Pillar 3 Risk Disclosure

EATON VANCE MANAGEMENT (INTERNATIONAL) LIMITED FSA DISCLOSURES

A). PILLAR 3 DISCLOSURE STATEMENT

B). STEWARDSHIP CODE DISCLOSURE STATEMENT

C). REMUNERATION CODE 

The information provided on the following pages is required to be disclosed in accordance with the rules adopted by the Financial Services Authority and does not form part of the audited accounts.

A). PILLAR 3 DISCLOSURE STATEMENT

Introduction

The firm is required by the Financial Services Authority (“FSA”) to disclose information relating to the capital it holds and each material category of risk it faces in order to assist users of its accounts and to encourage market discipline. These disclosures aim to provide information on the risk exposures faced by the firm and the risk assessment process it has in place to monitor them. Known as “Pillar 3” disclosures, they are required to be made under Chapter 11 of the FSA’s Prudential Sourcebook for Banks, Building Societies and Investment Firms (“BIPRU”) and are seen as complimentary to the firm’s minimum capital requirement calculation (“Pillar 1”) and the internal review of its capital adequacy (“Pillar 2”).

Risk management

The firm has established a risk management process in order to ensure that it has effective systems and controls in place to identify, monitor and manage risks arising in the business. The risk management process is overseen by the Chief Executive Officer, with the Board of Directors taking overall responsibility for this process. A formal update on operational matters is provided to the Board periodically. Management accounts demonstrating continued adequacy of the firm’s regulatory capital are also provided on a regular basis.

Appropriate action is taken where risks are identified which fall outside of the firm’s risk tolerance levels or where the need for remedial action is required in respect of identified weaknesses in the firm’s mitigating controls. Specific risks applicable to the firm come under the headings of business, operational, liquidity, credit and market.

Business risk

The main business risk that the firm has considered relates to the investment performance of the funds it distributes and the separate accounts it manages. To the degree there is a period of significant poor investment performance in these products relative to competing investment products, it will be difficult to attract and retain investment clients. A decline in investment assets managed would lead to a decline in management fee and distribution revenues. A further business risk relates to the level of support it receives from its US based parent, Eaton Vance Management (EVM) and the decisions made by EVM concerning what operations it wishes to run out of the UK. EVM has no difficulty in financing the UK office though it could decide to add or remove functions it wishes to see located here.

Operational risk

The firm places strong reliance on the operational procedures and controls that it has in place in order to mitigate operational risk and seeks to ensure that all personnel are aware of their responsibilities in this respect.

The firm has identified a number of key operational risks to manage. These relate to systems failure, failure of a third party provider, key man, and potential for serious regulatory breaches. Appropriate polices are in place to mitigate these risks, which includes taking out adequate professional indemnity insurance.

The risk of loss of key investment management personnel is mitigated by having an appropriate remuneration structure in place at EVM, which acts as the sub-advisor for the investment products offered by EVMI. EVM has alternative arrangements in place should a disaster recovery event occur. These arrangements are tested on a regular basis in order to ensure that they would be effective should they be required to be invoked.

The firm has no significant history of operational failures which have resulted in unintended costs being incurred.

Liquidity

The firm is required to maintain sufficient liquidity to ensure that there is no significant risk that its liabilities cannot be met as they fall due or that financial resources can only be secured at excessive cost. Liquidity risk may occur if sudden unexpected cash flows are experienced or if regular sources of funding cease or are withdrawn.

The firm keeps an amount equivalent to three months’ expenditure in its bank accounts at all times, with any cash required to be held for working capital purposes being held over and above this amount. The firm has always had sufficient liquidity within the business to meet its obligations and there are no perceived threats to this given the support it has from the parent company. The cash position of the firm is monitored by the Chief Executive, who would be able to call on the parent for further capital as required.

Credit risk

The main credit risk to which the firm is exposed is in respect of its debtors. However, there has not been a history of bad debts and as such the counterparty risk it is required to hold in respect of fees due is considered to be more than adequate to cover such eventuality. The number of credit exposures relating to the firm’s investment management clients is limited. The firm considers that there is little risk of default by its clients. All bank accounts are held with large international credit institutions.

Given the nature of the firm’s exposures, no specific policy for hedging and mitigating credit risk are in place. The firm uses the simplified standardised approach detailed in BIPRU 3.5.5 of the FSA Handbook when calculating risk weighted exposures in respect of its debtors. This amounts to 8% of the total balance due. All bank balances are subject to a risk weighted exposure of 1.6% in accordance with BIPRU 3.4 of the FSA Handbook.

Market risk

The firm takes no market risk other than foreign exchange risk in respect of its accounts receivable and cash balances held in currencies other than GBP.

The change in the value of fees due to foreign exchange fluctuations has not previously been material to the firm. Since the settlement of debtor balances takes place without undue delay, the timing of the amount becoming payable and subsequently being paid is such that it is not considered to present a material risk to the firm.

The firm calculates its foreign exchange risk by reference to the rules in BIPRU 7.5.1 of the FSA Handbook and applies an 8% risk factor to its foreign exchange exposure.

Capital adequacy

Capital resources

As at 31 October 2011 the firm’s audited regulatory capital resources were £3,073,000. This comprised solely of core Tier 1 capital of £4,394,000 less a deduction of £1,321,000.

The firm maintains capital resources as follows:

*No innovative tier one capital is held

Capital requirement

As at 31 October, 2011, the firm’s Pillar 1 capital requirement was £1,164,000 (based on 31 October 2010 audited Annual Report). This has been determined by reference to the firm’s Fixed Overheads Requirement (“FOR”) and calculated in accordance with the FSA’s General Prudential Sourcebook (“GENPRU”) at GENPRU 2.1.53. The requirement is based on the FOR since at all times this exceeds the total of the credit and market risk capital requirements it faces and also exceeds its base capital requirement of €50,000.

The FOR is based on annual expenses net of variable costs deducted, which include base compensation and other expenditures which include facilities expenses, marketing expenses, taxes, and other miscellaneous expenses required during the course of business. The firm monitors its expenditure on a monthly basis and takes into account any material fluctuations in order to determine whether the FOR remains appropriate to the size and nature of the business or whether any adjustment needsto be made intra-year. This is monitored by the Chief Financial Officer and reported to senior management on a regular basis.

Satisfaction of capital requirements

 As at 31 October 2011, the firm had a regulatory capital surplus under Pillar 1 of £1,909,000.

Since the firm’s ICAAP (Pillar 2) process has not identified capital to be held over and above the Pillar 2 requirement, including the results of stress testing and scenario analysis performed, the capital resources detailed above are considered adequate to continue to finance the firm over the next year. No additional capital injections are considered necessary and the firm expects to continue to be profitable.

B). STEWARDSHIP CODE DISCLOSURE STATEMENT

FSA COBS Rule 2.2.3R requires FSA authorised firms to disclose whether they conform to the requirements of the UK Financial Reporting Council’s Stewardship Code (the “Code”). Adherence to the Code is voluntary. The Company pursues an active trading strategy. This involves a wide variety of investment products and timeframes. Therefore, while the Company supports the principles of the Code, it does not consider it appropriate to conform to the Code at this time. Further, the Company does not consider it appropriate to commit to a voluntary code of practice within a particular individual jurisdiction given the global nature of our investment strategy.

C). REMUNERATION CODE

Eaton Vance Management International Limited (the "Firm") is authorised and regulated by the Financial Services Authority as a Limited Licence Firm and so, it is subject to FSA Rules on remuneration. These are contained in the FSA's Remuneration Code located in the SYSC Sourcebook of the FSA’s Handbook. The Remuneration Code ("the RemCode") covers an individual’s total remuneration, fixed and variable. The Firm incentivises staff through a combination of the two.

The Firm's business is to provide investment management services to its clients.

Our policy is designed to ensure that we comply with the RemCode and our compensation arrangements:

1. are consistent with and promotes sound and effective risk management;

2. do not encourage excessive risk taking;

3. include measures to avoid conflicts of interest; and

4. are in line with the Firm's business strategy, objectives, values and long-term interests.

Proportionality

Enshrined in the European remuneration provisions is the principle of proportionality. The FSA have sought to apply proportionality in the first instance by categorising firms into 4 tiers. The Firm falls within the FSA's fourth proportionality tier and as such this disclosure is made in line with the requirements for a Tier 4 Firm.

Application of the requirements

We are required to disclose certain information on at least an annual basis regarding our Remuneration policy and practices for those staff whose professional activities have a material impact on the risk profile of the firm. Our disclosure is made in accordance with our size, internal organisation and the nature, scope and complexity of our activities.

1. Summary of information on the decision-making process used for determining the firm’s remuneration policy including use of external benchmarking consultants where relevant.

• The firm’s policy has been agreed by the Directors in line with the RemCode principles laid down by the FSA.
• Due to the size, nature and complexity of the firm, we have not appointed an independent remuneration committee.
• The Firm’s policy will be reviewed as part of annual process and procedures, or following a significant change to the business requiring an update to its internal capital adequacy assessment.
• The firm’s ability to pay bonus is based on the performance of firm overall.

2. Summary of how the firm links between pay and performance.

• Individuals are rewarded based on their contribution to the overall success of EVMI and Eaton Vance and recognise employees who contribute to EVMI and Eaton Vance’s development
• Employees in a sales role are rewarded to recognise their contribution in developing both new and existing client relationships.
• Other factors such as performance, reliability, effectiveness of controls, business development and contribution to the business are taken into account when assessing the performance of the senior staff responsible for the control and management of the firm.

3. Aggregate quantitative information on remuneration, there is only one division.
Aggregate compensation expense for fiscal year 2011: £3,351,663

4. Aggregate quantitative information on remuneration, for code staff whose actions have a material impact on the risk profile of the firm.
Aggregate compensation expense for fiscal year 2011: £991,442