FIRST PUERTO RICO AAA FIXED-INCOME FUND

Transcription

1 FIRST PUERTO RICO AAA Fixed-Income Fund Prospectus June 27, 2011 This prospectus contains important information about the shares of Common Stock of the Fund. Please read it before investing and keep it for future reference. FIRST PUERTO RICO AAA FIXED-INCOME FUND

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4 PROSPECTUS First Puerto Rico AAA Fixed-Income Fund, Inc. Common Stock The Fund is a continuously offered, non-diversified, open-end management investment company registered under the Puerto Rico Investment Companies Act, as amended. The Fund commenced operations on July 3, Investment objective: $ The Fund seeks to provide Puerto Rico investors with the opportunity to obtain current income consistent with prudent investment management. Principal investment strategies: $ The Fund will invest primarily in taxable fixed-income securities, including U.S. and foreign government, mortgagebacked, asset-backed and corporate debt securities. Normally, at least 20% of the Fund s assets must be invested in Puerto Rico fixed-income securities. $ The Fund will invest at least 95% of its assets in securities that, at the time of purchase, have been rated AAA by Standard & Poor s, Aaa by Moody s Investors Service, Inc., AAA by Fitch Ratings, or in the highest credit-rating category by any other nationally recognized statistical rating organization. See Investment Objective and Policies Principal Investment Strategies beginning on page 22. $ The Fund may issue preferred stock and debt securities, and engage in other forms of leverage to increase amounts available for investment. Common stock offered by the Fund: $ The Fund offers to the public, on a continuous basis, shares of Class A common stock of the Fund (the Shares ). $ The Shares are being offered only to individuals who have their principal residence in Puerto Rico and to entities whose principal office and principal place of business are located in Puerto Rico. Dividends and Automatic Reinvestment: $ The Fund intends to declare and distribute monthly dividends of substantially all of its net investment income. $ All dividends declared and distributed by the Fund will be reinvested automatically in additional Shares of the Fund unless a shareholder elects to receive cash. Investment considerations: $ The Fund is designed, and is suitable, for long-term investors that are residents of Puerto Rico. The Fund is not a vehicle for trading purposes. $ The price of the Shares of the Fund will depend on the value of the Fund s underlying investments, which will fluctuate with general market and economic conditions and other factors that may be beyond the control of the Fund. $ The Fund is a non-diversified investment company, and is subject to risks that may result in a loss of your investment. See Risk Factors and Special Considerations beginning on page 7. $ While the use of leverage provides the opportunity for increased net income, it can create special risks, including higher volatility of the net asset value and the market value of the Shares of the Fund. See Risk Factors and Special Considerations of Leverage beginning on page 28. Tax benefits: $ Ordinary Dividends (as defined herein) received by Qualifying Individuals, estates and trusts will be subject to a 10% preferential tax to be withheld at source rather than to the regular tax on ordinary income. See Tax Matters Puerto Rico Taxation of Fund Shareholders beginning on page 34. $ Investments in the Fund by individuals who acquired their U.S. citizenship by reason of their birth or residence in Puerto Rico and who reside in Puerto Rico at the time of death are not subject to Puerto Rico or U.S. estate taxes. $ Gain on the sale or redemption of Fund shares held for more than six months is subject to special tax rates for qualifying individuals and qualifying institutions. $ An investment in the Fund is subject to taxation as described under Tax Matters beginning on page 33. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE OFFICE OF THE COMMISSIONER OF FINANCIAL INSTITUTIONS OF PUERTO RICO. THE OFFICE OF THE COMMISSIONER OF FINANCIAL INSTITUTIONS HAS NOT MADE ANY DETERMINATION REGARDING THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The shares offered by this prospectus are not deposits or obligations of any bank, are not endorsed or guaranteed by any bank and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. June 27, 2011 Santander Securities - Distributor

5 THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, OR WITH ANY STATE SECURITIES COMMISSION OTHER THAN THE OFFICE OF THE COMMISSIONER OF FINANCIAL INSTITUTIONS OF PUERTO RICO. THE SECURITIES DESCRIBED IN THIS PROSPECTUS ARE OFFERED FOR SALE ONLY IN THE COMMONWEALTH OF PUERTO RICO PURSUANT TO REGISTRATION OF THE FUND WITH THE OFFICE OF THE COMMISSIONER OF FINANCIAL INSTITUTIONS OF PUERTO RICO AS AN INVESTMENT COMPANY UNDER THE PUERTO RICO INVESTMENT COMPANIES ACT, AS AMENDED. THE FUND HAS NOT BEEN REGISTERED UNDER THE U.S. INVESTMENT COMPANY ACT OF THESE SECURITIES ARE BEING OFFERED EXCLUSIVELY TO INDIVIDUALS HAVING THEIR PRINCIPAL RESIDENCE WITHIN THE COMMONWEALTH OF PUERTO RICO AND TO PERSONS, OTHER THAN INDIVIDUALS, WHOSE PRINCIPAL OFFICE AND PRINCIPAL PLACE OF BUSINESS ARE LOCATED WITHIN THE COMMONWEALTH OF PUERTO RICO. (continued from previous page) Other Fund characteristics: $ The Fund may seek to hedge its portfolio through the use of futures transactions, swaps and options to reduce volatility in both the net asset value of its shares of common stock and its net interest income. $ The value of the shares of the Fund will depend on the value of the underlying investments held by the Fund which will fluctuate with general market economic conditions and other factors which may be beyond the control of the Fund. $ The Fund may enter into various types of transactions with affiliated parties as described in this prospectus. All transactions with affiliates will be subject to procedures adopted by the Board of Directors and, particularly, the independent Directors of the Board, in an effort to address potential conflicts of interest. There is no assurance that the procedures will be effective. $ Santander Asset Management Corporation, as investment adviser to the Fund, manages the overall investment policy, strategic asset allocation, portfolio rebalancing and risk management of the Fund s assets. The principal offices of Santander Asset Management Corporation are located at Santander Tower Building, Suite 1800, Tabonuco Street B-7, Guaynabo, Puerto Rico , and its main telephone number is (787) No dealer, salesperson or any other person has been authorized to give any information or to make any representations in connection with this offering other than those contained in this prospectus and you should not rely on such other information and representations. This prospectus does not constitute an offer by the Fund or Santander Securities to sell or a solicitation of an offer to buy any of the securities offered hereby in any jurisdiction other than the Commonwealth of Puerto Rico.

6 Table of Contents Page PROSPECTUS SUMMARY...1 FEES AND EXPENSES OF THE FUND...6 RISK FACTORS AND SPECIAL CONSIDERATIONS...7 FINANCIAL HIGHLIGHTS...20 THE FUND...21 LIMITATIONS ON THE OFFERING AND TRANSFER OF SHARES...21 INVESTMENT OBJECTIVE AND POLICIES...21 Investment Objectives...21 Principal Investment Strategies...22 Statutory Investment Requirements...24 Investment Restrictions...25 Other Investment Policies and Practices...25 Derivatives and Hedging Techniques...28 RISK FACTORS AND SPECIAL CONSIDERATIONS OF LEVERAGE...28 Effects of Leverage...28 Portfolio Management and Other Considerations 29 PORTFOLIO TRANSACTIONS AND TURNOVER...30 NET ASSET VALUE...31 DIVIDENDS AND DISTRIBUTIONS...32 AUTOMATIC DIVIDED REINVESTMENT PLAN...33 TAX MATTERS...33 Puerto Rico Taxation of the Fund...34 Puerto Rico Taxation of Fund Shareholders...34 United States Taxation of the Fund...35 United States Taxation of Qualifying Investors...36 Page PURCHASE OF SHARES...37 REDEMPTION OF SHARES...39 AUTOMATIC REDEMPTION...41 FUND MANAGEMENT...41 Directors and Officers...41 Compensation of Directors...42 Indemnification of Directors...43 Investment Adviser...43 Administrator...44 Transfer Agent and Sub-Transfer Agent...44 Custodian...45 Banking Relationship...45 FUND DISTRIBUTION...45 PERFORMANCE INFORMATION...45 EXCHANGING SHARES...46 PRIVACY POLICY...47 LEGAL MATTERS AND AUDITORS...47 ADDITIONAL INFORMATION...47 APPENDIX A Securities in Which the Fund May Invest...A-1 APPENDIX B Ratings of Municipal Obligations and Debt Securities...B-1 APPENDIX C Hedging and Related Income Strategies...C-1 APPENDIX D Privacy Policy...D-1 APPENDIX E Letter of Intent and Right of Accumulation... E-1 APPENDIX F Puerto Rico Residency Representation Letter... F-1 No dealer, sales representative, or any other person has been authorized to give any information or to make any representations, other than those contained in this prospectus, in connection with the offer made herein. If given or made, such other information and representations must not be relied upon as having been authorized by the Fund or Santander Securities Corporation (the Distributor ). This prospectus does not constitute an offer by the Fund or the Distributor to sell shares of the Fund to or to buy shares of the Fund from any person to whom it is unlawful to make such offer or in any jurisdiction other than the Commonwealth of Puerto Rico. This prospectus contains important information you should know and read before investing. Please keep it for future reference.

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8 PROSPECTUS SUMMARY This summary is qualified in its entirety by reference to more detailed information included elsewhere in this prospectus and to the Certificate of Incorporation and By-Laws of the Fund, all other relevant documents referred to herein, and all applicable statutory and regulatory provisions. A copy of the Certificate of Incorporation and By-Laws of the Fund may be examined at the offices of Santander Asset Management Corporation located at Santander Tower Building, Suite 1800, Tabonuco Street B-7, Guaynabo, Puerto Rico The Fund... The Offering... First Puerto Rico AAA Fixed-Income Fund, Inc. (the Fund ) is a continuously offered, non-diversified, open-end management investment company. The Fund is incorporated under the laws of the Commonwealth of Puerto Rico and is registered as an investment company under the Investment Companies Act of Puerto Rico (the Puerto Rico Investment Companies Act ). See The Fund. Class A shares of the Fund s Common Stock (the Shares ) may be purchased through Santander Securities Corporation, a securities broker-dealer registered in Puerto Rico ( Santander Securities ), and other securities dealers which have entered into selected dealer agreements with Santander Securities. The Fund offers its Shares at a price equal to the net asset value ( NAV ) per share next determined after a purchase order is received and becomes effective, plus a maximum initial sales charge of 3.50%. The initial sales charge is reduced gradually for purchases of $50,000 or more, down to a minimum of 1.25% for purchases of $1,000,000 or more, in a single transaction or in several transactions pursuant to such shareholder s Right of Accumulation or a Letter of Intent. See Purchase of Shares, Purchase of SharesCRight of Accumulation and CLetter of Intent. The minimum initial investment in Shares is $10,000 and the minimum subsequent investment is $100. The Fund reserves the right to waive or modify the initial and subsequent investment requirements at any time. See Fees and Expenses and Purchase of Shares. To permit the Fund to invest the net proceeds from the sale of its shares of Common Stock in an orderly manner, the Fund may, from time to time, suspend the sale of its Shares. See Purchase of Shares. Offering and Transfer Restrictions... The Shares are being offered for sale exclusively to individuals who maintain their principal residence in Puerto Rico and to entities that have their principal office and principal place of business in Puerto Rico. For purposes of this prospectus, entities having their principal office and principal place of business in Puerto Rico are considered to be residents of Puerto Rico. Investors will be required to deliver a Puerto Rico residency representation letter in the form of Appendix D to this prospectus. The shares may be sold, pledged, hypothecated or otherwise transferred exclusively to residents of Puerto Rico. Shareholders who cease to be Puerto Rico residents will not have available the tax benefits that make the Fund an attractive investment, and such shareholders have an obligation to notify Santander Securities or a dealer within 30 days of ceasing to be Puerto Rico residents, to redeem their shares as soon as it becomes economically feasible to do so, and to agree not to purchase any more shares (otherwise their shares may be redeemed automatically by the Fund). See Risk Factors and Special ConsiderationsCLimitations on the Offering and

9 Transfer of Shares, Limitations on the Offering and Transfer of Shares and Appendix DC Puerto Rico Residency Representation Letter. Investment objective... Investment policies... The Fund s investment objective is to provide Puerto Rico investors with the opportunity to obtain current income consistent with prudent investment management. The Fund will invest, under normal market conditions, up to 80% of its assets in taxable non-puerto Rico fixedincome securities, including U.S. and foreign government, mortgagebacked, asset-backed and corporate debt securities. The Fund normally will invest at least 20% of its assets in Puerto Rico fixed-income securities to comply with Puerto Rico regulatory requirements. See Investment Objective and Policies. The following are the principal investment policies of the Fund: At least 95% of the Fund s assets will be invested in securities that, at the time of purchase, are rated AAA by Standard & Poor s, a Division of The McGraw Hill Companies ( S&P ), Aaa by Moody s Investors Service, Inc. ( Moody s ), AAA by Fitch Ratings ( Fitch ), or in the highest credit-rating category by any other nationally recognized statistical rating organization. The Fund may invest up to 5% of its total assets in securities that, at the time of purchase, are rated below investment grade or, if not rated, that are considered by Santander Asset Management Corporation ( SAM ), in its capacity as investment adviser (in such capacity, the Investment Adviser ), to be below investment grade. Maturities... Redemptions... It is anticipated that the Fund will invest substantially all of its assets in securities having a wide range of maturities, including securities with maturities of 30 years or more. No market presently exists for the Shares and it is not currently anticipated that a secondary market will develop. The Fund s Certificate of Incorporation, however, provides that the Board of Directors of the Fund, not less frequently than once each year, shall permit shareholders to redeem their shares of common stock at periodic intervals. The Board of Directors of the Fund has adopted a policy that allows shareholders to redeem their Shares on a daily basis at a price per share equal to their respective net asset value per share determined as of the close of trading on the New York Stock Exchange ( NYSE ) based on prices at the time of closing (generally, the NYSE closes at 4:00 p.m., prevailing Eastern time) on each Business Day (as defined herein). See Redemption of Shares. Shares that are redeemed by a shareholder that has held such shares for less than 60 days prior to redemption will be subject to a redemption fee of 1.00% of the net asset value of the shares being redeemed. There is no redemption fee for Shares redeemed after having been held for at least 60 days prior to redemption. The redemption fees are designed to discourage short-term trading in Shares of the Fund. The redemption fees will be used to compensate the Fund for expenses directly related to redemption. See Redemption of Shares. 2

10 Leverage... The Fund may increase amounts available for investment through the use of leverage. The Fund may also utilize leverage to pay for redemptions of its common stock or to pay certain expenses of the Fund. The Fund may borrow money from banks or other financial institutions, enter into reverse repurchase agreements and dollar rolls and offer commercial paper and other debt securities or shares of preferred stock. All such forms of leverage may represent in the aggregate up to 50% of the Fund s total assets immediately after such leverage. The proceeds from such leverage will be invested in longer-term obligations in accordance with the Fund s investment objective. Issuance and ongoing expenses of such leverage will be borne by the Fund and will reduce the net asset value of the common stock of the Fund. The use of leverage by the Fund creates an opportunity for increased net income but, at the same time, creates special risks. Because, under normal market conditions, obligations with longer maturities produce higher yields than short-term and medium-term obligations, the Investment Adviser believes that the spread inherent in the difference between the short-term and medium-term rates paid by the Fund in the course of leveraging and the longer-term rates received by the Fund from securities purchased with the proceeds of such leverage will provide holders of common stock with a potentially higher yield. Investors should note, however, that leverage creates certain risks for holders of common stock, including higher volatility of both the net asset value and market value of the common stock. Since any decline in the value of the Fund s investments will be borne entirely by holders of common stock, the effect of leverage in a declining market would result in a greater decrease in net asset value per share than if the Fund were not leveraged, which likely would be reflected in a decline in the market price for shares of common stock. Additionally, fluctuations in the dividend rate on, and the amount of taxable income allocable to, the preferred stock will affect the yield to holders of common stock. See Risk Factors and Special Considerations of Leverage. Holders of common stock will receive substantially all net income of the Fund remaining after payment of interest or dividends associated with leverage and any preferred stock to be issued by the Fund and will generally be entitled to a pro-rata share of net realized capital gains. Upon any liquidation of the Fund, the holders of shares of any outstanding preferred stock will be entitled to receive liquidating distributions before any distribution is made to holders of common stock. Investment Adviser... Santander Asset Management Corporation ( SAM or the Investment Adviser ) is the Fund s investment adviser responsible for the management of the assets of the Fund, subject to the discretion of the Fund s Board of Directors. SAM is a wholly owned subsidiary of Santander Securities, the Fund s distributor. See Fund ManagementC Investment Adviser. Administrator... SAM is the Fund s administrator. See Fund ManagementC Administrator. 3

11 Transfer Agent... Custodian... Distribution Plan... Dividends and Distributions... Banco Santander Puerto Rico ( Banco Santander ) is the Fund s transfer agent. Banco Santander and the Fund have engaged BNY Mellon Asset Servicing (successor to PNC Global Investment Servicing Inc.) to act as sub-transfer agent. See Fund ManagementCTransfer Agent and Sub- Transfer Agent. Citibank, N.A. is the Fund s custodian. See Fund ManagementC Custodian. The Fund has adopted a distribution plan for its Shares (the Distribution Plan ) that permits it to pay account maintenance and distribution fees to support the sale and distribution of shares and services provided to investors by Santander Securities or other brokers or financial institutions. The Distribution Plan provides that the Fund pays Santander Securities an account maintenance and distribution fee, accrued daily and paid monthly, at the annual rate of 0.25% of the average daily net assets of the Fund (excluding outstanding leverage), as defined under Fund ManagementCInvestment Adviser, in order to compensate the Distributor and securities firms with which the Distributor enters into related agreements (including clearing brokers) for providing certain distributionrelated activities (including networking, record-keeping and other shareholder services) with respect to holders of Shares. See Fund Distribution. The Fund intends to distribute monthly dividends of substantially all of its net investment income, if any, to holders of Shares. Monthly distributions to holders of Shares will consist of all or a portion of its net investment income remaining after the payment of interest expense or dividends in connection with the Fund s leverage program. At times, in order to maintain a stable level of dividends, the Fund may pay out less than all of its net investment income or pay out accumulated undistributed income in addition to current net investment income. Net capital gains, if any, will be retained by the Fund, unless the Board of Directors determines that capital gains must be distributed to holders of common stock and preferred stock in order to ensure advantageous tax treatment for the Fund. See Dividends and Distributions and Tax Matters. Ordinary Dividends (as defined below under Tax Matters ) distributed to investors will be distributed net of a 10% Puerto Rico income tax withholding, which will be automatically withheld at the source by the issuing and paying agent of the Fund. See Dividends and Distributions and Tax Matters. Automatic Dividend Reinvestment Plan... Taxation... All dividend distributions will be reinvested automatically in additional shares of common stock of the Fund unless a shareholder elects to receive cash. Shareholders whose shares are held in the name of a broker or nominee should contact such broker or nominee to confirm that they may participate in the Fund s dividend reinvestment plan. See Automatic Dividend Reinvestment Plan. In the opinion of Pietrantoni Méndez & Alvarez LLP, counsel to the Fund, (i) amounts distributed as Ordinary Dividends (see Tax Matters ) on the Fund s shares of common stock will be subject to regular Puerto Rico income tax at a 10% preferential rate in the case of individuals, estates or trusts; 4

12 (ii) individual shareholders should take into consideration Ordinary Dividends and long-term capital gains subject to special tax rates for computing their net income subject to alternative minimum tax; (iii) Qualifying Corporations (see Tax Matters ) will be subject to regular and alternative minimum tax on Ordinary Dividends and will qualify for an 85% dividends received deduction for Ordinary Dividends received; (iv) by purchasing shares of the Fund, investors will be irrevocably agreeing to be subject to a 10% Puerto Rico income tax withholding that will be automatically withheld at source by the Fund or its paying agent (including the Distributor or a selected dealer) on amounts distributed as Ordinary Dividends; (v) the shares will be exempt from Puerto Rico personal property taxes and will not be subject to U.S. federal and Puerto Rico estate taxes in the hands of certain investors who are residents of Puerto Rico; (vi) the Fund will not be engaged in a U.S. trade or business and will not be subject to U.S. federal income tax on portfolio interest; (vii) the dividends paid by the Fund will constitute income from sources within Puerto Rico and as such will not be subject to U.S. federal income tax when received by (a) individuals who are bona fide residents of Puerto Rico during the entire taxable year of receipt and who own, directly or indirectly, less than 10% of the total common stock of the Fund, (b) Puerto Rico corporations that are not engaged in a U.S. trade or business to which the dividends are effectively connected, or (c) Puerto Rico corporations that are engaged in a U.S. trade or business, but for which its investment in the Fund is not effectively connected to its U.S. trade or business; and (viii) gains on the sale or redemption of Fund shares held for more than six months, which are considered long-term capital gains, are subject to special tax rates for Qualifying Individuals and Qualifying Corporations (see Tax Matters ). Transactions Involving Affiliates... The Fund may enter into various types of transactions with affiliated parties as described in this prospectus. All transactions with affiliates will be subject to procedures adopted by the Board of Directors and, particularly, the independent Directors of the Board, in an effort to address potential conflicts of interest. There is no assurance that the procedures will be effective. See Risk FactorsCTransactions Involving Affiliates and Portfolio Transactions and Turnover. 5

13 FEES AND EXPENSES OF THE FUND The following table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. Shareholders fees, such as initial sales charges or redemption fees, are charged directly to an investor s account when the shareholder buys or sells shares of the Fund. Annual Fund operating expenses are paid out of the Fund s assets and include fees for portfolio management, maintenance of shareholder accounts, shareholder servicing, accounting and other expenses. You do not pay these fees directly but, as the example below shows, these costs are borne indirectly by all Fund shareholders. Shareholder fees (paid directly from your investment) Class A Maximum sales charge on purchases % Maximum redemption fee 1.00% 2 Annual Fund Operating Expenses (as a percentage of average daily net assets) (deducted from Fund assets) Investment advisory fee % Maximum administration fee % Account maintenance and distribution fees (12b-1) % Other expenses % Total annual Fund operating expenses % (1) (2) (3) (4) (5) (6) The initial sales charge on purchases of Shares decreases gradually with the size of the purchase and will be 1.25% for purchases in single transactions of $1,000,000 or more or in several transactions pursuant to such shareholder s Right of Accumulation or a Letter of Intent. See Purchase of Shares, Purchase of ShareCRight of Accumulation and CLetter of Intent. Shares acquired through the Fund s dividend reinvestment plan are not subject to initial sales charges or to any redemption fees or contingent deferred sales charges upon redemption. See Automatic Dividend Reinvestment Plan. Redemption fees are applicable only in cases of redemptions of Shares within 60 days of purchase, and are based on the net asset value at the time of the redemption or exchange. Investment advisory fees, which are indirectly paid by shareholders, and administrative fees, will be charged as a percentage of average daily net assets (including the assets purchased with the proceeds of leverage). Account maintenance and distribution fees to support the sale and distribution of shares and services provided to investors by Santander Securities or other brokers or financial institutions, which also are indirectly paid by shareholders, will be charged as a percentage of average daily net assets, excluding the assets purchased with the proceeds of leverage. Administration fees are reduced gradually for average daily net assets of the Fund above $250,000,000, down to a minimum of 0.07% for average daily net assets above $500,000,000. See Investment Advisory and Administrative AgreementCAdministrator. These expenses do not include interest payments on borrowed funds, taxes, brokerage commissions or extraordinary expenses. There is no guarantee that actual expenses will be the same as those shown on the table. Until at least May 31, 2012, SAM has agreed to waive its investment advisory fees and, if necessary, reimburse the Fund to the extent that the Fund s total annual operating expenses (including the investment advisory fees but excluding interest, taxes, brokerage commissions and extraordinary expenses) exceed 1.00% of average daily net assets (including the assets purchased with the proceeds of leverage). Under the Investment Advisory Agreement between SAM and the Fund, any reduction in SAM s management fees as a result of SAM s fee waivers may be recovered by SAM within the first two fiscal years following such fee waiver if overall Fund expenses fall below these percentage limitations. There is no guarantee that the actual expenses will be the same as shown on the table. Furthermore, the Fund may borrow money through, among other things, the issuance of preferred stock and debt securities, and other forms of leverage. As a result of any such borrowings, the Fund will incur interest costs not reflected in the preceding table. Assuming the utilization of leverage by borrowings in the amount of approximately 50% of the Fund s total assets, and an annual interest rate (including dividends on preferred stock) of 2.50% payable on such leverage based on market rates as of the date of this prospectus, the annual portfolio yield on the assets that the Fund s portfolio must experience (net of expenses) in order to cover such interest payments would be 1.25%. The actual cost of leverage (including dividends on preferred stock) will be based on market rates at the time the Fund undertakes a leveraging strategy, and such actual cost of leverage may be higher or lower than that assumed, as more fully described in the section entitled Risk Factors and Special Considerations of Leverage in this prospectus. 6

14 Example This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and that you redeem all your shares at the end of such period. This example also assumes (i) the deduction of a 3.50% initial sales load at the time of purchase of the Shares, (ii) a 5% return each year, (iii) the deduction of the total annual operating expenses described above, and (iv) the reinvestment of all dividends and other distributions at net asset value. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 year 3 years 5 years 7 years 10 years Assuming No Leverage $448 $657 $883 $1,127 $1,532 Assuming Leverage of 50% of the Fund s Total Assets $570 $1,029 $1,513 $2,024 $2,844 This example should not be considered a representation of future expenses or annual rates of return. Actual expenses or annual rates of return may be more or less than those assumed for purposes of the example. RISK FACTORS AND SPECIAL CONSIDERATIONS There is a risk that you could lose all or a portion of your investment in the Fund and that the income you will receive from your investment may vary. The net asset value of the Fund s shares of common stock will go up and down with interest rate changes as well as with the prices of the securities in which the Fund invests. These fluctuations are likely to be greater in the case of a fund having a leveraged capital structure, such as the Fund. See Risk Factors and Special Considerations of Leverage. All mutual funds take investment risks. The Fund s investment objective and principal investment strategies largely determine its risk profile. The Fund is subject to the following risk factors and special considerations, any of which could cause an investor to lose money: General. Fixed-income markets are volatile. Apart from the risks identified below, the Fund s investments may be influenced by the broad investment environment in the United States, Puerto Rico and international securities markets, which may be adversely affected by, among other things, interest rate fluctuations, inflation, politics, fiscal policy and current events. Therefore, as with any Fund that invests in securities, the Fund s net asset value will fluctuate. You may experience a decline in the value of your investment and could lose money. Lack of Secondary Market. The Fund expects that there will be no secondary market for its common stock, although the Board of Directors of the Fund has adopted a policy whereby shares are redeemable on a daily basis. Notwithstanding the foregoing, the right to redeem shares on a daily basis may be suspended or the date of payment postponed (i) for periods during which trading on the NYSE is restricted or the NYSE is closed (other than for customary weekend and holiday closings) or (ii) for any period during which an emergency exists as a result of which disposal of portfolio securities or determination of the net asset value per share of the Fund is not reasonably practicable. Accordingly, the liquidity of an investment in shares of common stock of the Fund may be limited and an investor may be unable to redeem or otherwise dispose of its shares of common stock at a time when it may deem such redemption or disposition to be most convenient. See Redemption of Shares. Long-Term Investment Vehicle. Because of the initial sales charge imposed on the purchase of Shares, the redemption fee imposed on Shares held for 60 days or less, and the lack of a secondary market for Shares, the Fund is designed primarily for long-term investors and should not be considered a vehicle for trading purposes. Fund Investment Risk. An investment in the Fund is not equivalent to an investment in the underlying securities held by the Fund. Manager Risk. The Fund is subject to manager risk, which is the chance that poor security selection by the investment adviser will cause the Fund to underperform other funds with a similar investment objective. 7

15 Fixed-Income Securities. The Fund will invest in Puerto Rico, U.S. and foreign fixed-income securities. Investments in fixed-income securities may subject the Fund to risks, including the following: Interest-Rate Risk: When interest rates decline, the market value of fixed-income securities tends to increase. A fundamental risk of these securities, however, is that their market value will fall if interest rates rise. The volatility of a security s market value will differ depending upon the security s duration, the issuer and the type of instrument. Since the value of fixed-income securities will generally decrease when interest rates rise, the net asset value of the Fund may likewise decrease. Default Risk/Credit Risk: Investments in fixed-income securities are subject to the risk that the issuer of the security could fail to make principal and interest payments when due, causing the Fund to sustain losses on such investments. Call Risk and Extension Risk: Fixed-income securities may be subject to both call risk and extension risk. Call risk exists when the issuer may exercise its right to pay principal on an obligation earlier than scheduled, which would cause cash flows to be returned earlier than expected. This typically results when interest rates have declined and the Fund will suffer from having to reinvest in lower-yielding securities. Extension risk exists when the issuer may exercise its right to pay principal on an obligation later than scheduled, which would cause cash flows to be returned later than expected. This typically results when interest rates have increased, and to the extent the Fund owns such securities, it will suffer from the inability to invest in higher-yield securities. Transactions Involving Affiliate; Conflicts of Interests. The Fund will not be registered under the 1940 Act and, therefore, will not be subject to the restrictions contained therein regarding, among other things, transactions between the Fund on the one hand and the Investment Adviser and its affiliates, including the Distributor, on the other hand. Furthermore, certain directors and officers of the Fund are also employees, officers or directors of the Investment Adviser, the Distributor and/or their respective affiliates, including Banco Santander Puerto Rico, the transfer agent of the Fund. It is anticipated that certain transactions, including secondary market transactions, will take place in which affiliates of the Fund (including the Distributor) may be the primary or only dealer in a particular portfolio security being purchased or sold by the Fund. In that event, independent sources for valuation or liquidity of the security may be limited or nonexistent. The Fund may invest a substantial portion of its assets in those securities. The Fund may also make in investments in securities issued by, or make deposits with, an affiliated party. In addition, the Fund may also purchase obligations issued by other investment companies advised by Santander Asset Management, which are affiliates of the Fund. As a result of such affiliated transactions and other dealings, the interests of the affiliated party may conflict with those of the Fund as to the price and other terms of the transaction in which they engage. Such portfolio transactions will be carried out on an arm s length basis and will be subject to procedures adopted by the Board of Directors of the Fund and particularly, by the Independent Directors, in an effort to address potential conflicts of interest that may arise from such transactions. There is no assurance that the procedures will be effective. The procedures also may be amended from time to time in the sole discretion of the Board of Directors, including the Independent Directors. An affiliated party may also act as agent in connection with the placement of the Fund s preferred stock, debt securities, and other forms of leverage. Such activities will be carried out in accordance with procedures established by the Fund s Board of Directors in an effort to address potential conflicts of interest including, among other things, the potential conflicts of interest in setting dividends or interest rates. There is no assurance these procedures will be effective. In addition, the advisory fee payable to the Investment Adviser (an affiliated party) during periods in which the Fund is utilizing leverage will be higher than when it is not doing so because the fee is calculated as a percentage of average net asset assets (including the proceeds of leverage). Because the asset base is not reduced by reduced by aggregate indebtedness incurred in leveraging the Fund, the Investment Adviser may have a conflict of interest in formulating a recommendation to the Fund as whether to and to what extent use leverage. Affiliated parties may also directly provide some or all of such leverage. Affiliated parties may also engage, at the present or in the future, in business transactions with or related to any one of the issuers of the Fund s investment assets, or with the competitors of such issuers, as well as provide them with investment banking, asset management, trust, or advisory services, including merger and acquisition advisory services. Certain affiliated parties may also consider acquiring certain issuers of the Fund s investment assets, or compete with them directly. These activities, both known and unknown, may present a conflict or various conflicts between an 8

16 affiliated party and the interests of the Fund. Affiliated parties may also publish or have published research reports on one or more of such issuers, and may have expressed opinions or provided recommendations inconsistent with the purchasing or holding of the securities of such issuers. Any of these activities, both known and unknown, may affect the market value of the securities issued by them, and therefore will affect the value of the Fund s Shares. The Fund also may purchase securities that are offered in underwritings in which one or more of such affiliated entities acts as lead manager or senior manager of the offering or is a member of the underwriting or selling group. Such transactions also will be subject to procedures adopted by the Fund s Board of Directors, including the Independent Directors. The procedures adopted by the Board of Directors in connection with transactions involving the Investment Adviser or any of its affiliates (including the Distributor or any other mutual fund that belongs to the First Puerto Rico Family of Funds), include requirements for approval of each such transaction by the Investment Adviser. The remaining procedures vary depending on whether the affiliated transaction is a secondary market transaction, repurchase agreement, derivatives transactions, or a purchase by the Fund during the existence of an underwriting syndicate in which one of such entities participates. The Fund will purchase from or sell to the dealer or financial institution that offers the best price for the security involved, provided that if an affiliate of the Fund offers a price equal to the best price quoted by an unaffiliated dealer or financial institution, the Fund may purchase from or sell the security to the affiliate. The overall cost to the Fund in connection with affiliated transactions must be at least as favorable for the Fund as that charged by other sources. There is no assurance, however, that the Fund will get the best rate or pricing available in affiliated transactions. Subject to compliance with the conflict of interest policies to be developed by the Fund s Board of Directors and the Investment Adviser, the Fund may also invest in securities issued by its affiliates in an amount not to exceed 5% of the Fund s total assets. For purposes of this limitation, Puerto Rico mortgage-backed securities issued or guaranteed by the Federal National Mortgage Association ( FNMA or Fannie Mae ), the Federal Home Loan Mortgage Corporation ( FHLMC or Freddie Mac ) or the Government National Mortgage Association ( GNMA or Ginnie Mae ) for which Banco Santander or any affiliate thereof (including Santander Mortgage Corporation) may be the seller or issuer of record shall not be considered securities issued by Banco Santander or any affiliate thereof. Notwithstanding the foregoing, the Fund may borrow utilizing reverse repurchase transactions from any affiliate more than 5% of the market value of the Fund s total assets (after giving effect to such borrowing). There also are certain volume limitations on such affiliated transactions, although those limitations provide a wide degree of latitude given the nature of the securities markets in Puerto Rico and the role of the Investment Adviser and its affiliates. The procedures also address the allocation of investment opportunities with respect to such affiliated transactions, requiring, in effect, that the Fund (and other advisory clients) be given a priority over purchases or sales for the account of the Investment Adviser and over simultaneous or subsequent orders of non-advisory clients. Repurchase agreements with the Investment Adviser or its affiliates must meet price tests similar to those described above. In addition, there are certain collateralization requirements. The procedures applicable to purchases by the Fund in primary offerings contain volume limitations both as to the percentage of the offering that may be purchased and the percentage of the Fund s assets that may be invested in a single offering. The precise limitations with respect to the percentage of the offering that may be purchased (which also contain a wide degree of latitude) vary, depending upon whether the Investment Adviser or its affiliates act as lead manager or senior manager, or is the seller of the securities purchased by the Fund. If the Investment Adviser or its affiliates act in any of those capacities, the volume limitations that apply as a percent of the offering are more stringent than those that apply where the Investment Adviser or its affiliates are merely a member of the underwriting syndicate. The volume limitations with respect to the percentage of Fund assets apply only where the Investment Adviser or its affiliates act in one of such capacities, and do not apply at all to securities issued or guaranteed by and backed by the full faith and credit of the United States or the Commonwealth of Puerto Rico, and their respective agencies or instrumentalities. There also are various internal procedural requirements involving such matters as reports to and oversight by the Board of Directors. Concentration. Since approximately 20% of the Fund s total assets will normally be invested in the obligations of a limited number of issuers concentrated in one geographic location, Puerto Rico, the Fund may be more susceptible to any single economic, political or regulatory occurrence than a more widely diversified fund. Fund s Non-Diversified Status. The Fund is classified as a non-diversified management investment company. This means that the Fund may invest a greater portion of its assets in a single issuer than would be the case if the Fund were classified as a diversified management investment company. As a non-diversified management investment company, the Fund may invest up to 25% of its total assets in the securities of a single issuer; provided that this limitation does not apply to securities issued or guaranteed by the Commonwealth of Puerto Rico, the U.S. Government, a state of 9

17 the United States, or any of their respective political subdivisions, agencies or instrumentalities (including Fannie Mae, Freddie Mac and GNMA mortgage-backed securities) under the rulings issued by the Commissioner. Accordingly, the Fund may be subject to greater risk with respect to its portfolio securities than a diversified fund because changes in the financial condition or market assessment of a single issuer may cause greater fluctuation in the net asset value of the Fund s shares. In addition, the Fund may be more exposed to any single economic, political or regulatory occurrence than a more widely diversified fund. Borrowing and Leverage. The Fund is authorized to issue commercial paper or other debt securities and shares of preferred stock to, and enter into repurchase and futures transactions with, Puerto Rico residents, representing not more than 50% of the Fund s total assets immediately after such issuance. Leverage creates certain risks for common shareholders, including higher volatility of the net asset value of the Shares, as well as higher dividend volatility. Leverage also creates the risk that the investment return on the Fund s Shares will be reduced to the extent the dividends paid on preferred stock and interest on debt securities, as applicable, and other related expenses exceed the income earned by the Fund on its investments. In addition, leverage may also reduce the return on Shares due to the risk of losses that may be recognized on portfolio securities or borrowings. The effects of leverage may cause a shareholder to lose any or all of its investment in the Fund. If the Fund is liquidated, debtholders and preferred shareholders will be entitled to receive liquidating distributions before any distribution is made to common shareholders. In addition, the Fund is authorized to borrow money in an amount up to 5% of its total assets (after giving effect to the amount borrowed) in order to meet repurchase requests, for other cash management purposes, to fund the purchase of portfolio securities for a period of not longer than 30 days and for other temporary, emergency or defensive purposes. The rights of any lenders to the Fund to receive payments of interest or repayments of principal will be senior to those of the holders of the Fund s shares, and the terms of any borrowings may contain provisions that limit certain activities of the Fund, including the payment of dividends (if any) to holders of shares. Interest payments and fees incurred in connection with borrowings will increase the Fund s expense ratio and will reduce any income the Fund otherwise has available for the payment of dividends. Upon the issuance by the Fund of commercial paper or other debt securities or shares of preferred stock, the Fund may be subject to certain restrictions on its investments imposed by one or more nationally recognized statistical rating organizations ( NRSROs ) that may issue ratings of such securities. The NRSRO leverage guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed by the Fund s investment policies. It is not anticipated that these guidelines will impede the Investment Adviser from managing the Fund s portfolio in accordance with the Fund s investment objective and policies. Limitations on the Offering and Transfer of Shares. The shares of common stock of the Fund have not been registered under the 1933 Act, or the securities laws of any State, and the Fund has not been registered under the 1940 Act. The shares of common stock of the Fund are being offered and only may be sold, pledged, hypothecated or otherwise transferred to individuals whose principal residence is in Puerto Rico, or to corporations and other business organizations whose principal office and place of business are in Puerto Rico. Prior to the initial sale and any subsequent transfer of shares of common stock of the Fund, each offeree and transferee will be required to represent to the Fund and the Distributor, in writing, that the above conditions to transfer are satisfied. Appendix F to this prospectus contains the form of Puerto Rico residency representation letter that must be delivered by each purchaser of the shares of common stock prior to the purchase and delivery of such shares. Such restrictions shall remain in effect until such time, if any, as the Fund and the Distributor shall determine, based on an opinion of counsel that such restrictions no longer are necessary in order to preserve an exemption for the shares of common stock from the registration requirements of the 1933 Act and for the Fund from the 1940 Act. Shareholders of the Fund (including Qualifying Individuals) who cease to be residents of Puerto Rico no longer will have available to them the tax benefits that make the Fund an attractive investment, and such shareholders have an obligation to redeem their shares as soon as it becomes economically feasible to do so (otherwise their shares may be redeemed automatically by the Fund). Derivative Instruments. The Fund may utilize derivative instruments as part of its hedging strategies and to enhance the Fund s return. Derivative instruments are securities or contracts that provide for payments based on or derived from the performance of an underlying asset, index or other economic benchmark. Essentially, a derivative instrument is a financial arrangement or a contract between two parties. Derivative contracts include options, futures contracts, forward contracts, forward commitment and when-issued securities transactions, forward foreign currency exchange contracts and interest-rate, mortgage and currency swaps. Transactions in derivative instruments can be, but are not necessarily, riskier than investments in conventional stocks, bonds and money-market instruments. 10