Ocean State Investment Pool. Cash Portfolio 2012 Investment Circular

Transcription

1 Ocean State Investment Pool Cash Portfolio 2012 Investment Circular

2 Dear Government Finance Professional, Now more than ever you must be creative in the face of shrinking budgets and depleted revenues. Improving investment performance for the liquid assets you manage is one area that could help the bottom line of your cities and towns, as well as your boards, commissions, and agencies. With your challenges in mind, I am pleased to introduce the Ocean State Investment Pool (OSIP Cash Portfolio) managed by Pyramis Global Advisors, a Fidelity Investments company. By creating economies of scale, OSIP is designed to provide a competitive cash investment option for government finance professionals, including high-quality investments, exceptional customer service, and access to proven, innovative account management technology. The pool, created by Treasury under the guidance of the Rhode Island State Investment Commission, is a voluntary, high credit quality, liquid, low-cost alternative investment vehicle that should help to improve and grow resources. The goal of the pool is to obtain as high a level of income as is generally consistent with the preservation of principal and liquidity. The benefits of joining the OSIP Cash Portfolio, a money market portfolio, include: Consistent and competitive yields at costs lower than other products in the market Flexible and convenient access to portfolio funds with withdrawal, purchase, and account information available by phone or web Support from Fidelity portfolio managers and credit research analysts Daily access for liquidity Daily accrual of dividends, regardless of the size or time of the investment I invite you to read this investment circular for more information about OSIP s services and benefits. Please contact the Trust s Administrator with any questions at OSIP or visit Thank you for your interest in the OSIP Cash Portfolio. Together, we can work to improve our financial outlook. Sincerely, Gina M. Raimondo General Treasurer The State of Rhode Island

3 Table of contents Structure and purpose 2 Authority for organization 2 Investment objectives and guidelines for the OSIP 3 Description of certain types of securities and related principal risks 7 I. Types of securities 7 II. Strategies 9 III. Other principal investment risks 9 Participant accounts 13 Warning calls for large redemptions 13 Online access to OSIP 13 Investing in the OSIP 14 Redemptions 15 Available forms 16 Audit confirmation request 16 Business days 17 Dividends and yields 17 Transaction summaries and statements 17 Determination of dividend, yield, and net asset value (NAV) 18 Expenses of the OSIP 19 Continuing disclosure obligations 19 Annual audit 19 Legal considerations 19 Trust investment advisor, servicing agents, and custodian 20 Changes in guidelines and regulations 20 Transfers 16 Closing an account 16 New employee authorization 16 This circular is the only authorized source of definitive information regarding investment in the Ocean State Investment Pool Cash Portfolio. Participants should read and retain it for future reference. Not FDIC Insured May Lose Value No Bank Guarantee Not NCUA or NCUSIF insured. May lose value. No credit union guarantee. Ocean State Investment Pool Cash Portfolio 2012 Investment Circular 1

4 Structure and purpose The Ocean State Investment Pool Trust ( OSIP or Trust ) offers the OSIP Cash Portfolio, an investment pool in which the State of Rhode Island and its agencies, authorities, commissions, boards, municipalities, political subdivisions, and other public units can invest cash that is not immediately required for use. The investment objective of the OSIP's Cash Portfolio is to seek to obtain as high a level of current income as is generally consistent with the preservation of principal and liquidity within the OSIP's investment guidelines. Authority for organization In 2011, the General Assembly of the State of Rhode Island enacted the Rhode Island Local Government Investment Pool Act Chapter of the Rhode Island General Laws of 1956 as amended (the "Act"), to enable the General Treasurer, subject to the approval of the State Investment Commission (the "Commission"), to create one or more investment pool trust funds. The purpose of an investment pool trust fund is to enable eligible governmental entities to participate with the State in providing maximum opportunities for the investment of public funds consistent with safety and the protection of those funds. The General Treasurer has created this investment pool trust in accordance with the Act. The Trustee shall be the General Treasurer of the State of Rhode Island in his or her capacity as General Treasurer. The General Treasurer shall invest each investment pool trust fund in instruments prescribed, and in amounts approved, by the Commission in accordance with Section of the Rhode Island General Laws of 1956 as amended and the Investment Guidelines approved by the Commission. The General Treasurer is authorized to sell to all agencies, authorities, commissions, boards, municipalities, political subdivisions, and other public units of the State, participation units in any such combined investment trust fund. Such participation units are made legal investments for all of the funds under the custody of such agencies, authorities, commissions, boards, municipalities, political subdivisions, and other public units of the State. The General Treasurer, subject to the approval of the Commission, shall by rule prescribe the time periods for investments in the investment pool and the procedure for withdrawal of funds from the investment pool. The General Treasurer shall promulgate such other rules as are deemed necessary for the efficient operation of the investment pool. Investment objective The investment objective of the OSIP Cash Portfolio is to obtain as high a level of current income as is generally consistent with the preservation of principal and liquidity within the OSIP's investment guidelines. 2

5 Investment objectives and guidelines for the OSIP Set forth below are the investment objectives and guidelines in effect as of January 25, 2012, ( Investment Guidelines ) to be followed by Pyramis Global Advisors, LLC ( Pyramis ), acting in its capacity as investment advisor (and together with any subadvisors or other agents or designees that it may retain from time to time, the Advisor ) with respect to certain Assets (as defined in the Investment Management and Service Agreement among the Trust, Pyramis, and Fidelity Investment Institutional Services Company Inc. (FIISC) (the "Agreement")) designated by the Trust for deposit in the OSIP Cash Portfolio. OSIP s Investment Objective The OSIP Cash Portfolio seeks to obtain as high a level of current income as is generally consistent with the preservation of principal and liquidity within the Investment Guidelines. OSIP s Principal Investment Strategies The Advisor will invest the OSIP s Assets in U.S. dollardenominated money market securities of domestic and foreign issuers, repurchase agreements, and reverse repurchase agreements. In buying and selling money market securities for the OSIP, the Advisor will comply with the requirements for money market funds promulgated under Rule 2a-7 of the Investment Company Act of 1940 (as such may be amended or otherwise modified from time to time, Rule 2a-7 ) regarding the portfolio quality, maturity, diversification, and liquidity of the OSIP s investments except as otherwise specified in the Investment Guidelines. The OSIP will also be managed in accordance with the Amortized Cost Method of Valuation described in Rule 2a-7. For purposes of clarity, the Advisor and the OSIP have agreed that the Advisor shall have the authority described in each instance where Rule 2a-7 makes reference to the board of directors. All capitalized terms used in the Investment Guidelines not otherwise defined will have the meaning ascribed to such term in Rule 2a-7 or the Agreement, as applicable. Eligible Investments Subject to the limitations described under the heading Investment Limitations below, the Advisor may invest the Assets of the OSIP in any securities that would constitute an Eligible Security under and as defined in Rule 2a-7. Examples of an Eligible Security under and as currently defined in Rule 2a-7 may include, without limitation, certain U.S. dollardenominated money market securities of domestic and foreign issuers (such as certain short-term commercial paper, notes and bonds, time deposits and certificates of deposits), U.S. Government securities and securities of certain government agencies, municipal securities, asset-backed securities, and repurchase agreements. Ocean State Investment Pool Cash Portfolio 2012 Investment Circular 3

6 Portfolio Quality, Maturity, Diversification, Liquidity, and Concentration Guidelines The OSIP may not purchase any securities if, as a result, the OSIP would not comply with any applicable portfolio quality, portfolio maturity, portfolio diversification, or portfolio liquidity requirements for money market funds under Rule 2a-7. Except for the purpose of the Minimum Weekly Liquidity Requirement, the OSIP shall not Acquire any security other than a Weekly Liquid Asset if, immediately after the Acquisition, the OSIP would have invested less than twenty (20%) percent of its Total Assets in Weekly Liquid Assets. The OSIP may not purchase the securities of any issuer (other than securities issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities) if, as a result, more than twenty-five (25%) percent of the OSIP s Total Assets would be invested in the securities of companies whose principal business activities are in the same industry, except that the OSIP may invest more than twenty-five (25%) percent of its Total Assets in the financial services industry. The Advisor or its designee may analyze the characteristics of a particular issuer and security and assign an industry or sector classification consistent with those characteristics in the event that the third-party classification provider used by the Advisor or its designee does not assign a classification. Whenever an investment policy or limitation set forth in the Investment Guidelines or in Rule 2a-7 states a maximum percentage of assets that may be invested in any security or other asset, or sets forth a policy regarding quality standards, such standard or percentage limitation will be determined immediately after and as a result of the acquisition of such security or other asset by the OSIP. Accordingly, any subsequent change in values, net assets, or other circumstances will not be considered when determining whether the investment complies with the OSIP s policies and limitations. 4

7 The OSIP's Investment Guidelines, with certain exceptions (as noted), adopt Rule 2a-7 constraints for money market funds as such rule is applied to portfolio quality, maturity, diversification, and liquidity. Some of these constraints are briefly outlined below: Certain Key Investment Constraints OSIP Investment Guidelines 1 Minimum Daily Liquid Asset Requirement 10% of Total Assets Minimum Weekly Liquid Asset Requirement 20% of Total Assets 2 Dollar-Weighted Average Portfolio Maturity (WAM) 60 days Dollar-Weighted Average Portfolio Life (WAL) 120 days 3 Maturity Limit 397 days 4 Second-Tier Securities 3% of Total Assets / 0.5% of Total Assets per issuer / 45-day maturity limit Issuer Diversification 5% of Total Assets 5 Illiquid Securities 5% of Total Assets 1. OSIP s Investment Guidelines may be subject to change without advance notice to reflect any regulatory modifications to Rule 2a-7. Accordingly, these constraints may change. This outline is only a summary of some of the key investment constraints, and investors are encouraged to review Rule 2a-7 in order to fully understand all of its provisions. 2. OSIP s Investment Guidelines contain an exception to the Rule 2a-7 minimum Weekly Liquid Asset requirement that a portfolio shall not Acquire any security other than a Weekly Liquid Asset if, immediately after the Acquisition, the portfolio would have invested less than 30% of its Total Assets in Weekly Liquid Assets. 3. This calculation does not take into account certain interest rate adjustments with respect to certain types of securities as further described in Rule 2a The OSIP may purchase certain securities that have a final legal maturity date that exceeds 397 days, so long as such securities are subject to a maturity shortening device permitted by Rule 2a-7 (known as a demand feature) that is exercisable at specified intervals not exceeding 397 calendar days. 5. Issuer diversification does not apply to securities issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities, or securities of money market funds or repurchase agreements collateralized by government securities. Rule 2a-7 currently allows for an exception which will permit the OSIP to invest up to 25% of its Total Assets in the First Tier Securities of a single issuer for up to three business days. Certain securities subject to guarantees (including insurance, letters of credit, and demand features) are not considered securities of their issuer, but are subject to separate diversification requirements set forth in Rule 2a-7. Ocean State Investment Pool Cash Portfolio 2012 Investment Circular 5

8 Investment Limitations The OSIP may not purchase any time deposit or certificate of deposit with a maturity date of greater than sixty (60) days (as measured from the settlement date to maturity date) unless the issuer of the time deposit or certificate of deposit at a minimum insures or pledges eligible collateral equal to one hundred (100%) percent of Public Deposits as defined in Chapter of the Rhode Island General Laws of 1956 as amended as of the effective date of the Investment Guidelines. If the OSIP is not a qualified institutional buyer within the meaning of Rule 144A of the Securities Act of 1933, the OSIP may not purchase any security which may only be offered or sold to a qualified institutional buyer. The OSIP may borrow money as a temporary measure to facilitate the repurchase or redemption of units in an amount not to exceed one third (1/3) of the current value of the Total Assets of the OSIP (including the amount borrowed) at the time the borrowing is made. The OSIP may pledge, mortgage, or hypothecate not more than one third (1/3) of the Total Assets of the OSIP (taken at current value) to secure such borrowings. Investment Guideline Modifications The Investment Guidelines are effective as of January 25, 2012, and supersede all prior written and oral agreements regarding investments of the OSIP. Any deviation from or amendment to these Investment Guidelines must be approved in writing by both the Advisor and the Trust prior to implementation thereof. 6

9 Description of certain types of securities and related principal risks The following pages provide a brief description of the principal types of securities in which the OSIP Cash Portfolio may invest, strategies that the Advisor may employ in pursuit of the investment objective of the OSIP Cash Portfolio, and a summary of the related principal risks. The Advisor may not buy all of these securities or use all of these techniques, unless the Advisor believes that doing so will help the OSIP Cash Portfolio achieve its investment objective. The Advisor is not limited by this discussion, however, and may purchase other types of securities and enter into other types of transactions if they are consistent with the OSIP s Investment Guidelines. I. Types of securities Asset-Backed Securities represent interests in pools of purchase contracts, financing leases, or sales agreements entered into by municipalities, mortgages, loans, receivables, or other assets. Payment of interest and repayment of principal may be largely dependent upon the cash flows generated by the assets backing the securities and, in certain cases, supported by letters of credit, surety bonds, or other credit enhancements. Asset-backed security values may also be affected by other factors including changes in interest rates, the availability of information concerning the pool and its structure, the creditworthiness of the servicing agent for the pool, the originator of the loans or receivables, or the entities providing the credit enhancement. In addition, these securities may be subject to prepayment risk. Domestic and Foreign Investments include U.S. dollar-denominated time deposits, certificates of deposit, and bankers acceptances of U.S. banks and their branches located outside of the United States, U.S. branches and agencies of foreign banks, and foreign branches of foreign banks. Domestic and foreign investments may also include U.S. dollardenominated securities issued or guaranteed by other U.S. or foreign issuers, including U.S. and foreign corporations or other business organizations, foreign governments, foreign government agencies or instrumentalities, and U.S. and foreign financial institutions, including savings and loan institutions, insurance companies, mortgage bankers, and real estate investment trusts, as well as banks. The obligations of foreign branches of U.S. banks may not be obligations of the parent bank in addition to the issuing branch, and may be limited by the terms of a specific obligation and by governmental regulation. Payment of interest and repayment of principal on these obligations may also be affected by governmental action in the country of domicile of the branch (generally referred to as sovereign risk) or by war or civil conflict. In addition, settlement of trades may occur outside of the United States and evidence of ownership of portfolio securities may be held outside of the United States. Accordingly, the OSIP may be subject to the risks associated with the settlement of trades and the holding of such property overseas. Various provisions of federal law governing the establishment and operation of U.S. branches do not apply to foreign branches of U.S. banks. Obligations of U.S. branches and agencies of foreign banks may be general obligations of the parent bank in addition to the issuing branch, or may be limited by the terms of a specific obligation and by federal and state regulation, as well as by governmental action in the country in which the foreign bank has its head office. Obligations of foreign issuers involve certain additional risks. These risks may include future unfavorable political and economic developments, withholding taxes, seizures of foreign deposits, currency controls, interest limitations, or other governmental restrictions that might affect repayment of principal or payment of interest, or the ability to honor a credit commitment. Additionally, there may be less public information available about Ocean State Investment Pool Cash Portfolio 2012 Investment Circular 7

10 foreign entities. Foreign issuers may be subject to less governmental regulation and supervision than U.S. issuers. Foreign issuers also generally are not bound by uniform accounting, auditing, and financial reporting requirements comparable to those applicable to U.S. issuers. Illiquid Securities cannot be sold or disposed of in the ordinary course of business within seven calendar days at approximately the value ascribed to them by the OSIP. Difficulty in selling securities may result in a loss or may be costly to the OSIP. In determining the liquidity of the OSIP s investments, various factors may be considered, including (1) the frequency and volume of trades and quotations, (2) the number of dealers and prospective purchasers in the marketplace, (3) dealer undertakings to make a market, and (4) the nature of the security and the market in which it trades (including any demand, put or tender features, the mechanics and other requirements for transfer, any letters of credit or other credit enhancement features, any ratings, the number of holders, the method of soliciting offers, the time required to dispose of the security, and the ability to assign or offset the rights and obligations of the security). Money Market Securities are high-quality, short-term obligations. Money market securities may be structured to be or may employ a trust or other form so that they constitute an Eligible Security under and as defined in Rule 2a-7 and are eligible investments for the OSIP. For example, put features can be used to modify the maturity of a security, or interest rate adjustment features can be used to enhance price stability. If a structure fails to function as intended, adverse tax or investment consequences may result. Neither the Internal Revenue Service (IRS) nor any other regulatory authority has ruled definitively on certain legal issues presented by certain structured securities. Future tax or other regulatory determinations could adversely affect the value, liquidity, or tax treatment of the income received from these securities or the nature and timing of distributions made by the OSIP. Repurchase Agreements involve an agreement to purchase a security and to sell that security back to the original seller at an agreed-upon price. The resale price reflects the purchase price plus an agreed-upon incremental amount which is unrelated to the coupon rate or maturity of the purchased security. As protection against the risk that the original seller will not fulfill its obligation, the securities are held in a separate account at a bank, marked-to-market daily, and maintained at a value at least equal to the sale price plus the accrued incremental amount. The value of the security purchased may be more or less than the price at which the counterparty has agreed to purchase the security. In addition, delays or losses could result if the other party to the agreement defaults or becomes insolvent. The OSIP may be limited in its ability to exercise its rights to liquidate assets related to repurchase agreements with an insolvent counterparty. The OSIP will engage in repurchase agreement transactions with parties whose creditworthiness has been reviewed and found satisfactory by the Advisor. Securities of Investment Companies, including shares of closed-end investment companies [which include business development companies (BDCs)], unit investment trusts, and open-ended investment companies, represent interests in professionally managed portfolios that may invest in any type of instrument. Investing in investment companies involves substantially the same risks as investing directly in the underlying instruments, but may involve additional expenses at the investment company level, such as portfolio management fees and operating expenses. For certain investment companies, such as BDCs, these expenses may be significant. Certain types of investment companies, such as closed-end investment companies, issue a fixed number of shares that trade on a stock exchange or over the counter or at a discount to their net asset value per share (NAV). Others are continuously offered at NAV, but may also be traded in the secondary market. The extent to which the OSIP can invest in securities of other investment companies may be limited by federal securities laws. With respect to investments in any such investment company or trust, the OSIP s Investment Guidelines do not apply to the management and administration of such investment company or trust. Tender Option Bonds are created by depositing intermediate- or long-term, fixed-rate or variable rate municipal bonds into a trust and issuing two classes of trust interests (or certificates ) with varying economic interests to investors. Holders of the first class of trust interests, or floating rate certificates, receive tax-exempt interest based on short-term rates 8

11 and may tender the certificate to the trust at par. As consideration for providing the tender option, the trust sponsor (typically a bank, broker-dealer, or other financial institution) receives periodic fees. The trust pays the holders of the floating rate certificates from proceeds of a remarketing of the certificates or from a draw on a liquidity facility provided by the sponsor. By investing in a floating rate certificate the OSIP will effectively hold a demand obligation that bears interest at the prevailing short-term tax-exempt rate. The floating rate certificate is typically an eligible security under Rule 2a-7. Holders of the second class of interests, sometimes called the residual income certificates, are entitled to any tax-exempt interest received by the trust that is not payable to floating rate certificate holders, and bear the risk that the underlying municipal bonds will decline in value. In selecting tender option bonds, the Advisor will consider the creditworthiness of the issuer of the underlying bond deposited in the trust, the experience of the custodian, and the quality of the sponsor providing the tender option. In certain instances, the tender option may be terminated if, for example, the issuer of the underlying bond defaults on interest payments. U.S. Government Securities are high-quality security issued or guaranteed by the U.S. Treasury or by an agency or instrumentality of the U.S. Government. U.S. Government Securities may be backed by the full faith and credit of the U.S. Treasury, the right to borrow from the U.S. Treasury, or the agency or instrumentality issuing or guaranteeing the security. Variable and Floating Rate Securities provide for periodic adjustments in the interest rate paid on the security. Variable rate securities provide for a specified periodic adjustment in the interest rate, while floating rate securities have interest rates that change whenever there is a change in a designated benchmark rate or the issuer s credit quality sometimes subject to a cap or floor on such rate. Some variable or floating rate securities, which may also have a nominal long-term stated maturity date, are structured with put features that permit holders to demand payment of the unpaid principal balance plus accrued interest from the issuers or certain financial intermediaries. II. Strategies In addition to the OSIP's Principal Investment Strategies, the Advisor may also employ other strategies, subject to the market conditions at the time, to help achieve the investment objectives of the OSIP Cash Portfolio, including, but not limited to: Borrowing: The OSIP may borrow money as a temporary measure to facilitate the repurchase or redemption of units in an amount not to exceed one third (1/3) of the current value of the Total Assets of the OSIP (including the amount borrowed) at the time the borrowing is made. The OSIP may pledge, mortgage, or hypothecate not more than one third (1/3) of the Total Assets of the OSIP (taken at current value) to secure such borrowings. Cash Management: The OSIP may hold uninvested cash that may earn credits that reduce its expenses. Reverse Repurchase Agreements: In a reverse repurchase agreement, the OSIP sells a security to another party, such as a bank or broker-dealer, in return for cash and agrees to repurchase that security at an agreed-upon price and time. The OSIP will enter into reverse repurchase agreements with parties whose creditworthiness has been reviewed and found satisfactory by the Advisor. Such transactions may increase fluctuations in the market value of the OSIP s assets and the OSIP s yield and may be viewed as a form of leverage. Temporary Defensive Policies: The OSIP reserves the right to hold a substantial amount of uninvested cash for temporary, defensive purposes. III. Other Principal Investment Risks Foreign Exposure: Entities located in foreign countries can be affected by adverse political, regulatory, market, or economic developments in those countries. Financial Services Exposure: Changes in government regulation and interest rates and economic downturns can have a significant negative effect on issuers in the financial services sector, including the price of their securities or their ability to meet their payment obligations. Ocean State Investment Pool Cash Portfolio 2012 Investment Circular 9

12 Interest Rate Changes: Interest rate increases can cause the price of a money market security to decrease. Issuers: Changes in the financial condition of an issuer, in specific economic or political conditions that affect a particular type of issuer, and in general economic or political conditions can affect the credit quality or value of an issuer s securities. Entities providing credit support or a maturity-shortening structure also can be affected by these types of changes. If the structure of a security fails to function as intended, the security could decline in value. The Advisor invests assets only with issuers whose creditworthiness and compliance with the applicable guidelines have been reviewed and found satisfactory by the Advisor. See Description of certain types of securities and related principal risks for more information. The OSIP may borrow money as a temporary measure to facilitate the repurchase or redemption of units in an amount not to exceed one-third (1/3) of the current value of the Total Assets of the OSIP (including the amount borrowed) at the time the borrowing is made. The OSIP may pledge, mortgage, or hypothecate not more than one third (1/3) of the Total Assets of the OSIP (taken at current value) to secure such borrowings. Issuer-Specific Changes: A decline in the credit quality of an issuer or a provider of credit support or a maturity-shortening structure for a security can cause the price of a money market security to decrease. Municipal Market Disruption Risk: The value of municipal securities may be affected by uncertainties in the municipal market related to legislation or litigation involving the taxation of municipal securities or the rights of municipal securities holders in the event of a bankruptcy. Proposals to restrict or eliminate the federal income tax exemption for interest on municipal securities are introduced before Congress from time to time. Proposals also may be introduced before state legislatures that would affect the state tax treatment of a municipal fund s distributions. If such proposals were enacted, the availability of municipal securities and the value of municipal securities held by the OSIP would be affected. Municipal bankruptcies are relatively rare, and certain provisions of the U.S. Bankruptcy Code governing such bankruptcies are unclear and remain untested. Further, the application of state law to municipal issuers could produce varying results among the states or among municipal securities issuers within a state. These legal uncertainties could affect the municipal securities market generally, certain specific segments of the market, or the relative credit quality of particular securities. Any of these effects could have a significant impact on the prices of some or all of the municipal securities held by the OSIP, making it more difficult for the OSIP to maintain a stable NAV. Municipal securities may be susceptible to downgrade, default, and bankruptcy, particularly during economic downturns. Factors affecting municipal securities include the budgetary constraints of local, state, and federal governments upon which the municipalities issuing municipal securities may be relying for funding, as well as lower tax collections, fluctuations in interest rates, and increasing construction costs. Municipal securities are also subject to the risk that the perceived likelihood of difficulties in the municipal securities markets could result in increased illiquidity, volatility, and credit risk. Certain municipal issuers may be unable to obtain additional financing through, or be required to pay higher interest rates on, new issues, which may reduce revenues available for these municipal issuers to pay existing obligations. In addition, certain municipal issuers may be unable to issue or market securities, resulting in fewer investment opportunities for funds investing in municipal securities. No Guarantee of Investment Performance: The value of investments made for the OSIP may increase as well as decrease. Past performance is no guarantee of future results. The Advisor has not made and is not making any guarantees, including any guarantee as to any specific level of performance of the assets. The OSIP is subject to various market and business risks. The Investment Guidelines and Rule 2a-7 may be amended or otherwise modified from time to time. An investment in the OSIP is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the OSIP seeks to preserve the value of the investment at $1.00 per unit, there is no guarantee that it will do so, and it is possible to lose money by investing in the OSIP. 10

13 Put Features entitle the holder to sell a security back to the issuer or a third party at any time or at specified intervals. In exchange for this benefit, the OSIP may accept a lower interest rate. Securities with put features are subject to the risk that the put provider is unable to honor the put feature (purchase the security). Put providers often support their ability to buy securities on demand by obtaining letters of credit or other guarantees from other entities. Demand features, standby commitments, and tender options are types of put features. Reforms and Government Intervention in the Financial Markets: Economic downturns can trigger various economic, legal, budgetary, tax, and regulatory reforms across the globe. Instability in the financial markets in the wake of the 2008 economic downturn led the U.S. Government and other governments to take a number of unprecedented actions designed to support certain financial institutions and segments of the financial markets that experienced extreme volatility, and in some cases, a lack of liquidity. Reforms are ongoing and their effects are uncertain. Federal, state, local, foreign, and other governments, their regulatory agencies, or self-regulatory organizations may take actions that affect the regulation of the instruments in which the OSIP may invest, or the issuers of such instruments, in ways that are unforeseeable. Reforms may also change the Investment Guidelines of the OSIP and could limit or preclude OSIP s ability to achieve its investment objective or engage in certain strategies. Also, while reforms generally are intended to strengthen markets, systems, and public finances, they could affect the OSIP s expenses and the value of its investments. The value of the OSIP s holdings is also generally subject to the risk of future local, national, or global economic disturbances based on unknown weaknesses in the markets in which it invests. In the event of such a disturbance, the issuers of securities held by the OSIP may experience significant declines in the value of their assets and even cease operations, or may receive government assistance accompanied by increased restrictions on their business operations or other government intervention. In addition, it is not certain that the U.S. Government or foreign governments will intervene in response to a future market disturbance, and the effect of any such future intervention cannot be predicted. Restricted Securities are subject to legal restrictions on their sale. Difficulty in selling securities may result in a loss or be costly to the OSIP. Restricted securities generally can be sold in privately negotiated transactions, pursuant to an exemption from registration under the Securities Act of 1933, or in a registered public offering. Where registration is required, the holder of a registered 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 may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the holder might obtain a less favorable price than prevailed when it decided to seek registration of the security. Sources of Liquidity or Credit Support: Issuers may employ various forms of credit and liquidity enhancements, including letters of credit, guarantees, swaps, puts, and demand features, and insurance provided by domestic or foreign entities such as banks and other financial institutions. For purposes of making initial and ongoing minimal credit risk determinations, the Advisor and its affiliates may rely on their evaluation of the credit of the issuer or the credit of the liquidity or credit enhancement provider. In evaluating the credit of a foreign bank or other foreign entities, factors considered may include whether adequate public information about the entity is available and whether the entity may be subject to unfavorable political or economic developments, currency controls, or other government restrictions that might affect its ability to honor its commitment. Changes in the credit quality of the issuer and/or entity providing the enhancement could affect the value of the security or the OSIP s unit price. Ocean State Investment Pool Cash Portfolio 2012 Investment Circular 11

14 Transfer Agent Bank Accounts: Proceeds from participant purchases of units of the OSIP pass through a series of demand deposit bank accounts before being held at the OSIP s custodian. Redemption proceeds will pass from the custodian to the participant through a similar series of bank accounts. The bank accounts are registered to the transfer agent or an affiliate, who acts as an agent for the OSIP when opening, closing, and conducting business in the bank accounts. The transfer agent or an affiliate may invest overnight balances in the accounts in repurchase agreements. Any balances that are not invested in repurchase agreements remain in the bank accounts overnight. Any risks associated with these accounts are investment risks of the OSIP. The OSIP faces the risk of loss of these balances if the bank becomes insolvent. When-Issued and Forward Purchase or Sale Transactions involve a commitment to purchase or sell specific securities at a predetermined price or yield in which payment and delivery take place after the customary settlement period for that type of security. Typically, no interest accrues to the purchaser until the security is delivered. The OSIP may renegotiate a when-issued or forward transaction and may sell the underlying securities before delivery, which may result in capital gains or losses for the OSIP. Yield and Net Asset Value: The OSIP s yield will change daily based on changes in interest rates and other market conditions. While the OSIP s assets will be invested in high-quality instruments as described above, investment in the OSIP is not without risk. For example, a major increase in interest rates or a decrease in the credit quality of the issuer of one of the OSIP s investments could cause the OSIP s unit price to decrease. If securities are sold before their maturity, their value may be more or less than par due to changes in value when interest rates rise or fall. Securities with longer maturities and the securities of issuers in the financial services sector can be more sensitive to interest rate changes. Short-term securities tend to react to changes in short-term interest rates. Several policies have been instituted to minimize these changes in value (see How dividend, yield, and net asset value (NAV) are determined ). When purchasing securities pursuant to one of these transactions, the purchaser assumes the rights and risks of ownership, including the risks of price and yield fluctuations and the risk that the security will not be issued as anticipated. Because payment for the securities is not required until the delivery date, these risks are in addition to the risks associated with the OSIP s investments. If the OSIP remains substantially fully invested at a time when a purchase is outstanding, the purchases may result in a form of leverage. When the OSIP has sold a security pursuant to one of these transactions, the OSIP does not participate in further gains or losses with respect to the security. If the other party to a delayed-delivery transaction fails to deliver or pay for the securities, the OSIP could miss a favorable price or yield opportunity or suffer a loss. 12

15 Participant accounts A municipality may open as many accounts as it desires. An account may be opened with a zero balance and maintained until activated with an initial deposit. A completed application must either precede or coincide with an initial deposit. Each application should designate the person(s) authorized to effect transactions on the account(s), and should include verification of signatures and authority of the person(s) authorized to act. For additional information and forms to establish an account, call the OSIP Client Services Team at OSIP, or visit OSIPNet to print out an account application. The OSIP Cash Portfolio maintains participant accounts in terms of full and fractional units of participation, rounded to the nearest 1/1,000th of a unit. All balances and reports are expressed in full and fractional units of participation, which are equivalent to dollars and cents (see How dividend, yield, and net asset value (NAV) are determined ). Payment for units sold shall be in such form as the General Treasurer shall prescribe. Initial and subsequent investments in the Trust shall be credited to the unitholder s account in the form of full and fractional units of the Trust at the NAV per unit next determined after the investment is accepted; provided, however, that the General Treasurer may, in his or her sole discretion, impose a service charge upon investments in the Trust. Warning calls for large redemptions Online access to OSIP By visiting OSIPNet, OSIP s dedicated website, participants of the Trust can access quotes and yields, view account information, process transactions such as purchases and redemptions, download forms and account reports, and obtain market information. Visit advisor.fidelity.com/osip. To assist the Trust s Investment Advisor in managing the OSIP Cash Portfolio effectively, we ask that participants provide one-day advance notice for investments or redemptions in excess of $20 million by calling the OSIP Client Services Team at OSIP. Ocean State Investment Pool Cash Portfolio 2012 Investment Circular 13

16 Investing in the OSIP Investments in the OSIP Cash Portfolio may be made on any day the portfolio is open for business, in one of four ways: 1. By wire Investments in any OSIP account may be made by wiring federal funds. All wire investments must be accompanied by a telephone call to the OSIP Client Services Team at OSIP, or by an instruction transmitted online through OSIPNet. The following information should be included on the wire advice in order to ensure proper credit: ABA: State Street Bank and Trust Company Boston, MA BNF: State of Rhode Island OSIP AC: OBI = Your OSIP account number with the OSIP purchase identification code (assigned by the Trust) All OSIP investments by wire that are preceded by a telephone call to the OSIP Client Services Team or by an instruction transmitted online through OSIPNet before 4:00 p.m. ET on the day of the wire will be credited that day and are entitled to that day s dividend. Any telephone or online instruction received after 4:00 p.m. ET will not be accepted for same-day credit. The telephone call to the OSIP Client Services Team or online instruction must identify the amount, the name of the account to be credited, and the OSIP account number. The OSIP Client Services Team will assign a purchase identification code for each wire placed through a telephone call. Purchases placed online will receive an acknowledgement number. For all transactions, please call OSIP or visit advisor.fidelity.com/osip. 2. By mail Investments in any OSIP account may be made by sending a check payable to the Ocean State Investment Pool to: Ocean State Investment Pool 100 Salem Street, Mailzone 01A Smithfield, RI Checks received by 4:00 p.m. ET will be credited to the participant s account on the business day on which the check is received. Investments by check received after 4:00 p.m. ET will be credited to the participant s account on the first business day following receipt of the check. Dividends will begin to accrue on the next business day after the investment is credited. Checks should be accompanied by a deposit slip that includes the total amount of the investment, amounts of the individual checks, and the OSIP account number. Please note that cash deposits are not accepted. Supplies of deposit slips are available by calling the OSIP Client Services Team. Investments by check may be subject to a collection period of up to seven (7) calendar days after receipt. 3. Automated Clearing House (ACH) Deposits made by ACH will be credited to the Trust account on the day of receipt, normally one business day following transmission, and will begin to accrue a dividend on that business day if received by 4:00 p.m. ET. ACH deposits received after 4:00 p.m. ET will be deposited to the account, where they will begin to accrue dividends on the first business day following receipt. ACH deposits may be subject to a collection period of up to seven (7) calendar days after receipt. 4. Direct deposit Direct deposits of certain federal aid and state reimbursements can be arranged. Funds will be credited and begin earning dividends on the day they are received by the Trust Administrator, Fidelity Investments Institutional Operations Company, Inc., and may be redeemed by check or wire the following business day. 14

17 Redemptions Payment for redemptions from the OSIP Cash Portfolio to the participant may take up to seven (7) days from when the request is received. Redemption of all or any part of a collected balance in an account may be made on any day the portfolio is open for business, in one of the following three ways: 1. By wire Call OSIP or visit OSIPNet to redeem any amount of your collected balance and have it wired in federal funds to any designated bank account authorized by an authorized official. All wire redemption requests must be received before 4:00 p.m. ET to be wired that day by the close of the Federal Reserve wire system. Dividends are earned through the preceding day. Any telephone or online redemption instructions received after 4:00 p.m. ET will not be accepted for same-day processing. For your protection, funds may be wired only to those bank accounts designated in writing by an authorized official. There is no limit to the number of bank accounts that may be listed. Bank wire changes may not be made directly on OSIPNet. Please call the OSIP Client Services Team for instructions to designate additional bank accounts for redemptions. Participants may initiate redemption transactions by telephone or electronically, including electronic orders placed in advance of the trade date once proper authorization has been received by the Trust s Administrator. Note that neither the Trust nor the Trust s Administrator will be responsible for any losses resulting from an unauthorized redemption transaction if it follows reasonable security procedures designed to verify the identity of the caller. The Trust Administrator will request personalized security codes or other verification information and may record calls. For redemption transactions conducted through the Internet, the use of an Internet browser with 128-bit encryption is recommended. The participant should verify the accuracy of its confirmation statements immediately after receipt. If you do not want the ability to redeem by telephone, call OSIP for instructions. 2. By check Participants may request that the OSIP issue a check made payable to the participating entity. Checks will be mailed to the participant s address of record upon receipt of properly authorized instructions. Any telephone or online redemption instructions received after 4:00 p.m. ET will not be accepted for sameday processing. All checks will be mailed on the business day following the redemption date. 3. Automated Clearing House (ACH) Participants can request a redemption through the Automated Clearing House by calling OSIP or visiting OSIPNet. The proceeds will be sent on the business day following the redemption and are normally credited to the bank account within 2 3 business days. For your protection, funds may be sent via ACH only to those bank accounts designated in writing by an authorized official. Ocean State Investment Pool Cash Portfolio 2012 Investment Circular 15

18 Transfers Transfers between qualified participants or between accounts of the same participant can be made by calling the OSIP Client Services Team, electronically through OSIPNet, or by sending written notification to: Ocean State Investment Pool 100 Salem Street, Mailzone 01A Smithfield, RI Transfer requests made to the OSIP Client Services Team or online by 4:00 p.m. ET on any business day will be processed the same day. Participants who wish to establish special authorization for the payment of assessments by transfer between OSIP accounts should call the OSIP Client Services Team for instructions and necessary forms. Transfers between accounts of different municipal entities cannot be made without previous written authorization. Closing an account Participants who wish to bring an account to a zero balance should call the OSIP Client Services Team to receive proper instructions for withdrawing the balance. Accounts that are closed during any given month will receive the accrued dividends at the beginning of the following month. Participants who wish to receive accrued but undistributed dividends at the time the account is closed should request this when they call the OSIP Client Services Team. New employee authorization An OSIP Employee Authorization form should be filed with the Trust Administrator when the treasurer or other authorized officials for an investment account change. The Trust Administrator is authorized to rely on the existing form until the proper authorization has been filed. Information and the necessary forms are available by calling OSIP or by visiting OSIPNet. Available forms Participants may obtain any OSIP Cash Portfolio forms they require by calling the OSIP Client Services Team or by visiting OSIPNet. Available forms include the OSIP Employee Authorization form, New Account Application, and OSIPNet User Agreement. Audit confirmation request Auditors should send requests for confirmations of account balances directly to the Trust Administrator as follows: Ocean State Investment Pool 100 Salem Street, Mailzone 01A Smithfield, RI An authorized official of the municipality must sign the auditor s request form or letter. 16

19 Business days The Trust s Investment Advisor is open for business and the NAV per unit of the OSIP Cash Portfolio is calculated each day on which both the Federal Reserve Bank of Boston and the New York Stock Exchange are open. At no time will the Trust Investment Advisor s office be closed for more than one day in observance of the same holiday. In the event such a case should arise, the Trust s Investment Advisor would follow the New York Stock Exchange closing schedule. All holiday announcements will be available on OSIPNet prior to the upcoming holiday. Additionally, one week prior to the holiday, a taped announcement will be available by calling the OSIP Client Services Team. The following are the holidays or their observances on which either the Federal Reserve Bank of Boston or the New York Stock Exchange normally is closed: New Year s Day Dr. Martin Luther King Jr. Day Presidents' Day Good Friday Memorial Day Independence Day Labor Day Columbus Day Veterans' Day Thanksgiving Day Christmas The General Treasurer may declare a suspension of the right of redemption or postpone the date of payment for the whole or any part of any period during which an emergency exists as a result of which disposal by the Trust of securities owned by it is not reasonably practicable for the Trust fairly to determine the value of its net assets. Such suspension shall take effect at such time as the General Treasurer shall specify but not later than the close of business on the next business day following the declaration of suspension, and thereafter there shall be no right of redemption or payment until the General Treasurer shall declare the suspension at an end. In case of a suspension of the right of redemption, a unitholder may either withdraw his or her request for redemption or receive payment based on the number of units it holds after the termination of the suspension. Dividends and yields Dividends accrue on a daily basis and are paid at the declared daily rate on the actual number of units of participation in the account. The dividend is paid on the first business day of the month following the month in which it was accrued, and is automatically reinvested into the account unless otherwise instructed by an authorized official. Dividend amounts are available the next business day by calling the OSIP Client Services Team or visiting OSIPNet. Quotations of the annualized daily dividend rate, the seven-day average annual yield, and the average annual yield for the preceding month also are available by calling the OSIP Client Services Team or visiting OSIPNet. For an explanation of how dividends and yields are computed, see Determination of dividend, yield, and net asset value (NAV). Transaction summaries and statements A transaction summary of each transaction reflecting the date, amount, type of transaction processed, and the resulting account balance will be sent promptly by mail for each transaction. A monthly account statement reflecting all transactions for the month, the dividend paid, and the fiscal year-to-date dividends will be sent after the close of each month, normally within five business days. This monthly statement is provided in lieu of an immediate confirmation for each transaction pursuant to Municipal Securities Rulemaking Board Rule G-15. Participants who wish to receive only monthly statements or who require information regarding the current status of any account should call the OSIP Client Services Team. Account information is also available through OSIPNet. For all transactions, please call OSIP or visit advisor.fidelity.com/osip. Ocean State Investment Pool Cash Portfolio 2012 Investment Circular 17

20 Determination of dividend, yield, and net asset value (NAV) Dividend The net income of OSIP Cash Portfolio assets is determined at the close of business each day. The calculation includes interest accrued or discount earned (including both original issue and market discount), plus or minus amortization of accumulated gains or losses realized on the sale of assets of the OSIP Cash Portfolio (see below), less amortization of premium and the expenses accrued to the OSIP Cash Portfolio applicable to that dividend period. All net income so determined is declared as a dividend to participants each day. Dividends are accrued throughout the month and, if automatically reinvested, purchase additional participation units at the NAV (expected to be $1.00) determined on the last business day of the current month. If the entire balance in an account is withdrawn during the month, accrued dividends will be paid on the first business day of the following month. Yield Annualized one-day yield calculation To determine the annualized one-day yield for the OSIP Cash Portfolio, take the daily dividend rate for a specific day, multiply it by 365, and then multiply it by 100 to arrive at a percentage. (Example: daily dividend rate of x 365 x 100 = 0.20%) The annualized seven-day and annualized monthly yields reflect an average of the yield over the past seven days or month. A participant may call the OSIP Client Services Team at OSIP or visit OSIPNet for a current yield quote. The current yield refers to the income generated by an investment in the OSIP Cash Portfolio over a period of time (normally one day, seven days, or monthly), expressed as an annual percentage rate. Net Asset Value The NAV per unit of the OSIP Cash Portfolio is calculated by adding the value of all portfolio securities and other assets, deducting the actual and accrued liabilities of the OSIP Cash Portfolio, and dividing by the number of units outstanding. Investments in the OSIP Cash Portfolio are not a deposit of a bank and are neither insured nor guaranteed by the State of Rhode Island, the Federal Deposit Insurance Corporation (FDIC), or the U.S. Government or any of its agencies. There is no guarantee that the OSIP Cash Portfolio will maintain a stable $1.00 per unit price, and it is possible to lose money by investing in the OSIP Cash Portfolio. The assets of the OSIP Cash Portfolio are valued on the basis of the amortized cost valuation technique. This involves valuing an instrument at its cost as adjusted for amortization of a premium or accretion of a discount, rather than its value based on current market quotations or appropriate substitutes that reflect current market conditions. While this method provides certainty of valuation, it may result in periods during which value, as determined by amortized cost, is higher or lower than the price received if the instrument were sold. The OSIP s investment guidelines include regular review of the market value of the OSIP Cash Portfolio s holdings by the Trustee, and the right of the Trustee to take corrective action as deemed appropriate. Such corrective action could include any of the following actions: The sale of instruments prior to maturity to realize capital gains or losses, or to shorten average portfolio maturity Withholding dividends Redemption of units in kind Establishing NAV by using available market quotations Other measures the Trustee may deem appropriate Certain occasions may arise in which the Trust s Investment Advisor sells some portfolio holdings prior to maturity. The proceeds realized by such a sale may be higher or lower than the original cost, resulting in a capital gain or loss. These gains and losses are amortized by adjusting the daily net income and distribution. Gains and losses shall be amortized and distributed as soon as practicable, but in no case shall the period of amortization exceed one year. 18

21 Expenses of the OSIP The Trust pays one all-inclusive management fee for investment management, custody, administration, and other participant services of the OSIP. The fee is accrued each day and is paid monthly at an annual percentage rate determined using the fee schedule that follows. The fee is paid to Pyramis, the Trust s Investment Advisor. Pyramis is responsible for paying all operating expenses of the Trust (excluding expenses of the Trustee, brokerage fees, commissions, taxes, and extraordinary non-recurring expenses).* Average Net Assets ($ billions) Annualized Fee Rate On the first $500 million 0.148% On the next $500 million 0.144% Over $1 billion 0.138% Annualized fee rates are charged in a tiered fashion such that 0.148% is charged on the first $500 million or less of average net assets, 0.144% is charged on amounts in excess of $500 million to $1 billion, and so on. * FIISC reimbursed $30, of the Trust's legal expenses related to its initial commencement of operations in Continuing disclosure obligations To the extent applicable to comply with Rule 15c2-12 (the Rule ) under the Securities Exchange Act of 1934, on behalf of the Trust, and for the benefit of registered and beneficial unit holders of the Trust, the Trust has executed the Agreement, dated as of February 28, 2012 (as amended from time to time, the Agreement) that provides for the continuing disclosure of certain information as required by the Rule. Under the Agreement, Pyramis is obligated to provide certain financial information related to the Trust annually to each nationally recognized municipal securities information repository (NRMSIR), and to a recognized information depository in the State of Rhode Island, if one exists. The Agreement further requires that Pyramis provide notice of the occurrence of certain events enumerated in the Agreement to either the Municipal Securities Rulemaking Board or each NRMSIR, and to a recognized information depository in the State of Rhode Island, if one exists. Annual audit PricewaterhouseCoopers LLP, an independent registered public accounting firm, will audit the OSIP s financial statements following the close of each fiscal year. The audit will include a physical count of securities held by the custodian, State Street Bank and Trust Company, and a review of the adequacy of controls through a systems review and evaluation. An annual report including the Auditor s opinion will be issued to each participant of record as of June 30, the close of the OSIP s fiscal year. Pyramis will pay all costs of conducting the audit and issuing the annual report. Legal considerations OSIP is not a mutual fund and is exempted from the Investment Company Act of Investments in the OSIP Cash Portfolio are not deposits of a bank and are neither insured nor guaranteed by the State of Rhode Island, the FDIC, or the U.S. Government or any of its agencies. There is no guarantee that the OSIP Cash Portfolio will maintain a stable $1.00 per unit price, and it is possible to lose money by investing in the OSIP Cash Portfolio. For more information about OSIP s structure, please see Structure and purpose and Authority for organization." Ocean State Investment Pool Cash Portfolio 2012 Investment Circular 19