Offering Circular. T. Rowe Price Stable Value Common Trust Fund. Profile of the T. Rowe Price Stable Value Common Trust Fund ( trust )

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1 T. Rowe Price Stable Value Common Trust Fund Sponsored by T. Rowe Price Trust Company Offering Circular July 1, 2012 Profile of the T. Rowe Price Stable Value Common Trust Fund ( trust ) What is the trust s investment objective and program? The trust seeks to maximize current income and maintain principal stability of $1.00 per unit by investing primarily in a diversified portfolio of guaranteed investment contracts ( GICs ), bank investment contracts ( BICs ), synthetic investment contracts ( SICs ), and separate account contracts ( SACs ). Although investment in the trust is not without risk, the trust seeks to reduce risk through diversification, credit analysis, and attention to current developments and trends in both the economy and financial markets. The trust cannot guarantee that it will achieve its investment objective. The trust invests principally in a portfolio of GICs, BICs, SICs, SACs, and other similar contracts (collectively referred to as Contracts ) issued by U.S. insurance companies, U.S. banks, U.S. branches of foreign insurance companies, foreign banks, and other financial institutions that meet the quality standards established by T. Rowe Price Trust Company ( trustee ). From time to time, the trust may invest in other instruments, including annuities, group annuity contracts, and funding agreements issued by insurance companies, as well as other bank, insurance, and other financial institution contracts. A GIC is an investment where the trust agrees to deposit a sum of money with the issuer of the GIC and the issuer promises to repay the principal amount of the deposit plus interest (typically at a fixed rate). In addition, under certain conditions, withdrawals may be made from the GIC prior to its maturity without incurring adjustments for market value fluctuation. Similar instruments, when issued by banks, are referred to as BICs. Under applicable state regulations, insurance companies are authorized to issue various types of GICs and account for these Contracts as underwritten insurance policies rather than as corporate debt obligations. The amount deposited with the issuer of a GIC or BIC becomes part of the general assets of the issuer, and repayment is backed by the general assets of the issuer. A SIC is an investment contract issued by an insurance company, bank, or other issuer. SICs are supported by underlying fixed income securities that are held in the name of the trust in a custody account. Accordingly, ownership of the underlying securities remains with the trust. Similar to GICs and BICs, unscheduled withdrawals may be made from SICs under certain conditions without incurring adjustments for market fluctuation on the proceeds of the withdrawal. The SIC s interest rate (also called a crediting rate) fluctuates periodically and is primarily based on the return of the underlying fixed income securities portfolios. However, under the terms of the SIC, the portfolios gains and losses are typically amortized so that they are not immediately reflected in the SIC s interest rate. This amortization mechanism, in addition to certain contingent payment obligations of the SIC issuer, helps promote stability. To assist it in the management of the underlying portfolios of SICs, the trustee is advised by T. Rowe Price Associates, Inc. ( Price Associates ). See the Fees and expenses section below for more information on fees associated with SICs. FAM123-SVF SVFOC 7/12 T. Rowe Price Stable Value Common Trust Fund 1

2 A SAC is a contract under which the trust agrees to deposit cash and/or securities with an insurance company in order to create a fixed income portfolio. The calculation of the SAC s interest rate, amortization of gains and losses, contingent payment obligations, and unscheduled withdrawal rights are similar to those described above for SICs. The assets underlying the SAC are segregated from the insurer s general account. By law, the insurer owns the assets of the separate account; however, the assets are designed to be protected from the claims of an insurer s general creditors, including other policyholders, in the event of insurer insolvency. This structure is a hybrid between a SIC (where the trust owns the SIC s underlying assets) and a GIC (where ownership of the trust s assets that are used to purchase the GIC is transferred to the GIC issuer s general account). To help facilitate risk management and a consistent investment approach, Price Associates would be retained by the insurer to manage the assets in the insurance company separate account associated with the SAC, although the insurer would have the right to replace Price Associates. See the Additional Considerations Unique to SACs and the Fees and expenses sections below for more information about Price Associates and fees associated with SACs. Supporting securities for SICs and SACs typically include obligations of the U.S. government or its agencies, mortgagebacked securities, asset-backed securities, obligations of supranational agencies or foreign governments, trust preferreds, and investment-grade corporate debt securities, some of which may be non-u.s. dollar denominated investments. Derivatives designed to either manage risk or enhance return may also be utilized. The supporting securities for SICs and SACs are subject to credit risk and may be downgraded or even go into default, potentially reducing the trust s yield and unit price. SIC and SAC issuers do not reimburse the trust for losses due to payment defaults on supporting securities. Also, although credit exposure to the Contract issuer is reduced through the underlying securities associated with the SICs and SACs, it is not entirely eliminated. If the Contract issuer defaults or becomes insolvent, there may be a delay in the trust s ability to acquire and/or liquidate the supporting securities. Also, even if the trust obtains immediate access to the supporting securities upon default of the Contract issuer, the market value of the securities may be less than the Contract s book value, and the trust could sustain a loss. These potential delays and losses may be magnified in the case of SACs because the insurance company, as opposed to the trust, owns the supporting securities. Additional risks associated with the Contracts: GICs and BICs are obligations where the trust is relying solely on the GIC or BIC issuer (as applicable) to repay, with interest, all of the principal deposited with the issuer. In the event of a default by or insolvency of the Contract issuer, there may be insufficient funds to pay the amount due on the GIC or BIC. As a result, the trust s yield or unit price may be adversely impacted. A Contract issuer default or insolvency may result in the trust having no greater right to payment, and no greater claim against the general account assets, than any other policyholder or creditor of the Contract issuer. Credit risk is more concentrated for GICs and BICs as compared to SICs and SACs. For SICs and SACs, if an underlying security suffers a significant credit impairment (such as a bankruptcy or payment default), the Contract issuer may have the right to force the trust to write down the book value of the SIC or SAC, causing the trust to incur a loss of principal or negative effect on performance if the market value is less than the book value. Principal risk for the trust can also occur if the SIC or SAC issuer suffers a significant adverse credit event or becomes insolvent and the trustee is not able to deposit the underlying securities or their proceeds with another issuer. If the SIC or SAC issuer is not replaced before such adverse credit event or insolvency occurs, the underlying assets that are covered by the SIC or SAC would be marked to market, which could result in principal losses for the trust if the market value of the underlying assets are less than the book value of the SIC or SAC. Replacing a SAC issuer with another issuer could be more difficult as compared to a SIC. Because the SAC issuer, and not the trust, owns the underlying fixed income securities portfolio, access to such securities portfolio is more difficult and may be delayed under certain circumstances. For example, in the case of an insolvency of the SAC issuer coupled with generally declining values of the fixed income securities, the ownership structure of the SAC s securities portfolio could lead to the trust realizing losses that it may have been able to avoid or mitigate if the SAC were instead structured as a SIC due to the potential delay in gaining access to the securities. There is a limited universe of banks, insurers, and other financial institutions that issue SICs and SACs and there is no guarantee that the trust will be able to secure replacement issuers or that the terms of such replacement issuer s Contracts will be as favorable as those of the terminated Contract. Additional considerations unique to SACs: Price Associates would be paid an investment management fee related to the SAC assets by the insurance company and it also is retained for a fee by the trustee in order to assist the trustee in the management of the trust s assets (including any SACs). Further, the insurance company typically increases the fees payable by the trust to the insurance company in connection with the SAC to reflect the investment advisory fees payable by the insurance company to Price Associates. These fees are factored into the SAC s crediting rates and T. Rowe Price Stable Value Common Trust Fund 2

3 thereby reduce interest income earned by the trust on the SAC. In order to avoid potential conflicts that could arise in such a case from Price Associates earning additional fee income relating to the allocation of assets to a SAC, the trust would receive a credit equal to the fee received by Price Associates from the SAC s issuer for managing the assets underlying the SAC. In the event Price Associates is no longer the manager of the SAC s underlying assets as more fully described below, the trust would not receive such credit. SACs typically give the issuer the right to terminate Price Associates as the investment manager at will, with the issuer having the right to either substitute another third-party manager or the issuer may manage the assets directly. If the SAC issuer elected to terminate Price Associates as investment manager, the management of the underlying assets would be subject to certain investment guidelines, but there would be no assurance that it would be managed in the same style as if Price Associates were to continue to manage the SAC s underlying investments. External management of the assets underlying the SAC could be avoided by an election by the trustee to terminate the SAC. However, depending on the particular circumstances, termination of the SAC may not be advantageous to the trust or feasible. Some SACs may provide alternatives to termination of Price Associates (such as conversion to a GIC) but these may not always be attractive or viable options. Investment restrictions The trust will generally limit its total investment in the GICs and BICs of any one issuer to 10% of the trust s total value at the time of purchase. The trust will generally limit its total investment in SICs and SACs of any one issuer to 25% of the trust s total value at time of purchase. The trust s exposure to any single issuer of Contracts generally will not exceed 35% of the trust s total value at the time of purchase. Generally, the trust invests primarily in Contracts that have maturities/duration, at the time of issuance, between one and five years. The trustee expects that the trust will generally maintain an average dollar-weighted maturity/duration of between one and four years. Illiquidity Generally, Contracts are not assignable or transferable without the permission of the issuer. Therefore, an active secondary market for these instruments currently does not exist, nor is one expected to develop. Furthermore, these Contracts may be subject to a substantial discount or penalty if terminated prior to maturity. Accordingly, Contracts are typically considered to be illiquid investments. The trust s Amended and Restated Declaration of Trust ( Declaration of Trust ) therefore provides that, as a general rule, at least either 12-months or 30-months advance written notice, as applicable, is required for withdrawals that are not related to certain participant-directed benefit payments or permitted participant-directed investment elections. Refer to the How can money be withdrawn from the trust? section below and the Declaration of Trust for further details. Industry concentration The trust ordinarily will have significant investment concentration in the insurance and banking industries. Investments in these industries may be affected by general economic conditions, as well as by heightened competition among other companies in the financial services industry, such as mutual funds. Since the trust s portfolio will be concentrated in the obligations of insurance companies and banks, an investment in the trust may be subject to greater risk than an investment in a vehicle that is not so concentrated, and, in particular, may be affected by developments in the financial services industry. For example, volatile interest rate environments could adversely affect an issuer s investment portfolio and cause the issuer problems in meeting its fixed-rate obligations to policyholders or creditors. These factors could also result in adverse effects on the profitability of various lines of business. Issuers may respond to such events by limiting or even eliminating particular lines of business. Accordingly, these factors may affect the credit quality of the trust s investments, and issuers may be reluctant to continue to underwrite Contracts. The trust attempts to minimize any risks that might result from concentrating in the insurance and banking industries by diversification of the trust s investments in SICs, SACs, and other GIC-alternative products and through credit analysis. Industry regulation Insurance companies are subject to regulation and supervision by the states in which they do business. This regulation and supervision relate to, among other things, the standards of solvency that must be maintained, the nature of and limitations on investments, periodic examinations and financial reporting, and requirements regarding reserves for claims, losses, and unearned premiums. Foreign-based insurance companies may also be subject to regulation and supervision in their home countries. Regulatory authorities usually have the authority to seize and rehabilitate problem insurers for the protection of policyholders. If a Contract issuer in the trust were to be seized by regulatory authorities, this event could adversely affect the book value of the issuer s Contract and potentially cause a loss to the trust. Banks also are subject to similar levels of regulation and supervision at the state, federal, and/or foreign home country level (depending on the type of bank). T. Rowe Price Stable Value Common Trust Fund 3

4 Cash reserves The trust will maintain a cash reserve to augment its liquidity. The level of this cash reserve will fluctuate and will be predicated on expected future liquidity needs. Generally, the reserve will be invested in investment-grade short-term cash equivalents, money market mutual funds managed by an affiliate of the trustee, including the T. Rowe Price Prime Reserve Fund, Inc. ( Prime Reserve Fund ) and the T. Rowe Price Reserve Investment Fund ( Reserve Fund ), an underlying series of the T. Rowe Price Reserve Investment Funds, Inc., and investment contracts with enhanced liquidity features. Other collective investment funds The trust may invest in collective investment funds, including other trusts sponsored by the trustee and advised by an affiliate. For example, cash reserves may be invested in the T. Rowe Price U.S. Treasury Money Market Trust ( Money Market Trust ), a collective investment fund that invests in a portfolio of short-term U.S. Treasury securities, other securities directly guaranteed by the U.S. government, and investments collateralized by such securities, including repurchase agreements for which securities directly guaranteed by the U.S. government are held as collateral. The trust also may invest in SICs where the SICs are supported by units of collective investment funds that are owned by the trust. For example, the trust may invest in the T. Rowe Price Managed Bond Common Trust Fund ( Managed Bond Trust ). The Managed Bond Trust is a collective investment fund sponsored by the trustee that invests in a portfolio of fixed income securities, including government securities, agency securities, collateralized mortgage obligations, asset-backed securities, and investment-grade corporate bonds. The units of the Managed Bond Trust are wrapped by a Contract issued by a financial institution or insurance company that agrees to provide book value payments from the Contract upon certain participant-initiated events. Credit analysis Although the ratings of Fitch, Moody s, and Standard & Poor s are used as preliminary indicators of investment quality, the trustee places primary significance on in-depth credit analysis and security research provided by its investment adviser. All of the trust s investments are selected from an approved list deemed appropriate for the trust. The investment adviser maintains a credit rating system based upon comparative credit analysis of issuers within the same industry and individual credit analysis of each company. This analysis takes into consideration such factors as an issuer s asset quality, present and potential liquidity, profitability, capital adequacy, and product mix. At time of purchase, Contracts and, in the case of SACs and SICs, underlying securities, are required to meet quality and credit standards established by the trustee. Generally, at the time of purchase of a GIC, the issuer must carry a rating of at least AA- under the investment adviser s proprietary credit rating system. Generally, at the time of purchase of a SIC or SAC, the issuer must carry a rating of at least A+ under the investment adviser s proprietary credit rating system. Also, with respect to supporting securities for SICs, the trust s investment guidelines require such securities to carry an investment-grade rating at the time of purchase by at least one nationally recognized statistical rating organization and such a requirement typically would apply to underlying securities purchased for a SAC. The specific rating requirement varies depending on the nature of the security under the guidelines. An investment-grade security can range from AAA to BBB- rated securities. The highest ratings are assigned to issuers perceived to be the best credit risks. Ratings depend on a variety of factors that may change over time and that are not absolute standards of quality. Yield information For current yield information, determined daily, please call toll-free: What are the main benefits and risks of investing in the trust? The trust seeks to provide maximum current income while maintaining stability of principal. Because the Contracts are longer-term instruments that cannot be readily sold on the open market, they typically pay a higher rate of interest than a money market fund. However, there is still the risk that the issuer will default or become insolvent or that the value of the securities underlying a SIC will decline. For whom is this an appropriate investment? The trust may be suitable for retirement plan investors seeking high credit quality and current income who can accept some risk. Investments in the trust may not substantially outpace inflation over time, so participants who invest solely in this conservative trust may not be able to save enough for their retirement years. T. Rowe Price Stable Value Common Trust Fund 4

5 How are the units of participation valued? The trust s investments and other assets are valued in accordance with the Declaration of Trust, which provides that all assets are valued at fair value as determined by the trustee, except for certain Contracts, which generally are valued at contract value to the extent permitted under accounting principles generally accepted in the United States ( GAAP ). Contract value (also known as book value) is cost plus accrued income minus redemptions. A Contract is generally permitted to be valued at contract value to the extent it is fully benefit-responsive as determined by certain tests and held by a trust offered only to qualified employer-sponsored defined-contribution plans. Contracts that do not meet the criteria for valuation at contract value as prescribed by GAAP will be valued at fair value as determined by the trustee, and such value may be more or less than contract value. Short-term investments having maturities of one year or less will be valued at amortized cost, which approximates market value. While the trustee attempts to maintain a stable value of $1.00 per unit, neither the trust nor the trustee can guarantee that the trust s unit value will be held at $1.00 per unit. Although the trust must be valued at least quarterly, the trustee currently calculates its unit value at the end of every business day that the New York Stock Exchange is open (normally 4 p.m. ET). How are income and capital gains treated? Income and capital gains earned by the trust are included in the daily calculation of its unit value. Since the trust is a group trust (under the Internal Revenue Code) that comprises assets of qualified retirement plans, and certain governmental and church plans, earnings will not ordinarily be subject to federal taxation, except for any earnings that constitute unrelated business taxable income. If the trust had such income, the trust would file any necessary tax return and, in accordance with the Declaration of Trust, the trustee would charge any tax associated with such income to the trust. How can money be withdrawn from the trust? Withdrawals are governed by the applicable provisions in the Declaration of Trust and the trust s Administrative Procedures. Participant-initiated transfers may be made directly from the trust to an eligible investment option in accordance with participating plan provisions. Transferred amounts must be held in an eligible investment option for 90 days before subsequent transfer to a competing fixed income investment option can occur. An eligible investment option includes most common stock funds and any fixed income fund that has a duration that is equal to or greater than three years. In addition, any balanced fund whose fixed income component has a duration that is equal to or greater than three years will also be deemed to be eligible. Money market funds, other stable value products, and certain bond funds that have a duration of less than three years will be deemed to be competing funds and, therefore, are not eligible investment options. Benefit payments to and other withdrawals by plan participants are also governed by, and executed in accordance with, the provisions of their respective retirement plan documents. These include payments in the event of death, retirement, disability, termination of employment, as well as in-service withdrawals authorized by the participating plan. If the trust represents one investment class in a participating plan s portfolio of multiple investments that are not participant-directed, the trustee reserves the right to require that withdrawals for participant benefits must be made at least pro-rata according to the ratio of the plan s account balance in the trust to total plan assets. The pro-rata percentage is determined by dividing the plan sponsor s account balance in the trust by the total plan assets. The plan may permit the withdrawal of monies from the other investment classes without redeeming units of the trust. A participating plan or trust may make withdrawals at the plan level for any reason following either 12-months or 30-months written notice, as applicable, to the trustee. This 12-month or 30-month notice period, as applicable, is referred to as the advance notice period. Generally, a plan is required to provide at least 30-months advance written notice if it joined the trust on or after July 15, 2002, and at the time of its withdrawal request it owns five percent (5%) or more of the total units of the trust. All other plans generally are required to provide at least 12-months advance written notice. Refer to Section 5.2 of the Declaration of Trust for further details. If notification is for total account termination, purchase orders for additional units generally will not be accepted. The participating plan or trust may continue to request participant-directed benefit withdrawals and investment transfers during the applicable advance notice period. The applicable advance notice period may be waived under certain limited exceptions as determined by the trustee from time to time. T. Rowe Price Stable Value Common Trust Fund 5

6 Withdrawals necessary to preserve the tax-exempt status of the trust or premature withdrawals affecting the value of the units held by participating plans or trusts will be processed as soon as practical following not less than 30-days written notice to the trustee. If such withdrawals would cause the trust to incur penalties or other losses due to cancellation and/or modification of Contracts or sale of securities prior to maturity or otherwise, such penalties or losses may be allocated entirely and directly to the account of the withdrawing participating plan or trust. Please note that under the Declaration of Trust, the trustee has certain rights to distribute a retirement plan s investment without prior notice. For example, for retirement plans that are no longer qualified plans, distributions would be made as required to preserve the trust s tax-exempt status. The trustee reserves the right to review documentary evidence of compliance with the restrictions outlined in this section. Failure to comply with these restrictions may cause the withdrawal or transfer to be classified as plan-directed rather than participant-directed. More about the trust Organization The trust is sponsored by T. Rowe Price Trust Company (a Maryland-chartered, limited-purpose trust company). It is organized as a group trust under federal tax laws and a common trust fund (also known as a collective investment fund) under Maryland state banking laws. Units of the trust are not deposits or obligations of, or guaranteed by, the U.S. government or its agencies or T. Rowe Price Trust Company and are subject to investment risks, including possible loss of principal. The trust is a pooled investment vehicle that is managed like a mutual fund, but it is not subject to regulation as an investment company under the Investment Company Act of Units of the trust are offered in reliance upon an exemption from registration under the Securities Act of A notice has been filed on behalf of the trust with the National Futures Association claiming an exclusion from the definition of the term commodity pool operator ( CPO ) under the Commodity Exchange Act, as amended, and the rules of the Commodity Futures Trading Commission promulgated thereunder. Accordingly, the trust is not subject to registration or regulation as a CPO. The trust may accept investments only from certain qualified retirement plans, such as defined benefit and defined contribution plans, as well as certain plans maintained by state and local governments or an instrumentality thereof. Individual retirement accounts (IRAs) and most Keogh plans may not invest in the trust. As with any collective investment vehicle, the trust can experience significant inflows and outflows of cash and/or securities, especially when retirement plans join or leave the trust. There is no public market for the trust s units; they can be transferred or redeemed only in accordance with the trust s withdrawal provisions. Management The trust is exclusively managed by its trustee, T. Rowe Price Trust Company, which is a subsidiary of Price Associates. The trustee is advised by Price Associates, a registered investment adviser. Also, the trustee has retained the services of an independent custodian and accounting firm. Trustee: T. Rowe Price Trust Company Investment Adviser to Trustee: T. Rowe Price Associates, Inc. Custodian: The Bank of New York Mellon Independent Public Accountant: PricewaterhouseCoopers Robert A. Madore and Antonio L. Luna have day-to-day responsibility for managing the trust s portfolio and work with a T. Rowe Price Investment Advisory Committee in developing and executing the trust s investment strategy. Mr. Madore joined Price Associates in 2001 and was appointed an officer of the trustee in Mr. Luna joined Price Associates in 1996 and was appointed an officer of the trustee in T. Rowe Price Stable Value Common Trust Fund 6

7 Conflicts of interest Portfolio managers within the T. Rowe Price family of companies typically manage multiple accounts. These accounts may include, among others, mutual funds, separate accounts (assets managed on behalf of institutions such as pension funds, colleges and universities, foundations), and common trust funds. Portfolio managers make investment decisions for each portfolio based on the investment objectives, policies, practices, and other relevant investment considerations that the managers believe are applicable to that portfolio. Consequently, portfolio managers may purchase (or sell) securities for one portfolio and not another portfolio. As part of determining portfolio managers compensation, all portfolios managed by a portfolio manager are subject to evaluation. Also, T. Rowe Price has adopted brokerage and trade allocation policies and procedures that it believes are reasonably designed to address any potential conflicts associated with managing multiple accounts for multiple clients. Additional information concerning brokerage and trade allocation policies used by T. Rowe Price generally may be found in the Statement of Additional Information for the Price Funds, located on the T. Rowe Price website. Powers held by the trustee The trustee may take whatever actions believed to be necessary and consistent with its fiduciary duties to manage the trust and protect trust assets. Such actions may be in addition to those duties expressly authorized by the Declaration of Trust. The trustee may employ and compensate suitable agents, custodians, recordkeepers, auditors, investment advisers, consultants, and counsel. Consistent with applicable requirements under the Employee Retirement Income Security Act of 1974 (ERISA), these parties may be domestic or foreign, and they may or may not be affiliated with the trustee. Fees and expenses Under the terms of the Declaration of Trust, the trust bears no expenses other than taxes and legal expenses, if any. Costs associated with SICs and SACs, specifically wrap fees payable to the Contract issuer and custody fees on the underlying assets, are factored into the Contracts crediting rates and, thereby reduce interest income earned by the trust. For SACs, investment management fees paid by the issuer for the underlying assets also are typically factored into the Contracts crediting rates and reduce interest income earned by the trust; see the Additional Considerations Unique to SACs section above for more information on a credit that would be payable to the trust under certain circumstances in connection with investment management fees. More information about costs associated with SICs and SACs held by the trust during a particular calendar year can be found in the trust s Annual Report for such year. The trustee charges the participating plan an annual fee ( trustee fee ), which is agreed upon by both parties. The fee is calculated and assessed based on daily unit valuations of plan assets, and participating plans may authorize the trustee to withdraw trust units to pay the fee. The trustee uses the fee primarily to pay normal operating expenses associated with the trust, including fees for accounting, recordkeeping, and investment advisory services provided by third parties, and such providers may be affiliates of the trustee. Additional information This offering circular contains summaries, believed to be accurate, of certain provisions of the Declaration of Trust. The offering circular may be amended at any time so long as the amended circular is consistent with the Declaration of Trust. The full Declaration of Trust is furnished to plan sponsors, along with a copy of an Investment Agency Appointment and Participation Authorization, which the plan fiduciary is required to execute prior to the trustee s acceptance of the plan s investment in the trust. In the event of a conflict between this offering circular and the terms of the Declaration of Trust, the latter will control. Additional information about the trust is available in the Declaration of Trust, the terms of which have been incorporated herein. Copies of this offering circular may be made available to plan participants upon their request. This offering circular provides an overview of certain risks related to the trust and its Contracts and other investments and does not represent an exhaustive explanation of all associated risks and considerations T. Rowe Price Stable Value Common Trust Fund 7