the Fund's flexibility with respect to buying or selling securities and may impair the Fund's liquidity.
Interest rate The market value of debt securities generally varies in response to changes in prevailing interest rates. Interest rate changes can be sudden and unpredictable. In addition, short-term and long-term rates are not necessarily correlated to each other as short-term rates tend to be influenced by government monetary policy while long-term rates are market driven and may be influenced by
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macroeconomic events (such as economic expansion or contraction), inflation expectations, as well as supply and demand. During periods of declining interest rates, the market value of debt securities generally increases. Conversely, during periods of rising interest rates, the market value of debt securities generally declines. This occurs because new debt securities are likely to be issued with higher interest rates as interest rates increase, making the old or outstanding debt securities less attractive. In general, the market prices of long-term debt securities or securities that make little (or no) interest payments are more sensitive to interest rate fluctuations than shorter-term debt securities. The longer the Fund's average weighted portfolio duration, the greater the potential impact a change in interest rates will have on its share price. Also, certain segments of the fixed income markets, such as high quality bonds, tend to be more sensitive to interest rate changes than other segments, such as lower-quality bonds.
Liquidity Liquidity risk exists when particular investments are or become difficult to purchase or sell at the price at which the Fund has valued the security, whether because of current market conditions, the financial condition of the issuer, or the specific type of investment. If the market for a particular security becomes illiquid (for example, due to changes in the issuer's financial condition), the Fund may be unable to sell such security at an advantageous time or price due to the difficulty in selling such securities. To the extent that the Fund and its affiliates hold a significant portion of an issuer's outstanding securities, the Fund may also be subject to greater liquidity risk than if the issuer's securities were more widely held. The Fund may also need to sell some of the Fund's more liquid securities when it otherwise would not do so in order to meet redemption requests, even if such sale of the liquid holdings would be disadvantageous from an investment standpoint. Reduced liquidity may also have an adverse impact on a security's market value and the sale of such securities often results in higher brokerage charges or dealer discounts and other selling expenses. Reduced liquidity in the secondary market for certain securities will also make it more difficult for the Fund to obtain market quotations based on actual trades for purposes of valuing the Fund's portfolio and thus pricing may be prone to error when market quotations are volatile, infrequent and/or subject to large spreads between bid and ask prices. In addition, prices received by the Fund for securities may be based on institutional “round lot” sizes, but the Fund may purchase, hold or sell smaller, “odd lot” sizes, which may be harder to sell. Odd lots may trade at lower prices than round lots, which may affect the Fund’s ability to accurately value its investments.
The market for certain equity or debt securities may become illiquid under adverse market or economic conditions independent of any specific adverse changes in the conditions of a particular issuer. Liquidity risk generally increases (meaning that securities become more illiquid) as the number, or relative need, of investors seeking to liquidate in a given market increases; for example, when an asset class or classes fall out of favor and investors sell their holdings in such classes, either directly or indirectly through investment funds, such as mutual funds.
Management The investment manager's judgments about markets, interest rates or the attractiveness, relative values or potential appreciation of particular investment strategies or sectors or securities purchased for the Fund's portfolio may prove to be incorrect, all of which could cause the Fund to perform less favorably and may result in a decline in the Fund's share price.
The investment manager selects investments for the Fund based on its own analysis and information as well as on external sources of information, such as information that the investment manager obtains from other sources including through conferences and discussions with third parties, and data that issuers of securities provide to the investment manager or file with government agencies. The investment manager may also use information concerning institutional positions and buying activity in a security.
The investment manager is not in a position to confirm the completeness, genuineness or accuracy of any of such information that is provided or filed by an issuer, and in some cases, complete and accurate information is not readily available. It is also possible that information on which the investment manager relies could be wrong or misleading. Additionally, legislative, regulatory, or tax developments may affect the investment techniques available to the investment manager in connection with managing the Fund and may also adversely affect the ability of the Fund to achieve its investment goal. Management risk is greater when less qualitative information is available to the investment manager about an investment.
Market The market value of securities owned by the Fund may go up or down, sometimes rapidly or unpredictably due to general market conditions which are not specifically related to a single security issuer. These general market conditions include real or perceived adverse economic or regulatory conditions, changes in interest or currency exchange rates or adverse investor sentiment generally. Market values may also decline due to factors which affect a particular industry or sector, or a particular segment, such as municipal or government securities. During a general downturn in the securities markets, multiple asset classes may decline in value simultaneously. When markets perform well, there can be no assurance that the Fund's securities will participate in or otherwise benefit from the advance.
Non-Diversification(Connecticut Fund) A non-diversified fund for purposes of the 1940 Act may, with respect to more than 25% of its assets, invest more than 5% of its assets
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(taken at market value at the time of purchase) in the outstanding securities of any single issuer and/or own more than 10% of the outstanding voting securities of any one issuer. However, the Fund intends to meet certain diversification requirements for tax purposes. Generally, to meet federal tax requirements at the close of each quarter, the Fund will not invest more than 25% of its total assets in any one issuer and, with respect to 50% of total assets, will not invest more than 5% of its total assets in any one issuer or more than 10% of the issuer's outstanding voting securities. These limitations do not apply to U.S. government securities and securities issued by regulated investment companies. If applicable federal income tax requirements are revised, the Fund may change its diversification policies without obtaining shareholder approval.
Because a non-diversified fund generally invests a greater portion of its assets in the securities of one or more issuers and/or invests overall in a smaller number of issuers than a diversified fund, the Fund may be more sensitive to a single economic, business, political, regulatory or other occurrence or to the financial results of a single issuer than a more diversified fund might be. Similarly, the Fund's credit risk increases as more of the Fund's assets are invested in a smaller number of issuers.
Portfolio turnover Portfolio turnover is a measure of how frequently the Fund's portfolio securities are bought and sold. High portfolio turnover rates generally increase transaction costs, which are Fund expenses. Such portfolio transactions may also result in the realization of taxable capital gains, including short-term capital gains, which are generally taxable at ordinary income tax rates for federal income tax purposes for shareholders subject to income tax and who hold their shares in a taxable account. Higher transaction costs reduce the Fund's returns.
The SEC requires annual portfolio turnover to be calculated generally as the lesser of the Fund's purchases or sales of portfolio securities during a given fiscal year, divided by the monthly average value of the Fund's portfolio securities owned during that year (excluding securities with a maturity or expiration date that, at the time of acquisition, was less than one year). For example, a fund reporting a 100% portfolio turnover rate would have purchased and sold securities worth as much as the monthly average value of its portfolio securities during the year.
The Fund's portfolio turnover rates are disclosed in the sections entitled “Portfolio Turnover” and “Financial Highlights” of the Fund's prospectus.
Portfolio turnover is affected by factors within and outside the control of the Fund and its investment manager. The investment manager's investment outlook for the type of securities in which the Fund invests may change as a result of unexpected developments in domestic or international securities markets, or in economic, monetary or political relationships. High market volatility may result in the investment manager using a more active trading strategy than it might have otherwise pursued. The Fund's investment manager will consider the economic effects of portfolio turnover but generally will not treat portfolio turnover as a limiting factor in making investment decisions. Investment decisions affecting turnover may include changes in investment policies or management personnel, as well as individual portfolio transactions.
Prepayment Debt securities, especially bonds that are subject to “calls” are subject to prepayment risk if their terms allow the payment of principal and other amounts due before their stated maturity. Amounts invested in a debt security that has been “called” or “prepaid” will be returned to an investor holding that security before expected by the investor. In such circumstances, the investor, such as a fund, may be required to re-invest the proceeds it receives from the called or prepaid security in a new security which, in periods of declining interest rates, will typically have a lower interest rate. Prepayment risk is especially prevalent in periods of declining interest rates.
Securities subject to prepayment risk are often called during a declining interest rate environment and generally offer less potential for gains and greater price volatility than other income-bearing securities of comparable maturity.
Call risk is similar to prepayment risk and results from the ability of an issuer to call, or prepay, a debt security early. If interest rates decline enough, the debt security's issuer can save money by repaying its callable debt securities and issuing new debt securities at lower interest rates.
State Because each Fund predominantly invests in the municipal securities of its state, its performance is closely tied to the ability of issuers of municipal securities in its state to continue to make principal and interest payments on their securities. The issuers' ability to make such payments is, in turn, primarily dependent upon economic, political and other conditions within the state.
Below is a discussion of certain conditions that may affect municipal issuers in various states. It is not a complete analysis of every material fact that may affect the ability of issuers of municipal securities to meet their debt obligations or of the economic or political conditions within any state and is subject to change. The information below is based on data available to the Fund from historically reliable sources, but the Fund has not independently verified it. In addition, the disclosure below reflects only the information available to the Fund as of May 1, 2024. The information and risks set forth below could change quickly and without notice due to new or different information becoming available, market or economic
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changes or other unforeseen events, among other factors. The Fund generally only updates the information below before June of each year. Therefore, the disclosure may not reflect any new or different information that becomes available.
The ability of issuers of municipal securities to continue to make principal and interest payments depends in large part upon their ability to raise revenues, primarily through taxes, and to control spending. Many factors can affect a state's revenues, including changes in state tax laws through legislation or referendum, the rate of population growth, man-made or natural disasters, unemployment rates, personal income growth, federal aid, and the ability to attract and retain successful businesses. A number of factors can also affect a state's spending, including the need for infrastructure improvements, increased costs for education and other services, current debt levels, and the existence of accumulated budget deficits.
The COVID-19 global pandemic began to impact the United States in early 2020. As a result of the pandemic, numerous measures were implemented to protect the public, which have significantly affected municipal market issuers, the market itself and most levels of the economy. Many governments ordered the closure of non-essential businesses and recommended or required social-distancing, instituted “shelter-in-place” policies and limited the size of gatherings.
As a result of these policies, economies across the country contracted, and many of the revenues received by municipal bond issuers were adversely affected. In addition, municipal issuers across the industry encountered spending pressure resulting from the costs of cleaning, providing personal protective equipment (PPE), moving employees home and instituting distance and online learning, as examples.
In 2020 and 2021, the federal government announced several programs available to many issuers in the municipal market, which helped finance additional costs and replace certain revenues lost as a result of the pandemic. Since 2021, when state and local governments began reopening, local and state economies and financial positions have improved. This improvement is evident in recent rating agency upgrades, which are outpacing downgrades by more than 2.5:1. In certain other sectors, recovery has been slower.
The following disclosure provides more information about the risks of investing in the Fund. Please read this information together with the section “Principal Risks” in the prospectus.
Arizona. The state’s economic base continues to diversify and is oriented toward professional services, high-tech manufacturing and health care sectors. The employment base, however, is less reliant on construction and is not overly concentrated in one sector. Economic conditions within Arizona were relatively strong in 2023, as the state's real GDP improved by 2.7%, compared to national real GDP growth of 2.5%. Meanwhile, per-capita personal income growth increased 5.6%, compared to 4.7% nationally. Population growth continues to exceed the national average, as the state reported a net population increase of 0.9% in 2023, compared to a 0.5% growth rate nationally.
In fiscal year 2022, the State of Arizona’s general fund revenues totaled $46.6 billion, an increase of 21.8% from the prior year. Meanwhile, general fund expenditures increased by 14.4% to $41.1 billion during the prior period. The increased collections of sales and income taxes resulting from improved economic activity and significantly higher federal and local government revenues related to COVID-19 aid were the primary drivers for increased revenue growth. Meanwhile, increased health, welfare, and educational expenditures pushed costs higher. Revenues in the general fund exceeded expenditures by $5.5 billion before other financing sources and uses. In fiscal year 2022, the state reported an overall general fund surplus of almost $4.4 billion after transfers in and out.
At the close of the fiscal year ending June 30, 2022, the state’s general fund reported an ending fund balance of $7.2 billion, an increase of approximately $4.4 billion from the prior fiscal year. Approximately 21.2% of the total general fund balance amount, or $1.5 billion, is designated by the state as non-spendable, restricted, or committed. The remaining 78.8%, or $5.6 billion, is designated as unassigned. Meanwhile, the State’s rainy-day fund had a balance of $981.2 million, or approximately 2.6% of budgeted general fund expenditures in fiscal year 2022, which is short of the statutory fund balance cap. The state acted to improve the rainy-day fund balance to protect the state from recessionary downturns and recently raised the reserve statutory cap to 10% of budgeted general fund revenues.
Under its constitution, Arizona cannot issue general obligation debt. Therefore, the state primarily relies on revenue bonds and Certificates of Participation. According to Moody’s state debt report published in September 2023, the state had net tax-supported debt of only $341 per capita, compared to a national median of $1,178 per capita, and ranked 42nd among states with respect to net tax-supported debt as a percent of own-source revenue. Historically, Arizona has relied on revenue bonds, lease obligations, and pay-as-you-go financing for its capital needs.
As of May 2024, the published ratings on the state were Aa1 and AA from Moody’s and S&P, respectively.
Colorado. The state’s economy has diversified over the years, spurred by growth in the services, trade and government sectors. Today, the state’s major economic sectors include manufacturing, agriculture, tourism, energy and mining. Economic growth has been further driven by expansion into the information technology, bioscience, engineering, and aerospace sectors. The state’s five largest industry sectors contributing to GDP include Finance,
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Insurance, Real Estate, Rental and Leasing; Professional and Business Services; Government and Governmental Enterprises; and Educational Services, Health Care and Social Assistance.
Colorado’s most recent population estimates from the U.S. Census Bureau stood at 5.878 million in 2023, an increase of 0.63% from the prior year. The state maintains a significant contingent of highly skilled workers, increasing levels of new business formation and a diverse base of growing technology-intensive and business services industries. According to the Bureau of Economic Analysis, the state’s real GDP increased by 2.9% in 2023, compared to the 2.5% national increase in 2023. According to the Bureau of Economic Analysis, Colorado’s total per-capita personal income ranked 7th in the United States, increasing 4.9% year-over-year; however, the state underperformed national growth rates of 5.2%. The state’s unemployment rate remains relatively low, at 3.7% as of March 2023.
The ending total fund balance of the General Fund was $3,102.3 million in fiscal year 2023. General Fund revenues increased overall by approximately $348.5 million (1.4%) over the prior year, and expenditures increased overall by $880.7 million (3.7%) relative to the prior fiscal year, resulting in $107.3 million excess of revenues over expenditures for fiscal year 2023.
The Colorado budget and financial process is constricted by a series of constitutional limitations that include a mandatory minimum of general fund reserves equal to 6.5% of general-purpose revenue fund appropriations. Senate Bill 21-226, enacted in 2021, modified the State’s General Fund reserve requirement. In response to the COVID-19 pandemic, 2020 legislation reduced the reserve from 7.25% of the amount appropriated from the General Fund to 2.86% in fiscal years 2021 and 2022, with the reserve restored to 7.25% for subsequent years. The 2021 bill increased the reserve to 13.4% for fiscal year 2022 and 15.0% for subsequent fiscal years. The state’s constitution also prohibits the issuance of general obligation debt, resulting in a significantly low debt burden for the state. According to Moody’s 2022 state debt medians report, the state ranked 29th among all states in net tax-supported debt per capita and 31st in net tax-supported debt as a percentage of personal income. The state relies primarily on pay-as-you-go lease financing to meet its capital improvement needs.
As of April 2024, Moody's rated Colorado Aa1 with a stable outlook, and S&P rated the state AA with a stable outlook.
Connecticut. After several years of negative demographic trends, the State of Connecticut has experienced positive population growth over the last four years. The total population reached 3.617 million in 2023, which represents 1.4% growth relative to 2019.
Connecticut remains one of the wealthiest states in the nation. The state maintains a strong and diverse economy that has grown considerably since the COVID-19 pandemic. State GDP was approximately $340.181 billion as of December 31, 2023, which was 23.3% higher than three years prior. Per-capita personal income was approximately 130% of the U.S. average. The state’s seasonally adjusted unemployment rate stood at 4.5% as of February 28, 2024, which remains higher than the national average (3.8%).
The state has improved its liquidity position in recent years, owing largely to the financial aid provided through the Coronavirus Aid, Relief, and Economic Security (CARES) Act as well as the American Rescue Plan (ARP). Connecticut received $1.382 billion through the CARES Act and was granted $2.8 billion through the ARP. The federal funds closed large projected budget deficits for both fiscal year 2020 and fiscal year 2021 and allowed the state to contribute funds to its budgetary reserve fund (BRF). The BRF held a balance of roughly $5.186 billion at the end of fiscal year 2023, exceeding the statutory cap of 15% of appropriations.
The state has implemented two statutory budget provisions over the last decade to protect its budget from more substantial structural imbalances during a potential economic downturn. First, Connecticut initiated a seven-year phase-in of a statutory revenue cap in fiscal year 2020, which currently limits budgeted appropriations to 98.75% of projected revenue. Second, the state established a volatility cap to separate excess collections derived from its two revenue sources most vulnerable to recessionary volatility (personal income tax and the pass-through entity tax).
In recent years, Connecticut has benefitted from a combination of significant federal aid and strong income and sales revenue growth. The state generated a $551.133 million general fund surplus in fiscal year 2023, representing roughly 2.7% of general fund expenditures. The surplus was transferred to pay down the State Employees’ Retirement System (SERS) and Teachers’ Retirement System (TRS) pension plan liabilities. Connecticut is currently projecting a $153.9 million operating surplus in fiscal year 2024.
The state’s fixed costs remain elevated, reflecting in part Connecticut’s obligations to fund K-12 school building construction, which is generally handled at the local level of government in other states. Connecticut carried approximately $25.8 billion of general obligation and tax-supported debt as of December 31, 2021. Net tax-supported debt was approximately $7,157 per capita and 8.6% of personal income. Debt service now represents 13.9% of annual government spending.
Despite significant support for both the SERS and TRS over the last few years, the state maintains a severely underfunded pension system. As of June 30, 2022, the state’s unfunded SERS obligation stood at approximately $20.9 billion,
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resulting in a funded ratio of just 48.5%. Connecticut’s unfunded TRS obligation approximated $16.4 billion, which resulted in a funded ratio of 59.8%. The state has implemented substantial changes to its pension funding approach, including increasing amortization periods for both the State Employees Retirement System (SERS) and Teachers’ Retirement System (TRS) and lowering the discount rate. Connecticut also faces significant other post-employment benefit (OPEB) obligations. The state OPEB liability was approximately $19.5 billion as of June 30, 2022, equivalent to $5,408 per capita and approximately 6.5% of personal income. The plan is currently 6.1% pre-funded, as the state has increased contributions above pay-as-you-go levels. Connecticut is also statutorily required to fund one-third of the teacher pension OPEB costs, resulting in an additional $2.9 billion liability.
As of April 30, 2024, Connecticut is rated Aa3 (stable) by Moody’s and AA- (stable) by S&P.
Michigan. Heading into the COVID-19 pandemic, Michigan had experienced nearly a decade of economic growth and diversification, with the high employment concentration in manufacturing contributing to historically volatile economic cyclicality. U.S. light vehicle sales, which remain a key component of the state’s economy, experienced a 12% gain in 2023 compared to 2022. The auto industry, however, has remained subject to volatility, such as that triggered by the Great Recession of 2008-2009, during which U.S. light vehicle sales experienced a 21% drop, as well as by the most recent economic recession. As a result, Michigan’s economy remains less stable compared to states with more diverse economies. Favorably, the state has emphasized rebuilding the Budget Stabilization Fund (BSF) since the last recession.
According to the 2023, U.S. Census, Michigan is the 10th most populous state. with a population of slightly more than 10 million residents that has declined slowly over the past three years. The state’s 2023 GDP was $539.9 billion, or 1.6% higher than the previous year. According to the U.S. Bureau of Economic Analysis, the real GDP change between the fourth quarter of 2023 and the third quarter of 2023 was 0.5%, slightly lower than the U.S. growth of 0.8% within the same period.
U.S. light vehicle sales had fluctuated around 17.0 million units on an annual basis in the three years following a peak of 17.5 million units in 2016, but experienced a significant decline as a result of the COVID-19 pandemic. According to the Michigan Department of Treasury, U.S. light vehicle sales increased 12% year-over-year to 15.5 million units in 2023 (still higher than the Great Recession low of 10.4 million units in 2009). Auto manufacturing was meaningfully impaired during the pandemic by shortages of microprocessors, which are key components of modern cars and trucks. In 2022, approximately 14% of Michigan’s non-farm employment was in manufacturing, compared to 8.4% for the nation. Nevertheless, the proportionate share has been declining as a percentage of state employment after representing as much as 19% of employment in 2000. Michigan’s exposure to the auto sector thus remains a periodic source of instability to the state’s economy.
The state’s two major governmental funds are the General Fund and the School Aid Fund. Combined revenues of these funds declined 2% (-2%) between September 30, 2022 and September 30, 2023. Michigan’s January 2024 revenue estimates project a 0.2% decline (-0.2%) in revenue to the state’s major governmental funds for the fiscal year ending September 30, 2024, compared to the prior fiscal year. As of September 30, 2023, the state’s General Fund had an ending available fund balance of $3.9 billion, and the Budget Stabilization Fund (BSF) had approximately $1.8 billion. Combined, these totals comprise 11% of expenditures, which is below the median level for states nationwide. The state projects that by September 30, 2024, its available General Fund balance will decline to approximately $1.5 billion, and the Budget Stabilization Fund balance will increase to approximately $2 billion.
Michigan carries a moderate bonded debt burden and has a large contingent liability for local government debt, primarily through its guarantee of local school bonds. As of fiscal year end 2022, net tax supported debt was estimated at $8.68 billion, or 1.4% of estimated GDP, which is less than the 2% median of states. Michigan's current debt per capita is $865, which ranks 30th highest among all states. Debt to income was 1.5%, which ranked 29th highest. General obligation bonds accounted for 13% of the state’s total net tax supported debt, appropriation bonds of the State Building Authority accounted for 39%, and pledged revenue bonds accounted for 31%.
The state has a relatively high retirement benefit liability. In 2022, the state’s combined retirement liabilities were estimated at $54.5 billion, or 8.7% of GDP, 11th highest among all states. Including net tax supported debt for the corresponding year, the state’s long-term liabilities reflect approximately 10.1% of GDP. Pursuant to legislation passed in 1997, Michigan required all new state employees (not including Michigan State Police Officers) hired after March 31, 1997 to participate in the State of Michigan Defined Contribution Retirement Plan. Employees who had been part of the workforce before the aforementioned date were given the option of either remaining in the current defined benefit plan or transferring into the new defined contribution plan. As of May 2022, only 22% of current employees participated in the defined benefit plan. In 2012, the state enacted reforms requiring employees to contribute more money in order to stay in the OPEB plan; and in 2017, the state enacted a law that moved new public school employees (starting in February 2018) into either a hybrid plan or a plan that resembles a 401(k).
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As of May 1, 2024, the state of Michigan was rated AA+ by Fitch, Aa1 by Moody’s and AA by S&P.
Minnesota. Minnesota has benefitted from consistent population growth over the last several years. The state’s population was approximately 5.738 million as of December 31, 2023, representing a cumulative 2.3% increase over the last five years.
The Minnesota economy has grown rapidly over the last three years. State GDP was approximately $471.8 billion as of December 31, 2023, representing 24.3% growth since 2020. Wealth levels remain stable, with per-capita personal income of $71,886 representing approximately 104% of the U.S. average. The state’s seasonally adjusted unemployment rate stood at just 2.7% as of March 2024, a rate lower than the national average (3.8%).
The state has established a favorable liquidity position, buoyed by a predictable revenue mix and financial aid provided through the Coronavirus Aid, Relief and Economic Security (CARES) Act as well as the American Rescue Plan (ARP) Act. Minnesota received $2.187 billion through the CARES Act as well as $2.8 billion through the ARP Act. Additionally, the state generated stronger-than-anticipated revenue growth over the last two fiscal years. Although the 2022-23 biennium was expected to end with a projected balance of $12.283 billion, actual collections exceeded the previously forecasted amounts, and estimated spending was lower. The 2022-23 biennium closed with a surplus of $13.103 billion, and the state’s unassigned fund balance measured $14.147 billion at the end of fiscal year 2023. The 2024-25 biennium is projected to yield a $2.392 billion surplus. Owing to the large carryforward from the prior biennium, a significant portion of the 2024-25 biennium appropriated budget consists of one-time expenditures that are not planned to continue beyond the current biennium.
The state maintains manageable fixed costs. Net tax-supported debt of $9.367 billion was approximately $1,638 per capita and 2.4% of personal income. Debt service accounted for approximately 2.6% of general government spending in fiscal 2023. All of the state’s debt is fixed rate and amortizes over 20 years.
Minnesota participates in nine defined benefit pension plans in addition to providing support to local government pension plans. The funded ratios of the largest plans have improved in recent years due to strong investment returns and greater contributions from the state. Minnesota has contributed at or above the “tread water” benchmark for three consecutive years, a significant improvement from smaller contributions in the four years prior. The state maintains significant legal flexibility to enact pension reform and exercised its authority in each of 2010, 2015 and 2018 to increase employer and employee contributions, reduce benefits and reduce the assumed rate of return. As is the case with many states, Minnesota funds other post-employment benefits (OPEB) liabilities on a pay-as-you-go basis. The total OPEB liability was $629.8 million as of June 30, 2022, which equates to only $105 per capita.
As of April 29, 2024, Minnesota was rated Aaa (stable) by Moody’s and AAA (stable) by S&P.
Ohio. Following national trends, Ohio experienced moderate but steady growth in 2023. Ohio’s seasonally adjusted GDP grew by 2.7% in the first quarter, before decelerating for the remainder of the year to 2.1% in the fourth quarter of 2023. After the rapid rise in CPI during fiscal year 2022, decisive action by the Fed and other market conditions drove inflationary pressure down in fiscal year 2023. By June 2023, the CPI for all urban consumers had decreased to 3% for the last 12 months, a decrease from the 9.1% peak in 2022.
Ohio, like most of the United States, benefited from strong labor conditions in 2023. The state’s unemployment rate decreased steadily throughout the year, punctuated by a historic low of 3.4% in June 2023 (per the Bureau of Labor Statistics). Labor force participation climbed to 62.2% by fiscal year-end, while the national rate remained comparatively stagnant at 62.6% in the last quarter of 2023.
Ohio’s population was estimated to be 11.786 million in 2023, a 0.22% increase year over year. The state’s wealth and income levels lag behind the national averages. Ohio’s per-capita income of $60,402 is 88% of the national average (most recent data US Department of Commerce).
Ohio’s financial performance benefits from strong fiscal management, high liquidity due to reserves outside the general fund, manageable debt, and the state's statutory requirement calling for surplus revenues to be deposited into the Budget Stabilization Fund (BSF). Ohio also has a mechanism in place that allows the Governor to withhold expenditures in order to maintain a balanced budget, and the Governor has made use of this power in recent years. BSF recorded a record-high balance of $3.5 billion for fiscal year 2023. By law, the target balance for the BSF is permitted to be as high as 10% of the prior fiscal year’s general revenue fund revenues.
The state ended fiscal year 2023 with a general fund balance of $19.72 billion, an increase from $15.64 billion at the end of fiscal year 2022. The improvement in fund balance was primarily driven by a $2.96 billion increase in revenue, which was largely due to increases in income tax and sales tax revenues of 2.1% and 3.9%, respectively. Total expenditures increased $2.36 million over the prior year.
Ohio’s debt load remains moderate, and the constitution caps debt service at 5% of revenues plus net state lottery profits. Overall long-term debt of the State’s primary government decreased $1.3 billion or 7.2% during 2023, for an ending balance of $16.67 billion. During the year, the state issued
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$544.4 million debt, of which $200.3 million was refunded. General obligation debt totals $7.770 billion in fiscal year 2023, compared to $8.690 billion in fiscal year 2022.
Funding for the state’s pension system, which is comprised of the Ohio Public Employees Retirement System (OPERS), State Teachers Retirement System (STRS) and Highway Patrol Retirement System (HPRS), has improved since a series of reforms were enacted in 2012, with the goal of improving the funded ratios. The key changes included increasing the required number of years of service as well as the eligibility age to retire with full benefits, increasing the minimum salary threshold for eligibility to participate in the system, and increasing the number of years used in determining the “final average salary” from three to five. At the end of fiscal year 2023, the state’s overall average pension funded ratio across all plans was 81.3%, which was higher than the national average of 78%.
As of April 2024, Moody’s, S&P, and Fitch maintain long-term credit ratings on the state of Aaa (stable), AAA (stable), and AAA.
Oregon. Since the end of COVID-19 pandemic, Oregon has experienced moderating economic growth. Gross state product increased 2.4% on an annualized basis as of December 2023, and nonfarm payrolls decreased 0.1% in March 2024, compared to the previous March. As of March 2024, the unemployment rate has increased to 4.2%, having reached a historic low of 3.5% in March 2022. Unemployment remains significantly below the peak level of 13.2%, recorded in April 2020 during the early stages of the pandemic. Oregon's population was estimated at approximately 4.233 million as of July 2023, a decrease of -0.1% from the prior year. However, the state’s population has increased 11% since 2010, driven by net migration. Wealth indicators are near United States averages; per-capita income and median household income amount to 101% and 102% of nationwide levels, respectively, while the state’s poverty ratio is 12.1%, compared to 11.5% nationwide. Historically, technology and manufacturing have functioned as the primary drivers of income and employment; recently, however, health services, professional and business services, construction and leisure and hospitality have been growing sectors.
Oregon’s constitution requires a balanced biennial budget, and the state maintains significant flexibility to raise revenues and reduce expenses, subject to the majority approval of the legislature. In addition, each biennium budget includes a stated allotment of spending, which can be withheld without legislative approval in order to quickly address a budget shortfall.
Oregon completed the 2021-2023 biennium period with net tax revenues of $30.7 billion, an amount 30% higher than the baseline forecast. The outperformance was mostly driven by stronger-than-expected economic activity in the wake of the pandemic. Because revenues came in more than 2% over the budget, $5.6 billion of the surplus will be returned to taxpayers on their April 2024 state income tax returns. Under the terms of the state’s "kicker" provision, if the amount of revenues received in any biennium period exceeds the budget by more than 2%, the excess must be returned to state taxpayers.
The state’s enacted 2023-2025 budget, including the General Fund and lottery fund, totals $33.5 billion, an increase of 25% over the 2021-2023 biennium period. A significant portion of the increase was the result of one-time expenditures on programs targeting public health initiatives in the state, such as reducing homelessness. While the budget is structurally balanced, the income tax “kicker” triggered by the previous budget surplus created a deficit of approximately $4 billion, which Oregon plans to offset with its undesignated surplus fund balance. The largest spending categories are education (41% of the budget) and human services (34% of the budget). General Fund revenues were budgeted to amount to $31.9 billion, and the General Fund ending fund surplus balance was projected to be $444 million. Revenue growth is substantially driven by the performance of personal income and corporate income tax receipts. The state does not collect a sales tax. Revenues are on track to meet expectations as of April 2024.
At the end of the 2021-2023 biennium period, the combined balance in the state’s Rainy Day Fund (RDF) and Education Stability Fund (ESF) was $2.1 billion, an increase from $1.38 billion at the end of the 2019-2021 biennium. Based on forecasts for the 2023-2025 period, the combined balance in the RDF and ESF is projected to increase to approximately $2.9 billion by the end of biennium period. Contributions to the RDF and ESF are capped at 7.5% and 5%, respectively, of the prior biennium’s total General Fund revenues.
Oregon's outstanding general obligation and appropriation debt stood at $7.51 billion at the end of fiscal year 2023, an increase from $6.81 billion the prior year. According to Moody's 2022 State Debt Medians Report (the most recent report), Oregon’s net tax-supported debt of $12 billion equated to net-tax supported debt per capita of $2,820, which is higher than the national median of $1,178. Debt-to-personal income of 4.5% was also high, compared to the national median of 2.2%.
In recent years, funding of Oregon’s public employees’ retirement system (OPERS) has fluctuated owing to pension reforms, actual investment returns, and increased employer contributions. As of June 2022 (the most recent available data), the funded ratio declined slightly from 87.6% to 84.6%, while the state’s share of the unfunded liability increased from $2.9 billion to $4.0 billion.
As of April 26, 2024, Moody's, S&P, and Fitch maintained long-term credit ratings on the state of Aa1, AA+, and AA+, respectively. In April of 2024, Fitch revised its outlook from
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“stable” to “positive”, indicating the potential for an upgrade to AAA within the next two years.
Pennsylvania. The Commonwealth of Pennsylvania experienced a large influx of residents in 2020. Since peaking in 2021, however, the commonwealth’s total population has declined slightly, by -0.40% to 12.961 million in 2023. Pennsylvania is the fifth largest state by population.
Economic activity within Pennsylvania was significantly impacted by the COVID-19 pandemic. The commonwealth lost approximately 1.05 million jobs between February 2020 and April 2020, a decline of approximately 17.5%. As of March 2024, Pennsylvania’s job market has nearly fully recovered, with employment currently at 99.6% relative to pre-pandemic levels. State GDP expanded by approximately 5.8% in 2023 to $965.1 billion and 14.3% since 2021. Pennsylvania remains the sixth largest economy in the nation. Wealth levels remain stable, with per-capita personal income of $67,839 representing 99% of the U.S. average in 2023. The commonwealth’s seasonally adjusted unemployment rate stood at 3.4% as of March 2024, which is slightly lower than the 3.8% national average.
Historically, Pennsylvania has struggled to generate operating surpluses, relying on debt financing and withdrawals from its budgetary stabilization reserve (BSR) to meet operating expenses. The commonwealth’s finances have been buoyed by the receipt of significant federal funds from the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the American Rescue Plan (ARP) Act. The commonwealth has redeveloped its fiscal strategies to improve the strength of its General Fund by maximizing the use of federal funding. In addition, the commonwealth appropriated an additional $896 million in CARES Act and ARPA funding, along with $1.6 billion of Inflation Reduction Act funding, in 2023.
The combination of historically high profit margins and the Tax Cut and Job Act (2017) drove corporate tax revenues higher in 2023 and offset declines in certain major tax categories. Overall, tax revenues, which account for 45% of general fund revenues, increased 1.1% in fiscal year 2023. As of June 30, 2023, fiscal year general fund revenues exceeded expenses by $5.76 billion, which resulted in a transfer to the BSR. The commonwealth completed fiscal year 2023 with a $18.2 billion general fund balance, of which $5.15 billion was transferred to the BSR to bring the reserve above its targeted threshold. Currently, total fund balance levels are at 20.3% of general fund expenditures, which is the highest level on record since 2008. The excess revenues in fiscal 2023 also enabled the commonwealth to transfer an additional $900 million to the BSR in fiscal year 2024. The fiscal year 2024 general fund budget totals approximately $45.5 billion, a 6% year-over-year increase. The budget makes additional deposits into the rainy-day fund. Act 91 of 2002 stipulates that the BSR carry a balance equivalent to 6.0% of general fund revenues to mitigate unexpected revenue shortfalls resulting from economic downturns.
Pennsylvania carries a fixed cost burden higher than most states’. Net tax-supported debt of $20.3 billion was approximately $1,565 per capita and 2.4% of personal income, higher than the national medians of $1,179 and 2.2%, respectively. The commonwealth’s amortization equates approximately to the average U.S. state’s, with approximately 62.5% of outstanding debt scheduled to mature over the next ten years.
The commonwealth’s pension systems, which in prior years were nearly fully funded, have been adversely affected by a combination of market disruptions, increased benefits and underfunding. The average pension funding ratio across all plans was only 61.5% in fiscal 2023, compared to 56.4% in fiscal year 2019. The Public Schools Employees Retirement System (PSERS) was approximately 61.3% funded with a net pension liability (NPL) of $265 million, while the State Employees Retirement System (SERS) was 61.5% funded, with an NPL of $19.4 billion. The total unfunded liability of all plans, including other post-employment benefits (OPEB), is approximately 37.1 billion.
Pennsylvania has funded its full actuarily determined contribution (ADC) in each of the last five fiscal years and enacted reforms to address long-term liabilities. The commonwealth now offers newly-hired workers the option to contribute retirement benefits to a 401(k)-style investment plan or to another defined contribution plan. In addition, the commonwealth has increased the retirement age and made adjustments to the salary component of the pension benefit formula for these retirees. The impact of the reforms is not anticipated to benefit the commonwealth in the near-term, however; any savings are not expected to be realized until at least 2032. Additionally, Pennsylvania carries an elevated OPEB liability of $17.4 billion, translating to approximately $1,342 per capita.
As of May 3, 2024, Pennsylvania is rated Aa3 (Stable) by Moody’s and A+ (Stable) by S&P.
U.S. Territories Since the Fund may invest in municipal securities issued by U.S. territories, the ability of municipal issuers in U.S. territories to continue to make principal and interest payments may affect the Fund's performance. As with state municipal issuers, the ability to make these payments depends upon economic, political and other conditions.
Below is a discussion of certain conditions that may affect municipal issuers in various U.S. territories. It is not a complete analysis of every material fact that may affect the ability of issuers of municipal securities to meet their debt obligations or the economic or of political conditions within any U.S. territory, and is subject to change. The information below is based on data available to the Fund from historically reliable sources, but the Fund has not independently verified
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it. In addition, the disclosure below reflects only the information available to the Fund as of May 1, 2024. The information and risks set forth below could change quickly and without notice due to new or different information becoming available, market or economic changes or other unforeseen events, among other things. The Fund generally only updates the information below before June of each year. Therefore, the disclosure may not reflect any new or different information that becomes available.
The ability of issuers of municipal securities to continue to make principal and interest payments depends in large part upon their ability to raise revenues, primarily through taxes, and to control spending. Many factors can affect a territory's revenues, including the rate of population growth, man-made or natural disasters, unemployment rates, personal income growth, federal aid, and the ability to attract and retain successful businesses. A number of factors can also affect a territory's spending, including the need for infrastructure improvements, increased costs for education and other services, current debt levels, and the existence of accumulated budget deficits.
Guam. Guam is an organized, unincorporated territory of the United States, located approximately 3,800 miles west-southwest of Hawaii, 1,500 miles south-southeast of Japan and 1,600 miles east of the Philippines. The island is approximately 212 square miles, stretching 30 miles long and varying in width between four and nine miles. Guam had an estimated population of 153,836 as of 2020, according to the most recently available information from the U.S. Census Bureau.
The U.S. military and tourism industry are significant drivers in Guam’s economy. Additionally, the government of Guam also receives significant support from the U.S. Treasury. In terms of tourism, visitor arrivals reached an all-time peak in 2019 of 1.67 million and averaged 1.54 million visitors between 2015 and 2019. However, visitor arrivals plummeted to 0.32 million visitors in calendar year 2020 due to the COVID-19 pandemic. Visitor arrivals increased in 2022 and 2023. For the calendar year 2024, visitor arrivals continue to increase. However, numbers of visitors are still below pre-COVID levels. Guam depends highly upon Asian travelers (from Japan and Korea), and many of these travelers have not returned post-COVID-19. Although Asian visitor arrivals are still far below historic levels, they have been increasing. Japanese tourists had traditionally been the largest visitor base; recently, however, Japanese visits have seen a decline, while South Korean visits have seen strong growth. Of note, the significant negative impacts upon the tourism industry have resulted in material declines in hotel occupancy and room rates since the beginning of the COVID-19 pandemic. The hotel occupancy rate declined to 66% in calendar year 2022 from 89.5% in 2019 while the average room rate decreased to $192 from $211 in the prior year. As of March 2024, the preliminary hotel occupancy rate was 62.3%, compared to 59.7% a year earlier, and the weighted hotel room rate was $198. The unemployment rate was reported at 4.1% as of September 2023. While this rate is significantly lower than the 17.9% rate in 2020, it is still above historic levels. Civilian employment has increased in each year since the pandemic through 2023.The U.S. military presence in Guam remains somewhat of a stabilizing contributor to the economy. As of September 31, 2022, the most recent available information, the island was home to 6,667 active military members. The Department of Defense plans to relocate additional military members from Okinawa, Japan to Guam in the future. The current plan contemplates the relocation of approximately 6,300 military personnel and 320 dependents by fiscal year 2028.
Heading into the pandemic, Guam’s overall financial condition had shown signs of improvement, but continues to remain stressed. The general fund has had a lengthy history of producing recurring annual operating deficits. In four of the past six years, the general fund has produced a surplus after net transfers, including a surplus of $46.3 million in fiscal year 2020 and $30.4 million in 2021. Even still, while the accumulated general fund deficit improved from $47.8 million in fiscal year 2018 to an accumulated deficit of $1.5 million, the unassigned general fund deficit remained significant at $108.1 million (-15.4% of expenditures) in fiscal year 2020. Of note, Guam has received various rounds of stimulus from the federal government since the start of the pandemic and has received an estimated $556 million in direct aid as part of the American Rescue Plan Act (ARPA) in 2021 according to the National Conference of State Legislatures. Of equal note, as part of the ARPA, Guam will now be reimbursed by the Federal Government for the earned income tax credit, which has historically been an unfunded federal mandate for the Government of Guam and is expected to provide approximately $55 million to the general fund. Throughout the pandemic, the government prioritized balancing its budget, and for fiscal year 2023, it expects to generate another surplus and deposit 2% into its “rainy day” fund. The government’s fiscal condition continues to improve through fiscal year 2024.
Guam maintains a relatively leveraged balance sheet, completing fiscal year 2021 with roughly $1.0 billion of net tax-supported debt. While Guam’s status as a territory is not a direct comparison to states, Guam’s debt levels on a per capita basis of approximately $6,200 nonetheless significantly exceeds Moody’s 2022 50-state median of $1,178. Higher debt levels are partially attributable to the territory’s responsibility for government services generally provided by both state and local governments.
The government closed its defined benefit plan to new members in 1995 and replaced it with a defined contribution plan, resulting in a more favorable pension funding situation. Of note, pursuant to legislation passed in 2016, eligible employees in the defined contribution plan were granted the
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option to transfer into a new hybrid defined benefit-contribution plan, DB 1.75, during 2017. Guam reported that approximately 3,379 of 8,947 defined contribution plan members elected to transfer into the new plan during the eligibility window. As reported in the fiscal year 2022 audit (with a measurement date in 2021), the reported aggregate net pension liability was $1.1 billion across the defined benefit plan, with a funded ratio of 62%. As of September 30, 2022, Guam’s aggregate unfunded actuarial accrued OPEB liability was $1.9 billion.
As of March 1, 2024, Guam’s general obligation debt was rated by Moody’s at Baa3, with a stable outlook. S&P rated Guam’s general obligation debt BB-, with a stable outlook.
Mariana Islands. The Commonwealth of the Northern Mariana Islands (CNMI) became a U.S. territory in 1975. At that time, the U.S. government agreed to exempt the islands from federal minimum wage and immigration laws in an effort to help stimulate the economy. As a result, the islands were able to develop a large garment industry, which at one time encompassed 40% of the economy, and its rapid growth from 1980-1995 elevated CNMI’s overall economic growth to among the highest levels worldwide. Critical to this growth was duty-free access to U.S. markets and local authority over immigration and the minimum wage. However, in 2005, the World Trade Organization (WTO) eliminated quotas on apparel imports from other textile producing countries. Subsequently, CNMI lost its main competitive advantage. In 2007, CNMI's immigration and minimum wage laws were federalized. Since then, CNMI has been required to follow all U.S. immigration and minimum wage laws. The minimum wage increased by $0.50 each year (except in 2011, 2013, and 2015, when no increase occurred) until it reached the current U.S. minimum wage of $7.25. Under the new immigration laws, all non-U.S. born residents were required to leave CNMI by 2012 unless they qualified for a working visa. The increasing minimum wage in CNMI, combined with current immigration laws, has caused the territory’s garment industry to rapidly decline, hindering the economic and financial stability of the commonwealth. According to the 2020 Census, the population of CNMI was 49,796, representing a 7.9% decrease from the 2010 Census.
Estimates show that real GDP for CNMI decreased 29.7% in 2020, after decreasing 11.3% in 2019. The decline in GDP was primarily a result of decreases in exports of goods and services, private fixed investment, and government spending. Exports of services declined by 31.1 in 2020, driven by a decrease in visitor spending, including a decline in casino gambling. The number of visitors to CNMI declined 81.7% year over year in 2020 and declined another 86% in 2021 before rebounding in 2022. Through the first quarter of 2023, the number of visitors has been higher than it was through the same quarter in 2022. As a result of the pandemic, revenues from casino gambling decreased by more than 95%. Private fixed investment decreased 42.7% year-over-year due to a decline in spending on structures and equipment and in private sector construction activity. Government spending declined 6 percent year over year in 2020; federal government spending decreased 43% year over year after being elevated in 2019 due primarily to recovery activities following Typhoon Yutu.
CNMI’s net deficit position decreased 4.89% from $504.7 million (with no prior period adjustments) in fiscal year 2019 to $480 million in fiscal year 2020. The improvement was partially driven by a decrease in net pension liabilities and a reduction in the unrestricted net deficit position. The adoption of Government Accounting Standards Board (GASB) accounting regulations required the inclusion of net pension liability for fiscal year 2019, which was not required for previous fiscal years.
The commonwealth’s general fund had an unassigned fund deficit of $134.9 million at the end of fiscal year 2020, a slight increase of 0.489% over the prior year. CNMI has operated at a deficit since 1984, as the territory historically has spent more than it has collected in revenue. Since the territory has had minimal spare revenue due to the operating deficit, the commonwealth has historically foregone funding its retirement requirements; as a result, CNMI's pension fund remains heavily underfunded. The commonwealth had a net pension liability of $470.4 million and a funded status of 19.85% at the end of fiscal 2021.
Moody’s last rated the commonwealth general obligation bonds at B2; however, the rating agency withdrew the credit from review in September 2013 due to lack of disclosure. Standard & Poor’s does not rate the commonwealth.
Puerto Rico. The Commonwealth of Puerto Rico (“Puerto Rico”), along with its related issuers, is among the largest and most widely held issuers of municipal bonds, due in part to such bonds’ exemption from federal, local and state taxes in all U.S. states. However, certain municipal issuers in Puerto Rico have continued to experience significant financial difficulties. Credit rating firms, such as Standard & Poor’s, Fitch Ratings, and Moody’s Investors Service, have downgraded their respective ratings of Puerto Rico’s general obligation debt further below investment grade, along with the ratings of certain related Puerto Rico issuers. On July 7, 2016, Standard & Poor’s downgraded Puerto Rico’s general obligation rating to D. On July 1, 2016, Moody’s revised the outlook on Puerto Rico’s Caa3 general obligation rating to “developing” from “negative.” On July 5, 2016, Fitch Ratings downgraded Puerto Rico to D. Additionally, several of the other credit agencies have maintained a negative outlook on certain Puerto Rico issuers. More recently, Moody’s withdrew its ratings of Puerto Rico in July 2021. Although the Fund has not been required to sell securities that have been downgraded to below investment grade, it is prohibited from making further purchases of any securities not rated
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“investment grade” by at least one U.S. nationally recognized rating service.
In June 2014, Governor Padilla signed into law the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (Act), citing a "fiscal emergency" relating to certain of its public corporations. According to the governor, the Act was meant to provide a legal framework that can be used by certain Puerto Rico public corporations, including Puerto Rico Electric Power Authority (PREPA), to seek protection from creditors and to reorganize and restructure their debt should they become insolvent. Although Puerto Rico is a U.S. territory, neither Puerto Rico nor its subdivisions or agencies are currently eligible to file under the U.S. Bankruptcy Code in order to seek protection from creditors or to restructure their debt. Congress created a framework to restructure the island’s debt. As of this writing, Puerto Rico has completed restructuring most of its governmental entities, with a few in the final stages.
Puerto Rico's economy has traditionally tracked that of the U.S. mainland. However, as an island it is more exposed to environmental risks and demographic risks. Puerto Rico entered its own recession in 2006, ahead of the mainland. As a result of population flight to the mainland, Puerto Rico struggled to recover. After beginning the restructuring process, the island sustained extensive damage from Hurricane Maria in 2017; that disaster was followed by earthquakes in 2019 and 2020 and by COVID-19 in 2020. As a result of significant federal aid to rebuild after the natural disasters, COVID-19 relief and savings accrued from not paying debt service during the restructuring, the government’s financial situation has improved.
Puerto Rico’s unemployment rate remains high compared to mainland metrics. Despite volatility resulting from Hurricane Maria and from COVID-19, however, unemployment has improved from highs over the past decade. As of October 2023, the unemployment rate was 5.5%, a decrease from 6.5% a year earlier. Although total non-farm payroll employment (seasonally adjusted) has declined on a year-over-year basis since 2013, Puerto Rico has experienced recent growth in this area, as well, as it did after Hurricane Maria. Payroll employment, which was 920,800 for 2022, has improved to 955,900 as of October 2023, a 3.8% increase. The largest employment sectors include services (40%), government (21%), trade (20%) and manufacturing (9%) as of October 2023. While the manufacturing sector comprises only 9% of employment, it is the largest sector in terms of gross domestic product. According to preliminary 2017 data, the most current available, the manufacturing sector constituted 48.2% of total GDP. The manufacturing sector has undergone some major changes. Pharmaceuticals, biotechnology and technology became growth areas in the 1990s, but this trend has reversed since then, with manufacturing employment declining 38% from fiscal years 2007 to 2015 (most recent data available).
Tourism is an important part of the economy, and tax revenues and the number of visitors to the island were significantly impacted by Hurricane Maria, the 2019 and 2020 earthquakes and COVID-19. The island registered total hotel registrations of 213,200 as of December 2023, a 5.2% increase year-over-year. Occupancy rates hover around 69.9%, down from historical highs, but improved post-COVID-19.
The island’s population has stabilized over the past several years, which is an improvement from out-migration experienced for the last decade or more.
The commonwealth has operated within a deficit for well over a decade. The deficit operations have resulted from incorrect revenue assumptions, underestimated spending levels, lack of financial management, poor collection rates and a weak economy, among other factors. The Fortuño and Padilla Administrations each tried to implement economic and fiscal revitalization plans, but neither was able to ameliorate its deficit operations. Unfortunately, the commonwealth has not produced audited financial statements since June 30, 2021. However, the commonwealth has experienced strong revenue growth over the past several years. On a cash basis, the government is producing higher-than-budgeted results, owing in part to federal aid, conservative budgeting and the re-opening of the economy after COVID-19 related closures. Cash has also been bolstered by the government’s refraining from paying debt service. When the bankruptcy is complete and the Federal Oversight and Management Board (FOMB) is disbanded, it will remain to be seen how the government manages its budget and incorporates restarting debt service payments on restructured debt.
Puerto Rico’s debt levels have historically been higher than per-capita metrics for the nation as a whole, given that Puerto Rico centralizes the majority of its debt issuance at the territory level. These debt levels increased as Puerto Rico financed significant capital and infrastructure improvements, and historically, the commonwealth has relied on the capital markets for funding of current year expenses. As a result of the bankruptcy, Puerto Rico has restructured nearly all of its governmental debt (excluding PREPA), which has not only brought down overall debt levels, but lowered annual debt service requirements.
According to the June 30, 2022, actuarial report, Puerto Rico continues to maintain a very high unfunded pension liability of $48 billion, and its primary pension fund had an estimated funded ratio of below 1%. It also had an estimated unfunded other post-employment benefits (OPEB) liability of $1.3 billion as of June 30, 2022. Consequently, the commonwealth faces large pension requirements and a pension fund with an extremely large unfunded liability.
Outstanding issues relating to the potential for a transition to statehood may also result in broad implications for Puerto
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Rico and its financial and credit position. The political party currently in power supports statehood. The U.S. House of Representatives has considered legislation that would allow the residents of Puerto Rico to vote on the territory’s political status. If approved by Congress, Puerto Rico would first hold a referendum asking residents if they prefer Puerto Rico to be a self-governing commonwealth or to change the island's status. If a majority were to vote for a different status, the island would then hold a second election to decide what status is desired. One of these options would be statehood. The president has recommended that Congress appropriate money for Puerto Rico to hold a non-partisan election on the question of political status. It is not clear what the timeline, the outcome or the repercussions would be of such a vote. A plebiscite was held on June 8, 2017, and although 97% of voters chose statehood, only 23% of voters turned out to vote. Given that the current governor supports statehood., the topic is more publicly prominent than it has been when a non-pro-statehood governor has been in office.
U.S. Virgin Islands. The United States Virgin Islands (USVI) is an organized, unincorporated territory of the United States, located approximately 40 miles east of the Commonwealth of Puerto Rico. The U.S. Virgin Islands is composed of the main islands of Saint Croix, Saint John and Saint Thomas, along with a series of smaller islands. The total land area of the territory is 133.73 square miles.
The U.S. Virgin Islands continues to experience negative net migration, completing 2020 with an estimated population of 106,290. The number of total residents has declined by approximately 1.9% over the last decade. Total non-farm employment has been relatively stable, at approximately 35,500 as of October 2023, but still lower than highs in 2014. The unemployment rate was 3.3% as of October 2023, the lowest rate in two decades. The local economy remains narrow, with tourism and related industries accounting for roughly 80% of annual economic activity. The number of total visitors to the island declined by 58.7% in 2020 to 856,147 as a result of the COVID-19 pandemic. The number of visitors to the USVI improved in 2021, but is still considerably lower than pre-COVID-19 levels. Calendar-year-to-date as of September 2023 shows 595,768 visitors, which is 5.5% lower than a year earlier. Average hotel occupancy was approximately 61.2% as of July 2023.
Weaker tourism trends have negatively impacted economic activity, as nominal GDP has contracted by an aggregate 13.2% over the last five years. Per capita personal income was approximately $25,497 in 2019, representing 45.4% of the national average. The economy has been additionally impacted by the closure of the Hovensa petroleum refinery in 2012. The refinery was previously the largest employer and taxpayer on the islands; the closure resulted in the loss of roughly 2,000 jobs. The USVI labor force totaled 39,709 as of January 31, 2022, an increase of 2.9% from the same period in 2021.
The USVI maintains elevated fixed costs, with net tax supported debt of $2.006 billion. Debt-per-capita is approximately $18,752, which is considerably higher than the 50-state median of $1,068. Net tax-supported debt additionally represents 52.8% of GDP, which is also considerably higher than the 50-state median and is the second-highest among the territories, following Puerto Rico. The government employees’ retirement system also has a very large unfunded liability, which has been exacerbated by the government’s deferral of its statutorily-required contributions. As of September 30, 2020, the pension system had a funded ratio of 11%; the system’s actuaries project the system will exhaust its assets in fiscal year 2024. In 2022, the USVI refinanced part of its outstanding debt in an effort both to benefit from lower rates and to provide a new windfall of revenues dedicated to its pension system. This additional revenue source is expected to help stabilize the pension fund; however, it remains to be seen how materially pension metrics will improve.
The USVI has struggled to provide audited financial statements in a timely manner. The territory has still not disclosed audited financials since fiscal year 2020.
Policies and Procedures Regarding the Release of Portfolio Holdings
The Fund's overall policy with respect to the release of portfolio holdings is to release such information consistent with applicable legal requirements and the fiduciary duties owed to shareholders. Subject to the limited exceptions described below, the Fund will not make available to anyone non-public information with respect to its portfolio holdings, until such time as the information is made available to all shareholders or the general public.
For purposes of this policy, portfolio holdings information does not include aggregate, composite or descriptive information that, in the reasonable judgement of the Fund’s Chief Compliance Officer, does not present risks of dilution, arbitrage, market timing, insider trading or other inappropriate trading to the detriment of the Fund. Information excluded from the definition of portfolio holdings information generally includes, without limitation: (1) descriptions of allocations among asset classes, regions, countries or industries/sectors; (2) aggregated data such as average or median ratios, market capitalization, credit quality or duration; (3) performance attributions by industry, sector or country; or (4) aggregated risk statistics. Such information, if made available to anyone, will be made available to any person upon request, but, because such information is generally not material to investors, it may or may not be posted on the Fund's website. In addition, other information may also be deemed to not be portfolio holdings information if, in the reasonable belief of the Fund's Chief Compliance Officer (or his/her designee), the release of such information would not present risks of dilution,
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arbitrage, market timing, insider trading or other inappropriate trading for the Fund.
Consistent with current law, the Fund releases complete portfolio holdings information each fiscal quarter through regulatory filings with no more than a 60-day lag.
In addition, subject to the limited exceptions noted below, a complete list of the Fund's portfolio holdings is generally released no sooner than 15 calendar days after the end of each calendar month but may be released earlier provided the release is made available to the general public. Other portfolio holdings information, such as top 10 holdings, commentaries and other materials that may reference specific holdings information of the Fund as of the most recent month end are generally released five days after the end of each month but may be released earlier or later as deemed appropriate by the Fund’s portfolio manager. Released portfolio holdings information can be viewed at www.franklintempleton.com.
To the extent that this policy would permit the release of portfolio holdings information regarding a particular portfolio holding for the Fund that is the subject of ongoing purchase or sale orders/programs, or if the release of such portfolio holdings information would otherwise be sensitive or inappropriate due to liquidity or other market considerations, the portfolio manager for the Fund may request that the release of such information be withheld.
Exceptions to the portfolio holdings release policy (to the extent not otherwise permitted pursuant to an exclusion) will be made only when: (1) the Fund has a legitimate business purpose for releasing portfolio holdings information in advance of release to all shareholders or the general public; (2) the recipient is subject to a duty of confidentiality pursuant to a signed non-disclosure agreement; and (3) the release of such information would not otherwise violate the antifraud provisions of the federal securities laws or fiduciary duties owed to Fund shareholders. The determination of whether to grant an exception, which includes the determination of whether the Fund has a legitimate business purpose for releasing portfolio holdings information in advance of release to all shareholders shall be made by the Fund's Chief Compliance Officer or his/her designee, following a request submitted in writing.
The eligible third parties to whom portfolio holdings information may be released in advance of general release fall into the following categories: data consolidators (including rating agencies), fund rating/ranking services and other data providers; service providers to the Fund and investment manager; municipal securities brokers using the Investor Tools product which brings together buyers and sellers of municipal securities in the normal operation of the municipal securities markets; certain entities, in response to any regulatory requirements, approved by the investment manager’s Chief Compliance Officer in limited circumstances; and transition managers hired by Fund shareholders. In addition, should the Fund process a shareholder’s redemption request in-kind, the Fund may, under certain circumstances, provide portfolio holdings information to such shareholder to the extent necessary to allow the shareholder to prepare for receipt of such portfolio securities.
The specific entities to whom the Fund may provide portfolio holdings in advance of their release to the general public are:
• Bloomberg, Capital Access, CDA (Thomson Reuters), FactSet, Fidelity Advisors, S&P Global Ratings, Vestek, and Fidelity Trust Company, all of whom may receive portfolio holdings information 15 days after the quarter end.
• Service providers to the Fund that receive portfolio holdings information from time to time in advance of general release in the course of performing, or to enable them to perform, services for the Fund, including: Custodian Bank: JPMorgan Chase Bank; Sub-Administrator: JPMorgan Chase Bank; Independent Registered Public Accounting Firm: PricewaterhouseCoopers LLP; Outside Fund Legal Counsel: Stradley Ronon Stevens & Young, LLP; Independent Directors'/Trustees' Counsel: Vedder Price P.C.; Proxy Voting Services: Glass, Lewis & Co., LLC and Institutional Shareholder Services, Inc.; Brokerage Analytical Services: Sanford Bernstein, Brown Brothers Harriman, Royal Bank of Canada Capital Markets, JP Morgan Securities Inc.; Financial Printers: Donnelley Financial Solutions, Inc. or GCOM Solutions, Inc.
Eligible third parties that do not otherwise have a duty of confidentiality or have not acknowledged such a duty are required to (a) execute a non-disclosure agreement that includes the following provisions or (b) otherwise acknowledge and represent adherence to substantially similar provisions. Non-disclosure agreements include the following provisions:
• The recipient agrees to keep confidential until such information either is released to the public or the release is otherwise approved by the Chief Compliance Officer.
• The recipient agrees not to trade on the non-public information received.
• The recipient agrees to refresh its representation as to confidentiality and abstention from trading upon request from Franklin Templeton.
In no case does the Fund receive any compensation in connection with the arrangements to release portfolio holdings information to any of the above-described recipients of the information.
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A fund other than a U.S. registered Franklin Templeton fund, such as an offshore fund or an unregistered private fund, with holdings that are not substantially similar to the holdings of a U.S. registered Franklin Templeton fund, is not subject to the restrictions imposed by the policy.
Several investment managers within Franklin Templeton (F-T Managers) serve as investment managers to offshore funds that are registered or otherwise authorized for sale with foreign regulatory authorities. Certain of these offshore funds may from time to time invest in securities substantially similar to those of the Fund. The release of portfolio holdings information for such offshore funds is excluded from the Fund's portfolio holdings release policy if such information is given to banks, broker-dealers, insurance companies, registered investment managers and other financial institutions (offshore investment managers) with discretionary authority to select offshore funds on behalf of their clients. Such information may only be disclosed for portfolio analytics, such as risk analysis/asset allocation, and the offshore investment manager will be required to execute a non-disclosure agreement, whereby such offshore investment manager: (1) agrees that it is subject to a duty of confidentiality; (2) agrees that it will not (a) purchase or sell any portfolio securities based on any information received; (b) trade against any U.S. registered Franklin Templeton fund, including the Fund; (c) knowingly engage in any trading practices that are adverse to any such fund or its shareholders; and (d) trade in shares of any such fund; and (3) agrees to limit the dissemination of such information so received within its organization other than to the extent necessary to fulfill its obligations with respect to portfolio analytics for its discretionary clients.
Certain F-T Managers serve as investment advisers to privately placed funds that are exempt from registration, including Canadian institutional pooled funds (“Canadian funds”). In certain circumstances, such unregistered private funds and Canadian funds may have portfolio holdings that are not, in the aggregate, substantially similar to the holdings of a U.S. registered fund, as determined by the Chief Compliance Officer or his/her designee. Under such circumstances the release of portfolio holdings information to a client or potential client or unitholder of the unregistered private fund or Canadian fund may be permissible. In circumstances where an unregistered private fund or Canadian fund invests in portfolio securities that, in the aggregate, are substantially similar to the holdings of a U.S. registered fund, such private funds and Canadian funds are subject to the restrictions imposed by the policy, except that the release of holdings information to a current investor therein is permissible conditioned upon such investor’s execution of a non-disclosure agreement to mitigate the risk that portfolio holdings information may be used to trade inappropriately against a fund. Such non-disclosure agreement must provide that the investor: (1) agrees that it is subject to a duty of confidentiality; (2) agrees to not disseminate such information (except that the investor may be permitted to disseminate such information to an agent as necessary to allow the performance of portfolio analytics with respect to the investor’s investment in such fund); and (3) agrees not to trade on the non-public information received or trade in shares of any U.S. registered Franklin or Templeton fund that is managed in a style substantially similar to that of such fund, in the case of a Canadian fund.
U.S. registered open-end funds and offshore registered funds that invest substantially all of their assets in registered open-end funds and/or Exchange Traded Funds are excepted from the policy’s restrictions.
Certain F-T Managers provide model portfolios composed of portfolio holdings information to the sponsors of programs offering separately managed accounts, unified model accounts or similar accounts (“Program Sponsors”). If such model portfolios are substantially similar to those of a U.S. registered fund, such model portfolios may be provided to Program Sponsors so long as: (1) the recipient Program Sponsors has executed a non-disclosure agreement or other agreement containing or incorporating confidentiality provisions that restrict the use and dissemination of confidential portfolio holdings information received by the Program Sponsor as described in the following sentence, or other provisions that impose similar restrictions on such use and dissemination and, (2) the model portfolio has been deemed sufficiently liquid by the F-T Manager's liquidity committee or the applicable F-T Managers for the strategies of the applicable model portfolios, as determined in their reasonable judgment. Such agreement must provide that the Program Sponsor agrees that: (1) it is subject to a duty of confidentiality; (2) it will use confidential model portfolio information only to the extent necessary to perform its obligations under the agreement; and (3) it will not disclose confidential model portfolio information except to personnel or parties who have a need to know such confidential information in connection with, or in order to fulfill the purposes contemplated by, the agreement.
Some F-T Managers serve as sub-advisers to other mutual funds not within the Franklin Templeton fund complex ("other funds"), which may be managed in a style substantially similar to that of a U.S. registered Franklin or Templeton fund. Such other funds are not subject to the Fund's portfolio holdings release policy. The sponsors of such funds may disclose the portfolio holdings of such funds at different times than the Fund discloses its portfolio holdings.
The Fund's portfolio holdings release policy and all subsequent amendments have been reviewed and approved by the Fund's board, and any other material amendments shall also be reviewed and approved by the board. The investment manager's compliance staff conducts periodic reviews of compliance with the policy and provides at least
28
annually a report to the board regarding the operation of the policy and any material changes recommended as a result of such review. The investment manager's compliance staff also will supply the board yearly with a list of exceptions granted to the policy, along with an explanation of the legitimate business purpose of the Fund that is served as a result of the exception.
The Trust has a board of trustees. Each trustee will serve until that person resigns or retires and/or a successor is elected and qualified. The board is responsible for the overall management of the Trust, including general supervision and review of the Fund's investment activities. The board, in turn, appoints the officers of the Trust who are responsible for administering the Fund's day-to-day operations. The board also monitors the Fund to help ensure that no material conflicts exist among share classes. While none are expected, the board will act appropriately to resolve any material conflict that may arise.
The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Trust, principal occupations during at least the past five years, number of portfolios overseen in the Franklin Templeton fund complex and other directorships held during at least the past five years are shown below.
Independent Board Members
Name,
Year of Birth |
Position |
Length
of Time |
Number
of Portfolios Overseen
by |
Other Directorships Held During at Least the Past 5 Years |
Harris J. Ashton (1932) One Franklin Parkway San Mateo, CA 94403-1906 |
Trustee |
Since 1984 |
118 |
Bar-S Foods (meat packing company) (1981-2010). |
Director
of various companies; and formerly,
Director, RBC Holdings, Inc. (bank holding company) (until 2002); and
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers) (until 1998). | ||||
Terrence
J. Checki (1945) |
Trustee |
Since 2017 |
118 |
Hess Corporation (exploration of oil and gas) (2014-present). |
Member
of the Council on Foreign Relations (1996-present); Member of the National
Committee on U.S.-China Relations (1999-present); member of the board of
trustees of the Economic Club of New York (2013-present); member of the
board of trustees of the Foreign Policy Association (2005-present); member
of the board of directors of Council of the Americas (2007-present) and
the Tallberg Foundation (2018-present); and formerly,
Executive Vice President of the Federal Reserve Bank of New York and Head
of its Emerging Markets and Internal Affairs Group and Member of
Management Committee (1995-2014); and Visiting Fellow at the Council on
Foreign Relations (2014). | ||||
Mary C. Choksi (1950) One Franklin Parkway San Mateo, CA 94403-1906 |
Trustee |
Since 2014 |
118 |
Omnicom Group Inc. (advertising and marketing communications services) (2011-present) and White Mountains Insurance Group, Ltd. (holding company) (2017-present); and formerly, Avis Budget Group Inc. (car rental) (2007-2020). |
Director
of various companies; and formerly,
Founder and Senior Advisor, Strategic Investment Group (investment
management group) (2015-2017); Founding Partner and Senior Managing
Director, Strategic Investment Group (1987-2015); Founding Partner and
Managing Director, Emerging Markets Management LLC (investment management
firm) (1987-2011); and Loan Officer/Senior Loan Officer/Senior Pension
Investment Officer, World Bank Group (international financial institution)
(1977-1987). |
29
Name,
Year of Birth |
Position |
Length
of Time |
Number
of Portfolios Overseen
by |
Other Directorships Held During at Least the Past 5 Years |
Edith E. Holiday (1952) One Franklin Parkway San Mateo, CA 94403-1906 |
Lead Independent Trustee |
Trustee since 1998 and Lead Independent Trustee since 2019 |
118 |
Hess Corporation (exploration of oil and gas) (1993-present); Santander Holdings USA (holding company) (2019-present); and formerly, Santander Consumer USA Holdings, Inc. (consumer finance) (2016-2023), Canadian National Railway (railroad) (2001-2021), White Mountains Insurance Group, Ltd. (holding company) (2004-2021), RTI International Metals, Inc. (manufacture and distribution of titanium) (1999-2015) and H.J. Heinz Company (processed foods and allied products) (1994-2013). |
Director
or Trustee of various companies and trusts; and formerly,
Assistant to the President of the United States and Secretary of the
Cabinet (1990-1993); General Counsel to the United States Treasury
Department (1989-1990); and Counselor to the Secretary and Assistant
Secretary for Public Affairs and Public Liaison-United States Treasury
Department (1988-1989). | ||||
J. Michael Luttig (1954) One Franklin Parkway San Mateo, CA 94403-1906 |
Trustee |
Since 2009 |
118 |
Boeing Capital Corporation (aircraft financing) (2006-2010). |
Counselor
and Special Advisor to the CEO and Board of Directors of The Coca-Cola
Company (beverage company) (2021-present); and formerly,
Counselor and Senior Advisor to the Chairman, CEO, and Board of Directors,
of The Boeing Company (aerospace company), and member of the Executive
Council (2019-2020); Executive Vice President, General Counsel and member
of the Executive Council, The Boeing Company (2006-2019); and Federal
Appeals Court Judge, United States Court of Appeals for the Fourth Circuit
(1991-2006). | ||||
Larry D. Thompson (1945) One Franklin Parkway San Mateo, CA 94403-1906 |
Trustee |
Since 2007 |
118 |
Graham Holdings Company (education and media organization) (2011-2021); The Southern Company (energy company) (2014-2020; previously 2010-2012) and Cbeyond, Inc. (business communications provider) (2010-2012). |
Director
of various companies; Counsel, Finch McCranie, LLP (law firm)
(2015-present); John A. Sibley Professor of Corporate and Business Law,
University of Georgia School of Law (2015-present; previously 2011-2012);
and formerly,
Independent Compliance Monitor and Auditor, Volkswagen AG (manufacturer of
automobiles and commercial vehicles) (2017-2020); Executive Vice President
- Government Affairs, General Counsel and Corporate Secretary, PepsiCo,
Inc. (consumer products) (2012-2014); Senior Vice President - Government
Affairs, General Counsel and Secretary, PepsiCo, Inc. (2004-2011); Senior
Fellow of The Brookings Institution (2003-2004); Visiting Professor,
University of Georgia School of Law (2004); and Deputy Attorney General,
U.S. Department of Justice (2001-2003). | ||||
Valerie M. Williams (1956) One Franklin Parkway San Mateo, CA 94403-1906 |
Trustee |
Since 2021 |
109 |
Omnicom Group, Inc. (advertising and marketing communications services) (2016-present), DTE Energy Co. (gas and electric utility) (2018-present), Devon Energy Corporation (exploration and production of oil and gas) (2021-present); and formerly, WPX Energy, Inc. (exploration and production of oil and gas) (2018-2021). |
Director
of various companies; and formerly,
Regional Assurance Managing Partner, Ernst & Young LLP (public
accounting) (2005-2016) and various roles of increasing responsibility at
Ernst & Young (1981-2005). |
30
Interested Board Members and Officers
Name, Year of Birth and Address |
Position |
Length of Time Served |
Number
of Portfolios |
Other
Directorships Held |
|||||
Gregory E. Johnson2 (1961) One Franklin Parkway San Mateo, CA 94403-1906 |
Chairman of the Board and Trustee |
Chairman of the Board since 2023 and Trustee since 2007 |
128 |
None |
|||||
Executive
Chairman, Chairman of the Board and Director, Franklin Resources, Inc.;
officer and/or director or trustee, as the case may be, of some of the
other subsidiaries of Franklin Resources, Inc. and of certain funds in the
Franklin Templeton fund complex; Vice Chairman, Investment Company
Institute; and formerly,
Chief Executive Officer (2013-2020) and President (1994-2015) Franklin
Resources, Inc. |
|||||||||
Rupert H. Johnson, Jr.3 (1940) One Franklin Parkway San
Mateo, CA 94403-1906 |
Trustee |
Since 2013 |
118 |
None |
|||||
Principal Occupation During at Least the Past 5 Years: Director
(Vice Chairman), Franklin Resources, Inc.; Director, Franklin Advisers,
Inc.; and officer and/or director or trustee, as the case may be, of some
of the other subsidiaries of Franklin Resources, Inc. and of certain funds
in the Franklin Templeton fund complex. |
|||||||||
Ben
Barber (1969) |
Vice President |
Since 2020 |
Not Applicable |
Not Applicable | |||||
Senior
Vice President, Franklin Advisers, Inc.; Director, Municipal Bonds;
officer of certain funds in the Franklin Templeton fund complex;
and formerly, Co-Head
of Municipal Bonds, Goldman Sachs Asset Management
(1999-2020). | |||||||||
Ted P. Becker (1951) 280 Park Avenue New York, NY 10017 |
Chief Compliance Officer |
Since 2023 |
Not Applicable |
Not Applicable |
|||||
Vice President, Global Compliance of Franklin Templeton (since 2020); Chief Compliance Officer of Franklin Templeton Fund Adviser, LLC (since 2006); Chief Compliance Officer of certain funds associated with Legg Mason & Co. or its affiliates (since 2006); formerly, Director of Global Compliance at Legg Mason (2006-2020); Managing Director of Compliance of Legg Mason & Co. (2005-2020). |
|||||||||
Sonal Desai, Ph.D. (1963) One Franklin Parkway San Mateo, CA 94403-1906 |
President and Chief Executive Officer Investment Management |
Since 2018 |
Not Applicable |
Not Applicable |
|||||
Director
and Executive Vice President, Franklin Advisers, Inc.; Executive Vice
President, Franklin Templeton Institutional, LLC; and officer of certain
funds in the Franklin Templeton fund complex. |
|||||||||
Susan Kerr (1949) 280 Park Avenue New York, NY 10017 |
Vice President - AML Compliance |
Since 2021 |
Not Applicable |
Not Applicable |
|||||
Senior
Compliance Analyst, Franklin Templeton; Chief Anti-Money Laundering
Compliance Officer, Legg Mason & Co., or its affiliates; Anti Money
Laundering Compliance Officer; Senior Compliance Officer, Franklin
Distributors, LLC; and officer of certain funds in the Franklin Templeton
fund complex. |
|||||||||
Christopher Kings (1974) One
Franklin Parkway |
Chief Executive Officer - Finance and Administration |
Since January 2024 |
Not Applicable |
Not Applicable |
|||||
Senior
Vice President, Franklin Templeton Services, LLC; and officer of certain
funds in the Franklin Templeton fund complex. |
|||||||||
Navid J. Tofigh (1972) One Franklin Parkway San Mateo, CA 94403-1906 |
Vice President and Secretary |
Vice President since 2015 and Secretary since 2023 |
Not Applicable |
Not Applicable |
|||||
Senior
Associate General Counsel, Franklin Templeton; and officer of certain
funds in the Franklin Templeton fund complex. |
31
Name, Year of Birth and Address |
Position |
Length of Time Served |
Number
of Portfolios |
Other
Directorships Held |
Jeffrey W. White (1971) One
Franklin Parkway |
Chief Financial Officer, Chief Accounting Officer and Treasurer |
Since January 2024 |
Not Applicable |
Not Applicable |
Chief
Financial Officer, Chief Accounting Officer & Treasurer and officer of
certain funds in the Franklin Templeton fund complex;
and formerly,
Director and Assistant Treasurer within Franklin Templeton Global Fund Tax
and Fund Administration and Financial Reporting
(2017-2023). |
Note 1: Rupert H. Johnson, Jr. is the uncle of Gregory E. Johnson.
Note 2: Officer information is current as of the date of this SAI. It is possible that after this date, information about officers may change.
1. Information is for the calendar year ended December 31, 2023, unless otherwise noted. We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton fund complex. These portfolios have a common investment manager or affiliated investment managers.
2. Gregory E. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as an officer and director of Franklin Resources, Inc. (Resources), which is the parent company of the Fund's investment manager and distributor.
3. Rupert H. Johnson, Jr. is considered to be an interested person of the Fund under the federal securities laws due to his position as an officer and director and a major shareholder of Resources, which is the parent company of the Fund's investment manager and distributor.
The Trust's independent board members constitute the sole independent board members of 24 investment companies in the Franklin Templeton complex for which each independent board member currently is paid a $304,000 annual retainer fee, together with a $7,000 per meeting fee for attendance at each regularly scheduled board meeting, a portion of which fees are allocated to the Trust. To the extent held, compensation may also be paid for attendance at specially held board meetings. The Trust's lead independent board member is paid an annual supplemental retainer of $40,000 for services to such investment companies, a portion of which is allocated to the Trust. Board members who serve on the Audit Committee of the Trust and such other funds are paid a $10,000 annual retainer fee, together with a $3,000 fee per Committee meeting in which they participate, a portion of which is allocated to the Trust. Terrence J. Checki, who serves as chairman of the Audit Committee of the Trust and such other funds receives a fee of $50,000 per year in lieu of the Audit Committee member retainer fee, a portion of which is allocated to the Trust. The following table provides the total fees paid to independent board members by the Trust and by other funds in Franklin Templeton.
Name |
|
Total
Fees |
|
|
Total
Fees |
|
|
Number
of |
| |
Harris J. Ashton |
|
24,329 |
|
|
650,849 |
|
|
35 |
| |
Terrence J. Checki |
|
29,374 |
|
|
759,849 |
|
|
35 |
| |
Mary C. Choksi |
|
26,928 |
|
|
695,225 |
|
|
35 |
| |
Edith E. Holiday |
|
29,567 |
|
|
782,097 |
|
|
35 |
| |
J. Michael Luttig |
|
25,778 |
|
|
710,097 |
|
|
35 |
| |
Larry D. Thompson |
|
26,928 |
|
|
692,097 |
|
|
35 |
| |
Valerie M. Williams |
|
26,739 |
|
|
686,000 |
|
|
27 |
| |
|
|
|
|
|
|
|
|
|
|
|
1. |
For the fiscal year ended February 29, 2024. |
| ||||||||
2. |
For the calendar year ended December 31, 2023. |
| ||||||||
3. |
We base the number of boards on the number of U.S. registered investment companies in Franklin Templeton. This number does not include the total number of series or portfolios within each investment company for which the board members are responsible. |
|
Independent board members are reimbursed for expenses incurred in connection with attending board meetings and such expenses are paid pro rata by each fund in Franklin Templeton for which they serve as director or trustee. No officer or board member received any other compensation, including pension or retirement benefits, directly or indirectly from the Trust or other funds in Franklin Templeton. Certain officers or board members who are shareholders of Franklin Resources, Inc. (Resources) may be deemed to receive indirect remuneration by virtue of their participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial investments in one or more of the Franklin Templeton funds, as is consistent with their individual financial goals. In February 1998, this policy was formalized through the adoption of a requirement that each board member invest one-third of fees received for serving as a director or trustee of a Templeton fund (excluding committee fees) in shares of one or more Templeton funds and one-third of fees received for serving as a director or trustee of a Franklin fund (excluding committee fees) in shares of one or more Franklin funds until the value of such investments equals or exceeds five times the annual retainer and regular board meeting fees paid to such board member. Investments in the name of family members or entities controlled by a board member constitute fund holdings of such board member for purposes of this policy, and a three-year phase-in period applies to such investment requirements for newly elected board members. In implementing such policy, a board member's fund holdings existing on February 27, 1998, are valued as of such date with subsequent investments valued at cost.
The following tables provide the dollar range of equity securities beneficially owned by the board members of the Fund on December 31, 2023.
32
Independent Board Members
Board Member |
Fund |
Dollar
Range of Equity |
Aggregate Dollar Range of Equity Securities in All Funds Overseen by the Board Member in the Franklin Templeton Fund Complex ($) | |||
Harris J. Ashton |
— |
— |
Over 100,000 | |||
Terrence J. Checki |
— |
— |
Over 100,000 | |||
Mary C. Choksi |
— |
— |
Over 100,000 | |||
Edith E. Holiday |
— |
— |
Over 100,000 | |||
J. Michael Luttig |
— |
— |
Over 100,000 | |||
Larry D. Thompson |
— |
— |
Over 100,000 | |||
Valerie M. Williams |
— |
— |
Over 100,000 | |||
Interested Board Members
Board Member |
Fund |
Dollar
Range of Equity |
Aggregate Dollar Range of Equity Securities in All Funds Overseen by the Board Member in the Franklin Templeton Fund Complex ($) | |||
Gregory E. Johnson |
— |
— |
Over 100,000 | |||
Rupert H. Johnson, Jr. |
— |
— |
Over 100,000 | |||
Board committees The board maintains two standing committees: the Audit Committee and the Nominating Committee. The Audit Committee is generally responsible for recommending the selection of the Trust's independent registered public accounting firm (auditors), including evaluating their independence and meeting with such auditors to consider and review matters relating to the Trust's financial reports and internal controls. The Audit Committee is comprised of the following independent trustees of the Trust: Terrence J. Checki, Mary C. Choksi, Edith E. Holiday, J. Michael Luttig, Larry D. Thompson and Valerie M. Williams. The Nominating Committee is comprised of the following independent trustees of the Trust: Harris J. Ashton, Terrence J. Checki, Mary C. Choksi, Edith E. Holiday, J. Michael Luttig, Larry D. Thompson and Valerie M. Williams.
The Nominating Committee is responsible for selecting candidates to serve as board members and recommending such candidates (a) for selection and nomination as independent board members by the incumbent independent board members and the full board; and (b) for selection and nomination as interested board members by the full board.
When the board has or expects to have a vacancy, the Nominating Committee receives and reviews information on individuals qualified to be recommended to the full board as nominees for election as board members, including any recommendations by “Qualifying Fund Shareholders” (as defined below). To date, the Nominating Committee has been able to identify, and expects to continue to be able to identify, from its own resources an ample number of qualified candidates. The Nominating Committee, however, will review recommendations from Qualifying Fund Shareholders to fill vacancies on the board if these recommendations are submitted in writing and addressed to the Nominating Committee at the Trust's offices at One Franklin Parkway, San Mateo, CA 94403-1906 and are presented with appropriate background material concerning the candidate that demonstrates his or her ability to serve as a board member, including as an independent board member, of the Trust. A Qualifying Fund Shareholder is a shareholder who (i) has continuously owned of record, or beneficially through a financial intermediary, shares of the Fund having a net asset value of not less than two hundred and fifty thousand dollars ($250,000) during the 24-month period prior to submitting the recommendation; and (ii) provides a written notice to the Nominating Committee containing the following information: (a) the name and address of the Qualifying Fund Shareholder making the recommendation; (b) the number of shares of the Fund which are owned of record and beneficially by such Qualifying Fund Shareholder and the length of time that such shares have been so owned by the Qualifying Fund Shareholder; (c) a description of all arrangements and understandings between such Qualifying Fund Shareholder and any other person or persons (naming such person or persons) pursuant to which the recommendation is being made; (d) the name, age, date of birth, business address and residence address of the person or persons being recommended; (e) such other information regarding each person recommended by such Qualifying Fund Shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the SEC had the nominee been nominated by the board; (f) whether the shareholder making the recommendation believes the person recommended would or would not be an “interested person” of the Trust, as defined in the 1940 Act; and (g) the written consent of each person recommended to serve as a board member of the Trust if so nominated and elected/appointed.
The Nominating Committee may amend these procedures from time to time, including the procedures relating to the evaluation of nominees and the process for submitting recommendations to the Nominating Committee.
During the fiscal year ended February 29, 2024, the Audit Committee met three times; the Nominating Committee did not meet.
33
Board role in risk oversight The board, as a whole, considers risk management issues as part of its general oversight responsibilities throughout the year at regular board meetings, through regular reports that have been developed by management, in consultation with the board and its counsel. These reports address certain investment, valuation, liquidity and compliance matters. The board also may receive special written reports or presentations on a variety of risk issues, either upon the board’s request or upon the investment manager’s initiative. In addition, the Audit Committee of the board meets regularly with the investment manager's internal audit group to review reports on their examinations of functions and processes within Franklin Templeton that affect the Fund.
With respect to investment risk, the board receives regular written reports describing and analyzing the investment performance of the Fund. In addition, the portfolio managers of the Fund meet regularly with the board to discuss portfolio performance, including investment risk. To the extent that the Fund changes a particular investment strategy that could have a material impact on the Fund’s risk profile, the board generally is consulted with respect to such change. To the extent that the Fund invests in certain complex securities, including derivatives, the board receives periodic reports containing information about exposure of the Fund to such instruments. In addition, the investment manager's investment risk personnel meet regularly with the board to discuss a variety of issues, including the impact on the Fund of the investment in particular securities or instruments, such as derivatives and commodities.
With respect to valuation, the Fund’s investment manager provides periodic reports to the board that enable the board to oversee the Fund's investment manager, as the board's Valuation Designee, in monitoring and assessing material risks associated with fair valuation determinations, including material conflicts of interest. In addition, the board reviews the investment manager's performance of an annual valuation risk assessment under which the investment manager seeks to identify and enumerate material valuation risks which are or may be impactful to the Fund including, but not limited to (1) the types of investments held (or intended to be held) by the Fund, giving consideration to those investments’ characteristics; (2) potential market or sector shocks or dislocations which may affect the ongoing valuation operations; and (3) the extent to which each fair value methodology uses unobservable inputs. The investment manager reports any material changes to the risk assessment, along with appropriate actions designed to manage such risks, to the Board.
With respect to liquidity risk, the board receives liquidity risk management reports under the Fund’s Liquidity Risk Management (LRM) Program and reviews, no less frequently than annually, a written report prepared by the LRM Program Administrator that addresses, among other items, the operation of the LRM Program and assesses its adequacy and effectiveness of implementation as well as any material changes to the LRM Program.
With respect to compliance risks, the board receives regular compliance reports prepared by the investment manager’s compliance group and meets regularly with the Fund’s Chief Compliance Officer (CCO) to discuss compliance issues, including compliance risks. In accordance with SEC rules, the independent board members meet regularly in executive session with the CCO, and the Fund’s CCO prepares and presents an annual written compliance report to the board. The Fund’s board adopts compliance policies and procedures for the Fund and approves such procedures for the Fund’s service providers. The compliance policies and procedures are specifically designed to detect and prevent violations of the federal securities laws.
The investment manager periodically provides an enterprise risk management presentation to the board to describe the way in which risk is managed on a complex-wide level. Such presentation covers such areas as investment risk, reputational risk, personnel risk, and business continuity risk.
Board structure A super-majority of board members consist of independent board members who are not deemed to be “interested persons” by reason of their relationship with the Fund’s management or otherwise as provided under the 1940 Act. While the Chairperson of the Board is an interested person, the board is also served by a lead independent board member. The lead independent board member, together with independent counsel, reviews proposed agendas for board meetings and generally acts as a liaison with management with respect to questions and issues raised by the independent board members. The lead independent board member also presides at separate meetings of independent board members held in advance of each scheduled board meeting where various matters, including those being considered at such board meeting are discussed. It is believed such structure and activities assure that proper consideration is given at board meetings to matters deemed important to the Fund and its shareholders.
Trustee qualifications Information on the Fund’s officers and board members appears above including information on the business activities of board members during the past five years and beyond. In addition to personal qualities, such as integrity, the role of an effective Fund board member inherently requires the ability to comprehend, discuss and critically analyze materials and issues presented in exercising judgments and reaching informed conclusions relevant to his or her duties and fiduciary obligations. The board believes that the specific background of each board member evidences such ability and is appropriate to his or her serving on the Fund’s board. As indicated, Harris J. Ashton has served as a chief executive officer of a NYSE-listed public corporation; Terrence J. Checki has served as a senior
34
executive of a Federal Reserve Bank and has vast experience evaluating economic forces and their impact on markets, including emerging markets; Mary C. Choksi has an extensive background in asset management, including founding an investment management firm; Larry D. Thompson and Edith E. Holiday each have legal backgrounds, including high level legal positions with departments of the U.S. government; J. Michael Luttig has fifteen years of judicial experience as a Federal Appeals Court Judge and eleven years of experience as Executive Vice President and General Counsel of a major public company; Valerie M. Williams has over 35 years of audit and public accounting experience serving numerous global and multi-location companies in various industries; and Gregory E. Johnson and Rupert H. Johnson, Jr. are both high ranking executive officers of Franklin Templeton.
The Fund’s board of trustees has designated the investment manager as the board’s Valuation Designee to perform fair value determinations for the Fund and to assess any material risks associated with such determinations, including material conflicts of interest, if any. The Valuation Designee also performs an annual valuation risk assessment to identify and enumerate material valuation risks which are or may be impactful to the Fund. The Fund’s investment manager and its affiliates have formed a Valuation Committee (VC) to assist these obligations. The VC oversees and administers the policies and procedures governing fair valuation determination of securities. The VC meets monthly to review and approve fair value reports and conduct other business, and meets whenever necessary to review potential significant market events and take appropriate steps to adjust valuations in accordance with established policies. The VC also reviews the investment manager’s annual valuation risk assessment and provides periodic reports to the board of trustees regarding pricing determinations.
The Fund's policies and procedures governing fair valuation determination of securities have been initially reviewed and approved by the board of trustees and any material amendments will also be reviewed and approved by the board. The investment manager's compliance staff, or another group within Franklin Templeton, conducts periodic reviews of compliance with the policies and provides at least annually a report to the board of trustees regarding the operation of the policies and any material changes recommended as a result of such review.
Investment manager and services provided The Fund's investment manager is Franklin Advisers, Inc., One Franklin Parkway, San Mateo, CA 94403-1906. The investment manager is a wholly owned subsidiary of Resources, a publicly owned company engaged in the financial services industry through its subsidiaries. Charles B. Johnson (former Chairman and Director of Resources) and Rupert H. Johnson, Jr. are the principal shareholders of Resources.
The investment manager provides investment research and portfolio management services, and selects the securities for the Fund to buy, hold or sell. The investment manager's extensive research activities include, as appropriate, traveling to meet with issuers and to review project sites. The investment manager also selects the brokers who execute the Fund's portfolio transactions. The investment manager provides periodic reports to the board, which reviews and supervises the investment manager's investment activities. To protect the Fund, the investment manager and its officers, directors and employees are covered by fidelity insurance.
The investment manager makes decisions for the Fund in accordance with its obligations as investment adviser to the Fund. From time to time, certain affiliates may request that the investment manager focus the Fund’s investments on certain securities, strategies or markets or shift the Fund’s strategy slightly to enhance its attractiveness to specific investors, which may create a conflict of interest. The investment manager may, but is not required to, focus or shift the Fund’s investments in the manner requested provided that the investment manager believes that such investments are consistent with the Fund’s stated investment goals and strategies and are in the best interests of the Fund and its shareholders. In addition, the investment manager and its affiliates manage numerous other investment companies and accounts. The investment manager may give advice and take action with respect to any of the other funds it manages, or for its own account, that may differ from action taken by the investment manager on behalf of the Fund. Similarly, with respect to the Fund, the investment manager is not obligated to recommend, buy or sell, or to refrain from recommending, buying or selling any security that the investment manager and access persons, as defined by applicable federal securities laws, may buy or sell for its or their own account or for the accounts of any other fund. The investment manager is not obligated to refrain from investing in securities held by the Fund or other funds it manages.
The Fund, its investment manager and the Fund's principal underwriter have each adopted a code of ethics, as required by federal securities laws. Under the code of ethics, employees who are designated as access persons may engage in personal securities transactions, including transactions involving securities that are being considered for the Fund or that are currently held by the Fund, subject to certain general restrictions and procedures. The personal securities transactions of access persons of the Fund, its investment manager and the Fund's principal underwriter will be governed by the code of ethics. The code of ethics is on file with, and available from, the SEC.
35
Management fees The Fund pays the investment manager a fee equal to an annual rate of:
• 0.625% of the value of month-end net assets up to and including $100 million;
• 0.500% of the value of month-end net assets over $100 million up to and including $250 million;
• 0.450% of the value of month-end net assets over $250 million up to and including $7.5 billion;
• 0.440% of the value of month-end net assets over $7.5 billion up to and including $10 billion;
• 0.430% of the value of month-end net assets over $10 billion up to and including $12.5 billion;
• 0.420% of the value of month-end net assets over $12.5 billion up to and including $15 billion;
• 0.400% of the value of month-end net assets over $15 billion up to and including $17.5 billion;
• 0.380% of the value of month-end net assets over $17.5 billion up to and including $20 billion; and
• 0.360% of the value of month-end net assets in excess of $20 billion.
The fee is calculated daily and paid monthly according to the terms of the management agreement. Each class of the Fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended February 29, 2024, February 28, 2023 and February 28, 2022, the Fund paid the following management fees:
Management Fees Earned ($) |
Management Fees Waived / Expenses Reimbursed ($) |
Management Fee Paid (After Waivers / Expenses Reimbursed) ($) | |||||
2024 | |||||||
Arizona Fund |
3,573,111 |
– |
3,573,111 |
||||
Colorado Fund |
2,571,752 |
– |
2,571,752 |
||||
Connecticut Fund |
836,375 |
112,706 |
723,669 |
||||
Michigan Fund |
3,414,063 |
– |
3,414,063 |
||||
Minnesota Fund |
3,645,772 |
– |
3,645,772 |
||||
Ohio Tax-Free Income Fund |
5,303,206 |
– |
5,303,206 |
||||
Oregon Fund |
4,396,053 |
– |
4,396,053 |
||||
Pennsylvania Fund |
3,528,347 |
– |
3,528,347 |
||||
2023 | |||||||
Arizona Fund |
3,959,003 |
– |
3,959,003 |
||||
Colorado Fund |
2,905,717 |
– |
2,905,717 |
||||
Connecticut Fund |
898,487 |
98,589 |
799,898 |
||||
Michigan Fund |
3,792,491 |
– |
3,792,491 |
||||
Minnesota Fund |
4,198,792 |
– |
4,198,792 |
||||
Ohio Tax-Free Income Fund |
6,184,062 |
– |
6,184,062 |
||||
Oregon Fund |
4,979,293 |
– |
4,979,293 |
||||
Pennsylvania Fund |
4,008,840 |
– |
4,008,840 |
||||
2022 | |||||||
Arizona Fund |
4,925,238 |
– |
4,925,238 |
||||
Colorado Fund |
3,656,065 |
– |
3,656,065 |
||||
Connecticut Fund |
1,111,918 |
– |
1,111,918 |
||||
Michigan Fund |
4,596,973 |
– |
4,596,973 |
||||
Minnesota Fund |
5,350,028 |
– |
5,350,028 |
||||
Ohio Tax-Free Income Fund |
7,836,360 |
– |
7,836,360 |
||||
Oregon Fund |
6,168,007 |
– |
6,168,007 |
||||
Pennsylvania Fund |
5,011,417 |
– |
5,011,417 |
Portfolio managers
The following table identifies the portfolio managers, the number of other accounts (other than the Fund) for which the portfolio managers have day-to-day management responsibilities and the total assets in such accounts, within each of the following categories: registered investment companies, other pooled investment vehicles, and other accounts. For each category, the number of accounts and total assets in the accounts where fees are based on performance are also indicated, as applicable. Unless noted otherwise, all information is provided as of February 29, 2024.
Name |
Type of Account |
Number of Accounts Managed |
Total Assets Managed (x $1 million) |
Number of Accounts Managed for which Advisory Fee is Performance- Based |
Assets
Managed for which Advisory Fee is |
John Bonelli |
Registered Investment Companies |
16 1 0 |
25,252.8 50.2 None |
None None None |
None None None |
36
Other Pooled Investment Vehicles |
|||||||||
Other Accounts |
Michael Conn |
Registered Investment Companies |
16 0 0 |
25,252.8 None None |
None None None |
None None None | ||||
Other Pooled Investment Vehicles |
|||||||||
Other Accounts |
Christopher Sperry |
Registered Investment Companies |
16 160 0 |
25,252.8 8,591.4 None |
None None None |
None None None | ||||
Other Pooled Investment Vehicles |
|||||||||
Other Accounts |
John Wiley |
Registered Investment Companies |
16 1 1 |
25,252.8 50.2 435.5 |
None None None |
None None None | ||||
Other Pooled Investment Vehicles |
|||||||||
Other Accounts |
Portfolio managers that provide investment services to the Fund may also provide services to a variety of other investment products, including other funds, institutional accounts and private accounts. The advisory fees for some of such other products and accounts may be different than that charged to the Fund and may include performance based compensation (as noted above, if any). This may result in fees that are higher (or lower) than the advisory fees paid by the Fund. As a matter of policy, each fund or account is managed solely for the benefit of the beneficial owners thereof. As discussed below, the separation of the trading execution function from the portfolio management function and the application of objectively based trade allocation procedures help to mitigate potential conflicts of interest that may arise as a result of the portfolio managers managing accounts with different advisory fees.
Conflicts. The management of multiple funds, including the Fund, and accounts may also give rise to potential conflicts of interest if the funds and other accounts have different objectives, benchmarks, time horizons, and fees as the portfolio manager must allocate his or her time and investment ideas across multiple funds and accounts. The investment manager seeks to manage such competing interests for the time and attention of portfolio managers by having portfolio managers focus on a particular investment discipline. Most other accounts managed by a portfolio manager are managed using the same investment strategies that are used in connection with the management of the Fund. Accordingly, portfolio holdings, position sizes, and industry and sector exposures tend to be similar across similar portfolios, which may minimize the potential for conflicts of interest. As noted above, the separate management of the trade execution and valuation functions from the portfolio management process also helps to reduce potential conflicts of interest. However, securities selected for funds or accounts other than the Fund may outperform the securities selected for the Fund. Moreover, if a portfolio manager identifies a limited investment opportunity that may be suitable for more than one fund or other account, the Fund may not be able to take full advantage of that opportunity due to an allocation of that opportunity across all eligible funds and other accounts. The investment manager seeks to manage such potential conflicts by using procedures intended to provide a fair allocation of buy and sell opportunities among funds and other accounts.
The structure of a portfolio manager’s compensation may give rise to potential conflicts of interest. A portfolio manager’s base pay and bonus tend to increase with additional and more complex responsibilities that include increased assets under management. As such, there may be an indirect
37
relationship between a portfolio manager’s marketing or sales efforts and his or her bonus.
Finally, the management of personal accounts by a portfolio manager may give rise to potential conflicts of interest. While the funds and the investment manager have adopted a code of ethics which they believe contains provisions designed to prevent a wide range of prohibited activities by portfolio managers and others with respect to their personal trading activities, there can be no assurance that the code of ethics addresses all individual conduct that could result in conflicts of interest.
The investment manager and the Fund have adopted certain compliance procedures that are designed to address these, and other, types of conflicts. However, there is no guarantee that such procedures will detect each and every situation where a conflict arises.
Compensation. The investment manager seeks to maintain a compensation program that is competitively positioned to attract, retain and motivate top-quality investment professionals. Portfolio managers receive a base salary, a cash incentive bonus opportunity, an equity compensation opportunity, and a benefits package. Portfolio manager compensation is reviewed annually, and the level of compensation is based on individual performance, the salary range for a portfolio manager’s level of responsibility and Franklin Templeton guidelines. Portfolio managers are provided no financial incentive to favor one fund or account over another. Each portfolio manager’s compensation consists of the following three elements:
Base salary Each portfolio manager is paid a base salary.
Annual bonus Annual bonuses are structured to align the interests of the portfolio manager with those of the Fund’s shareholders. Each portfolio manager is eligible to receive an annual bonus. Bonuses generally are split between cash (50% to 65%) and restricted shares of Resources stock (17.5% to 25%) and mutual fund shares (17.5% to 25%). The deferred equity-based compensation is intended to build a vested interest of the portfolio manager in the financial performance of both Resources and mutual funds advised by the investment manager. The bonus plan is intended to provide a competitive level of annual bonus compensation that is tied to the portfolio manager achieving consistently strong investment performance, which aligns the financial incentives of the portfolio manager and Fund shareholders. The Chief Investment Officer of the investment manager and/or other officers of the investment manager, with responsibility for the Fund, have discretion in the granting of annual bonuses to portfolio managers in accordance with Franklin Templeton guidelines. The following factors are generally used in determining bonuses under the plan:
• Investment performance. Primary consideration is given to the historic investment performance over the 1, 3 and 5 preceding years of all accounts managed by the portfolio manager. The pre-tax performance of each fund managed is measured relative to a relevant peer group and/or applicable benchmark as appropriate.
• Non-investment performance. The more qualitative contributions of the portfolio manager to the investment manager’s business and the investment management team, including professional knowledge, productivity, responsiveness to client needs and communication, are evaluated in determining the amount of any bonus award.
• Responsibilities. The characteristics and complexity of funds managed by the portfolio manager are factored in the investment manager’s appraisal.
Additional long-term equity-based compensation Portfolio managers may also be awarded restricted shares or units of Resources stock or restricted shares or units of one or more mutual funds. Awards of such deferred equity-based compensation typically vest over time, so as to create incentives to retain key talent.
Benefits Portfolio managers also participate in benefit plans and programs available generally to all employees of the investment manager.
Ownership of Fund shares. The investment manager has a policy of encouraging portfolio managers to invest in the funds they manage. Exceptions arise when, for example, a fund is closed to new investors or when tax considerations or jurisdictional constraints cause such an investment to be inappropriate for the portfolio manager. The following is the dollar range of Fund shares beneficially owned by the portfolio managers (such amounts may change from time to time):
Portfolio Manager |
Dollar
Range of |
John Bonelli |
None |
Michael Conn |
None |
Christopher Sperry |
None |
John Wiley |
None |
Administrator and services provided Franklin Templeton Services, LLC (FT Services) has an agreement with the investment manager to provide certain administrative services and facilities for the Fund. FT Services is an indirect, wholly owned subsidiary of Resources and is an affiliate of the Fund's investment manager and principal underwriter.
The administrative services FT Services provides include preparing and maintaining books, records, and tax and financial reports, and monitoring compliance with regulatory requirements.
38
Administration fees The investment manager pays FT Services a monthly fee equal to an annual rate of:
• 0.150% of the Fund’s average daily net assets up to and including $200 million;
• 0.135% of the Fund’s average daily net assets over $200 million, up to and including $700 million;
• 0.100% of the Fund’s average daily net assets over $700 million, up to and including $1.2 billion; and
• 0.075% of the Fund’s average daily net assets in excess of $1.2 billion.
For the last three fiscal years ended February 29, 2024, February 28, 2023 and February 28, 2022, the investment manager paid FT Services the following administration fees:
Administration Fees Paid (After Waivers / Expenses Reimbursed) ($) | ||||
2024 | ||||
Arizona Fund |
1,013,094 |
|||
Colorado Fund |
726,781 |
|||
Connecticut Fund |
213,541 |
|||
Michigan Fund |
975,988 |
|||
Minnesota Fund |
1,029,533 |
|||
Ohio Tax-Free Income Fund |
1,398,941 |
|||
Oregon Fund |
1,196,971 |
|||
Pennsylvania Fund |
1,003,687 |
|||
2023 | ||||
Arizona Fund |
1,098,259 |
|||
Colorado Fund |
825,679 |
|||
Connecticut Fund |
231,696 |
|||
Michigan Fund |
1,061,035 |
|||
Minnesota Fund |
1,150,369 |
|||
Ohio Tax-Free Income Fund |
1,562,934 |
|||
Oregon Fund |
1,324,443 |
|||
Pennsylvania Fund |
1,109,108 |
|||
2022 | ||||
Arizona Fund |
1,314,035 |
|||
Colorado Fund |
1,031,803 |
|||
Connecticut Fund |
295,966 |
|||
Michigan Fund |
1,240,966 |
|||
Minnesota Fund |
1,408,398 |
|||
Ohio Tax-Free Income Fund |
1,839,635 |
|||
Oregon Fund |
1,561,312 |
|||
Pennsylvania Fund |
1,333,121 |
Shareholder servicing and transfer agent Franklin Templeton Investor Services, LLC (Investor Services) is the Fund's shareholder servicing agent and acts as the Fund's transfer agent and dividend-paying agent. Investor Services is located at 3344 Quality Drive, Rancho Cordova, CA 95670-7313. Please send all correspondence to Investor Services at P.O. Box 997152, Sacramento, CA 95899-7152.
Investor Services receives a fee for servicing Fund shareholder accounts. The Fund also will reimburse Investor Services for certain out-of-pocket expenses necessarily incurred in servicing the shareholder accounts in accordance with the terms of its servicing contract with the Fund.
In addition, Investor Services may make payments to financial intermediaries that provide administrative services to defined benefit plans. Investor Services does not seek reimbursement by the Fund for such payments.
For all classes of shares of the Fund, except for Class R6 shares, Investor Services may also pay servicing fees, that will be reimbursed by the Fund, in varying amounts to certain financial institutions (to help offset their costs associated with client account maintenance support, statement preparation and transaction processing) that (i) maintain omnibus accounts with the Fund in the institution's name on behalf of numerous beneficial owners of Fund shares who are either direct clients of the institution or are participants in an IRS-recognized tax-deferred savings plan (including Employer Sponsored Retirement Plans and Section 529 Plans) for which the institution, or its affiliate, provides participant level recordkeeping services (called "Beneficial Owners"); or (ii) provide support for Fund shareholder accounts by sharing account data with Investor Services through the National Securities Clearing Corporation (NSCC) networking system. In addition to servicing fees received from the Fund, these financial institutions also may charge a fee for their services directly to their clients. Investor Services will also receive a fee from the Fund (other than for Class R6 shares) for services provided in support of Beneficial Owners and NSCC networking system accounts.
Sub-administrator JPMorgan Chase Bank, N.A. (JPMorgan) has an agreement with FT Services to provide certain sub-administrative services for the Fund. The administrative services provided by JPMorgan include, but are not limited to, certain fund accounting, financial reporting, tax, corporate governance and compliance and legal administration services.
Custodian JPMorgan Chase Bank, at its principal office at 270 Park Avenue, New York, NY 10017-2070, and at the offices of its branches and agencies throughout the world, acts as custodian of the Fund's securities and other assets.
Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP, 405 Howard Street, Suite 600, San Francisco, CA 94105, is the Trust's independent registered public accounting firm. The independent registered public accounting firm audits the financial statements included in the Trust's Annual Report to shareholders.
Since most purchases by the Fund are principal transactions at net prices, the Fund incurs little or no brokerage costs. The Fund deals directly with the selling or buying principal or market maker without incurring charges for the services of a broker on its behalf, unless it is determined that a better price
39
or execution may be obtained by using the services of a broker. Purchases of portfolio securities from underwriters will include a commission or concession paid to the underwriter, and purchases from dealers will include a spread between the bid and ask price. The Fund seeks to obtain prompt execution of orders at the most favorable net price. Transactions may be directed to dealers in return for research and statistical information, as well as for special services provided by the dealers in the execution of orders.
It is not possible to place an accurate dollar value on the special execution or on the research services the investment manager receives from dealers effecting transactions in portfolio securities. The allocation of transactions to obtain additional research services allows the investment manager to supplement its own research and analysis activities and to receive the views and information of individuals and research staffs from many securities firms. The receipt of these products and services does not reduce the investment manager's research activities in providing investment advice to the Fund.
As long as it is lawful and appropriate to do so, the investment manager and its affiliates may use this research and data in their investment advisory capacities with other clients.
If purchases or sales of securities of the Fund and one or more other investment companies or clients supervised by the investment manager are considered at or about the same time, transactions in these securities will be allocated among the several investment companies and clients in a manner deemed equitable to all by the investment manager, taking into account the respective sizes of the accounts and the amount of securities to be purchased or sold. In some cases, this procedure could have a detrimental effect on the price or volume of the security so far as the Fund is concerned. In other cases, it is possible that the ability to participate in volume transactions may improve execution and reduce transaction costs to the Fund.
For the last three fiscal years ended February 29, 2024, February 28, 2023 and February 28, 2022, the Fund did not pay any brokerage commissions.
For the fiscal year ended February 29, 2024, the Fund did not pay brokerage commissions to brokers who provided research services.
As of February 29, 2024, the Fund did not own securities of their regular broker-dealers.
The discussion below pertains to all Funds, unless otherwise noted.
The following discussion is a summary of certain additional tax considerations generally affecting the Fund and its shareholders, some of which may not be described in the Fund’s prospectus. No attempt is made to present a complete detailed explanation of the tax treatment of the Fund or its shareholders. The discussions here and in the prospectus are not intended as a substitute for careful tax planning.
The following discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), and applicable regulations in effect on the date of this SAI, including any amendments to the Code resulting from the TCJA. Future legislative, regulatory or administrative changes, including any provisions of law that sunset and thereafter no longer apply, or court decisions may significantly change the tax rules applicable to the Fund and its shareholders. Any of these changes or court decisions may have a retroactive effect. Where indicated below, IRS refers to the United States Internal Revenue Service.
This is for general information only and not tax advice. All investors should consult their own tax advisors as to the federal, state, local and foreign tax provisions applicable to them.
Multi-class distributions The Fund calculates income dividends and capital gain distributions the same way for each class. The amount of any income dividends per share will differ, however, generally due to any differences in the distribution and service (Rule 12b-1) fees applicable to the classes and Class R6 transfer agency fees.
Distributions The Fund intends to declare income dividends from its net investment income each day that its net asset value is calculated and pay them monthly. Capital gains, if any, may be paid at least annually. The Fund may distribute income dividends and capital gains more frequently, if necessary or appropriate in the board’s discretion. The amount of any distribution will vary, and there is no guarantee the Fund will pay either income dividends or capital gain distributions. Your income dividends and capital gain distributions will be automatically reinvested in additional shares at net asset value unless you elect to receive them in cash. Distributions declared in October, November or December to shareholders of record in such month and paid in January are treated as if they were paid in December.
Distributions of net investment income. The Fund receives income generally in the form of interest on its investments. This income, less expenses incurred in the operation of the Fund, constitutes the Fund's net investment income from which dividends may be paid to you. This net investment income may either be tax-exempt or taxable when distributed to you.
Exempt-interest dividends. By meeting certain requirements of the Code, the Fund qualifies to pay exempt-interest dividends to you. These dividends are derived from interest income exempt from regular federal income tax, and are not
40
subject to regular federal income tax when they are paid to you.
In addition, to the extent that exempt-interest dividends are derived from interest on obligations of any state or its political subdivisions, or from interest on qualifying U.S. territorial obligations (including qualifying obligations of Puerto Rico, the U.S. Virgin Islands or Guam), they also may be exempt from that state's personal income tax. Income from municipal securities of other states generally does not qualify as tax-free. Because of these tax exemptions, the Fund may not be a suitable investment for retirement plans and other tax-exempt investors, or for residents of states other than the state in which a state-specific Fund primarily invests.
Corporate shareholders should be advised that these personal income tax rules may not apply to them and that exempt-interest dividends may be taxable for state income and franchise tax purposes.
Taxable income dividends. The Fund may earn taxable income from many sources, including temporary investments, the discount on stripped obligations or their coupons, income from securities loans or other taxable transactions, and ordinary income on the sale of market discount bonds. If you are a taxable investor, any income dividends the Fund pays from this income are taxable to you as ordinary income. Because the Fund invests primarily in tax-exempt debt securities, it does not anticipate that any of its dividends will be treated as qualified dividends subject to reduced rates of federal taxation for individuals.
Distributions of capital gains. The Fund may realize capital gains and losses on the sale of its portfolio securities.
Distributions of short-term capital gains are taxable to you as ordinary income. Distributions of long-term capital gains are taxable to you as long-term capital gains, regardless of how long you have owned your shares in the Fund. Any net capital gains realized by the Fund (in excess of any available capital loss carryovers) generally are distributed once each year, and may be distributed more frequently, if necessary, to reduce or eliminate excise or income taxes on the Fund.
Capital gain dividends and any net long-term capital gains you realize from the sale of Fund shares are generally taxable at the reduced long-term capital gains tax rates. For single individuals with taxable income not in excess of $47,025 in 2024 ($94,050 for married individuals filing jointly), the long-term capital gains tax rate is 0%. For single individuals and joint filers with taxable income in excess of these amounts but not more than $518,900 or $583,750, respectively, the long-term capital gains tax rate is 15%. The rate is 20% for single individuals with taxable income in excess of $518,900 and married individuals filing jointly with taxable income in excess of $583,750. The taxable income thresholds are adjusted annually for inflation. An additional 3.8% Medicare tax may also be imposed as discussed below.
Returns of capital. If the Fund's distributions exceed its earnings and profits (i.e., generally, its taxable income and realized capital gains) for a taxable year, all or a portion of the distributions made in that taxable year may be characterized as a return of capital to you. A return of capital distribution will generally not be taxable, but will reduce the cost basis in your Fund shares and will result in a higher capital gain or in a lower capital loss when you sell your shares. Any return of capital in excess of the basis in your Fund shares, however, will be taxable as a capital gain. In the case of a non-calendar year fund, earnings and profits are first allocated to distributions made on or before December 31 of its taxable year and then to distributions made thereafter. The effect of this provision is to “push” returns of capital into the next calendar year.
Undistributed capital gains. The Fund may retain or distribute to shareholders its net capital gain for each taxable year. The Fund currently intends to distribute net capital gains. If the Fund elects to retain its net capital gain, the Fund will be taxed thereon (except to the extent of any available capital loss carryovers) at the applicable corporate tax rate. If the Fund elects to retain its net capital gain, it is expected that the Fund also will elect to have shareholders treated as if each received a distribution of its pro rata share of such gain, with the result that each shareholder will be required to report its pro rata share of such gain on its tax return as long-term capital gain, will receive a refundable tax credit for its pro rata share of tax paid by the Fund on the gain, and will increase the tax basis for its shares by an amount equal to the deemed distribution less the tax credit.
Information on the amount and tax character of distributions The Fund will inform you of the amount of your income dividends and capital gain distributions at the time they are paid, and will advise you of their tax status for federal income tax purposes shortly after the close of each calendar year. This information will include the portion of the distributions that on average are comprised of taxable or tax-exempt income, or interest income that is a tax preference item when determining your federal alternative minimum tax. If you have not owned your Fund shares for a full year, the Fund may report to shareholders and distribute to you, as taxable, tax-exempt or tax preference income, a percentage of income that may not be equal to the actual amount of each type of income earned during the period of your investment in the Fund.
The Fund makes every effort to identify reclassifications of income to reduce the number of corrected forms mailed to shareholders. However, when necessary, the Fund will send you a corrected tax reporting statement to reflect reclassified information. This can result from rules in the Code that effectively prevent regulated investment companies such as the Fund from ascertaining with certainty until after the calendar year end the final amount and character of distributions the Fund has received on its investments during
41
the prior calendar year. If you receive a corrected tax reporting statement, use the information on this statement, and not the information on your original statement, in completing your tax returns.
Avoid "buying a dividend." At the time you purchase your Fund shares, the price of the shares may reflect undistributed income, undistributed capital gains, or net unrealized appreciation in the value of the portfolio securities held by the Fund. For taxable investors, a subsequent distribution to you of such amounts, although constituting a return of your investment, would be taxable. Buying shares in the Fund just before it declares an income dividend or capital gain distribution is sometimes known as “buying a dividend.”
Election to be taxed as a regulated investment company The Fund has elected to be treated as a regulated investment company under Subchapter M of the Code. It has qualified as a regulated investment company for its most recent fiscal year, and intends to continue to qualify during the current fiscal year. As a regulated investment company, the Fund generally pays no federal income tax on the income and gains it distributes to you. In order to qualify for treatment as a regulated investment company, the Fund must satisfy the requirements described below.
Distribution requirement. The Fund must distribute an amount equal to the sum of at least 90% of its net tax-exempt income and 90% of its investment company taxable income, if any, for the tax year (including, for purposes of satisfying this distribution requirement, certain distributions made by the Fund after the close of its taxable year that are treated as made during such taxable year).
Income requirement. The Fund must derive at least 90% of its gross income from interest, certain payments with respect to securities loans, and gains from the sale or other disposition of securities, or other income derived from its business of investing in such securities.
Asset diversification test. The Fund must satisfy the following asset diversification test at the close of each quarter of the Fund’s tax year: (1) at least 50% of the value of the Fund’s assets must consist of cash and cash items, U.S. government securities, securities of other regulated investment companies, and securities of other issuers (as to which the Fund has not invested more than 5% of the value of the Fund’s total assets in securities of an issuer and as to which the Fund does not hold more than 10% of the outstanding voting securities of the issuer); and (2) no more than 25% of the value of the Fund’s total assets may be invested in the securities of any one issuer (other than U.S. government securities or securities of other regulated investment companies) or of two or more issuers which the Fund controls and which are engaged in the same or similar trades or businesses.
In some circumstances, the character and timing of income realized by the Fund for purposes of the income requirement or the identification of the issuer for purposes of the asset diversification test is uncertain under current law with respect to a particular investment, and an adverse determination or future guidance by the IRS with respect to such type of investment may adversely affect the Fund’s ability to satisfy these requirements. In other circumstances, the Fund may be required to sell portfolio holdings in order to meet the income requirement, distribution requirement, or asset diversification test, which may have a negative impact on the Fund’s income and performance. In lieu of potential disqualification, the Fund is permitted to pay a tax for certain failures to satisfy the asset diversification test or income requirement, which, in general, are limited to those due to reasonable cause and not willful neglect.
If for any taxable year the Fund does not qualify as a regulated investment company, all of its taxable income (including its net capital gain) would be subject to tax at the applicable corporate tax rate without any deduction for dividends paid to shareholders, and the dividends would be taxable to the shareholders as ordinary income (or possibly as qualified dividend income) to the extent of the Fund’s current and accumulated earnings and profits. Failure to qualify as a regulated investment company, subject to savings provisions for certain qualification failures, which, in general, are limited to those due to reasonable cause and not willful neglect, would thus have a negative impact on the Fund’s income and performance. In that case, the Fund would be liable for federal, and possibly state, corporate taxes on its taxable income and gains, and distributions to you would be taxed as dividend income to the extent of the Fund’s earnings and profits. Even if such savings provisions apply, the Fund may be subject to a monetary sanction of $50,000 or more. Moreover, the board reserves the right not to maintain the qualification of the Fund as a regulated investment company if it determines such a course of action to be beneficial to shareholders.
Capital loss carryovers The capital losses of the Fund, if any, do not flow through to shareholders. Rather, the Fund may use its capital losses, subject to applicable limitations, to offset its capital gains without being required to pay taxes on or distribute to shareholders such gains that are offset by the losses. If the Fund has a "net capital loss" (that is, capital losses in excess of capital gains), the excess (if any) of the Fund's net short-term capital losses over its net long-term capital gains is treated as a short-term capital loss arising on the first day of the Fund's next taxable year, and the excess (if any) of the Fund's net long-term capital losses over its net short-term capital gains is treated as a long-term capital loss arising on the first day of the Fund's next taxable year. Any such net capital losses of the Fund that are not used to offset capital gains may be carried forward indefinitely, subject to
42
certain limitations, to reduce any future capital gains realized by the Fund in succeeding taxable years.
Excise tax distribution requirements
Required distributions. To avoid federal excise taxes, the Code requires the Fund to distribute to you by December 31 of each year, at a minimum, the following amounts:
• 98% of its taxable ordinary income earned during the calendar year;
• 98.2% of its capital gain net income earned during the 12-month period ending October 31; and
• 100% of any undistributed amounts of these categories of income or gain from the prior year.
The Fund intends to declare and pay these distributions in December (or to pay them in January, in which case you must treat them as received in December), but can give no assurances that its distributions will be sufficient to eliminate all taxes.
Tax reporting for income and excise tax years. Because the periods for measuring a regulated investment company’s income are different for income (determined on a fiscal year basis) and excise tax years (determined as noted above), special rules are required to calculate the amount of income earned in each period, and the amount of earnings and profits needed to support that income. For example, if the Fund uses the excise tax period ending on October 31 as the measuring period for calculating and paying out capital gain net income and realizes a net capital loss between November 1 and the end of the Fund’s fiscal year, the Fund may calculate its earnings and profits without regard to such net capital loss in order to make its required distribution of capital gain net income for excise tax purposes. The Fund also may elect to treat part or all of any "qualified late year loss" as if it had been incurred in the succeeding taxable year in determining the Fund’s taxable income, net capital gain, net short-term capital gain, and earnings and profits. The effect of this election is to treat any such “qualified late year loss” as if it had been incurred in the succeeding taxable year, which may change the timing, amount, or characterization of Fund distributions.
A "qualified late year loss” includes (i) any net capital loss incurred after October 31 of the current taxable year, or, if there is no such loss, any net long-term capital loss or any net short-term capital loss incurred after October 31 of the current taxable year (“post-October capital losses”), and (ii) the sum of (1) the excess, if any, of (a) specified losses incurred after October 31 of the current taxable year, over (b) specified gains incurred after October 31 of the current taxable year and (2) the excess, if any, of (a) ordinary losses incurred after December 31 of the current taxable year, over (b) the ordinary income incurred after December 31 of the current taxable year. The terms “specified losses” and “specified gains” mean ordinary losses and gains from the sale, exchange, or other disposition of property (including the termination of a position with respect to such property). The terms “ordinary losses” and “ordinary income” mean other ordinary losses and income that are not described in the preceding sentence. Special rules apply to a fund with a fiscal year ending in November or December that elects to use its taxable year for determining its capital gain net income for excise tax purposes. The Fund may only elect to treat any post-October capital loss, specified gains and specified losses incurred after October 31 as if it had been incurred in the succeeding year in determining its taxable income for the current year.
Because these rules are not entirely clear, the Fund may be required to interpret the "qualified late-year loss" and other rules relating to these different year-ends to determine its taxable income and capital gains. The Fund’s reporting of income and its allocation between different taxable and excise tax years may be challenged by the IRS, possibly resulting in adjustments in the income reported by the Fund on its tax returns and/or by the Fund to you on your year-end tax statements.
Medicare tax An additional 3.8% Medicare tax is imposed on net investment income earned by certain individuals, estates and trusts. “Net investment income,” for these purposes, means investment income, including ordinary dividends and capital gain distributions received from the Fund and net gains from redemptions or other taxable dispositions of Fund shares, reduced by the deductions properly allocable to such income. Investment income does not include exempt interest dividends. In the case of an individual, the tax will be imposed on the lesser of (1) the shareholder’s net investment income or (2) the amount by which the shareholder’s modified adjusted gross income exceeds $250,000 (if the shareholder is married and filing jointly or a surviving spouse), $125,000 (if the shareholder is married and filing separately) or $200,000 (in any other case). Any liability for this additional Medicare tax is reported by you on, and paid with, your federal income tax return.
Sales of Fund shares Sales and exchanges of Fund shares are generally taxable transactions for federal and state income tax purposes. If you sell your Fund shares, or exchange them for shares of a different Franklin Templeton or Legg Mason fund, you are required to report any gain or loss on your sale or exchange. If you owned your shares as a capital asset, any gain or loss that you realize is a capital gain or loss, and is long-term or short-term, depending on how long you owned your shares. Under current law, shares held one year or less are short-term and shares held more than one year are long-term. The conversion of shares of one class into another class of the same fund is not a taxable exchange for federal income tax purposes. Capital losses in any year are deductible only to the extent of capital gains
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plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income.
Sales at a loss within six months of purchase. If you sell or exchange Fund shares that you owned for six months or less:
· any loss incurred is disallowed to the extent of any exempt-interest dividends paid to you on your shares, and
· any remaining loss is treated as a long-term capital loss to the extent of any long-term capital gains distributed to you by the Fund.
However, the loss disallowance rule for exempt-interest dividends will not apply to any loss incurred on a redemption or exchange of shares of a fund that declares dividends daily and distributes them at least monthly.
Wash sales. All or a portion of any loss that you realize on the sale or exchange of your Fund shares will be disallowed to the extent that you buy other shares in the Fund (through reinvestment of dividends or otherwise) within 30 days before or after your sale or exchange. Any loss disallowed under these rules will be added to your tax basis in the new shares.
Deferral of basis. In reporting gain or loss on the sale of your Fund shares, you may be required to adjust your basis in the shares you sell under the following circumstances:
IF:
• In your original purchase of Fund shares, you paid a sales charge and received a reinvestment right (the right to reinvest your sales proceeds at a reduced or with no sales charge), and
• You sell some or all of your original shares within 90 days of their purchase, and
• You reinvest the sales proceeds in the Fund or in another Franklin Templeton fund by January 31 of the calendar year following the calendar year in which the disposition of the original shares occurred, and the sales charge that would otherwise apply is reduced or eliminated;
THEN: In reporting any gain or loss on your sale, all or a portion of the sales charge that you paid for your original shares is excluded from your tax basis in the shares sold and added to your tax basis in the new shares.
Reportable transactions. Under Treasury regulations, if a shareholder recognizes a loss with respect to the Fund’s shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder (or certain greater amounts over a combination of years), the shareholder must file with the IRS a disclosure statement on Form 8886. 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.
Cost basis reporting Beginning in calendar year 2012, the Fund is required to report the cost basis of Fund shares sold or exchanged to you and the IRS annually. The cost basis of Fund shares acquired by purchase will generally be based on the amount paid for the shares, including any front-end sales charges, and then may be subsequently adjusted for other applicable transactions as required by the Code. The difference between the selling price and the cost basis of Fund shares generally determines the amount of the capital gain or loss realized on the sale or exchange of Fund shares. Capital gains and losses on the sale or exchange of Fund shares are generally taxable transactions for federal and state income tax purposes.
Shares acquired on or after January 1, 2012. Cost basis reporting is generally required for Fund shares that are acquired by purchase, gift, inheritance or other transfer on or after January 1, 2012 (referred to as “covered shares”), and subsequently sold or exchanged on or after that date. Cost basis reporting does not apply to sales or exchanges of shares acquired before January 1, 2012, or to shares held in money market funds that maintain a stable $1 net asset value and tax-deferred accounts, such as individual retirement accounts and qualified retirement plans.
Cost basis methods. Treasury regulations permit the use of several methods to determine the cost basis of mutual fund shares. The method used will determine which specific shares are treated as sold or exchanged when there are multiple purchases at different prices and the entire position is not sold at one time.
The Fund’s default method is the average cost method. Under the average cost method, the cost basis of your Fund shares will be determined by averaging the cost basis of all outstanding shares. The holding period for determining whether gains and losses are short-term or long-term is based on the first-in-first-out method (FIFO) which treats the earliest shares acquired as those first sold or exchanged.
If you wish to select a different cost basis method, or choose to specifically identify your shares at the time of each sale or exchange, you must contact the Fund. However, once a shareholder has sold or exchanged covered shares from the shareholder’s account, a change by the shareholder from the average cost method to another permitted method will only apply prospectively to shares acquired after the date of the method change.
Under the specific identification method, Treasury regulations require that you adequately identify the tax lots of Fund shares to be sold, exchanged or transferred at the time of each transaction. An adequate identification is made by providing the dates that the shares were originally acquired and the number of shares to be sold, exchanged or
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transferred from each applicable tax lot. Alternatively, an adequate identification of shares may be made with a standing order of instruction on your account. If you do not provide an adequate identification the Fund is required to use the FIFO method with any shares with an unknown acquisition date treated as sold or exchanged first.
The Fund does not recommend any particular cost basis method and the use of other methods may result in more favorable tax consequences for some shareholders. It is important that you consult with your tax or financial advisor to determine which method is best for you and then notify the Fund if you intend to use a method other than average cost.
If your account is held by your financial advisor or other broker-dealer, that firm may select a different cost basis default method. In these cases, please contact the firm to obtain information with respect to the available methods and elections for your account.
Shares acquired before January 1, 2012. Cost basis reporting is not generally required for Fund shares that were acquired by purchase, gift, inheritance or other transfer prior to January 1, 2012 (referred to as “noncovered shares”), regardless of when they are sold or exchanged. As a service to shareholders, the Fund presently intends to continue to provide shareholders cost basis information for eligible accounts for shares acquired prior to January 1, 2012. Consistent with prior years, this information will not be reported to the IRS or any state taxing authority.
Shareholders that use the average cost method for shares acquired before January 1, 2012 must make the election to use the average cost method for these shares on their federal income tax returns in accordance with Treasury regulations. This election cannot be made by notifying the Fund.
Important limitations regarding cost basis information. The Fund will report the cost basis of your Fund shares by taking into account all of the applicable adjustments required by the Code for purposes of reporting cost basis information to shareholders and the IRS annually. However the Fund is not required, and in many cases the Fund does not possess the information, to take all possible basis, holding period or other adjustments into account in reporting cost basis information to you. Therefore, shareholders should carefully review the cost basis information provided by the Fund, whether this information is provided with respect to covered or noncovered shares, and make any additional basis, holding period or other adjustments that are required by the Code when reporting these amounts on their federal and state income tax returns. Shareholders remain solely responsible for complying with all federal and state income tax laws when filing their income tax returns.
Additional information about cost basis reporting. For additional information about cost basis reporting, including the methods and elections available to you, please contact Franklin Templeton at (800) DIAL BEN/342-5236. Additional information is also available on www.franklintempleton.com/costbasis.
Tax certification and backup withholding Tax laws require that you certify your tax information when you become an investor in the Fund. For U.S. citizens and resident aliens, this certification is made on IRS Form W-9. Under these laws, the Fund must withhold a portion of your distributions and sales proceeds unless you:
• provide your correct Social Security or taxpayer identification number,
• certify that this number is correct,
• certify that you are not subject to backup withholding, and
• certify that you are a U.S. person (including a U.S. resident alien).
If you fail to meet any of these certification requirements, you will be subject to federal backup withholding at a rate of 24% on any reportable payments that you receive from the Fund, including any exempt-interest dividends (even though this income is not subject to regular federal income tax), taxable ordinary and capital gain dividends, and any redemption proceeds on the sale of your Fund shares. State backup withholding may also apply.
The Fund must also withhold if the IRS instructs it to do so. Backup withholding is not an additional tax. Any amounts withheld may be credited against the shareholder’s U.S. federal income tax liability, provided the appropriate information is furnished to the IRS. Certain payees and payments are exempt from backup withholding and information reporting.
Failure of a tax-exempt security to qualify to pay exempt-interest. Failure of the issuer of a tax-exempt security to comply with certain legal or contractual requirements relating to the tax-exempt security could cause interest on the security, as well as Fund distributions derived from this interest, to become taxable, perhaps retroactively to the date the tax-exempt security was issued. In such a case, you, the IRS and the appropriate state tax authorities may receive amended information returns for a prior taxable year in order to report additional taxable income. This, in turn, could require shareholders to file amended federal and state income tax returns for such prior year to report and pay tax and interest on their pro rata share of the additional amount of taxable income.
Qualified dividends and the corporate dividends-received deduction Because the income of the Fund is primarily derived from investments earning interest rather than dividend income, generally none of its income dividends will be
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qualifying dividend income or dividends eligible for the corporate dividends-received deduction.
Investment in complex securities The Fund’s investment in certain complex securities could subject it to one or more special tax rules (including, but not limited to, the wash sale rules), which may affect whether gains and losses recognized by the Fund are treated as ordinary or capital or as short-term or long-term, accelerate the recognition of income or gains to the Fund, defer losses to the Fund, and cause adjustments to the holding periods of the Fund’s securities. These rules, therefore, could affect the amount, timing and/or tax character of the Fund’s distributions to shareholders. Moreover, because the tax rules applicable to complex securities, including derivative financial instruments, are in some cases uncertain under current law, an adverse determination or future guidance by the IRS with respect to these rules (which determination or guidance could be retroactive) may affect whether the Fund has made sufficient distributions and otherwise satisfied the relevant requirements to maintain its qualification as a regulated investment company and avoid a fund-level tax.
In general. Gain or loss recognized by the Fund on the sale or other disposition of municipal bonds and other portfolio investments will generally be capital gain or loss. Such capital gain and loss may be long-term or short-term depending, in general, upon the length of time a particular investment position is maintained and, in some cases, upon the nature of the transaction. Portfolio investments held for more than one year generally will be eligible for long-term capital gain or loss treatment.
Debt obligations purchased at a discount. Gain recognized on the disposition of a debt obligation purchased by the Fund with market discount (generally, at a price less than its principal amount) will be treated as ordinary income to the extent of the portion of the market discount that accrued during the period of time the Fund held the debt obligation, unless the Fund made an election to accrue market discount into income currently. Fund distributions of accrued market discount on municipal bonds, including any current inclusions, are taxable to shareholders as ordinary income to the extent of the Fund’s earnings and profits.
Debt obligations issued at a discount. If the Fund purchases a debt obligation (such as a zero coupon security or pay-in-kind security) that was originally issued at a discount, the Fund generally is required to include in gross income each year the portion of the original issue discount that accrues during such year. Fund distributions from accruals of original issue discount on municipal bonds are generally taxable to shareholders as exempt-interest dividends to the extent of the Fund’s earnings and profits. The Fund’s investment in such securities issued at a discount may cause the Fund to recognize income and make distributions to shareholders before it receives any cash payments on the securities. To generate cash to satisfy those distribution requirements, the Fund may have to sell portfolio securities that it otherwise might have continued to hold or to use cash flows from other sources such as the sale of Fund shares.
Investments in debt obligations that are at risk of or in default. The Fund may also hold obligations that are at risk of or in default. Tax rules are not entirely clear about issues such as whether and to what extent the Fund should recognize market discount on such a debt obligation, when the Fund may cease to accrue interest, original issue discount or market discount, when and to what extent the Fund may take deductions for bad debts or worthless securities and how the Fund should allocate payments received on obligations in default between principal and income. These and other related issues will be addressed by the Fund in order to ensure that it distributes sufficient income to preserve its status as a regulated investment company.
Treatment of private activity bond interest Interest on certain private activity bonds, while exempt from regular federal income tax, is a tax preference item for individual taxpayers when determining their alternative minimum tax under the Code. Private activity bond interest could subject you to or increase your liability under the federal alternative minimum tax, depending on your personal tax position. Persons defined in the Code as substantial users (or persons related to such users) of facilities financed by private activity bonds should consult their tax advisors before buying Fund shares.
Generally, exempt-interest dividends derived from interest on certain tax-exempt private activity bonds is considered an item of tax preference includable in the alternative minimum taxable income of individual taxpayers. However, tax-exempt interest on private activity bonds issued in 2009 and 2010 is not an item of tax preference for purposes of the alternative minimum tax.
Effect on taxation of social security benefits; denial of interest deduction. Exempt-interest dividends must be taken into account in computing the portion, if any, of social security or railroad retirement benefits that must be included in an individual shareholder's gross income subject to federal income tax. Further, a shareholder of the Fund is denied a deduction for interest on indebtedness incurred or continued to purchase or carry shares of the Fund.
Treatment of pre-refunded bonds Under the TCJA, interest paid on a bond issued after December 31, 2017, to advance refund another bond is subject to federal income tax.
State income taxes Some state tax codes adopt the Code through a certain date. As a result, such conforming states may not have adopted the version of the Code as amended by the TCJA, the Regulated Investment Company Modernization Act of 2010, or other federal tax laws enacted after the applicable conformity date. Other states may have
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adopted an income or other basis of tax that differs from the Code.
The tax information furnished by the Fund to shareholders and the IRS annually with respect to the amount and character of dividends paid, cost basis information with respect to shares redeemed or exchanged, and records maintained by the Fund with respect to the cost basis of Fund shares, will be prepared on the basis of current federal income tax law to comply with the information reporting requirements of the Code, and not necessarily on the basis of the law of any state in which a shareholder is resident or otherwise subject to tax. If your account is held by your financial advisor or other broker, contact that firm with respect to any state information reporting requirements applicable to your investment in the Fund. Certain funds are required to report tax information, including tax-exempt interest dividends subject to state income tax, to the California Franchise Tax Board, the Connecticut Department of Revenue Services and the Minnesota Department of Revenue, annually.
Accordingly, the amount and character of income, gain or loss realized by a shareholder with respect to an investment in Fund shares for state income tax purposes may differ from that for federal income tax purposes. Franklin Templeton provides additional tax information, including tax-exempt income by jurisdiction and U.S. government interest, on www.franklintempleton.com (under the Tax Center) to assist shareholders with the preparation of their federal and state income tax returns. Shareholders are solely responsible for determining the amount and character of income, gain or loss to report on their federal, state and local income tax returns each year as a result of their purchase, holding and sale of Fund shares.
Non-U.S. investors Non-U.S. investors may be subject to U.S. withholding and estate tax, and are subject to special U.S. tax certification requirements.
In general. The United States imposes a flat 30% withholding tax (or a tax at a lower treaty rate) on U.S. source dividends. Exemptions from U.S. withholding tax are provided for capital gains realized on the sales of Fund shares, exempt-interest dividends, capital gain dividends paid by the Fund from net long-term capital gains, short-term capital gain dividends paid by the Fund from net short-term capital gains, and interest-related dividends paid by the Fund from its qualified net interest income from U.S. sources, unless you are a nonresident alien individual present in the United States for a period or periods aggregating 183 days or more during the calendar year. “Qualified interest income” includes, in general, the sum of the Fund’s U.S. source: i) bank deposit interest, ii) short-term original issue discount, iii) portfolio interest, and iv) any interest-related dividend passed through from another regulated investment company.
However, notwithstanding such exemptions from U.S. withholding tax at source, any taxable distributions and proceeds from the sale of your Fund shares will be subject to backup withholding at a rate of 24% if you fail to properly certify that you are not a U.S. person.
It may not be practical in every case for the Fund to report to shareholders, and the Fund reserves the right in these cases to not report, interest-related or short-term capital gain dividends. Additionally, the Fund’s reporting of interest-related or short-term capital gain dividends may not, in turn, be passed through to shareholders by intermediaries who have assumed tax reporting responsibilities for this income in managed or omnibus accounts due to systems limitations or operational constraints.
Effectively connected income. Taxable ordinary income dividends paid by the Fund to non-U.S. investors on portfolio investments are generally subject to U.S. withholding tax at 30% or a lower treaty rate. However, if you hold your Fund shares in connection with a U.S. trade or business, your income and gains may be considered effectively connected income and taxed in the U.S. on a net basis at graduated income tax rates in which case you may be required to file a nonresident U.S. income tax return.
U.S. estate tax. An individual who is a non-U.S. investor will be subject to U.S. federal estate tax on the value of the Fund shares owned at the time of death, unless a treaty exemption applies between the country of residence of the non-U.S. investor and the U.S. Even if a treaty exemption is available, a decedent’s estate may nevertheless be required to file a U.S. estate tax return to claim the exemption, as well as to obtain a U.S. federal transfer certificate. The transfer certificate will identify the property (i.e., Fund shares) on which a U.S. federal tax lien has been released and is required before the Fund can release a nonresident alien decedent's investment in the Fund to his or her estate. A transfer certificate is not required for property administered by an executor or administrator appointed, qualified and acting within the United States. For estates with U.S. situs assets of not more than $60,000 (there is a statutory estate tax credit for this amount of property), an affidavit from the executor of the estate or other authorized individual along with additional evidence requested by the IRS relating to the decedent’s estate evidencing the U.S. situs assets may be provided in lieu of a federal transfer certificate. Transfers by gift of shares of the Fund by a non-U.S. investor who is a nonresident alien individual will not be subject to U.S. federal gift tax. The tax consequences to a non-U.S. investor entitled to claim the benefits of a treaty between the country of residence of the non-U.S. investor and the U.S. may be different from the consequences described above.
Tax certification and backup withholding as applied to non-U.S. investors. Non-U.S. investors have special U.S. tax certification requirements to avoid backup withholding at a
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rate of 24% and, if applicable, to obtain the benefit of any income tax treaty between the non-U.S. investor’s country of residence and the United States. To claim these tax benefits, the non-U.S. investor must provide a properly completed Form W-8BEN (or other Form W-8, where applicable) to establish his or her status as a non-U.S. investor, to claim beneficial ownership over the assets in the account, and to claim, if applicable, a reduced rate of or exemption from withholding tax under the applicable treaty. A Form W-8BEN generally remains in effect for a period of three years beginning on the date that it is signed and ending on the last day of the third succeeding calendar year. In certain instances, Form W-8BEN may remain valid indefinitely unless the investor has a change of circumstances that renders the form incorrect and necessitates a new form and tax certification. Non-U.S. investors must advise the Fund of any change of circumstances that would render the information given on the form incorrect and must then provide a new W-8BEN to avoid the prospective application of backup withholding.
Foreign Account Tax Compliance Act Under the Foreign Account Tax Compliance Act (FATCA), foreign entities, referred to as foreign financial institutions (FFI) or non-financial foreign entities (NFFE) that are shareholders in the Fund may be subject to a 30% withholding tax on income dividends (other than exempt-interest dividends) paid by the Fund. The FATCA withholding tax generally can be avoided: (a) by an FFI, if it reports certain direct and indirect ownership of foreign financial accounts held by U.S. persons with the FFI, and (b) by an NFFE, if it: (i) certifies that it has no substantial U.S. persons as owners, or (ii) if it does have such owners, reports information relating to them to the withholding agent, which will, in turn, report that information to the IRS. The U.S. Treasury has negotiated intergovernmental agreements (IGA) with certain countries and is in various stages of negotiations with a number of other foreign countries with respect to one or more alternative approaches to implement FATCA. An entity in one of those countries may be required to comply with the terms of an IGA and applicable local law instead of U.S. Treasury regulations.
An FFI can avoid FATCA withholding if it is deemed compliant or by becoming a “participating FFI,” which requires the FFI to enter into a U.S. tax compliance agreement with the IRS under section 1471(b) of the Code (FFI agreement) under which it agrees to verify, report and disclose certain of its U.S. accountholders and provided that such entity meets certain other specified requirements. The FFI will report to the IRS, or, depending on the FFI’s country of residence, to the government of that country (pursuant to the terms and conditions of an applicable IGA and applicable law), which will, in turn, report to the IRS. An FFI that is resident in a country that has entered into an IGA with the U.S. to implement FATCA will be exempt from FATCA withholding provided that the FFI shareholder and the applicable foreign government comply with the terms of such agreement.
An NFFE that is the beneficial owner of a payment from the Fund can avoid the FATCA withholding tax generally by certifying that it does not have any substantial U.S. owners or by providing the name, address and taxpayer identification number of each substantial U.S. owner. The NFFE will report information either (i) to the Fund, or other applicable withholding agent, which will, in turn, report information to the IRS, or (ii) directly to the IRS.
Such foreign shareholders also may fall into certain exempt, excepted or deemed compliant categories as established by U.S. Treasury regulations, IGAs, and other guidance regarding FATCA. An FFI or NFFE that invests in the Fund will need to provide the Fund with documentation properly certifying the entity’s status under FATCA in order to avoid FATCA withholding. The requirements imposed by FATCA are different from, and in addition to, the U.S. tax certification rules to avoid backup withholding described above.
Each Fund, except Franklin Connecticut Tax-Free Income Fund, is a diversified series of Franklin Tax-Free Trust (Trust), an open-end management investment company, commonly called a mutual fund. The Franklin Connecticut Tax-Free Income Fund is a non-diversified series of the Trust. The Trust was initially organized as a Massachusetts business trust in September 1984, was converted to a Delaware statutory trust effective July 1, 2007 and is registered with the SEC.
Each Fund currently offers five classes of shares, Class A, Class A1, Class C, Class R6 and Advisor Class. On September 10, 2018, all outstanding Class A shares were renamed Class A1 shares. The Funds began offering new Class A shares on September 10, 2018. The Fund may offer additional classes of shares in the future. The full title of each class is:
• Franklin Arizona Tax-Free Income Fund - Class A
• Franklin Arizona Tax-Free Income Fund - Class A1
• Franklin Arizona Tax-Free Income Fund - Class C
• Franklin Arizona Tax-Free Income Fund - Class R6
• Franklin Arizona Tax-Free Income Fund - Advisor Class
• Franklin Colorado Tax-Free Income Fund - Class A
• Franklin Colorado Tax-Free Income Fund - Class A1
• Franklin Colorado Tax-Free Income Fund - Class C
• Franklin Colorado Tax-Free Income Fund - Class R6
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• Franklin Colorado Tax-Free Income Fund - Advisor Class
• Franklin Connecticut Tax-Free Income Fund - Class A
• Franklin Connecticut Tax-Free Income Fund - Class A1
• Franklin Connecticut Tax-Free Income Fund - Class C
• Franklin Connecticut Tax-Free Income Fund - Class R6
• Franklin Connecticut Tax-Free Income Fund - Advisor Class
• Franklin Michigan Tax-Free Income Fund - Class A
• Franklin Michigan Tax-Free Income Fund - Class A1
• Franklin Michigan Tax-Free Income Fund - Class C
• Franklin Michigan Tax-Free Income Fund - Class R6
• Franklin Michigan Tax-Free Income Fund - Advisor Class
• Franklin Minnesota Tax-Free Income Fund - Class A
• Franklin Minnesota Tax-Free Income Fund - Class A1
• Franklin Minnesota Tax-Free Income Fund - Class C
• Franklin Minnesota Tax-Free Income Fund - Class R6
• Franklin Minnesota Tax-Free Income Fund - Advisor Class
• Franklin Ohio Tax-Free Income Fund - Class A
• Franklin Ohio Tax-Free Income Fund - Class A1
• Franklin Ohio Tax-Free Income Fund - Class C
• Franklin Ohio Tax-Free Income Fund - Class R6
• Franklin Ohio Tax-Free Income Fund - Advisor Class
• Franklin Oregon Tax-Free Income Fund - Class A
• Franklin Oregon Tax-Free Income Fund - Class A1
• Franklin Oregon Tax-Free Income Fund - Class C
• Franklin Oregon Tax-Free Income Fund - Class R6
• Franklin Oregon Tax-Free Income Fund - Advisor Class
• Franklin Pennsylvania Tax-Free Income Fund - Class A
• Franklin Pennsylvania Tax-Free Income Fund - Class A1
• Franklin Pennsylvania Tax-Free Income Fund - Class C
• Franklin Pennsylvania Tax-Free Income Fund - Class R6
• Franklin Pennsylvania Tax-Free Income Fund - Advisor Class
Shares of each class represent proportionate interests in the Fund's assets. On matters that affect the Fund as a whole, each class has the same voting and other rights and preferences as any other class. On matters that affect only one class, only shareholders of that class may vote. Each class votes separately on matters affecting only that class, or matters expressly required to be voted on separately by state or federal law. Shares of each class of a series have the same voting and other rights and preferences as the other classes and series of the Trust for matters that affect the Trust as a whole. Additional series may be offered in the future.
The Trust has noncumulative voting rights. For board member elections, this gives holders of more than 50% of the shares voting the ability to elect all of the members of the board. If this happens, holders of the remaining shares voting will not be able to elect anyone to the board.
The Trust does not intend to hold annual shareholder meetings. The Trust or a series of the Trust may hold special meetings, however, for matters requiring shareholder approval.
As of June 3, 2024, the principal shareholders of the Fund, beneficial or of record, were:
Name and Address |
Share Class |
Percentage (%) | |
Franklin Arizona Tax-Free Income Fund |
|||
EDWARD JONES & CO |
A |
40.27 |
|
FOR THE BENEFIT OF CUSTOMERS |
|||
12555 MANCHESTER RD |
|||
SAINT LOUIS MO 631313710 |
|||
WFCS LLC |
A |
12.15 |
|
SPECIAL CUSTODY ACCT FOR THE |
|||
EXCLUSIVE BENEFIT OF CUSTOMER |
|||
2801 MARKET STREET |
|||
ST LOUIS MO 631032523 |
|||
CHARLES SCHWAB & CO INC |
A |
7.80 |
|
SPECIAL CUSTODY ACCT FBO CUSTOMERS |
|||
ATTN MUTUAL FUNDS |
|||
211 MAIN ST |
|||
SAN FRANCISCO CA 941051905 |
|||
MERRILL LYNCH PIERCE FENNER & SMITH |
A |
6.79 |
|
FOR THE BENEFIT OF ITS CUSTOMER |
|||
ATTN FUND ADMINISTRATION |
|||
4800 DEER LAKE DR E |
|||
JACKSONVILLE FL 322466484 |
|||
MORGAN STANLEY SMITH BARNEY LLC |
A |
5.21 |
|
FOR THE EXCLUSIVE BEN OF ITS CUSTOMERS |
|||
1 NEW YORK PLAZA FL 12 |
|||
NEW YORK NY 100041901 |
|||
EDWARD JONES & CO |
A1 |
22.15 |
|
FOR THE BENEFIT OF CUSTOMERS |
|||
12555 MANCHESTER ROAD |
|||
SAINT LOUIS MO 631313710 |
|||
49
Name and Address |
Share Class |
Percentage (%) | |
WFCS LLC |
A1 |
13.78 |
|
SPECIAL CUSTODY ACCT FOR THE |
|||
EXCLUSIVE BENEFIT OF CUSTOMER |
|||
2801 MARKET STREET |
|||
ST LOUIS MO 631032523 |
|||
MERRILL LYNCH PIERCE FENNER & SMITH |
A1 |
7.35 |
|
FOR THE SOLE BENEFIT OF ITS CUSTOMERS |
|||
ATTN FUND ADMINISTRATION/973M9 |
|||
4800 DEER LAKE DR E |
|||
JACKSONVILLE FL 322466486 |
|||
MORGAN STANLEY SMITH BARNEY LLC |
A1 |
5.20 |
|
FOR THE EXCLUSIVE BEN OF ITS CUSTOMERS |
|||
1 NEW YORK PLAZA FL 12 |
|||
NEW YORK NY 100041901 |
|||
CHARLES SCHWAB & CO INC |
Advisor |
23.80 |
|
ATTN MUTUAL FUNDS |
|||
211 MAIN ST |
|||
SAN FRANCISCO CA 941051905 |
|||
PERSHING LLC |
Advisor |
18.53 |
|
1 PERSHING PLAZA |
|||
JERSEY CITY NJ 073990001 |
|||
MERRILL LYNCH PIERCE FENNER & SMITH |
Advisor |
9.16 |
|
FOR SOLE BENEFIT OF ITS CUSTOMERS |
|||
ATTN FUND ADMINISTRATION |
|||
4800 DEER LAKE DR E |
|||
JACKSONVILLE FL 322466484 |
|||
LPL FINANCIAL |
Advisor |
7.83 |
|
A C 1000-005 |
|||
OMNIBUS CUSTOMER ACCOUNT |
|||
ATTN MUTUAL FUND TRADING |
|||
4707 EXECUTIVE DRIVE |
|||
SAN DIEGO CA 921213091 |
|||
RAYMOND JAMES |
Advisor |
7.50 |
|
OMNIBUS FOR MUTUAL FUNDS |
|||
HOUSE ACCT FIRM 92500015 |
|||
ATTN COURTNEY WALLER |
|||
880 CARILLON PKWY |
|||
ST PETERSBURG FL 337161102 |
|||
MORGAN STANLEY SMITH BARNEY LLC |
Advisor |
6.10 |
|
FOR THE EXCLUSIVE BEN OF ITS CUSTOMERS |
|||
1 NEW YORK PLAZA FL 12 |
|||
NEW YORK NY 100041901 |
|||
NATIONAL FINANCIAL SERVICES LLC |
Advisor |
6.08 |
|
FBO EXCLUSIVE BENEFIT OF OUR CUSTOMERS |
|||
ATTN MUTUAL FUND DEPARTMENT 4TH FLR |
|||
499 WASHINGTON BLVD |
|||
JERSEY CITY NJ 073101995 |
|||
AMERICAN ENTERPRISE INVESTMENT SVC |
Advisor |
5.37 |
|
FBO 41999970 |
|||
707 2ND AVE S |
|||
MINNEAPOLIS MN 554022405 |
|||
WFCS LLC |
C |
25.67 |
|
SPECIAL CUSTODY ACCT FOR THE |
|||
EXCLUSIVE BENEFIT OF CUSTOMER |
|||
2801 MARKET STREET |
|||
ST LOUIS MO 631032523 |
|||
PERSHING LLC |
C |
12.90 |
|
1 PERSHING PLAZA |
|||
JERSEY CITY NJ 073990001 |
|||
EDWARD JONES & CO |
C |
11.54 |
|
FOR THE BENEFIT OF CUSTOMERS |
|||
12555 MANCHESTER ROAD |
|||
SAINT LOUIS MO 631313710 |
|||
RAYMOND JAMES |
C |
9.19 |
|
OMNIBUS FOR MUTUAL FUNDS |
|||
HOUSE ACCT FIRM 92500015 |
|||
ATTN COURTNEY WALLER |
|||
880 CARILLON PKWY |
|||
ST PETERSBURG FL 337161102 |
|||
MORGAN STANLEY SMITH BARNEY LLC |
C |
8.32 |
|
FOR THE EXCLUSIVE BEN OF ITS CUSTOMERS |
|||
1 NEW YORK PLAZA FL 12 |
|||
NEW YORK NY 100041901 |
|||
J.P. MORGAN SECURITIES LLC |
C |
6.95 |
|
FOR THE EXCL BENE OF OUR CUST |
|||
OMNIBUS ACCOUNT |
|||
MUTUAL FUND DEPARTMENT |
|||
575 WASHINGTON BLVD FL 6 |
|||
JERSEY CITY NJ 073101616 |
|||
NATIONAL FINANCIAL SERVICES LLC |
C |
5.76 |
|
FBO EXCLUSIVE BENEFIT OF OUR CUSTOMERS |
|||
ATTN MUTUAL FUND DEPARTMENT 4TH FLR |
|||
499 WASHINGTON BLVD |
|||
JERSEY CITY NJ 073101995 |
|||
EDWARD JONES & CO |
R6 |
85.14 |
|
FOR THE BENEFIT OF CUSTOMERS |
|||
12555 MANCHESTER RD |
|||
SAINT LOUIS MO 631313710 |
|||
CHARLES SCHWAB & CO INC |
R6 |
8.38 |
|
SPECIAL CUSTODY ACCT FBO CUSTOMERS |
|||
ATTN MUTUAL FUNDS |
|||
211 MAIN ST |
|||
SAN FRANCISCO CA 94105 |
|||
Franklin Colorado Tax-Free Income Fund |
|||
EDWARD JONES & CO |
A |
43.12 |
|
FOR THE BENEFIT OF CUSTOMERS |
|||
12555 MANCHESTER RD |
|||
SAINT LOUIS MO 631313710 |
|||
WFCS LLC |
A |
7.26 |
|
SPECIAL CUSTODY ACCT FOR THE |
|||
EXCLUSIVE BENEFIT OF CUSTOMER |
|||
2801 MARKET STREET |
|||
ST LOUIS MO 631032523 |
|||
RAYMOND JAMES |
A |
5.84 |
|
OMNIBUS FOR MUTUAL FUNDS |
|||
HOUSE ACCT FIRM 92500015 |
|||
ATTN COURTNEY WALLER |
|||
880 CARILLON PKWY |
|||
ST PETERSBURG FL 337161102 |
|||
MORGAN STANLEY SMITH BARNEY LLC |
A |
5.61 |
|
FOR THE EXCLUSIVE BEN OF ITS CUSTOMERS |
|||
1 NEW YORK PLAZA FL 12 |
|||
NEW YORK NY 100041901 |
|||
50
Name and Address |
Share Class |
Percentage (%) | |
LPL FINANCIAL |
A |
5.34 |
|
OMNIBUS CUSTOMER ACCOUNT |
|||
ATTN MUTUAL FUND TRADING |
|||
4707 EXECUTIVE DR |
|||
SAN DIEGO CA 921213091 |
|||
EDWARD JONES & CO |
A1 |
28.23 |
|
FOR THE BENEFIT OF CUSTOMERS |
|||
12555 MANCHESTER ROAD |
|||
SAINT LOUIS MO 631313710 |
|||
WFCS LLC |
A1 |
9.69 |
|
SPECIAL CUSTODY ACCT FOR THE |
|||
EXCLUSIVE BENEFIT OF CUSTOMER |
|||
2801 MARKET STREET |
|||
ST LOUIS MO 631032523 |
|||
LPL FINANCIAL |
A1 |
5.90 |
|
OMNIBUS CUSTOMER ACCOUNT |
|||
OMNIBUS CUSTOMER ACCOUNT |
|||
ATTN MUTUAL FUND TRADING |
|||
4707 EXECUTIVE DRIVE |
|||
SAN DIEGO CA 921213091 |
|||
RBC CAPITAL MARKETS LLC |
A1 |
5.41 |
|
MUTUAL FUND OMNIBUS PROCESSING |
|||
OMNIBUS |
|||
ATTN MUTUAL FUND OPS MANAGER |
|||
250 NICOLLET MALL STE 1400 |
|||
MINNEAPOLIS MN 554011931 |
|||
PERSHING LLC |
Advisor |
22.15 |
|
1 PERSHING PLZ |
|||
JERSEY CITY NJ 073990001 |
|||
CHARLES SCHWAB & CO INC |
Advisor |
13.75 |
|
ATTN MUTUAL FUNDS |
|||
SPECIAL CUSTODY ACCT FBO CUSTOMERS |
|||
211 MAIN ST |
|||
SAN FRANCISCO CA 941051905 |
|||
RAYMOND JAMES |
Advisor |
11.88 |
|
OMNIBUS FOR MUTUAL FUNDS |
|||
HOUSE ACCT FIRM 92500015 |
|||
ATTN COURTNEY WALLER |
|||
880 CARILLON PKWY |
|||
ST PETERSBURG FL 337161102 |
|||
AMERICAN ENTERPRISE INVESTMENT SVC |
Advisor |
10.33 |
|
FBO 41999970 |
|||
707 2ND AVE S |
|||
MINNEAPOLIS MN 554022405 |
|||
NATIONAL FINANCIAL SERVICES LLC |
Advisor |
8.06 |
|
FBO EXCLUSIVE BENEFIT OF OUR CUSTOMERS |
|||
ATTN MUTUAL FUND DEPARTMENT 4TH FLR |
|||
499 WASHINGTON BLVD |
|||
JERSEY CITY NJ 073101995 |
|||
MORGAN STANLEY SMITH BARNEY LLC |
Advisor |
7.00 |
|
FOR THE EXCLUSIVE BEN OF ITS CUSTOMERS |
|||
1 NEW YORK PLAZA FL 12 |
|||
NEW YORK NY 100041901 |
|||
LPL FINANCIAL |
Advisor |
6.77 |
|
A C 1000-0005 |
|||
OMNIBUS CUSTOMER ACCOUNT |
|||
ATTN MUTUAL FUND TRADING |
|||
4707 EXECUTIVE DRIVE |
|||
SAN DIEGO CA 921213091 |
|||
UBS WM USA |
Advisor |
6.21 |
|
0O0 11011 6100 |
|||
OMNI ACCOUNT M/F |
|||
SPEC CDY A/C EXCL BEN CUSTOMERS UBSFSI |
|||
1000 HARBOR BLVD |
|||
WEEHAWKEN NJ 070866761 |
|||
WFCS LLC |
Advisor |
5.84 |
|
SPECIAL CUSTODY ACCT FOR THE |
|||
EXCLUSIVE BENEFIT OF CUSTOMER |
|||
2801 MARKET ST |
|||
SAINT LOUIS MO 631032523 |
|||
WFCS LLC |
C |
15.67 |
|
SPECIAL CUSTODY ACCT FOR THE |
|||
EXCLUSIVE BENEFIT OF CUSTOMER |
|||
2801 MARKET STREET |
|||
ST LOUIS MO 631032523 |
|||
EDWARD JONES & CO |
C |
13.97 |
|
FOR THE BENEFIT OF CUSTOMERS |
|||
12555 MANCHESTER ROAD |
|||
SAINT LOUIS MO 631313710 |
|||
PERSHING LLC |
C |
11.86 |
|
1 PERSHING PLAZA |
|||
JERSEY CITY NJ 073990001 |
|||
RAYMOND JAMES |
C |
7.58 |
|
OMNIBUS FOR MUTUAL FUNDS |
|||
HOUSE ACCT FIRM 92500015 |
|||
ATTN COURTNEY WALLER |
|||
880 CARILLON PKWY |
|||
ST PETERSBURG FL 337161102 |
|||
J.P. MORGAN SECURITIES LLC |
C |
7.57 |
|
FOR THE EXCL BENE OF OUR CUST |
|||
OMNIBUS ACCOUNT |
|||
MUTUAL FUND DEPARTMENT |
|||
575 WASHINGTON BLVD FL 6 |
|||
JERSEY CITY NJ 073101616 |
|||
MORGAN STANLEY SMITH BARNEY LLC |
C |
5.42 |
|
FOR THE EXCLUSIVE BEN OF ITS CUSTOMERS |
|||
1 NEW YORK PLAZA FL 12 |
|||
NEW YORK NY 100041901 |
|||
EDWARD JONES & CO |
R6 |
83.02 |
|
FOR THE BENEFIT OF CUSTOMERS |
|||
12555 MANCHESTER RD |
|||
SAINT LOUIS MO 631313710 |
|||
CHARLES SCHWAB & CO INC |
R6 |
10.63 |
|
SPECIAL CUSTODY ACCT FBO CUSTOMERS |
|||
ATTN MUTUAL FUNDS |
|||
211 MAIN ST |
|||
SAN FRANCISCO CA 94105 |
|||
NATIONAL FINANCIAL SERVICES LLC |
R6 |
5.39 |
|
FBO EXCLUSIVE BENEFIT OF OUR CUSTOMERS |
|||
ATTN MUTUAL FUND DEPARTMENT 4TH FLR |
|||
499 WASHINGTON BLVD |
|||
JERSEY CITY NJ 073101995 |
|||
51
Name and Address |
Share Class |
Percentage (%) | |
Franklin Connecticut Tax-Free Income Fund |
|||
WFCS LLC |
A |
13.11 |
|
SPECIAL CUSTODY ACCT FOR THE |
|||
EXCLUSIVE BENEFIT OF CUSTOMER |
|||
2801 MARKET STREET |
|||
ST LOUIS MO 631032523 |
|||
PERSHING LLC |
A |
12.65 |
|
1 PERSHING PLAZA |
|||
JERSEY CITY NJ 073990001 |
|||
EDWARD JONES & CO |
A |
11.80 |
|
FOR THE BENEFIT OF CUSTOMERS |
|||
12555 MANCHESTER RD |
|||
SAINT LOUIS MO 631313710 |
|||
MORGAN STANLEY SMITH BARNEY LLC |
A |
9.41 |
|
FOR THE EXCLUSIVE BEN OF ITS CUSTOMERS |
|||
1 NEW YORK PLAZA FL 12 |
|||
NEW YORK NY 100041901 |
|||
LPL FINANCIAL |
A |
9.07 |
|
OMNIBUS CUSTOMER ACCOUNT |
|||
ATTN MUTUAL FUND TRADING |
|||
4707 EXECUTIVE DR |
|||
SAN DIEGO CA 921213091 |
|||
MERRILL LYNCH PIERCE FENNER & SMITH |
A |
7.99 |
|
FOR THE BENEFIT OF ITS CUSTOMER |
|||
ATTN FUND ADMINISTRATION |
|||
4800 DEER LAKE DR E |
|||
JACKSONVILLE FL 322466484 |
|||
NATIONAL FINANCIAL SERVICES LLC |
A |
6.47 |
|
FBO EXCLUSIVE BENEFIT OF OUR CUSTOMERS |
|||
ATTN MUTUAL FUND DEPARTMENT 4TH FLR |
|||
499 WASHINGTON BLVD |
|||
JERSEY CITY NJ 073101995 |
|||
LPL FINANCIAL |
A1 |
10.71 |
|
OMNIBUS CUSTOMER ACCOUNT |
|||
OMNIBUS CUSTOMER ACCOUNT |
|||
ATTN MUTUAL FUND TRADING |
|||
4707 EXECUTIVE DRIVE |
|||
SAN DIEGO CA 921213091 |
|||
PERSHING LLC |
A1 |
8.15 |
|
1 PERSHING PLAZA |
|||
JERSEY CITY NJ 073990001 |
|||
MERRILL LYNCH PIERCE FENNER & SMITH |
A1 |
7.69 |
|
FOR THE SOLE BENEFIT OF ITS CUSTOMERS |
|||
ATTN FUND ADMINISTRATION/973P3 |
|||
4800 DEER LAKE DR E |
|||
JACKSONVILLE FL 322466486 |
|||
EDWARD JONES & CO |
A1 |
7.51 |
|
FOR THE BENEFIT OF CUSTOMERS |
|||
12555 MANCHESTER ROAD |
|||
SAINT LOUIS MO 631313710 |
|||
WFCS LLC |
A1 |
6.98 |
|
SPECIAL CUSTODY ACCT FOR THE |
|||
EXCLUSIVE BENEFIT OF CUSTOMER |
|||
2801 MARKET STREET |
|||
ST LOUIS MO 631032523 |
|||
NATIONAL FINANCIAL SERVICES LLC |
A1 |
5.98 |
|
FBO EXCLUSIVE BENEFIT OF OUR CUSTOMERS |
|||
ATTN MUTUAL FUND DEPARTMENT 4TH FLR |
|||
499 WASHINGTON BLVD |
|||
JERSEY CITY NJ 073101995 |
|||
MORGAN STANLEY SMITH BARNEY LLC |
A1 |
5.24 |
|
FOR THE EXCLUSIVE BEN OF ITS CUSTOMERS |
|||
1 NEW YORK PLAZA FL 12 |
|||
NEW YORK NY 100041901 |
|||
MORGAN STANLEY SMITH BARNEY LLC |
Advisor |
18.13 |
|
FOR THE EXCLUSIVE BEN OF ITS CUSTOMERS |
|||
1 NEW YORK PLAZA FL 12 |
|||
NEW YORK NY 100041901 |
|||
MERRILL LYNCH PIERCE FENNER & SMITH |
Advisor |
17.06 |
|
FOR SOLE BENEFIT OF ITS CUSTOMERS |
|||
ATTN FUND ADMINISTRATION |
|||
4800 DEER LAKE DR E |
|||
JACKSONVILLE FL 322466484 |
|||
UBS WM USA |
Advisor |
12.47 |
|
0O0 11011 6100 |
|||
SPEC CDY A/C EXCL BEN CUSTOMERS UBSFSI |
|||
1000 HARBOR BLVD |
|||
WEEHAWKEN NJ 070866761 |
|||
NATIONAL FINANCIAL SERVICES LLC |
Advisor |
12.23 |
|
FBO EXCLUSIVE BENEFIT OF OUR CUSTOMERS |
|||
ATTN MUTUAL FUND DEPARTMENT 4TH FLR |
|||
499 WASHINGTON BLVD |
|||
JERSEY CITY NJ 073101995 |
|||
LPL FINANCIAL |
Advisor |
10.22 |
|
A C 1000-0005 |
|||
OMNIBUS CUSTOMER ACCOUNT |
|||
ATTN MUTUAL FUND TRADING |
|||
4707 EXECUTIVE DRIVE |
|||
SAN DIEGO CA 921213091 |
|||
AMERICAN ENTERPRISE INVESTMENT SVC |
Advisor |
6.74 |
|
FBO 41999970 |
|||
707 2ND AVE S |
|||
MINNEAPOLIS MN 554022405 |
|||
RAYMOND JAMES |
Advisor |
5.30 |
|
OMNIBUS FOR MUTUAL FUNDS |
|||
HOUSE ACCT FIRM 92500015 |
|||
ATTN COURTNEY WALLER |
|||
880 CARILLON PKWY |
|||
ST PETERSBURG FL 337161102 |
|||
PERSHING LLC |
Advisor |
5.12 |
|
1 PERSHING PLAZA |
|||
JERSEY CITY NJ 073990001 |
|||
MORGAN STANLEY SMITH BARNEY LLC |
C |
23.44 |
|
FOR THE EXCLUSIVE BEN OF ITS CUSTOMERS |
|||
1 NEW YORK PLAZA FL 12 |
|||
NEW YORK NY 100041901 |
|||
RAYMOND JAMES |
C |
16.99 |
|
OMNIBUS FOR MUTUAL FUNDS |
|||
HOUSE ACCT FIRM 92500015 |
|||
ATTN COURTNEY WALLER |
|||
880 CARILLON PKWY |
|||
ST PETERSBURG FL 337161102 |
|||
52
Name and Address |
Share Class |
Percentage (%) | |
LPL FINANCIAL |
C |
10.89 |
|
FBO CUSTOMER ACCOUNTS |
|||
OMNIBUS CUSTOMER ACCOUNT |
|||
ATTN MUTUAL FUND TRADING |
|||
4707 EXECUTIVE DRIVE |
|||
SAN DIEGO CA 921213091 |
|||
WFCS LLC |
C |
7.59 |
|
SPECIAL CUSTODY ACCT FOR THE |
|||
EXCLUSIVE BENEFIT OF CUSTOMER |
|||
2801 MARKET STREET |
|||
ST LOUIS MO 631032523 |
|||
NATIONAL FINANCIAL SERVICES LLC |
C |
7.32 |
|
FBO EXCLUSIVE BENEFIT OF OUR CUSTOMERS |
|||
ATTN MUTUAL FUND DEPARTMENT 4TH FLR |
|||
499 WASHINGTON BLVD |
|||
JERSEY CITY NJ 073101995 |
|||
MERRILL LYNCH PIERCE FENNER & SMITH |
C |
6.57 |
|
OF ITS CUSTOMERS |
|||
ATTN FUND ADMINISTRATION 97GJ9 |
|||
4800 DEER LAKE DR E |
|||
JACKSONVILLE FL 322466486 |
|||
PERSHING LLC |
C |
5.90 |
|
1 PERSHING PLAZA |
|||
JERSEY CITY NJ 073990001 |
|||
MERRILL LYNCH PIERCE FENNER & SMITH |
R6 |
88.18 |
|
FOR SOLE BENEFIT OF ITS CUSTOMERS |
|||
ATTN FUND ADMINISTRATION |
|||
4800 DEER LAKE DR E |
|||
JACKSONVILLE FL 322466484 |
|||
EDWARD JONES & CO |
R6 |
8.84 |
|
FOR THE BENEFIT OF CUSTOMERS |
|||
12555 MANCHESTER RD |
|||
SAINT LOUIS MO 631313710 |
|||
Franklin Michigan Tax-Free Income Fund |
|||
EDWARD JONES & CO |
A |
26.11 |
|
FOR THE BENEFIT OF CUSTOMERS |
|||
12555 MANCHESTER ROAD |
|||
SAINT LOUIS MO 631313710 |
|||
NATIONAL FINANCIAL SERVICES LLC |
A |
9.21 |
|
FBO EXCLUSIVE BENEFIT OF OUR CUSTOMERS |
|||
ATTN MUTUAL FUND DEPARTMENT 4TH FLR |
|||
499 WASHINGTON BLVD |
|||
JERSEY CITY NJ 073101995 |
|||
LPL FINANCIAL |
A |
7.42 |
|
OMNIBUS CUSTOMER ACCOUNT |
|||
ATTN MUTUAL FUND TRADING |
|||
4707 EXECUTIVE DR |
|||
SAN DIEGO CA 921213091 |
|||
EDWARD JONES & CO |
A1 |
13.23 |
|
FOR THE BENEFIT OF CUSTOMERS |
|||
12555 MANCHESTER ROAD |
|||
SAINT LOUIS MO 631313710 |
|||
NATIONAL FINANCIAL SERVICES LLC |
A1 |
8.40 |
|
FBO EXCLUSIVE BENEFIT OF OUR CUSTOMERS |
|||
ATTN MUTUAL FUND DEPARTMENT 4TH FLR |
|||
499 WASHINGTON BLVD |
|||
JERSEY CITY NJ 073101995 |
|||
WFCS LLC |
A1 |
7.13 |
|
SPECIAL CUSTODY ACCT FOR THE |
|||
EXCLUSIVE BENEFIT OF CUSTOMER |
|||
2801 MARKET STREET |
|||
ST LOUIS MO 631032523 |
|||
RAYMOND JAMES |
A1 |
6.73 |
|
OMNIBUS FOR MUTUAL FUNDS |
|||
HOUSE ACCT FIRM 92500015 |
|||
ATTN COURTNEY WALLER |
|||
880 CARILLON PKWY |
|||
ST PETERSBURG FL 337161102 |
|||
UBS WM USA |
A1 |
5.57 |
|
0O0 11011 6100 |
|||
OMNI ACCOUNT M/F |
|||
SPEC CDY A/C EXCL BEN CUSTOMERS UBSFSI |
|||
1000 HARBOR BLVD |
|||
WEEHAWKEN NJ 070866761 |
|||
AMERICAN ENTERPRISE INVESTMENT SVC |
A1 |
5.07 |
|
FBO 41999970 |
|||
707 2ND AVE S |
|||
MINNEAPOLIS MN 554022405 |
|||
AMERICAN ENTERPRISE INVESTMENT SVC |
Advisor |
25.81 |
|
FBO 41999970 |
|||
707 2ND AVE S |
|||
MINNEAPOLIS MN 554022405 |
|||
RAYMOND JAMES |
Advisor |
15.83 |
|
OMNIBUS FOR MUTUAL FUNDS |
|||
HOUSE ACCT FIRM 92500015 |
|||
ATTN COURTNEY WALLER |
|||
880 CARILLON PKWY |
|||
ST PETERSBURG FL 337161102 |
|||
CHARLES SCHWAB & CO INC |
Advisor |
13.13 |
|
SPECIAL CUSTODY A/C FBO CUSTOMERS |
|||
ATTN MUTUAL FUNDS |
|||
211 MAIN ST |
|||
SAN FRANCISCO CA 941051905 |
|||
PERSHING |
Advisor |
12.82 |
|
1 PERSHING PLAZA |
|||
JERSEY CITY NJ 073990001 |
|||
NATIONAL FINANCIAL SERVICES LLC |
Advisor |
8.25 |
|
FBO EXCLUSIVE BENEFIT OF OUR CUSTOMERS |
|||
ATTN MUTUAL FUND DEPARTMENT 4TH FLR |
|||
499 WASHINGTON BLVD |
|||
JERSEY CITY NJ 073101995 |
|||
MERRILL LYNCH PIERCE FENNER & SMITH |
Advisor |
7.31 |
|
FOR SOLE BENEFIT OF ITS CUSTOMERS |
|||
ATTN FUND ADMINISTRATION |
|||
4800 DEER LAKE DR E |
|||
JACKSONVILLE FL 322466484 |
|||
LPL FINANCIAL |
Advisor |
6.06 |
|
FBO CUSTOMER ACCOUNTS |
|||
OMNIBUS CUSTOMER ACCOUNT |
|||
ATTN MUTUAL FUND TRADING |
|||
4707 EXECUTIVE DRIVE |
|||
SAN DIEGO CA 921213091 |
|||
53
Name and Address |
Share Class |
Percentage (%) | |
LPL FINANCIAL |
C |
14.41 |
|
FBO CUSTOMER ACCOUNTS |
|||
OMNIBUS CUSTOMER ACCOUNT |
|||
ATTN MUTUAL FUND TRADING |
|||
4707 EXECUTIVE DRIVE |
|||
SAN DIEGO CA 921213091 |
|||
EDWARD JONES & CO |
C |
11.28 |
|
FOR THE BENEFIT OF CUSTOMERS |
|||
12555 MANCHESTER ROAD |
|||
SAINT LOUIS MO 631313710 |
|||
NATIONAL FINANCIAL SERVICES LLC |
C |
9.51 |
|
FBO EXCLUSIVE BENEFIT OF OUR CUSTOMERS |
|||
ATTN MUTUAL FUND DEPARTMENT 4TH FLR |
|||
499 WASHINGTON BLVD |
|||
JERSEY CITY NJ 073101995 |
|||
PERSHING LLC |
C |
6.29 |
|
1 PERSHING PLAZA |
|||
JERSEY CITY NJ 073990001 |
|||
WFCS LLC |
C |
5.06 |
|
SPECIAL CUSTODY ACCT FOR THE |
|||
EXCLUSIVE BENEFIT OF CUSTOMER |
|||
2801 MARKET STREET |
|||
ST LOUIS MO 631032523 |
|||
EDWARD JONES & CO |
R6 |
39.79 |
|
FOR THE BENEFIT OF CUSTOMERS |
|||
12555 MANCHESTER RD |
|||
SAINT LOUIS MO 631313710 |
|||
CHARLES SCHWAB & CO INC |
R6 |
21.57 |
|
SPECIAL CUSTODY ACCT FBO CUSTOMERS |
|||
ATTN MUTUAL FUNDS |
|||
211 MAIN ST |
|||
SAN FRANCISCO CA 94105 |
|||
CITY OF ECORSE |
R6 |
20.12 |
|
3869 W JEFFERSON AVE |
|||
ECORSE MI 482291701 |
|||
Franklin Minnesota Tax-Free Income Fund |
|||
EDWARD JONES & CO |
A |
37.23 |
|
FOR THE BENEFIT OF CUSTOMERS |
|||
12555 MANCHESTER ROAD |
|||
SAINT LOUIS MO 631313710 |
|||
WFCS LLC |
A |
9.10 |
|
SPECIAL CUSTODY ACCT FOR THE |
|||
EXCLUSIVE BENEFIT OF CUSTOMER |
|||
2801 MARKET STREET |
|||
ST LOUIS MO 631032523 |
|||
LPL FINANCIAL |
A |
8.52 |
|
OMNIBUS CUSTOMER ACCOUNT |
|||
ATTN MUTUAL FUND TRADING |
|||
4707 EXECUTIVE DR |
|||
SAN DIEGO CA 921213091 |
|||
CHARLES SCHWAB & CO INC |
A |
5.50 |
|
SPECIAL CUSTODY ACCT FBO CUSTOMERS |
|||
ATTN MUTUAL FUNDS |
|||
211 MAIN ST |
|||
SAN FRANCISCO CA 941051905 |
|||
AMERICAN ENTERPRISE INVESTMENT SVC |
A |
5.47 |
|
FBO 41999970 |
|||
707 2ND AVE S |
|||
MINNEAPOLIS MN 554022405 |
|||
EDWARD JONES & CO |
A1 |
27.79 |
|
FOR THE BENEFIT OF CUSTOMERS |
|||
12555 MANCHESTER ROAD |
|||
SAINT LOUIS MO 631313710 |
|||
RAYMOND JAMES |
A1 |
8.43 |
|
OMNIBUS FOR MUTUAL FUNDS |
|||
HOUSE ACCT FIRM 92500015 |
|||
ATTN COURTNEY WALLER |
|||
880 CARILLON PKWY |
|||
ST PETERSBURG FL 337161102 |
|||
WFCS LLC |
A1 |
6.80 |
|
SPECIAL CUSTODY ACCT FOR THE |
|||
EXCLUSIVE BENEFIT OF CUSTOMER |
|||
2801 MARKET STREET |
|||
ST LOUIS MO 631032523 |
|||
LPL FINANCIAL |
A1 |
5.05 |
|
OMNIBUS CUSTOMER ACCOUNT |
|||
OMNIBUS CUSTOMER ACCOUNT |
|||
ATTN MUTUAL FUND TRADING |
|||
4707 EXECUTIVE DRIVE |
|||
SAN DIEGO CA 921213091 |
|||
PERSHING LLC |
Advisor |
28.59 |
|
1 PERSHING PLAZA |
|||
JERSEY CITY NJ 073990001 |
|||
CHARLES SCHWAB & CO INC |
Advisor |
14.89 |
|
SPECIAL CUSTODY ACCOUNT |
|||
FBO EXCLUSIVE BENEFIT OF CUSTOMERS |
|||
ATTN MUTUAL FUNDS |
|||
211 MAIN ST |
|||
SAN FRANCISCO CA 941051905 |
|||
LPL FINANCIAL |
Advisor |
13.16 |
|
FBO CUSTOMER ACCOUNTS |
|||
OMNIBUS CUSTOMER ACCOUNT |
|||
ATTN MUTUAL FUND TRADING |
|||
4707 EXECUTIVE DRIVE |
|||
SAN DIEGO CA 921213091 |
|||
UBS WM USA |
Advisor |
11.92 |
|
0O0 11011 6100 |
|||
SPEC CDY A/C EXCL BEN CUSTOMERS UBSFSI |
|||
1000 HARBOR BLVD |
|||
WEEHAWKEN NJ 070866761 |
|||
NATIONAL FINANCIAL SERVICES LLC |
Advisor |
6.29 |
|
FBO EXCLUSIVE BENEFIT OF OUR CUSTOMERS |
|||
ATTN MUTUAL FUND DEPARTMENT 4TH FLR |
|||
499 WASHINGTON BLVD |
|||
JERSEY CITY NJ 073101995 |
|||
AMERICAN ENTERPRISE INVESTMENT SVC |
Advisor |
5.84 |
|
FBO 41999970 |
|||
707 2ND AVE S |
|||
MINNEAPOLIS MN 554022405 |
|||
54
Name and Address |
Share Class |
Percentage (%) | |
WFCS LLC |
Advisor |
5.31 |
|
SPECIAL CUSTODY ACCT FOR THE |
|||
EXCLUSIVE BENEFIT OF CUSTOMER |
|||
2801 MARKET ST |
|||
SAINT LOUIS MO 631032523 |
|||
LPL FINANCIAL |
C |
19.09 |
|
FBO CUSTOMER ACCOUNTS |
|||
OMNIBUS CUSTOMER ACCOUNT |
|||
ATTN MUTUAL FUND TRADING |
|||
4707 EXECUTIVE DRIVE |
|||
SAN DIEGO CA 921213091 |
|||
EDWARD JONES & CO |
C |
13.91 |
|
FOR THE BENEFIT OF CUSTOMERS |
|||
12555 MANCHESTER ROAD |
|||
SAINT LOUIS MO 631313710 |
|||
WFCS LLC |
C |
13.44 |
|
SPECIAL CUSTODY ACCT FOR THE |
|||
EXCLUSIVE BENEFIT OF CUSTOMER |
|||
2801 MARKET STREET |
|||
ST LOUIS MO 631032523 |
|||
PERSHING LLC |
C |
8.38 |
|
1 PERSHING PLAZA |
|||
JERSEY CITY NJ 073990001 |
|||
CHARLES SCHWAB & CO INC |
C |
5.80 |
|
SPECIAL CUSTODY ACCT FBO CUSTOMERS |
|||
ATTN MUTUAL FUNDS |
|||
211 MAIN ST |
|||
SAN FRANCISCO CA 941051905 |
|||
EDWARD JONES & CO |
R6 |
61.95 |
|
FOR THE BENEFIT OF CUSTOMERS |
|||
12555 MANCHESTER RD |
|||
SAINT LOUIS MO 631313710 |
|||
CHARLES SCHWAB & CO INC |
R6 |
30.99 |
|
SPECIAL CUSTODY ACCT FBO CUSTOMERS |
|||
ATTN MUTUAL FUNDS |
|||
211 MAIN ST |
|||
SAN FRANCISCO CA 94105 |
|||
SEI PRIVATE TRUST COMPANY |
R6 |
5.52 |
|
C O EDWARD JONES TRUST COMPANY |
|||
1 FREEDOM VALLEY DRIVE |
|||
OAKS PA 19456 |
|||
Franklin Ohio Tax-Free Income Fund |
|||
EDWARD JONES & CO |
A |
28.24 |
|
FOR THE BENEFIT OF CUSTOMERS |
|||
12555 MANCHESTER ROAD |
|||
SAINT LOUIS MO 631313710 |
|||
NATIONAL FINANCIAL SERVICES LLC |
A |
12.22 |
|
FBO EXCLUSIVE BENEFIT OF OUR CUSTOMERS |
|||
ATTN MUTUAL FUND DEPARTMENT 4TH FLR |
|||
499 WASHINGTON BLVD |
|||
JERSEY CITY NJ 073101995 |
|||
PERSHING LLC |
A |
10.01 |
|
1 PERSHING PLAZA |
|||
JERSEY CITY NJ 073990001 |
|||
CHARLES SCHWAB & CO INC |
A |
7.55 |
|
SPECIAL CUSTODY ACCT FBO CUSTOMERS |
|||
ATTN MUTUAL FUNDS |
|||
211 MAIN ST |
|||
SAN FRANCISCO CA 941051905 |
|||
EDWARD JONES & CO |
A1 |
20.38 |
|
FOR THE BENEFIT OF CUSTOMERS |
|||
12555 MANCHESTER ROAD |
|||
SAINT LOUIS MO 631313710 |
|||
NATIONAL FINANCIAL SERVICES LLC |
A1 |
14.87 |
|
FBO EXCLUSIVE BENEFIT OF OUR CUSTOMERS |
|||
ATTN MUTUAL FUND DEPARTMENT 4TH FLR |
|||
499 WASHINGTON BLVD |
|||
JERSEY CITY NJ 073101995 |
|||
PERSHING LLC |
A1 |
7.30 |
|
1 PERSHING PLAZA |
|||
JERSEY CITY NJ 073990001 |
|||
UBS WM USA |
A1 |
5.43 |
|
0O0 11011 6100 |
|||
OMNI ACCOUNT M/F |
|||
SPEC CDY A/C EXCL BEN CUSTOMERS UBSFSI |
|||
1000 HARBOR BLVD |
|||
WEEHAWKEN NJ 070866761 |
|||
NATIONAL FINANCIAL SERVICES LLC |
Advisor |
29.81 |
|
FBO EXCLUSIVE BENEFIT OF OUR CUSTOMERS |
|||
ATTN MUTUAL FUND DEPARTMENT 4TH FLR |
|||
499 WASHINGTON BLVD |
|||
JERSEY CITY NJ 073101995 |
|||
PERSHING LLC |
Advisor |
13.35 |
|
1 PERSHING PLAZA |
|||
JERSEY CITY NJ 073990001 |
|||
RAYMOND JAMES |
Advisor |
11.21 |
|
OMNIBUS FOR MUTUAL FUNDS |
|||
HOUSE ACCT FIRM 92500015 |
|||
ATTN COURTNEY WALLER |
|||
880 CARILLON PKWY |
|||
ST PETERSBURG FL 337161102 |
|||
UBS WM USA |
Advisor |
7.56 |
|
0O0 11011 6100 |
|||
OMNI ACCOUNT M/F |
|||
SPEC CDY A/C EXCL BEN CUSTOMERS UBSFSI |
|||
1000 HARBOR BLVD |
|||
WEEHAWKEN NJ 070866761 |
|||
AMERICAN ENTERPRISE INVESTMENT SVC |
Advisor |
7.26 |
|
FBO 41999970 |
|||
707 2ND AVE S |
|||
MINNEAPOLIS MN 554022405 |
|||
CHARLES SCHWAB & CO INC |
Advisor |
6.11 |
|
ATTN MUTUAL FUNDS |
|||
211 MAIN ST |
|||
SAN FRANCISCO CA 941051905 |
|||
LPL FINANCIAL |
Advisor |
5.68 |
|
FBO CUSTOMER ACCOUNTS |
|||
OMNIBUS CUSTOMER ACCOUNT |
|||
ATTN MUTUAL FUND TRADING |
|||
4707 EXECUTIVE DRIVE |
|||
SAN DIEGO CA 921213091 |
|||
55
Name and Address |
Share Class |
Percentage (%) | |
STIFEL NICOLAUS & CO INC |
Advisor |
5.51 |
|
FBO EXCLUSIVE BENEFIT OF CUSTOMERS |
|||
501 N BROADWAY |
|||
SAINT LOUIS MO 631022131 |
|||
MERRILL LYNCH PIERCE FENNER & SMITH |
Advisor |
5.15 |
|
FOR SOLE BENEFIT OF ITS CUSTOMERS |
|||
ATTN FUND ADMINISTRATION |
|||
4800 DEER LAKE DR E |
|||
JACKSONVILLE FL 322466484 |
|||
NATIONAL FINANCIAL SERVICES LLC |
C |
25.94 |
|
FBO EXCLUSIVE BENEFIT OF OUR CUSTOMERS |
|||
ATTN MUTUAL FUND DEPARTMENT 4TH FLR |
|||
499 WASHINGTON BLVD |
|||
JERSEY CITY NJ 073101995 |
|||
CHARLES SCHWAB & CO INC |
C |
13.69 |
|
SPECIAL CUSTODY ACCT FBO CUSTOMERS |
|||
ATTN MUTUAL FUNDS |
|||
211 MAIN ST |
|||
SAN FRANCISCO CA 941051905 |
|||
EDWARD JONES & CO |
C |
9.61 |
|
FOR THE BENEFIT OF CUSTOMERS |
|||
12555 MANCHESTER ROAD |
|||
SAINT LOUIS MO 631313710 |
|||
PERSHING LLC |
C |
7.44 |
|
1 PERSHING PLAZA |
|||
JERSEY CITY NJ 073990001 |
|||
LPL FINANCIAL |
C |
5.75 |
|
FBO CUSTOMER ACCOUNTS |
|||
OMNIBUS CUSTOMER ACCOUNT |
|||
ATTN MUTUAL FUND TRADING |
|||
4707 EXECUTIVE DRIVE |
|||
SAN DIEGO CA 921213091 |
|||
EDWARD JONES & CO |
R6 |
70.82 |
|