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18.99. Securities Lending Risk

The Investment Compartment may lend securities to financial institutions. Securities lending involves exposure to certain risks, including operational risk (i.e., the risk of losses resulting from problems in the settlement and accounting process), “gap” risk (i.e., the risk of a mismatch between the return on cash collateral reinvestments and the fees the Investment Compartment has agreed to pay a borrower), and credit, legal, counterparty and market risk. If a securities lending counterparty were to default, the Investment Compartment would be subject to the risk of a possible delay in receiving collateral or in recovering the loaned securities, or to a possible loss of rights in the collateral. In the event a borrower does not return the Investment Compartment’s securities as agreed, the Investment Compartment may experience losses if the proceeds received from liquidating the collateral do not at least equal the value of the loaned security at the time the collateral is liquidated, plus the transaction costs incurred in purchasing replacement securities. This event could trigger adverse tax consequences for the Investment Compartment. The Investment Compartment could lose money if its short-term investment of the collateral declines in value over the period of the loan. Substitute payments for dividends received by the Investment Compartment for securities loaned out by the Investment Compartment will generally not be considered qualified dividend income. The securities lending agent will take the tax effects on shareholders of this difference into account in connection with the Investment Compartment’s securities lending program. Substitute payments received on tax-exempt securities loaned out will generally not be tax-exempt income.