Michael K. Hoffman, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036
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Title of Securities
Being Registered
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Amount Being
Registered
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Proposed
Maximum
Offering Price
Per Share
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Proposed
Maximum
Aggregate
Offering Price
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Amount of
Registration Fee
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Common shares of beneficial interest, $.01 par value
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$100,000,000(3)
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$7,130(4)
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U.S. government and agency securities;
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mezzanine and preferred securities; and
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• | convertible securities. | |
Common Equity Securities and Covered Call Option Strategy.
The Fund may invest in common stocks, limited liability company interests, trust certificates and other equity investments (“Common Equity Securities”) that the Sub-Adviser believes offer attractive yield and/or capital appreciation potential. As part of its Common Equity Securities strategy, the Fund currently intends to employ a strategy of writing (selling) covered call options and may, from time to time, buy or sell put options on individual Common Equity Securities and, to a lesser extent, on indices of securities and sectors of securities. This covered call option strategy is intended to generate current gains from option premiums as a means to enhance distributions payable to the Fund’s Common Shareholders.
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Structured Finance Investments.
The Fund may invest in structured finance investments, which are Income Securities and Common Equity Securities typically issued by special purpose vehicles that hold income-producing securities (
e.g.,
mortgage loans, consumer debt payment obligations and other receivables) and other financial assets. Structured finance investments are tailored, or packaged, to meet certain financial goals of investors. Typically, these investments provide investors with capital protection, income generation and/or the opportunity to generate capital growth. The Sub-Adviser believes that structured finance investments provide attractive risk-adjusted returns, frequent sector rotation opportunities and prospects for adding value through security selection. Structured finance investments include:
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Mortgage-Related Securities
. Mortgage-related securities are a form of derivative collateralized by pools of commercial or residential mortgages. Pools of mortgage loans are assembled as securities for sale to investors by various governmental, government-related and private organizations. These securities may include complex instruments such as collateralized mortgage obligations, REITs (including debt and preferred stock issued by REITs), and other real estate-related securities. The mortgage-related securities in which the Fund may invest include those with fixed, floating or variable interest rates, those with interest rates that change based on multiples of changes in a specified index of interest rates, and those with interest rates that change inversely to changes in interest rates, as well as those that do not bear interest. The Fund may invest in residential and commercial mortgage-related securities issued by governmental entities and private issuers, including subordinated mortgage-related securities. The underlying assets of certain mortgage-related securities may be subject to prepayments, which shorten the weighted average maturity and may lower the return of such securities.
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Asset-Backed Securities
. Asset-backed securities are a form of derivative issued by governmental entities and private issuers which utilizes securitization techniques similar to those used for mortgage-related securities. The collateral for these securities may include home
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equity loans, automobile and credit card receivables, boat loans, computer leases, airplane leases, mobile home loans, recreational vehicle loans and hospital account receivables. The Fund may invest in these and other types of asset-backed securities that may be developed in the future. Asset-backed securities are subject to the same risk of prepayment described above with respect to mortgage-related securities. Asset-backed securities may provide the Fund with a less effective security interest in the related collateral than do mortgage-related securities, and thus it is possible that recovery on repossessed collateral might be unavailable or inadequate to support payments on these securities.
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Collateralized Debt Obligations
. A collateralized debt obligation (“CDO”) is an asset-backed security whose underlying collateral is typically a portfolio of bonds, bank loans, other structured finance securities and/or synthetic instruments. Where the underlying collateral is a portfolio of bonds, a CDO is referred to as a collateralized bond obligation (“CBO”). Where the underlying collateral is a portfolio of bank loans, a CDO is referred to as a collateralized loan obligation (“CLO”). Investors in CDOs bear the credit risk of the underlying collateral. Multiple tranches of securities are issued by the CDO, offering investors various maturity and credit risk characteristics. Tranches are categorized as senior, mezzanine, and subordinated/equity, according to their degree of risk. If there are defaults or the CDO’s collateral otherwise underperforms, scheduled payments to senior tranches take precedence over those of mezzanine tranches, and scheduled payments to mezzanine tranches take precedence over those to subordinated/equity tranches. CDOs are subject to the same risk of prepayment described with respect to certain mortgage-related and asset-backed securities. The value of CDOs may be affected by changes in the market’s perception of the creditworthiness of the servicing agent for the pool, the originator of the pool, or the financial institution or fund providing the credit support or enhancement.
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Risk-Linked Securities
. Risk-linked securities (“RLS”) are a form of derivative issued by insurance companies and insurance-related special purpose vehicles that apply securitization techniques to catastrophic property and casualty damages. RLS are typically debt obligations for which the return of principal and the payment of interest are contingent on the non-occurrence of a pre-defined “trigger event.” Depending on the specific terms and structure of the RLS, this trigger could be the result of a hurricane, earthquake or some other catastrophic event.
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Real Property Asset Companies.
The Fund may invest in Income Securities and Common Equity Securities issued by companies that own, produce, refine, process, transport and market “real property assets,” such as real estate and the natural resources upon or within real estate (“Real Property Asset Companies”).
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Personal Property Asset Companies.
The Fund may invest in Income Securities and Common Equity Securities issued by companies that seek to profit primarily from the ownership, rental, leasing, financing
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or disposition of personal (as opposed to real) property assets (“Personal Property Asset Companies”). Personal (as opposed to real) property includes any tangible, movable property or asset. The Fund will typically seek to invest in Income Securities and Common Equity Securities of Personal Property Asset Companies the investment performance of which is not expected to be highly correlated with traditional market indexes because the personal property asset held by such company is non-correlated with traditional debt or equity markets. Such personal property assets include special situation transportation assets (e.g., railcars, airplanes and ships) and collectibles (e.g., antiques, wine and fine art).
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Private Securities.
The Fund may invest in privately issued Income Securities and Common Equity Securities of both public and private companies (“Private Securities”). Private Securities have additional risk considerations than comparable public securities, including availability of financial information about the issuer and valuation and liquidity issues.
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Investment Funds . As an alternative to holding investments directly, the Fund may also obtain investment exposure to Income Securities and Common Equity Securities by investing in other investment companies, including registered investment companies, private investment funds and/or other pooled investment vehicles (collectively, “Investment Funds”). The Fund may invest up to 30% of its total assets in Investment Funds that primarily hold (directly or indirectly) investments in which the Fund may invest directly, of which amount up to 20% of its total assets may be invested in Investment Funds that are registered as investment companies (“Registered Investment Funds”) under the Investment Company Act of 1940, as amended (the “1940 Act”). As used in this Prospectus, “Private Investment Funds” means privately offered Investment Funds that are excluded from the definition of “investment company” under the 1940 Act, including by operation of Section 3(c)(1) or 3(c)(7) thereof. Such funds may be commonly referred to as “hedge funds” or “private equity funds.” Investments in other Investment Funds involve operating expenses and fees at the Investment Fund level that are in addition to the expenses and fees borne by the Fund and are borne indirectly by holders of the Fund’s Common Shares. | |||
Synthetic Investments
. As an alternative to holding investments directly, the Fund may also obtain investment exposure to Income Securities and Common Equity Securities through the use of customized derivative instruments (including swaps, options, forwards, notional principal contracts or other financial instruments) to replicate, modify or replace the economic attributes associated with an investment in Income Securities and Common Equity Securities (including interests in Investment Funds.
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Investment Policies
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The Fund may allocate its assets among a wide variety of Income Securities and Common Equity Securities, provided that, under normal market conditions, the Fund will not invest more than:
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60% of its total assets in Income Securities rated below-investment grade;
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50% of its total assets in Common Equity Securities consisting of common stock;
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30% of its total assets in Investment Funds;
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20% of its total assets in non-U.S. dollar-denominated Income Securities of corporate and governmental issuers located outside the United States; and
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10% of its total assets in Income Securities of issuers in emerging markets.
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The percentage of the Fund’s total assets allocated to any category of investment may at any given time be significantly less than the maximum percentage permitted pursuant to the above referenced investment policies.
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Unless otherwise stated in this Prospectus or the SAI, the Fund’s investment policies are considered non-fundamental and may be changed by the Board of Trustees of the Fund (the “Board of Trustees”) without Common Shareholder approval. The Fund will provide investors with at least 60 days’ prior written notice of any change in the Fund’s investment policies. See “Investment Objective and Policies” in this Prospectus and in the SAI.
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Financial Leverage
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The Fund may seek to enhance the level of its current distributions by utilizing financial leverage through the issuance of senior securities such as preferred shares (“Preferred Shares”), through borrowing or the issuance of commercial paper or other forms of debt (“Borrowings”), through reverse repurchase agreements, dollar rolls or similar transactions or through a combination of the foregoing (collectively “Financial Leverage”). The Fund’s total Financial Leverage may vary over time; however, the aggregate amount of Financial Leverage is not expected to exceed 33
1
/
3
% of the Fund’s Managed Assets (as defined herein) after such issuance and/or borrowing; however, the Fund may utilize Financial Leverage up to the limits imposed by the 1940 Act. The Fund may also borrow in excess of such limit for temporary purposes such as the settlement of transactions.
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The Fund has entered into a committed facility agreement with BNP Paribas Prime Brokerage, Inc. (“BNP Paribas”) pursuant to which the Fund may borrow up to $30 million. As of November 30, 2010, outstanding Borrowings under the committed facility agreement were approximately $22.4 million, which represented approximately 9.0% of the Fund’s Managed Assets as of such date. The Fund invests a portion of its Managed Assets through participation in the Term Asset-Backed Securities Loan Facility program (the “TALF Program”), a program developed by the Board of Governors of the Federal Reserve System and the U.S. Department of the Treasury and operated by the Federal Reserve Bank of New York (“FRBNY”). Under the TALF Program, the FRBNY may provide loans to the Fund to purchase certain investment-grade, asset-backed securities which must be backed by auto loans, student loans, credit card loans, small business loans or certain commercial mortgage-backed securities. As of November 30, 2010, the Fund’s borrowings under the TALF Program represented approximately 4.3% of the Fund’s Managed Assets. In
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(the “Advisory Agreement”). Pursuant to the Advisory Agreement, the Investment Adviser is responsible for the management of the Fund and administers the affairs of the Fund to the extent requested by the Board of Trustees. As compensation for its services, the Fund pays the Investment Adviser a fee, payable monthly, in an annual amount equal to 1.00% of the Fund’s average daily Managed Assets. “Managed Assets” means the total assets of the Fund, including the assets attributable to the proceeds from any borrowings or other forms of Financial Leverage, minus liabilities, other than liabilities related to any Financial Leverage.
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Guggenheim Partners Asset Management, LLC acts as the Fund’s Sub-Adviser pursuant to a sub-advisory agreement with the Fund and the Investment Adviser (the “Sub-Advisory Agreement”). Pursuant to the Sub-Advisory Agreement, the Sub-Adviser is responsible for the management of the Fund’s portfolio of securities. As compensation for its services, the Investment Adviser pays the Sub-Adviser a fee, payable monthly, in a maximum annual amount equal to 0.50% of the Fund’s average daily Managed Assets.
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Each of the Investment Adviser and the Sub-Adviser are wholly-owned subsidiaries of Guggenheim Partners.
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Distributions
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The Fund intends to pay substantially all of its net investment income to Common Shareholders through monthly distributions. In addition, the Fund intends to distribute any net long-term capital gains to Common Shareholders as long-term capital gain dividends at least annually. The Fund expects that dividends paid on the Common Shares will consist of (i) investment company taxable income, which includes, among other things, ordinary income, short-term capital gain (for example, premiums earned in connection with the Fund’s covered call option strategy) and income from certain hedging and interest rate transactions, (ii) qualified dividend income and (iii) long-term capital gain (gain from the sale of a capital asset held longer than one year). To the extent the Fund receives dividends with respect to its investments in Common Equity Securities that consist of qualified dividend income (income from domestic and certain foreign corporations), a portion of the Fund’s distributions to its Common Shareholders may consist of qualified dividend income. The Fund cannot assure you, however, as to what percentage of the dividends paid on the Common Shares, if any, will consist of qualified dividend income or long-term capital gains, which are taxed at lower rates for individuals than ordinary income. See “Distributions.”
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If you hold your Common Shares in your own name or if you hold your Common Shares with a brokerage firm that participates in the Fund’s Automatic Dividend Reinvestment Plan (the “Plan”), unless you elect to receive cash, all dividends and distributions that are declared by the Fund will be automatically reinvested in additional Common Shares of the Fund pursuant to the Plan. If you hold your Common Shares with a brokerage firm that does not participate in the Plan, you will not be able to participate in the Plan and any dividend reinvestment may be effected on different terms than those described above. Consult your financial adviser for more information. See “Automatic Dividend Reinvestment Plan.”
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Listing and Symbol
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The Fund’s currently outstanding Common Shares are, and the Common Shares offered in this Prospectus will be, listed on the New York Stock Exchange (the “NYSE”) under the symbol “GOF.”
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Special Risk Considerations
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Not a Complete Investment Program
. The Fund is intended for investors seeking current income and capital appreciation. The Fund is not meant to provide a vehicle for those who wish to play short-term swings in the stock market. An investment in the Common Shares of the Fund should not be considered a complete investment program.Each Common Shareholder should take into account the Fund’s investment objective as well as the Common Shareholder’s other investments when considering an investment in the Fund.
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Investment and Market Risk
. An investment in Common Shares of the Fund is subject to investment risk, including the possible loss of the entire principal amount invested. An investment in the Common Shares of the Fund represents an indirect investment in the securities owned by the Fund. The value of those securities may fluctuate, sometimes rapidly and unpredictably. The value of the securities owned by the Fund will affect the value of the Common Shares. At any point in time, your Common Shares may be worth less than your original investment, including the reinvestment of Fund dividends and distributions.
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Management Risk
. The Fund is subject to management risk because it has an actively managed portfolio. The Sub-Adviser will apply investment techniques and risk analysis in making investment decisions for the Fund, but there can be no guarantee that these will produce the desired results.
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Income Risk
. The income investors receive from the Fund is based primarily on the interest it earns from its investments in Income Securities, which can vary widely over the short- and long-term. If prevailing market interest rates drop, investors’ income from the Fund could drop as well. The Fund’s income could also be affected adversely when prevailing short-term interest rates increase and the Fund is utilizing leverage, although this risk is mitigated to the extent the Fund’s investments include floating-rate obligations.
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Dividend Risk
. Dividends on common stock and other Common Equity Securities which the Fund may hold are not fixed but are declared at the discretion of an issuer’s board of directors. There is no guarantee that the issuers of the Common Equity Securities in which the Fund invests will declare dividends in the future or that, if declared, they will remain at current levels or increase over time.
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Income Securities Risk
. In addition to the risks discussed above, Income Securities, including high-yield bonds, are subject to certain risks, including:
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Issuer Risk
. The value of Income Securities may decline for a number of reasons which directly relate to the issuer, such as management performance, financial leverage and reduced demand for the issuer’s goods and services.
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Credit Risk
. Credit risk is the risk that one or more debt obligations in the Fund’s portfolio will decline in price, or fail to pay interest or principal when due, because the issuer of the obligation experiences a decline in its financial status.
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Interest Rate Risk
. Interest rate risk is the risk that Income Securities will decline in value because of changes in market interest rates. When market interest rates rise, the market value of Income Securities generally will fall.
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Reinvestment Risk
. Reinvestment risk is the risk that income from the Fund’s portfolio will decline if the Fund invests the proceeds from matured, traded or called Income Securities at market interest rates that are below the Fund portfolio’s current earnings rate. A decline in income could affect the Common Shares’ market price or the overall return of the Fund.
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Prepayment Risk
. During periods of declining interest rates, borrowers may exercise their option to prepay principal earlier than scheduled, forcing the Fund to reinvest in lower yielding securities. This is known as call or prepayment risk.
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Liquidity Risk
. The Fund may invest without limitation in Income Securities for which there is no readily available trading market or which are otherwise illiquid, including certain high-yield bonds. The Fund may not be able to readily dispose of illiquid securities and obligations at prices that approximate those at which the Fund could sell such securities and obligations if they were more widely traded and, as a result of such illiquidity, the Fund may have to sell other investments or engage in borrowing transactions if necessary to raise cash to meet its obligations. In addition, limited liquidity could affect the market price of Income Securities, thereby adversely affecting the Fund’s net asset value and ability to make distributions.
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Valuation of Certain Income Securities
. The Sub-Adviser normally uses an independent pricing service to value most Income Securities held by the Fund. Because the secondary markets for certain investments may be limited, they may be difficult to value. Where market quotations are not readily available, valuation may require more research than for more liquid investments. In addition, elements of judgment may play a greater role in valuation in such cases than for investments with a more active secondary market because there is less reliable objective data available.
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Duration and Maturity Risk
. The Fund has no set policy regarding portfolio maturity or duration. Holding long duration and long maturity investments will expose the Fund to certain magnified risks. These risks include interest rate risk, credit risk and liquidity risks as discussed above.
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Below-Investment Grade Securities Risk
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The Fund may invest in Income Securities rated below-investment grade or, if unrated, determined by the Sub-Adviser to be of comparable credit quality, which are commonly referred to as “high-yield” or “junk” bonds. Investment in securities of below-investment grade quality involves substantial risk of loss. Income Securities of below-investment grade
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quality are predominantly speculative with respect to the issuer’s capacity to pay interest and repay principal when due and therefore involve a greater risk of default or decline in market value due to adverse economic and issuer-specific developments. Income Securities of below-investment grade quality display increased price sensitivity to changing interest rates and to a deteriorating economic environment. The market values for Income Securities of below-investment grade quality tend to be more volatile and such securities tend to be less liquid than investment grade debt securities.
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Structured Finance Investments Risk.
The Fund’s structured finance investments may include residential and commercial mortgage-related and other asset-backed securities issued by governmental entities and private issuers. Holders of structured finance investments bear risks of the underlying investments, index or reference obligation and are subject to counterparty risk. The Fund may have the right to receive payments only from the structured product, and generally does not have direct rights against the issuer or the entity that sold the assets to be securitized. While certain structured finance investments enable the investor to acquire interests in a pool of securities without the brokerage and other expenses associated with directly holding the same securities, investors in structured finance investments generally pay their share of the structured product’s administrative and other expenses. Although it is difficult to predict whether the prices of indices and securities underlying structured finance investments will rise or fall, these prices (and, therefore, the prices of structured finance investments) will be influenced by the same types of political and economic events that affect issuers of securities and capital markets generally. If the issuer of a structured product uses shorter term financing to purchase longer term securities, the issuer may be forced to sell its securities at below market prices if it experiences difficulty in obtaining short-term financing, which may adversely affect the value of the structured finance investment owned by the Fund.
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The Fund may invest in structured finance products collateralized by low grade or defaulted loans or securities. Investments in such structured finance products are subject to the risks associated with below investment grade securities. Such securities are characterized by high risk. It is likely that an economic recession could severely disrupt the market for such securities and may have an adverse impact on the value of such securities.
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Mortgage-Backed Securities Risk.
The risks associated with mortgage-backed securities include: (1) credit risk associated with the performance of the underlying mortgage properties and of the borrowers owning these properties; (2) adverse changes in economic conditions and circumstances, which are more likely to have an adverse impact on mortgage-backed securities secured by loans on certain types of commercial properties than on those secured by loans on residential properties; (3) prepayment risk, which can lead to significant fluctuations in the value of the mortgage-backed security; (4) loss of all or part of the premium, if any, paid; and (5) decline in the market value of the security, whether resulting from changes in interest rates, prepayments on the underlying mortgage collateral
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or perceptions of the credit risk associated with the underlying mortgage collateral.
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Mortgage-backed securities represent an interest in a pool of mortgages. When market interest rates decline, more mortgages are refinanced and the securities are paid off earlier than expected. Prepayments may also occur on a scheduled basis or due to foreclosure. When market interest rates increase, the market values of mortgage-backed securities decline. At the same time, however, mortgage refinancings and prepayments slow, which lengthens the effective maturities of these securities. As a result, the negative effect of the rate increase on the market value of mortgage-backed securities is usually more pronounced than it is for other types of debt securities. In addition, due to increased instability in the credit markets, the market for some mortgage-backed securities has experienced reduced liquidity and greater volatility with respect to the value of such securities, making it more difficult to value such securities. The Fund may invest in sub-prime mortgages or mortgage-backed securities that are backed by sub-prime mortgages.
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Moreover, the relationship between prepayments and interest rates may give some high-yielding mortgage-related and asset-backed securities less potential for growth in value than conventional bonds with comparable maturities. In addition, in periods of falling interest rates, the rate of prepayments tends to increase. During such periods, the reinvestment of prepayment proceeds by the Fund will generally be at lower rates than the rates that were carried by the obligations that have been prepaid. Because of these and other reasons, mortgage-related and asset-backed security’s total return and maturity may be difficult to predict precisely. To the extent that the Fund purchases mortgage-related and asset-backed securities at a premium, prepayments (which may be made without penalty) may result in loss of the Fund’s principal investment to the extent of premium paid.
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Mortgage-backed securities generally are classified as either commercial mortgage-backed securities (“CMBS”) or residential mortgage-backed securities (“RMBS”), each of which are subject to certain specific risks.
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Commercial Mortgage-Backed Securities Risk
. The market for CMBS developed more recently and, in terms of total outstanding principal amount of issues, is relatively small compared to the market for residential single-family mortgage-related securities. CMBS are subject to particular risks, including lack of standardized terms, shorter maturities than residential mortgage loans and payment of all or substantially all of the principal only at maturity rather than regular amortization of principal. In addition, commercial lending generally is viewed as exposing the lender to a greater risk of loss than one-to-four family residential lending. Commercial lending, for example, typically involves larger loans to single borrowers or groups of related borrowers than residential one-to-four family mortgage loans. In addition, the repayment of loans secured by income producing properties typically is dependent upon the successful operation of the related real estate project and the cash flow generated therefrom. Net
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operating income of an income-producing property can be affected by, among other things: tenant mix, success of tenant businesses, property management decisions, property location and condition, competition from comparable types of properties, changes in laws that increase operating expense or limit rents that may be charged, any need to address environmental contamination at the property, the occurrence of any uninsured casualty at the property, changes in national, regional or local economic conditions and/or specific industry segments, declines in regional or local real estate values, declines in regional or local rental or occupancy rates, increases in interest rates, real estate tax rates and other operating expenses, change in governmental rules, regulations and fiscal policies, including environmental legislation, acts of God, terrorism, social unrest and civil disturbances. Consequently, adverse changes in economic conditions and circumstances are more likely to have an adverse impact on mortgage-related securities secured by loans on commercial properties than on those secured by loans on residential properties. Additional risks may be presented by the type and use of a particular commercial property. Special risks are presented by hospitals, nursing homes, hospitality properties and certain other property types. Commercial property values and net operating income are subject to volatility, which may result in net operating income becoming insufficient to cover debt service on the related mortgage loan. The exercise of remedies and successful realization of liquidation proceeds relating to CMBS may be highly dependent on the performance of the servicer or special servicer. There may be a limited number of special servicers available, particularly those that do not have conflicts of interest.
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Residential Mortgage-Backed Securities Risk
. Credit-related risk on RMBS arises from losses due to delinquencies and defaults by the borrowers in payments on the underlying mortgage loans and breaches by originators and servicers of their obligations under the underlying documentation pursuant to which the RMBS are issued. The rate of delinquencies and defaults on residential mortgage loans and the aggregate amount of the resulting losses will be affected by a number of factors, including general economic conditions, particularly those in the area where the related mortgaged property is located, the level of the borrower’s equity in the mortgaged property and the individual financial circumstances of the borrower. If a residential mortgage loan is in default, foreclosure on the related residential property may be a lengthy and difficult process involving significant legal and other expenses. The net proceeds obtained by the holder on a residential mortgage loan following the foreclosure on the related property may be less than the total amount that remains due on the loan. The prospect of incurring a loss upon the foreclosure of the related property may lead the holder of the residential mortgage loan to restructure the residential mortgage loan or otherwise delay the foreclosure process.
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Sub-Prime Mortgage Market Risk
. The residential mortgage market in the United States has experienced difficulties that may adversely affect the performance and market value of certain mortgages and mortgage-related securities. Delinquencies and losses on residential mortgage
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loans (especially sub-prime and second-line mortgage loans) generally have increased recently and may continue to increase, and a decline in or flattening of housing values (as has recently been experienced and may continue to be experienced in many housing markets) may exacerbate such delinquencies and losses. Borrowers with adjustable rate mortgage loans are more sensitive to changes in interest rates, which affect their monthly mortgage payments, and may be unable to secure replacement mortgages at comparably low interest rates. Also, a number of residential mortgage loan originators have recently experienced serious financial difficulties or bankruptcy. Largely due to the foregoing, reduced investor demand for mortgage loans and mortgage-related securities and increased investor yield requirements have caused limited liquidity in the secondary market for mortgage-related securities, which can adversely affect the market value of mortgage-related securities. It is possible that such limited liquidity in such secondary markets could continue or worsen. If the economy of the United States deteriorates further, the incidence of mortgage foreclosures, especially sub-prime mortgages, may increase, which may adversely affect the value of any mortgage-backed securities owned by the Fund.
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The significance of the mortgage crisis and loan defaults in residential mortgage loan sectors led to the enactment in July 2008 of the Housing and Economic Recovery Act of 2008, a wide-ranging housing rescue bill that offers up to $300 billion in assistance to troubled homeowners and emergency assistance to Freddie Mac and Fannie Mae, companies that operate under federal charter and play a vital role in providing financing for the housing markets. The above-mentioned housing bill could potentially have a material adverse effect on the Funds’ investment as the bill, among other things, (1) allows approximately 400,000 homeowners to refinance into affordable, government-backed loans through a program run by the Federal Housing Authority (“FHA”), a division of the U.S. Housing and Urban Development (“HUD”) and (2) provides approximately $180 million for “pre-foreclosure” housing counseling and legal services for distressed borrowers. In addition, the mortgage crisis has led public advocacy groups to demand, and governmental officials to propose and consider, a variety of other “bailout” and “rescue” plans that could potentially have a material adverse effect on the Funds’ investments. Certain borrowers may also seek relief through the “FHA Secure” refinancing option that gives homeowners with non-FHA adjustable rate mortgages, current or delinquent and regardless of reset status, the ability to refinance into a FHA-insured mortgage. The Helping Families Save Their Homes Act of 2009, which was enacted on May 20, 2009, provides a safe harbor for servicers entering into “qualified loss mitigation plans” with respect to residential mortgages originated before the act was enacted. By protecting servicers from certain liabilities, this safe harbor may encourage loan modifications and reduce the likelihood that investors in securitizations will be paid on a timely basis or will be paid in full. In addition to the above, a variety of other plans and proposals from federal and state regulatory agencies have been presented. Law, legislation or other government regulation, promulgated in furtherance of a “bailout” or “rescue” plan to address
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the crisis and distress in the residential mortgage loan sector, may result in a reduction of available transactional opportunities for the Fund, or an increase in the cost associated with such transactions. Any such law, legislation or regulation may adversely affect the market value of non-agency RMBS.
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A number of originators and servicers of residential and commercial mortgage loans, including some of the largest originators and servicers in the residential and commercial mortgage loan market, have experienced serious financial difficulties, including some that are now subject to federal insolvency proceedings. Such difficulties may affect the performance of non-agency RMBS and CMBS backed by mortgage loans. There can be no assurance that originators and servicers of mortgage loans will not continue to experience serious financial difficulties or experience such difficulties in the future, including becoming subject to bankruptcy or insolvency proceedings, or that underwriting procedures and policies and protections against fraud will be sufficient in the future to prevent such financial difficulties or significant levels of default or delinquency on mortgage loans.
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Asset-Backed Securities Risk
. ABS involve certain risks in addition to those presented by mortgage-backed securities. Therefore, there is the possibility that recoveries on the underlying collateral may not, in some cases, be available to support payments on these securities. ABS do not have the benefit of the same security interest in the underlying collateral as mortgage-backed securities and are more dependent on the borrower’s ability to pay and may provide the Fund with a less effective security interest in the related collateral than do mortgage-related securities. The collateral underlying ABS may constitute assets related to a wide range of industries and sectors. The collateral underlying ABS may constitute assets related to a wide range of industries and sectors. For example, ABS can be collateralized with credit card and automobile receivables. Credit card receivables are generally unsecured, and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which give debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. Most issuers of automobile receivables permit the servicers to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related automobile receivables. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have an effective security interest in all of the obligations backing such receivables. If the economy of the United States deteriorates, defaults on securities backed by credit card, automobile and other receivables may increase, which may adversely affect the value of any ABS owned by the Fund. In addition, these securities may provide the Fund with a less effective security interest in the related collateral than do mortgage-related securities. Therefore, there is the possibility that recoveries on the
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underlying collateral may not, in some cases, be available to support payments on these securities.
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The Credit CARD Act of 2009 imposes new regulations on the ability of credit card issuers to adjust the interest rates and exercise various other rights with respect to indebtedness extended through credit cards. The Fund and the Sub-Adviser cannot predict what effect, if any, such regulations might have on the market for ABS and such regulations may adversely affect the value of ABS owned by the Fund.
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The United States automobile manufacturers have recently reported reduced sales and the potential inability to meet their financing needs. As a result, certain automobile manufacturers have been granted access to emergency loans from the U.S. Government and have experienced bankruptcy. As a result of these events, the value of securities backed by receivables from the sale or lease of automobiles may be adversely affected. | |
Risks Associated with CDOs
. The credit quality of CDO securities depends primarily upon the quality of the underlying assets and the level of credit support and/or enhancement provided. The underlying assets (
e.g.
, debt obligations) of a CDO are subject to prepayments, which shorten the weighted average maturity and may lower the return of the securities issued by the CDO. If the credit support or enhancement is exhausted, losses or delays in payment may result if the required payments of principal and interest are not made. The value of CDO securities also may change because of changes in market value, that is changes in the market’s perception of the creditworthiness of the servicing agent for the pool, the originator of the pool, or the financial institution or fund providing the credit support or enhancement.
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Risks Associated with Risk-Linked Securities.
RLS are a form of derivative issued by insurance companies and insurance-related special purpose vehicles that apply securitization techniques to catastrophic property and casualty damages. Unlike other insurable low-severity, high-probability events (such as auto collision coverage), the insurance risk of which can be diversified by writing large numbers of similar policies, the holders of a typical RLS are exposed to the risks from high-severity, low-probability events such as that posed by major earthquakes or hurricanes. RLS represent a method of reinsurance, by which insurance companies transfer their own portfolio risk to other reinsurance companies and, in the case of RLS, to the capital markets. A typical RLS provides for income and return of capital similar to other fixed-income investments, but involves full or partial default if losses resulting from a certain catastrophe exceeded a predetermined amount. In essence, investors invest funds in RLS and if a catastrophe occurs that “triggers” the RLS, investors may lose some or all of the capital invested. In the case of an event, the funds are paid to the bond sponsor — an insurer, reinsurer or corporation — to cover losses. In return, the bond sponsors pay interest to investors for this catastrophe protection. RLS can be structured to pay-off on three types of variables—insurance-industry catastrophe loss indicies, insure-specific catastrophe losses and parametric indices based on the physical
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characteristics of catastrophic events. Such variables are difficult to predict or model, and the risk and potential return profiles of RLS may be difficult to assess. Catastrophe-related RLS have been in use since the 1990s, and the securitization and risk-transfer aspects of such RLS are beginning to be employed in other insurance and risk-related areas. The RLS market is thus in the early stages of development. No active trading market may exist for certain RLS, which may impair the ability of the Fund to realize full value in the event of the need to liquidate such assets.
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Risks Associated with Structured Notes
. Investments in structured notes involve risks, including credit risk and market risk. Where the Fund’s investments in structured notes are based upon the movement of one or more factors, including currency exchange rates, interest rates, referenced bonds and stock indices, depending on the factor used and the use of multipliers or deflators, changes in interest rates and movement of the factor may cause significant price fluctuations. Additionally, changes in the reference instrument or security may cause the interest rate on the structured note to be reduced to zero, and any further changes in the reference instrument may then reduce the principal amount payable on maturity. Structured notes may be less liquid than other types of securities and more volatile than the reference instrument or security underlying the note.
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Senior Loans Risk
. The Fund may invest in senior secured floating rate Loans made to corporations and other non-governmental entities and issuers (“Senior Loans”). Senior Loans typically hold the most senior position in the capital structure of the issuing entity, are typically secured with specific collateral and typically have a claim on the assets and/or stock of the borrower that is senior to that held by subordinated debt holders and stockholders of the borrower. The Fund’s investments in Senior Loans are typically below-investment grade and are considered speculative because of the credit risk of their issuers. The risks associated with Senior Loans of below-investment grade quality are similar to the risks of other lower grade Income Securities, although Senior Loans are typically senior and secured in contrast to subordinated and unsecured Income Securities. Senior Loans’ higher standing has historically resulted in generally higher recoveries in the event of a corporate reorganization. In addition, because their interest payments are adjusted for changes in short-term interest rates, investments in Senior Loans generally have less interest rate risk than other lower grade Income Securities, which may have fixed interest rates.
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Second Lien Loans Risk
. The Fund may invest in “second lien” secured floating rate Loans made by public and private corporations and other non-governmental entities and issuers for a variety of purposes (“Second Lien Loans”). Second Lien Loans are second in right of payment to one or more Senior Loans of the related borrower. Second Lien Loans are subject to the same risks associated with investment in Senior Loans and other lower grade Income Securities. However, Second Lien Loans are second in right of payment to Senior Loans and therefore are subject to the additional risk that the cash flow of the borrower and any property securing the Loan may be
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insufficient to meet scheduled payments after giving effect to the senior secured obligations of the borrower. Second Lien Loans are expected to have greater price volatility and exposure to losses upon default than Senior Loans and may be less liquid.
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Mezzanine Investments Risk
. The Fund may invest in certain lower grade securities known as “Mezzanine Investments,” which are subordinated debt securities that are generally issued in private placements in connection with an equity security (
e.g.
, with attached warrants) or may be convertible into equity securities. Mezzanine Investments are subject to the same risks associated with investment in Senior Loans, Second Lien Loans and other lower grade Income Securities. However, Mezzanine Investments may rank lower in right of payment than any outstanding Senior Loans and Second Lien Loans of the borrower, or may be unsecured (
i.e.
, not backed by a security interest in any specific collateral), and are subject to the additional risk that the cash flow of the borrower and available assets may be insufficient to meet scheduled payments after giving effect to any higher ranking obligations of the borrower. Mezzanine Investments are expected to have greater price volatility and exposure to losses upon default than Senior Loans and Second Lien Loans and may be less liquid.
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Convertible Securities Risk
. The Fund may invest in convertible securities, which include bonds, debentures, notes, preferred stocks and other securities that entitle the holder to acquire common stock or other equity securities of the same or a different issuer. Convertible securities generally offer lower interest or dividend yields than non-convertible securities of similar quality. As with all Income Securities, the market values of convertible securities tend to decline as interest rates increase and, conversely, to increase as interest rates decline. Convertible securities also tend to reflect the market price of the underlying stock in varying degrees, depending on the relationship of such market price to the conversion price in the terms of the convertible security. Convertible securities rank senior to common stock in an issuer’s capital structure and consequently entail less risk than the issuer’s common stock.
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Preferred Stock Risks
. The Fund may invest in preferred stock, which represents the senior residual interest in the assets of an issuer after meeting all claims, with priority to corporate income and liquidation payments over the issuer’s common stock. As such, preferred stock is inherently more risky than the bonds and other debt instruments of the issuer, but less risky than its common stock. Preferred stocks may be significantly less liquid than many other securities, such as U.S. Government securities, corporate debt and common stock.
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Foreign Securities Risk
. The Fund may invest up to 20% of its total assets in non-U.S. dollar-denominated Income Securities of foreign issuers. Investing in foreign issuers may involve certain risks not typically associated with investing in securities of U.S. issuers due to increased exposure to foreign economic, political and legal developments, including favorable or unfavorable changes in currency exchange rates, exchange control regulations (including currency
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blockage), expropriation or nationalization of assets, imposition of withholding taxes on payments, and possible difficulty in obtaining and enforcing judgments against foreign entities. Furthermore, issuers of foreign securities and obligations are subject to different, often less comprehensive, accounting, reporting and disclosure requirements than domestic issuers. The securities and obligations of some foreign companies and foreign markets are less liquid and at times more volatile than comparable U.S. securities, obligations and markets. These risks may be more pronounced to the extent that the Fund invests a significant amount of its assets in companies located in one region and to the extent that the Fund invests in securities of issuers in emerging markets. The Fund may also invest in U.S. dollar-denominated Income Securities of foreign issuers, which are subject to many of the risks described above regarding Income Securities of foreign issuers denominated in foreign currencies.
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Emerging Markets Risk
. The Fund may invest up to 10% of its total assets in Income Securities the issuers of which are located in countries considered to be emerging markets, and investments in such securities are considered speculative. Heightened risks of investing in emerging markets include: smaller market capitalization of securities markets, which may suffer periods of relative illiquidity; significant price volatility; restrictions on foreign investment; and potential restrictions on repatriation of investment income and capital.
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Foreign Currency Risk
. The value of securities denominated or quoted in foreign currencies may be adversely affected by fluctuations in the relative currency exchange rates and by exchange control regulations. The Fund’s investment performance may be negatively affected by a devaluation of a currency in which the Fund’s investments are denominated or quoted. Further, the Fund’s investment performance may be significantly affected, either positively or negatively, by currency exchange rates because the U.S. dollar value of securities denominated or quoted in another currency will increase or decrease in response to changes in the value of such currency in relation to the U.S. dollar.
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Common Equity Securities Risk
. The Fund may invest up to 50% of its total assets in Common Equity Securities. Common Equity Securities’ prices fluctuate for a number of reasons, including changes in investors’ perceptions of the financial condition of an issuer, the general condition of the relevant stock market and broader domestic and international political and economic events. The prices of Common Equity Securities are also sensitive to general movements in the stock market, so a drop in the stock market may depress the prices of Common Equity Securities to which the Fund has exposure. While broad market measures of Common Equity Securities have historically generated higher average returns than Income Securities, Common Equity Securities have also experienced significantly more volatility in those returns. Common Equity Securities in which the Fund may invest are structurally subordinated to preferred stock, bonds and other debt instruments in a company’s capital structure in terms of priority to corporate income and are therefore inherently more risky than preferred stock or debt instruments of such issuers.
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Risks Associated with the Fund’s Covered Call Option Strategy
. The ability of the Fund to achieve its investment objective is partially dependent on the successful implementation of its covered call option strategy. There are significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objectives. A decision as to whether, when and how to use options involves the exercise of skill and judgment, and even a well conceived transaction may be unsuccessful to some degree because of market behavior or unexpected events.
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As the writer of a covered call option, the Fund forgoes, during the option’s life, the opportunity to profit from increases in the market value of the security covering the call option above the sum of the premium and the strike price of the call, but retains the risk of loss should the price of the underlying security decline. As the Fund writes covered calls over more of its portfolio, its ability to benefit from capital appreciation becomes more limited. See “Risks—Risks Associated with the Fund’s Covered Call Option Strategy—Risks Associated with Covered Call and Put Options.”
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With respect to exchange-traded options, there can be no assurance that a liquid market will exist when the Fund seeks to close out an option position on an options exchange. If the Fund were unable to close out a covered call option that it had written on a security, it would not be able to sell the underlying security unless the option expired without exercise. See “Risks—Risks Associated with the Fund’s Covered Call Option Strategy—Exchange-Listed Option Risk.”
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The Fund may also write (sell) over-the-counter options (“OTC options”). Options written by the Fund with respect to non-U.S. securities, indices or sectors generally will be OTC options. OTC options differ from exchange-listed options in that they are two-party contracts, with exercise price, premium and other terms negotiated between buyer and seller, and generally do not have as much market liquidity as exchange-listed options. See “Risks—Risks Associated with the Fund’s Covered Call Option Strategy—OTC Option Risk.”
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Risks of Real Property Asset Companies
. The Fund may invest in Income Securities and Common Equity Securities issued by Real Property Asset Companies. Because of the Fund’s ability to make indirect investments in real estate and in the securities of companies in the real estate industry, it is subject to risks associated with the direct ownership of real estate, including declines in the value of real estate; general and local economic conditions; increased competition; and changes in interest rates. Because of the Fund’s ability to make indirect investments in natural resources and physical commodities, and in Real Property Asset Companies engaged in oil and gas exploration and production, gold and other precious metals, steel and iron ore production, energy services, forest products, chemicals, coal, alternative energy sources and environmental services, as well as related transportation companies and equipment manufacturers, the Fund is subject to risks associated with such real property assets,
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including supply and demand risk, depletion risk, regulatory risk and commodity pricing risk.
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Risks of Personal Property Asset Companies
. The Fund may invest in Income Securities and Common Equity Securities issued by Personal Property Asset Companies which invest in personal property such as special situation transportation assets (
e.g.
, railcars, airplanes and ships) and collectibles (
e.g.
, antiques, wine and fine art). The risks of special situation transportation assets include cyclicality of supply and demand for transportation assets and risk of decline in the value of transportation assets and rental values. The risks of collectible assets include the difficulty in valuing collectible assets, the relative illiquidity of collectible assets, the prospects of forgery or the inability to assess the authenticity of collectible assets and the high transaction and related costs of purchasing, selling and safekeeping collectible assets.
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Private Securities Risk
. The Fund may invest in privately issued Income Securities and Common Equity Securities of both public and private companies. Private Securities have additional risk considerations than investments in comparable public investments. Whenever the Fund invests in companies that do not publicly report financial and other material information, it assumes a greater degree of investment risk and reliance upon the Sub-Adviser’s ability to obtain and evaluate applicable information concerning such companies’ creditworthiness and other investment considerations. Certain Private Securities may be illiquid. Because there is often no readily available trading market for Private Securities, the Fund may not be able to readily dispose of such investments at prices that approximate those at which the Fund could sell them if they were more widely traded. Private Securities are also more difficult to value. Private Securities that are debt securities generally are of below-investment grade quality, frequently are unrated and present many of the same risks as investing in below-investment grade public debt securities.
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Investment Funds Risk
. As an alternative to holding investments directly, the Fund may also obtain investment exposure to Income Securities and Common Equity Securities by investing up to 20% of its total assets in Investment Funds, of which amount up to 10% of its total assets may be invested in Registered Investment Funds. Investments in Investment Funds present certain special considerations and risks not present in making direct investments in Income Securities and Common Equity Securities. Investments in Investment Funds involve operating expenses and fees that are in addition to the expenses and fees borne by the Fund. Such expenses and fees attributable to the Fund’s investment in another Investment Fund are borne indirectly by Common Shareholders. Accordingly, investment in such entities involves expense and fee layering. To the extent management fees of Investment Funds are based on total gross assets, it may create an incentive for such entities’ managers to employ financial leverage, thereby adding additional expense and increasing volatility and risk. A performance-based fee arrangement may create incentives for an adviser or manager to take greater investment risks in the hope of earning a higher profit participation. Investments in
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Investment Funds frequently expose the Fund to an additional layer of financial leverage.
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Private Investment Funds Risk
. In addition to those risks described above with respect to all Investment Funds, investing in Private Investment Funds may pose additional risks to the Fund. Certain Private Investment Funds in which the Fund participates may involve capital call provisions under which the Fund is obligated to make additional investments at specified levels even if it would otherwise choose not to. Investments in Private Investment Funds may have very limited liquidity. Often there will be no secondary market for such investments and the ability to redeem or otherwise withdraw from a Private Investment Fund may be prohibited during the term of the Private Investment Fund or, if permitted, may be infrequent. Certain Private Investment Funds may be subject to “lock-up” periods of a year or more. The valuation of investments in Private Investment Funds often will be based upon valuations provided by the adviser or manager and it may not always be possible to effectively assess the accuracy of such valuations, particularly if the fund holds substantial investments the values of which are determined by the adviser or manager based upon a fair valuation methodology. Incentive fee considerations, which are generally expected to be between 15%-25% of the net capital appreciation (if any) in the assets managed by a Private Investment Fund manager, may cause conflicts in the fair valuation of investment holdings by a Private Investment Fund’s adviser or manager.
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Private Investment Funds in which the Fund invests may employ a number of investment techniques, including short sales, investment in non-investment grade or nonmarketable securities, uncovered option transactions, forward transactions, futures and options on futures transactions, foreign currency transactions and highly concentrated portfolios, among others, which could, under certain circumstances, magnify the impact of any negative market, sector or investment development. The Fund may be exposed to increased leverage risk, as the Private Investment Funds in which it invests may borrow and may utilize various lines of credit, reverse repurchase agreements, “dollar” rolls, issuance of debt securities, swaps, forward purchases and other forms of leverage. Some of the Private Investment Funds may provide very limited information with respect to their operation and performance to the Fund, thereby severely limiting the Fund’s ability to verify initially or on a continuing basis any representations made by the Private Investment Funds or the investment strategies being employed, and exposing the Fund to concentration risk if it invests in a number of Private Investment Funds which have overlapping strategies and accumulate large positions in the same or related instruments without the Sub-Adviser’s knowledge. The Fund will not have the ability to direct or influence the management of the Private Investment Funds in which it invests, so the returns on such investments will primarily depend on the performance of the Private Investment Funds’ managers and could suffer substantial adverse effects by the unfavorable performance of such managers.
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Synthetic Investments Risk
. The Fund may be exposed to certain additional risks to the extent the Sub-Adviser uses derivatives as a means to synthetically implement the Fund’s investment strategies. If the Fund enters into a derivative instrument whereby it agrees to receive the return of a security or financial instrument or a basket of securities or financial instruments, it will typically contract to receive such returns for a predetermined period of time. During such period, the Fund may not have the ability to increase or decrease its exposure. In addition, such customized derivative instruments will likely be highly illiquid, and it is possible that the Fund will not be able to terminate such derivative instruments prior to their expiration date or that the penalties associated with such a termination might impact the Fund’s performance in a material adverse manner. Furthermore, derivative instruments typically contain provisions giving the counterparty the right to terminate the contract upon the occurrence of certain events. If a termination were to occur, the Fund’s return could be adversely affected as it would lose the benefit of the indirect exposure to the reference securities and it may incur significant termination expenses.
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Inflation/Deflation Risk
. Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as inflation decreases the value of money. As inflation increases, the real value of the Common Shares and distributions can decline. In addition, during any periods of rising inflation, the dividend rates or borrowing costs associated with the Fund’s use of Financial Leverage would likely increase, which would tend to further reduce returns to Common Shareholders. Deflation risk is the risk that prices throughout the economy decline over time—the opposite of inflation. Deflation may have an adverse affect on the creditworthiness of issuers and may make issuer default more likely, which may result in a decline in the value of the Fund’s portfolio.
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Market Discount Risk
. The Fund’s Common Shares have a limited trading history and have traded both at a premium and at a discount in relation to NAV. The Fund cannot predict whether the Common Shares will trade in the future at a premium or discount to NAV. The Fund’s Common Shares have recently traded at a premium to NAV per share, which may not be sustainable. If the Common Shares are trading at a premium to net asset value at the time you purchase Common Shares, the NAV per share of the Common Shares purchased will be less than the purchase price paid. Shares of closed-end investment companies frequently trade at a discount from NAV, but in some cases have traded above NAV. The risk of the Common Shares trading at a discount is a risk separate from the risk of a decline in the Fund’s NAV as a result of the Fund’s investment activities. The Fund’s NAV will be reduced immediately following an offering of the Common Shares due to the costs of such offering, which will be borne entirely by the Fund. The sale of Common Shares by the Fund (or the perception that such sales may occur) may have an adverse effect on prices of Common Shares in the secondary market. An increase in the number of Common Shares available may put downward pressure on the market price for Common Shares. The Fund may, from time to time, seek the consent
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of Common Shareholders to permit the issuance and sale by the Fund of Common Shares at a price below the Fund’s then current NAV, subject to certain conditions, and such sales of Common Shares at price below NAV, if any, may increase downward pressure on the market price for Common Shares. These sales, if any, also might make it more difficult for the Fund to sell additional Common Shares in the future at a time and price it deems appropriate.
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Whether Common Shareholder will realize a gain or loss upon the sale of Common Shares depends upon whether the market value of the Common Shares at the time of sale is above or below the price the Common Shareholder paid, taking into account transaction costs for the Common Shares, and is not directly dependent upon the Fund’s NAV. Because the market value of the Common Shares will be determined by factors such as the relative demand for and supply of the shares in the market, general market conditions and other factors outside the Fund’s control, the Fund cannot predict whether the Common Shares will trade at, below or above NAV, or at, below or above the public offering price for the Common Shares. Common Shares of the Fund are designed primarily for long-term investors; investors in Common Shares should not view the Fund as a vehicle for trading purposes.
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Dilution Risk
. The voting power of current Common Shareholders will be diluted to the extent that current Common Shareholders do not purchase Common Shares in any future offerings of Common Shares or do not purchase sufficient Common Shares to maintain their percentage interest. If the Fund is unable to invest the proceeds of such offering as intended, the Fund’s per Common Share distribution may decrease and the Fund may not participate in market advances to the same extent as if such proceeds were fully invested as planned. If the Fund sells Common Shares at a price below NAV pursuant to the consent of Common Shareholders, shareholders will experience a dilution of the aggregate NAV per Common Share because the sale price will be less than the Fund’s then-current NAV per Common Share. Similarly, were the expenses of the offering to exceed the amount by which the sale price exceeded the Fund’s then current NAV per Common Share, shareholders would experience a dilution of the aggregate NAV per Common Share. This dilution will be experienced by all shareholders, irrespective of whether they purchase Common Shares in any such offering. See “Description of Capital Structure—Common Shares—Issuance of Additional Common Shares.”
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Financial Leverage Risk
. Although the use of Financial Leverage by the Fund may create an opportunity for increased after-tax total return for the Common Shares, it also results in additional risks and can magnify the effect of any losses. If the income and gains earned on securities purchased with Financial Leverage proceeds are greater than the cost of Financial Leverage, the Fund’s return will be greater than if Financial Leverage had not been used. Conversely, if the income or gains from the securities purchased with such proceeds does not cover the cost of Financial Leverage, the return to the Fund will be less than if Financial Leverage had not been used.
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Financial Leverage involves risks and special considerations for shareholders, including the likelihood of greater volatility of net asset value and market price of and dividends on the Common Shares than a comparable portfolio without leverage; the risk that fluctuations in interest rates on Borrowings or in the dividend rate on any Preferred Shares that the Fund must pay will reduce the return to the Common Shareholders; and the effect of Financial Leverage in a declining market, which is likely to cause a greater decline in the net asset value of the Common Shares than if the Fund were not leveraged, which may result in a greater decline in the market price of the Common Shares.
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Because the fees received by the Investment Adviser and Sub-Adviser are based on the Managed Assets of the Fund (including the proceeds of any Financial Leverage), the Investment Adviser and Sub-Adviser have a financial incentive for the Fund to utilize Financial Leverage, which may create a conflict of interest between the Investment Adviser and the Sub-Adviser on the one hand and the Common Shareholders on the other. There can be no assurance that a leveraging strategy will be implemented or that it will be successful during any period during which it is employed.
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Financial leverage may also be achieved through the purchase of certain derivative instruments. The Fund’s use of derivative instruments exposes the Fund to special risks. See “Investment Objectives and Policies—Certain Other Investment Practices—Derivative Transactions” and “ Risks—Derivative Transactions Risk.”
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Recent economic and market events have contributed to severe market volatility and caused severe liquidity strains in the credit markets. If dislocations in the credit markets continue, the Fund’s leverage costs may increase and there is a risk that the Fund may not be able to renew or replace existing leverage on favorable terms or at all. If the cost of leverage is no longer favorable, or if the Fund is otherwise required to reduce its leverage, the Fund may not be able to maintain distributions on Common Shares at historical levels and Common Shareholders will bear any costs associated with selling portfolio securities.
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See “Risks – Financial Leverage Risk.”
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Derivative Transactions Risks
. Participation in options, futures and other derivative transactions involves investment risks and transaction costs to which the Fund would not be subject absent the use of such strategies. If the Sub-Adviser’s prediction of movements in the direction of the securities and interest rate markets is inaccurate, the consequences to the Fund may leave the Fund in a worse position than if it had not used such strategies. Positions in derivatives (such as options, swaps, and futures and forward contracts and options thereon) may subject the Fund to substantial loss of principal in relation to the Fund’s investment amount.
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Portfolio Turnover Risk
. The Fund’s annual portfolio turnover rate may vary greatly from year to year. Portfolio turnover rate is not considered a limiting factor in the execution of investment decisions for the Fund. A higher portfolio turnover rate results in correspondingly greater brokerage commissions and other transactional expenses that are borne
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by the Fund. High portfolio turnover may result in an increased realization of net short-term capital gains by the Fund which, when distributed to Common Shareholders, will be taxable as ordinary income. Additionally, in a declining market, portfolio turnover may create realized capital losses.
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Risk Associated with Recent Market Developments
. Global and domestic financial markets have experienced periods of unprecedented turmoil. Instability in the credit markets has made it more difficult for a number of issuers to obtain financings or refinancings for their investment or lending activities or operations. There is a risk that such issuers will be unable to successfully complete such financings or refinancings. In particular, because of the conditions in the credit markets, issuers of debt securities may be subject to increased cost for debt, tightening underwriting standards and reduced liquidity for loans they make, securities they purchase and securities they issue. There is also a risk that developments in sectors of the credit markets in which the Fund does not invest may adversely affect the liquidity and the value of securities in sectors of the credit markets in which the Fund does invest, including securities owned by the Fund.
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The debt and equity capital markets in the United States have been negatively impacted by significant write-offs in the financial services sector relating to sub-prime mortgages and the re-pricing of credit risk in the broadly syndicated market, among other things. These events, along with the deterioration of the housing market, the failure of major financial institutions and the resulting United States federal government actions led to worsening general economic conditions, which materially and adversely impacted the broader financial and credit markets and reduced the availability of debt and equity capital for the market as a whole and financial firms in particular. These events adversely affected the willingness of some lenders to extend credit, which may make it more difficult for issuers of Senior Loans to finance their operations. Such market conditions may increase the volatility of the value of securities owned by the Fund, may make it more difficult for the Fund to accurately value its securities or to sell its securities on a timely basis and may adversely affect the ability of the Fund to borrow for investment purposes and increase the cost of such borrowings, which would reduce returns to the Common Shareholders. These developments adversely affected the broader economy, and may continue to do so, which in turn may adversely affect the ability of issuers of securities owned by the Fund to make payments of principal and interest when due, lead to lower credit ratings and increased defaults. Such developments could, in turn, reduce the value of securities owned by the Fund and adversely affect the net asset value of the Fund’s Common Shares. In addition, the prolonged continuation or further deterioration of current market conditions could adversely impact the Fund’s portfolio.
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Recently, markets have witnessed more stabilized economic activity as expectations for an economic recovery increased. However, risks to a robust resumption of growth persist. A return to unfavorable economic conditions or sustained economic slowdown could adversely impact the Fund’s portfolio. Financial market conditions, as well as various
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social, political, and psychological tensions in the United States and around the world, have contributed to increased market volatility, may have long-term effects on the U.S. and worldwide financial markets; and may cause further economic uncertainties or deterioration in the United States and worldwide. Furthermore, volatile financial markets can expose the Fund to greater market and liquidity risk and potential difficulty in valuing portfolio instruments held by the Fund. The Investment Adviser and Sub-Adviser do not know how long the financial markets will continue to be affected by these events and cannot predict the effects of these or similar events in the future on the U.S. and global economies and securities markets in the Fund’s portfolio. The Investment Advisor and the Sub-Adviser intend to monitor developments and seek to manage the Fund’s portfolio in a manner consistent with achieving the Fund’s investment objective, but there can be no assurance that it will be successful in doing so. Given the risks described above, an investment in Common Shares may not be appropriate for all prospective investors. A prospective investor should carefully consider his or her ability to assume these risks before making an investment in the Fund.
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Risk Associated with Government Intervention in Financial Markets
. The instability in the financial markets discussed above has led the U.S. Government to take a number of unprecedented actions designed to support certain financial institutions and segments of the financial markets that have experienced extreme volatility, and in some cases a lack of liquidity. Federal, state, and other governments, their regulatory agencies, or self regulatory organizations may take actions that affect the regulation of the instruments in which the Fund invests, or the issuers of such instruments. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was signed into law in July 2010, has resulted in a significant revision of the U.S. financial regulatory framework. The Dodd-Frank Act covers a broad range of topics, including, among many others, a reorganization of federal financial regulators; a process designed to ensure financial system stability and the resolution of potentially insolvent financial firms; new rules for derivatives trading; the creation of a consumer financial protection watchdog; the registration and regulation of managers of private funds; the regulation of credit rating agencies; and new federal requirements for residential mortgage loans. The regulation of various types of derivative instruments pursuant to the Dodd-Frank Act may adversely affect issuers of securities in which the Fund invests that utilize derivatives strategies for hedging or other purposes. The ultimate impact of the Dodd-Frank Act, and any resulting regulation, is not yet certain and issuers of securities in which the Fund invests may also be affected by the new legislation and regulation in ways that are currently unforeseeable.
|
|
Governments or their agencies may also acquire distressed assets from financial institutions and acquire ownership interests in those institutions. The implications of government ownership and disposition of these assets are unclear, and such a program may have positive or negative effects on the liquidity, valuation and performance of the Fund’s portfolio holdings.
|
|
Legislation Risk
. At any time after the date of this Prospectus, legislation may be enacted that could negatively affect the assets of the Fund or the issuers of such assets. Changing approaches to regulation may have a negative impact on the Fund entities in which the Fund invests. Legislation or regulation may also change the way in which the Fund itself is regulated. There can be no assurance that future legislation, regulation or deregulation will not have a material adverse effect on the Fund or will not impair the ability of the Fund to achieve its investment objective.
|
|
TALF, TARP, PPIP and Other Government Programs Risks
. In response to the financial crises affecting the banking system and the financial markets, the United States government, the Treasury, the Board of Governors of the Federal Reserve System and other governmental and regulatory bodies have taken action in an attempt to stabilize the financial markets.
|
|
The TALF Program and the Legacy Term Asset-Backed Securities Loan Facility program (“Legacy TALF Program”) are operated by the established by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the U.S. Treasury as a credit facility designed to restore liquidity to the market for asset-backed securities and operated by the FRBNY.
|
|
Pursuant to the Emergency Economic Stabilization Act of 2008 (the “EESA”), the Troubled Asset Relief Program (the “TARP”) was established. The purpose of this legislation was to stabilize financial markets and institutions in light of the financial crisis affecting the United States. In connection with the TARP, the Treasury announced the creation of the Financial Stability Plan in early 2009. The Financial Stability Plan outlined a series of key initiatives to help restore the United States economy, one of which was the creation of the Public-Private Investment Program (“PPIP”). The PPIP is designed to encourage the transfer of eligible assets, which include certain illiquid real estate-related assets issued prior to 2009 (which may be rated below investment grade, have no readily available trading market (or otherwise be considered illiquid), may be difficult to value and may be backed in part by non-performing mortgages), from banks and other financial institutions in an effort to restart the market for these assets and support the flow of credit and other capital into the broader economy.
|
|
Other such programs may be sponsored, established or operated by U.S. or non U.S. governments from time to time. It is unclear what effect these programs, and their eventual termination, may have on the markets for credit securities in which the fund may invest over the near- and long-term. Such programs may have positive or negative effects on the liquidity, valuation and performance of the Fund’s portfolio holdings.
|
|
The Fund may invest a portion of its assets through participation in the TALF Program. Under the TALF Program, the FRBNY may provide loans to the Fund to purchase certain investment-grade, asset-backed securities which must be backed by auto loans, student loans, credit card loans, small business loans or certain commercial mortgage-
|
|
backed securities. The Fund may seek to participate in other government programs from time to time. Participation in such programs may expose the Fund to additional risks and may limit the Fund’s ability to engage in certain of the investment strategies or transactions described in this Prospectus or in the SAI. There can be no assurance that the Fund will be able to participate in any such program.
|
||
Market Disruption and Geopolitical Risk
. Continuing U.S. operations in Iraq and Afghanistan, instability in the Middle East and terrorist attacks in the United States and around the world may result in market volatility, may have long-term effects on the U.S. and worldwide financial markets and may cause further economic uncertainties in the United States and worldwide. The Fund does not know how long the securities markets may be affected by these events and cannot predict the effects of the occupation or similar events in the future on the U.S. economy and securities markets.
|
||
Anti-Takeover Provisions in the Fund’s Governing Documents
|
The Fund’s Certificate of Trust, Agreement and Declaration of Trust and Bylaws (the “Governing Documents”) include provisions that could limit the ability of other entities or persons to acquire control of the Fund or convert the Fund to an open-end fund. These provisions could have the effect of depriving the Common Shareholders of opportunities to sell their Common Shares at a premium over the then-current market price of the Common Shares. See “Anti-Takeover and Other Provisions in the Fund’s Governing Documents” and “Risks—Anti-Takeover Provisions.”
|
|
Administrator, Custodian, Transfer Agent and Dividend Disbursing Agent
|
The Bank of New York Mellon serves as the custodian of the Fund’s assets pursuant to a custody agreement. Under the custody agreement, the custodian holds the Fund’s assets in compliance with the 1940 Act. For its services, the custodian will receive a monthly fee based upon, among other things, the average value of the total assets of the Fund, plus certain charges for securities transactions. The Bank of New York Mellon also serves as the Fund’s dividend disbursing agent, agent under the Fund’s Automatic Dividend Reinvestment Plan (the “Plan Agent”), transfer agent and registrar with respect to the Common Shares of the Fund.
|
|
Guggenheim Funds Investment Advisors, LLC serves as the Fund’s administrator. Pursuant to an administration agreement with the Fund, Guggenheim Funds Investment Advisors, LLC provides certain administrative, bookkeeping and accounting services to the Fund.
|
||
Shareholder Transaction Expenses
|
|
Sales load (as a percentage of offering price)
|
—
%
(1)
|
Offering expenses borne by the Fund (as a percentage of offering price)
|
—
%
(1)
|
Automatic Dividend Reinvestment Plan fees
(2)
|
None
|
Percentage of Average Net Assets
|
|
Annual Expenses
|
Attributable to Common Shares
(3)
|
Management fee
(4)
|
1.38%
|
Interest expense
(5)
|
0.86%
|
Acquired Fund fees and expenses
|
0.03%
|
Other expenses
(6)
|
0.48%
|
Total annual expenses
|
2.75%
|
(1)
|
If Common Shares to which this Prospectus relates are sold to or through underwriters, the Prospectus Supplement will set forth any applicable sales load and the estimated offering expenses borne by the Fund. | |
(2)
|
You will pay brokerage charges if you direct the Plan Agent to sell your Common Shares held in a dividend reinvestment account. See “Automatic Dividend Reinvestment Plan.” | |
(3)
|
Based upon average net assets applicable to Common Shares during the period ended November 30, 2010. | |
(4)
|
The Fund pays an investment advisory fee to the Investment Adviser in an annual amount equal to 1.00% of the Fund’s average daily Managed Assets (as defined herein). Common Shareholders bear the portion of the investment advisory fee attributable to the assets purchased with the proceeds of Financial Leverage, which means that Common Shareholders effectively bear the entire advisory fee. | |
(5)
|
Includes interest payments on borrowed funds and interest expense on reverse repurchase agreements. Interest payments on borrowed funds is based upon the Fund’s outstanding Financial Leverage as of November 30, 2010, which included Borrowings under the Fund’s committed facility agreement in an amount equal to 9.0% of the Fund’s Managed Assets, at an annual interest rate cost to the Fund of 1.15% and Borrowings under the TALF program in an amount equal to 4.3% of the Fund’s Managed Assets, at an annual interest rate cost to the Fund of 3.80%. The actual amount of interest payments by the Fund will vary over time in accordance with the amount of Borrowings and variations in market interest rates. Interest expenses on reverse repurchase agreements assumes the use of leverage in the form of reverse repurchase agreements representing 15.1% of the Fund’s Managed Assets at an annual interest rate cost to the Fund of 1.99%. The actual amount of interest expense on reverse repurchase agreements borne by the Fund will vary over time in accordance with the level of the Fund’s use of reverse repurchase agreements and variations in market interest rates. The Fund has no present intent to increase the amount of Financial Leverage utilized by the Fund as a percentage of Managed Assets during the next year. | |
(7)
|
Other expenses are estimated based upon those incurred during the current fiscal year. |
1 Year
|
3 Years
|
5 Years
|
10 Years
|
||||||||||
Total Expenses Incurred
(1)
|
$ 52 | $ 108 | $ 167 | $ 325 |
*
|
The Example should not be considered a representation of future expenses or returns. Actual expenses may be higher or lower than those assumed. Moreover, the Fund’s actual rate of return may be higher or lower than the hypothetical 5% return shown in the Example.
The Example assumes that all dividends and distributions are reinvested at net asset value.
|
|
(1)
|
The example above does not include sales loads or estimated offering costs.
|
Per share operating performance for a Common Share outstanding throughout the period
|
For the Six Months Ended November 30, 2010 (unaudited)
|
For the Year Ended May 31, 2010
|
For the Year Ended May 31, 2009
|
For the period July 27, 2007* through May 31, 2008
|
|||||||||
Net asset value, beginning of period
|
$
|
17.56
|
$
|
12.42
|
$
|
17.52
|
$
|
19.10
|
(b)
|
||||
Income from investment operations
|
|||||||||||||
Net investment income
(a)
|
0.92
|
1.76
|
1.06
|
0.79
|
|||||||||
Net realized and unrealized gain (loss) on investments, options, futures, swaps and unfunded commitments
|
1.61
|
5.23
|
(4.31
|
)
|
(0.99
|
)
|
|||||||
Total from investment operations
|
2.53
|
6.99
|
(3.25
|
)
|
(0.20
|
)
|
|||||||
Common Share offering expenses charged
to paid-in-capital
|
—
|
—
|
—
|
(0.04
|
)
|
||||||||
Distributions to Common Shareholders
|
|||||||||||||
From and in excess of net investment income
|
(0.92
|
)
|
(1.85
|
)
|
(1.36
|
)
|
(0.98
|
)
|
|||||
Return of capital
|
—
|
—
|
(0.49
|
)
|
(0.36
|
)
|
|||||||
Total distributions
|
(0.92
|
)
|
(1.85
|
)
|
(1.85
|
)
|
(1.34
|
)
|
|||||
Net asset value, end of period
|
$
|
19.17
|
$
|
17.56
|
$
|
12.42
|
$
|
17.52
|
|||||
Market value, end of period
|
$
|
20.02
|
$
|
17.46
|
$
|
11.53
|
$
|
16.78
|
|||||
Total investment return
(c)
|
|||||||||||||
Net asset value
|
14.62
|
%
|
59.06
|
%
|
-18.37
|
%
|
-1.40
|
%
|
|||||
Market value
|
20.48
|
%
|
70.37
|
%
|
-19.51
|
%
|
-9.41
|
%
|
|||||
Ratios and supplemental data
|
|||||||||||||
Net assets, applicable to Common Shareholders, end of period (thousands)
|
$
|
177,647
|
$
|
161,783
|
$
|
113,076
|
$
|
159,509
|
|||||
Ratios to Average Net Assets applicable to Common Shares:
|
|||||||||||||
Total expenses, excluding interest expense
|
1.86
|
%
(d)(e)
|
1.98
|
%
(d)
|
2.06
|
%
(d)
|
1.72
|
%
(d)(e)
|
|||||
Total expenses, including interest expense
|
2.72
|
%
(d)(e)
|
2.97
|
%
(d)
|
3.25
|
%
(d)
|
3.36
|
%
(d)(e)
|
|||||
Net investment income, including interest expense
|
9.99
|
%
(e)
|
11.30
|
%
|
7.84
|
%
|
5.08
|
%
(d)
|
|||||
Portfolio turnover
(f)
|
27
|
%
|
67
|
%
|
58
|
%
|
210
|
%
|
|||||
Senior Indebtedness
|
|||||||||||||
Total Borrowings outstanding (in thousands)
|
$
|
70,396
|
$
|
69,117
|
$
|
31,085
|
$
|
76,016
|
|||||
Asset coverage per $1,000 of indebtedness
(g)
|
$
|
3,524
|
$
|
3,341
|
$
|
4,638
|
$
|
3,098
|
*
|
Commencement of operations.
|
(a)
|
Based on average shares outstanding during the period.
|
(b)
|
Before deduction of offering expenses charged to capital.
|
(c)
|
Total investment return is calculated assuming a purchase of a Common Share at the beginning of the period and a sale on the last day of the period reported either at net asset value (“NAV”) or market price per share. Dividends and distributions are assumed to be reinvested at NAV for NAV returns or the prices obtained under the Fund’s Dividend Reinvestment Plan for market value returns. Total investment return does not reflect brokerage commissions. A return calculated for a period of less than one year is not annualized.
|
(d)
|
The ratios of total expenses to average net assets applicable to Common Shares do not reflect fees and espenses incurred indirectly by the Fund as a result of its investment in shares of other investment companies. If these fees were included in the expense ratios, expense ratios would increase by 0.03% for the period ended November 30, 2010, 0.05% for the year ended May 31, 2010, 0.08% for the year ended May 31, 2009, and 0.04% for the period ended May 31, 2008.
|
(e)
|
Annualized.
|
(f)
|
Portfolio turnover is not annualized for periods less than a year.
|
(g)
|
Calculated by subtracting the Fund’s total liabilities (not including borrowings) from the Fund’s total assets and dividing by the total borrowings.
|
Fiscal Year Ended
|
Type of Leverage
|
Total Amount Outstanding
|
Asset Coverage Per $1,000
|
||||||
May 31, 2010
|
Total Leverage
|
$
|
69,116,885
|
$ 3,341 | |||||
Committed Facility Agreement
|
$
|
26,865,369
|
|||||||
Reverse Repurchase Agreements
(1)
|
$
|
31,621,245
|
|||||||
TALF Program
(1)
|
$
|
10,630,271
|
|||||||
May 31, 2009
|
Total Leverage
|
$
|
31,084,801
|
$ 4,638 | |||||
Committed Facility Agreement
|
$
|
22,127,551
|
|||||||
Reverse Repurchase Agreements
(1)
|
$
|
8,957,250
|
|||||||
May 31, 2008
|
Total Leverage
|
$
|
76,016,239
|
$ 3,098 | |||||
Reverse Repurchase Agreements
(1)
|
$
|
76,016,239
|
(1)
|
As a result of the Fund having earmarked or segregated cash or liquid securities to collateralize the transactions or otherwise having covered the transactions, in accordance with releases and interpretive letters issued by the Securities and Exchange Commission (the “SEC”), the Fund does not treat its obligations under such transactions as senior securities representing indebtedness for purposes of the 1940 Act.
|
Market Price
|
NAV per Common
Share on Date of Market Price High and Low
(1)
|
Premium/(Discount) on
Date of Market Price
High and Low
(2)
|
|||||||||||||||||
During Quarter Ended
|
High
|
Low
|
High
|
Low
|
High
|
Low
|
|||||||||||||
February 28, 2011
|
$
|
21.00
|
$
|
18.41
|
$
|
19.69
|
$
|
19.04
|
6.65
|
%
|
(3.31
|
)%
|
|||||||
November 30, 2010
|
21.14
|
18.90
|
19.38
|
19.13
|
9.08
|
(1.20
|
)
|
||||||||||||
August 31, 2010
|
19.58
|
17.27
|
18.19
|
17.53
|
7.64
|
(1.48
|
)
|
||||||||||||
May 31, 2010
|
18.97
|
16.02
|
17.97
|
17.68
|
5.56
|
(9.39
|
)
|
||||||||||||
February 28, 2010
|
17.82
|
16.00
|
17.03
|
15.89
|
4.64
|
0.69
|
|||||||||||||
November 30, 2009
|
15.91
|
14.35
|
15.76
|
14.24
|
0.95
|
0.77
|
|||||||||||||
August 31, 2009
|
14.88
|
12.01
|
14.15
|
12.45
|
5.16
|
(3.53
|
)
|
||||||||||||
May 31, 2009
|
11.90
|
7.50
|
12.34
|
10.51
|
(3.57
|
)
|
(28.64
|
)
|
|||||||||||
February 28, 2009
|
11.26
|
8.71
|
12.31
|
11.04
|
(8.53
|
)
|
(21.11
|
)
|
|||||||||||
November 30, 2008
|
16.13
|
8.05
|
16.33
|
11.89
|
(1.22
|
)
|
(32.30
|
)
|
|||||||||||
August 31, 2008
|
17.06
|
14.36
|
17.46
|
16.46
|
(2.29
|
)
|
(12.76
|
)
|
•
|
60% of its total assets in Income Securities rated below-investment grade;
|
|
•
|
50% of its total assets in Common Equity Securities;
|
|
•
|
30% of its total assets in other investment companies, including registered investment companies, private investment funds and/or other pooled investment vehicles;
|
|
•
|
20% of its total assets in non-U.S. dollar-denominated fixed-income securities of corporate and governmental issuers located outside the United States; and
|
|
•
|
10% of its total assets in emerging markets.
|
•
|
Companies engaged in the ownership, construction, financing, management and/or sale of commercial, industrial and/or residential real estate (or that have assets primarily invested in such real estate), including real estate investment trusts (“REITs”); and
|
|
•
|
Companies engaged in energy, natural resources and basic materials businesses and companies engaged in associated businesses. These companies include, but are not limited to, those engaged in businesses such as oil and gas exploration and production, gold and other precious metals, steel and iron ore production, energy services, forest products, chemicals, coal, alternative energy sources and environmental services, as well as related transportation companies and equipment manufacturers.
|
Assumed portfolio total return (net of expenses)
|
(10.00)%
|
(5.00)%
|
0.00%
|
5.00%
|
10.00%
|
Common Share total return
|
(14.75)%
|
(7.77)%
|
(.79)%
|
6.19%
|
13.17%
|
Commercial Mortgage-Backed Securities Risk
. The market for CMBS developed more recently and, in terms of total outstanding principal amount of issues, is relatively small compared to the market for residential single-family mortgage-related securities. CMBS are subject to particular risks, including lack of standardized terms, shorter maturities than residential mortgage loans and payment of all or substantially all of the principal only at maturity rather than regular amortization of principal. In addition, commercial lending generally is viewed as exposing the lender to a greater risk of loss than one-to-four family residential lending. Commercial lending, for example, typically involves larger loans to single borrowers or groups of related borrowers than residential one-to-four family mortgage loans. In addition, the repayment of loans secured by income producing properties typically is dependent upon the successful operation of the related real estate project and the cash flow generated therefrom. Net operating income of an income-producing property can be affected by, among other things: tenant mix, success of tenant businesses, property management decisions, property location and condition, competition from comparable types of properties, changes in laws that increase operating expense or limit rents that may be charged, any need to address environmental contamination at the property, the occurrence of any uninsured casualty at the property, changes in national, regional or local economic conditions and/or specific industry segments, declines in regional or local real estate values, declines in regional or local rental or occupancy rates, increases in interest rates, real estate tax rates and other operating expenses, change in governmental rules, regulations and fiscal policies, including environmental legislation, acts of God, terrorism, social unrest and civil disturbances. Consequently, adverse changes in economic conditions and circumstances are more likely to have an adverse impact on mortgage-related securities secured by loans on commercial properties than on those secured by loans on residential properties. Additional risks may be presented by the type and use of a particular commercial property. Special risks are presented by hospitals, nursing homes, hospitality properties and certain other property types. Commercial property values and net operating income are subject to volatility, which may result in net operating income becoming insufficient to cover debt service on the related mortgage loan. The exercise of remedies and successful realization of liquidation proceeds relating to CMBS may be highly dependent on the performance of the servicer or special servicer. There may be a limited number of special servicers available, particularly those that do not have conflicts of interest.
|
|
Residential Mortgage-Backed Securities Risk
. Credit-related risk on RMBS arises from losses due to delinquencies and defaults by the borrowers in payments on the underlying mortgage loans and breaches by originators and servicers of their obligations under the underlying documentation pursuant to which the RMBS are issued. The rate of delinquencies and defaults on residential mortgage loans and the aggregate amount of the resulting losses will be affected by a number of factors, including general economic conditions, particularly those in the area where the related mortgaged property is located, the level of the borrower’s equity in the mortgaged property and the individual financial circumstances of the borrower. If a residential mortgage loan is in default, foreclosure on the related residential property may be a lengthy and difficult process involving significant legal and other expenses. The net proceeds obtained by the holder on a residential mortgage loan following the foreclosure on the related property may be less than the total amount that remains due on the loan. The prospect of incurring a loss upon the foreclosure of the related property may lead the holder of the residential mortgage loan to restructure the residential mortgage loan or otherwise delay the foreclosure process.
|
|
Sub-Prime Mortgage Market Risk.
The residential mortgage market in the United States has experienced difficulties that may adversely affect the performance and market value of certain mortgages and mortgage-related securities. Delinquencies and losses on residential mortgage loans (especially sub-prime and second-line mortgage loans) generally have increased recently and may continue to increase, and a decline in or flattening of housing values (as has recently been experienced and may continue to be experienced in many housing markets) may exacerbate such delinquencies and losses. Borrowers with adjustable rate mortgage loans are more sensitive
|
to changes in interest rates, which affect their monthly mortgage payments, and may be unable to secure replacement mortgages at comparably low interest rates. Also, a number of residential mortgage loan originators have recently experienced serious financial difficulties or bankruptcy. Largely due to the foregoing, reduced investor demand for mortgage loans and mortgage-related securities and increased investor yield requirements have caused limited liquidity in the secondary market for mortgage-related securities, which can adversely affect the market value of mortgage-related securities. It is possible that such limited liquidity in such secondary markets could continue or worsen. If the economy of the United States deteriorates further, the incidence of mortgage foreclosures, especially sub-prime mortgages, may increase, which may adversely affect the value of any mortgage-backed securities owned by the Fund.
|
|
The significance of the mortgage crisis and loan defaults in residential mortgage loan sectors led to the enactment in July 2008 of the Housing and Economic Recovery Act of 2008, a wide-ranging housing rescue bill that offers up to $300 billion in assistance to troubled homeowners and emergency assistance to Freddie Mac and Fannie Mae, companies that operate under federal charter and play a vital role in providing financing for the housing markets. The above-mentioned housing bill could potentially have a material adverse effect on the Funds’ investment as the bill, among other things, (1) allows approximately 400,000 homeowners to refinance into affordable, government-backed loans through a program run by the Federal Housing Authority (“FHA”), a division of the U.S. Housing and Urban Development (“HUD”) and (2) provides approximately $180 million for “pre-foreclosure” housing counseling and legal services for distressed borrowers. In addition, the mortgage crisis has led public advocacy groups to demand, and governmental officials to propose and consider, a variety of other “bailout” and “rescue” plans that could potentially have a material adverse effect on the Funds’ investments. Certain borrowers may also seek relief through the “FHA Secure” refinancing option that gives homeowners with non-FHA adjustable rate mortgages, current or delinquent and regardless of reset status, the ability to refinance into a FHA-insured mortgage. The Helping Families Save Their Homes Act of 2009, which was enacted on May 20, 2009, provides a safe harbor for servicers entering into “qualified loss mitigation plans” with respect to residential mortgages originated before the act was enacted. By protecting servicers from certain liabilities, this safe harbor may encourage loan modifications and reduce the likelihood that investors in securitizations will be paid on a timely basis or will be paid in full. In addition to the above, a variety of other plans and proposals from federal and state regulatory agencies have been presented. Law, legislation or other government regulation, promulgated in furtherance of a “bailout” or “rescue” plan to address the crisis and distress in the residential mortgage loan sector, may result in a reduction of available transactional opportunities for the Fund, or an increase in the cost associated with such transactions. Any such law, legislation or regulation may adversely affect the market value of non-agency RMBS.
|
|
A number of originators and servicers of residential and commercial mortgage loans, including some of the largest originators and servicers in the residential and commercial mortgage loan market, have experienced serious financial difficulties, including some that are now subject to federal insolvency proceedings. Such difficulties may affect the performance of non-agency RMBS and CMBS backed by mortgage loans. There can be no assurance that originators and servicers of mortgage loans will not continue to experience serious financial difficulties or experience such difficulties in the future, including becoming subject to bankruptcy or insolvency proceedings, or that underwriting procedures and policies and protections against fraud will be sufficient in the future to prevent such financial difficulties or significant levels of default or delinquency on mortgage loans.
|
•
|
declines in the value of real estate;
|
|
•
|
general and local economic conditions;
|
|
•
|
unavailability of mortgage funds;
|
|
•
|
overbuilding;
|
|
•
|
extended vacancies of properties;
|
|
•
|
increased competition;
|
|
•
|
increases in property taxes and operating expenses;
|
|
•
|
changes in zoning laws;
|
|
•
|
losses due to costs of cleaning up environmental problems and contamination;
|
|
•
|
limitations on, or unavailability of, insurance on economic terms;
|
|
•
|
liability to third parties for damages resulting from environmental problems;
|
|
•
|
casualty or condemnation losses;
|
|
•
|
limitations on rents;
|
|
•
|
changes in neighborhood values and the appeal of properties to tenants;
|
|
•
|
changes in valuation due to the impact of terrorist incidents on a particular property or area, or on a segment of the economy; and
|
•
|
changes in interest rates.
|
Supply and Demand Risk
. A decrease in the production of a physical commodity or a decrease in the volume of such commodity available for transportation, mining, processing, storage or distribution may adversely impact the financial performance of an energy, natural resources, basic materials or an associated company that devotes a portion of its business to that commodity. Production declines and volume decreases could be caused by various factors, including catastrophic events affecting production, depletion of resources, labor difficulties, environmental proceedings, increased regulations, equipment failures and unexpected maintenance problems, import supply disruption, governmental expropriation, political upheaval or conflicts or increased competition from alternative energy sources or commodity prices. Alternatively, a sustained decline in demand for such commodities could also adversely affect the financial performance of energy, natural resources, basic materials or associated companies. Factors that could lead to a decline in demand include economic recession or other adverse economic conditions, higher taxes on commodities or increased governmental regulations, increases in fuel economy, consumer shifts to the use of alternative commodities or fuel sources, changes in commodity prices, or weather.
|
|
Depletion and Exploration Risk
. Many energy, natural resources, basic materials and associated companies are engaged in the production of one or more physical commodities or are engaged in transporting, storing, distributing and processing these items on behalf of shippers. To maintain or grow their revenues, these companies or their customers need to maintain or expand their reserves through exploration of new sources of supply, through the development of existing sources, through acquisitions or through long-term contracts to acquire reserves. The financial performance of energy, natural resources, basic materials and associated companies may be adversely affected if they, or the companies to whom they provide the service, are unable to cost-effectively acquire additional reserves sufficient to replace the natural decline.
|
|
Operational and Geological Risk
. Energy, natural resources, basic materials companies and associated companies are subject to specific operational and geological risks in addition to normal business and management risks. Some examples of operational risks include mine rock falls, underground explosions and pit wall failures. Geological risk would include faulting of the ore body and misinterpretation of geotechnical data.
|
|
Regulatory Risk
. Energy, natural resources, basic materials and associated companies are subject to significant federal, state and local government regulation in virtually every aspect of their operations, including how facilities are constructed, maintained and operated, environmental and safety controls, and the prices they may charge for the products and services they provide. Various governmental authorities have the power to enforce compliance with these regulations and the permits issued under them, and violators are subject to administrative, civil and criminal penalties, including civil fines, injunctions or both. Stricter laws, regulations or enforcement policies could be enacted in the future which would likely increase compliance costs and may adversely affect the operations and financial performance of energy, natural resources and basic materials companies.
|
|
Commodity Pricing Risk
. The operations and financial performance of energy, natural resources and basic materials companies may be directly affected by commodity prices, especially those energy, natural resources, basic materials and associated companies that own the underlying commodity. Commodity prices fluctuate for several reasons, including changes in market and economic conditions, the impact of weather on demand, levels of domestic production and imported commodities, energy conservation, domestic and foreign governmental regulation and taxation, the availability of local, intrastate and interstate transportation systems, governmental expropriation and political upheaval and conflicts. Volatility of commodity prices, which may lead to a reduction in production or supply, may also negatively impact the performance of energy, natural resources, basic materials and associated companies that are solely involved in the transportation, processing, storing, distribution or marketing of commodities. Volatility of commodity prices may also make it more difficult for energy, natural resources, basic materials and associated companies to
|
raise capital to the extent the market perceives that their performance may be directly or indirectly tied to commodity prices.
|
|
Precious Metals Pricing Risk
.
The Fund may invest in companies that have a material exposure to precious metals, such as gold, silver and platinum and precious metals related instruments and securities. The price of precious metals can fluctuate widely and is affected by numerous factors beyond the Fund’s control including: global or regional political, economic or financial events and situations; investors’ expectations with respect to the future rates of inflation and movements in world equity, financial and property markets; global supply and demand for specific precious metals, which is influenced by such factors as mine production and net forward selling activities by precious metals producers, central bank purchases and sales, jewelry demand and the supply of recycled jewelry, net investment demand and industrial demand, net of recycling; interest rates and currency exchange rates, particularly the strength of and confidence in the U.S. dollar; and investment and trading activities of hedge funds, commodity funds and other speculators. The Fund does not intend to hold physical precious metals
|
Cyclicality of Supply and Demand for Transportation Assets
. The transportation asset leasing and sales industry has periodically experienced cycles of oversupply and undersupply of railcars, aircraft and ships.The oversupply of a specific type of transportation asset in the market is likely to depress the values of that type of transportation asset. The supply and demand of transportation assets is affected by various cyclical factors that are not under the Fund’s control, including: (i) passenger and cargo demand; (ii) commercial demand for certain types of transportation assets, (iii) fuel costs and general economic conditions affecting lessees’ operations; (iv) government regulation, including operating restrictions; (v) interest rates; (vi) the availability of credit; (vii) manufacturer production level; (viii) retirement and obsolescence of certain classes of transportation assets; (ix) re-introduction into service of transportation assets previously in storage; and (x) traffic control infrastructure constraints.
|
|
Risk of Decline in Value of Transportation Assets and Rental Values
. In addition to factors linked to the railway, aviation and shipping industries, other factors that may affect the value of transportation assets, and thus of the Personal Property Asset Companies in which the Fund invests, include: (i) manufacturers merging or exiting the industry or ceasing to produce specific types of transportation asset; (ii) the particular maintenance and operating history of the transportation assets; (iii) the number of operators using that type of transportation asset; (iv) whether the railcar, aircraft or ship is subject to a lease; (v) any regulatory and legal requirements that must be satisfied before the transportation asset can be operated, sold or re-leased, (vi) compatibility of parts and layout of the transportation asset among operators of particular asset; and (vii) any renegotiation of a lease on less favorable terms.
|
|
Technological Risks
. The availability for sale or lease of new, technologically advanced transportation assets and the imposition of stringent noise, emissions or environmental regulations may make certain types of transportation assets less desirable in the marketplace and therefore may adversely affect the owners’ ability to lease or sell such transportation assets. Consequently, the owner will have to lease or sell many of the transportation assets close to the end of their useful economic life. The owners’ ability to manage these technological risks by modifying or selling transportation assets will likely be limited.
|
|
Risks Relating to Leases of Transportation Assets
. Owner/lessors of transportation assets will typically require lessees of assets to maintain customary and appropriate insurance. There can be no assurance that the lessees’ insurance will cover all types of claims that may be asserted against the owner, which could adversely affect the value of the Fund’s investment in the Personal Property Asset Company owning such transportation asset. Personal Property Asset Companies will be subject to credit risk of the lessees’ ability to
|
the provisions of the lease of the transportation asset. The Personal Property Asset Company will need to re-lease or sell transportation assets as the current leases expire in order to continue to generate revenues. The ability to re-lease or sell transportation assets will depend on general market and competitive conditions. Some of the competitors of the Personal Property Asset Company may have greater access to financial resources and may have greater operational flexibility. If the Personal Property Asset Company is not able to re-lease a transportation asset, it may need to attempt to sell the aircraft to provide funds for its investors, including the Fund.
|
Valuation of Collectible Assets
. The market for collectible assets as a financial investment is in the early stages of development. Collectible assets are typically bought and sold through auction houses, and estimates of prices of collectible assets at auction are imprecise. Accordingly, collectible assets are difficult to value.
|
|
Liquidity of Collectible Assets
. There are relatively few auction houses in comparison to brokers and dealers of traditional financial assets. The ability to sell collectible assets is dependent on the demand for particular classes of collectible assets, which demand has been volatile and erratic in the past. There is no assurance that collectible assets can be sold within a particular timeframe or at the price at which such collectible assets are valued, which may impair the ability of the Fund to realize full value of Personal Property Asset Companies in the event of the need to liquidate such assets.
|
|
Authenticity of Collectible Assets
. The value of collectible assets often depends on its rarity or scarcity, or of its attribution as the product of a particular artisan. Collectible Assets are subject to forgery and to the inabilities to assess the authenticity of the collectible asset, which may significantly impair the value of the collectible asset.
|
|
High Transaction and Related Costs
. Collectible assets are typically bought and sold through auction houses, which typically charge commissions to the purchaser and to the seller which may exceed 20% of the sale price of the collectible asset. In addition, holding collectible assets entails storage and insurance costs, which may be substantial.
|
Title of Class
|
Amount Authorized
|
Amount Held by the Fund or for its Account
|
Amount Outstanding
|
|||
Common shares of beneficial interest, par value $0.01 per share
|
Unlimited
|
0
|
9,268,340
|
•
|
the merger or consolidation of the Fund or any subsidiary of the Fund with or into any Principal Shareholder;
|
|
•
|
the issuance of any securities of the Fund to any Principal Shareholder for cash (other than pursuant of any automatic dividend reinvestment plan);
|
|
•
|
the sale, lease or exchange of all or any substantial part of the assets of the Fund to any Principal Shareholder, except assets having an aggregate fair market value of less than $1,000,000, aggregating for the purpose of such computation all assets sold, leased or exchanged in any series of similar transactions within a twelve-month period; or
|
|
•
|
the sale, lease or exchange to the Fund or any subsidiary of the Fund, in exchange for securities of the Fund, of any assets of any Principal Shareholder, except assets having an aggregate fair market value of less than $1,000,000, aggregating for purposes of such computation all assets sold, leased or exchanged in any series of similar transactions within a twelve-month period.
|
(i)
|
The Fund must derive in each taxable year at least 90% of its gross income from the following sources: (a) dividends, interest (including tax-exempt interest), payments with respect to certain securities loans, and gains from the sale or other disposition of stock, securities or foreign currencies, or other income (including gain from options, futures and forward contracts) derived with respect to its business of investing in such stock, securities or foreign currencies; and (b) interests in “qualified publicly traded partnerships” (as defined in the Code). Generally, a qualified publicly traded partnership includes a partnership the interests of which are traded on an established securities market or readily tradable on a secondary market (or the substantial equivalent thereof).
|
|
(ii)
|
The Fund must diversify its holdings so that, at the end of each quarter of each taxable year (a) at least 50% of the market value of the Fund’s total assets is represented by cash and cash items, U.S. government securities, the securities of other RICs and other securities, with such other securities limited, in respect of any one issuer, to an amount not greater than 5% of the value of the Fund’s total assets and not more than 10% of the outstanding voting securities of such issuer and (b) not more than 25% of the market value of the Fund’s total assets is invested in the securities (other than U.S. government securities and the securities of other RICs) of (I) any one issuer, (II) any two or more issuers that the Fund controls and that are determined to be engaged in the same business or similar or related trades or businesses or (III) any one or more “qualified publicly traded partnerships” (as defined in the Code).
|
|
(iii)
|
The Fund must distribute in each taxable year at least 90% of its investment company taxable income (generally, its ordinary income and the excess of any net short-term capital gain over net long-term capital loss).
|
•
|
the names of any agents, underwriters or dealers
|
|
•
|
any sales loads or other items constituting underwriters’ compensation;
|
|
•
|
any discounts, commissions, or fees allowed or paid to dealers or agents;
|
|
•
|
the public offering or purchase price of the offered Common Shares and the net proceeds the Fund will receive from the sale; and
|
|
•
|
any securities exchange on which the offered Common Shares may be listed.
|
•
|
An overallotment in connection with an offering creates a short position in the common stock for the underwriter’s own account.
|
|
•
|
An underwriter may place a stabilizing bid to purchase the Common Shares for the purpose of pegging, fixing, or maintaining the price of the Common Shares.
|
|
•
|
Underwriters may engage in syndicate covering transactions to cover overallotments or to stabilize the price of the Common Shares by bidding for, and purchasing, the Common Shares or any other securities in the open market in order to reduce a short position created in connection with the offering.
|
|
•
|
The managing underwriter may impose a penalty bid on a syndicate member to reclaim a selling concession in connection with an offering when the Common Shares originally sold by the syndicate member is purchased in syndicate covering transactions or otherwise.
|
Page
|
|
The Fund
|
B-2
|
Investment Objective and Policies
|
B-2
|
Investment Restrictions
|
B-14
|
Management of the Fund
|
B-16
|
Portfolio Transactions
|
B-27
|
U.S. Federal Income Tax Considerations
|
B-28
|
General Information
|
B-35
|
Financial Statements and Report of Independent Registered Public Accounting Firm
|
B-36
|
Appendix A: Description of Securities Ratings of Investments
|
A-1
|
Appendix B: Proxy Voting Procedures
|
BB-1
|
Per Share
|
Total
(1)
|
|
Public offering price
|
$ |
$
|
Underwriting discount
|
$ |
$
|
Proceeds, before expenses, to the Fund
(2)
|
$ |
$
|
(1)
|
[The Fund has granted the underwriters an option to purchase up to an additional common shares at the public offering price, less the sales load, within days of the date of this prospectus solely to cover overallotments, if any. If such option is exercised in full, the public offering price, sales load, estimated offering expenses and proceeds, before expenses, to the Trust will be $ , $ and $ , respectively.
See “Underwriting.”]
|
(2)
|
Offering expenses payable by the Fund will be deducted from the Proceeds, before expenses, to the Fund.
Total offering expenses (other than sales load) are estimated to be $ , which will be paid by the Fund.
|
TABLE OF CONTENTS
|
|
Page
|
|
Prospectus Supplement
|
|
Prospectus Supplement Summary
|
S-4
|
Summary of Fund Expenses
|
S-6
|
Capitalization
|
S-8
|
Use of Proceeds
|
S-9
|
Recent Developments
|
S-9
|
Underwriters
|
S-10
|
Legal Matters
|
S-10
|
Independent Registered Public Accounting Firm
|
S-10
|
Additional Information
|
S-10
|
Prospectus
|
|
Prospectus Summary
|
1
|
Summary of Fund Expenses
|
30
|
Financial Highlights
|
32
|
Senior Securities and Other Financial Leverage
|
33
|
The Fund
|
34
|
Use of Proceeds
|
34
|
Market and Net Asset Value Information
|
34
|
Investment Objective and Policies
|
35
|
Use of Financial Leverage
|
47
|
Risks
|
51
|
Management of the Fund
|
70
|
Net Asset Value
|
72
|
Distributions
|
73
|
Automatic Dividend Reinvestment Plan
|
74
|
Description of Capital Structure
|
74
|
Anti-Takeover and Other Provisions in the Fund’s Governing Documents
|
76
|
Closed-End Fund Structure
|
77
|
Repurchase of Common Shares
|
78
|
U.S. Federal Income Tax Considerations
|
78
|
Plan of Distribution
|
82
|
Custodian, Administrator, Transfer Agent and Dividend Disbursing Agent
|
84
|
Legal Matters
|
84
|
Independent Registered Public Accounting Firm
|
84
|
Additional Information
|
84
|
Privacy Principles of the Fund
|
85
|
Table of Contents of the Statement of Additional Information
|
86
|
The Fund
|
Guggenheim Strategic Opportunities Fund (the “Fund”) is a diversified, closed-end management investment company that commenced operations on July 26, 2007. The Fund’s objective is to maximize total return through a combination of current income and capital appreciation.
The Fund’s common shares of beneficial interest, par value $0.01 per share, are called “Common Shares” and the holders of Common Shares are called “Common Shareholders” throughout this Prospectus Supplement and the accompanying Prospectus.
|
Management of the Fund
|
Guggenheim Funds Investment Advisors, LLC (the “Investment Adviser”) serves as the Fund’s investment adviser and is responsible for the management of the Fund. Guggenheim Partners Asset Management, Inc. (the “Sub-Adviser”) is responsible for the management of the Fund’s portfolio of securities. Each of the Investment Adviser and the Sub-Adviser are wholly-owned subsidiaries of Guggenheim Partners, LLC (“Guggenheim Partners”).
|
Listing and Symbol
|
The Fund’s currently outstanding Common Shares are and the Common Shares offered by this Prospectus Supplement and the accompanying Prospectus will be, subject to notice of issuance, listed on the New York Stock Exchange (the “NYSE”) under the symbol “GOF.” As of
, the last reported sale price for the Fund’s Common
Shares was $
. The net asset value (“NAV”) per share of the
Fund’s Common Shares at the close of business on , was $ .
|
Distributions
|
The Fund has paid distributions to Common Shareholders every fiscal quarter since inception. Payment of future distributions is subject to approval by the Fund’s Board of Trustees, as well as meeting the covenants of any outstanding borrowings and the asset coverage requirements of the Investment Company Act of 1940, as amended (the “1940 Act”). The Fund’s next regularly scheduled quarterly
distribution will be for the quarter ending
and, if approved by
the Board of Trustees, is expected to be paid to common shareholders
on or about
. The distributions the Fund has paid since inception
are as follows:
|
Payment Date
|
Distribution per Common Share
|
The Offering
|
Common Shares Offered by the Fund
|
Common Shares Outstanding after the Offering
|
Shareholder Transaction Expenses
|
|
Sales load (as a percentage of offering price)
|
%
|
Offering expenses borne by the Fund (as a percentage of offering price)
|
%
(1)
|
Automatic Dividend Reinvestment Plan fees
(2)
|
None
|
Percentage of Net Assets
|
|
Annual Expenses
|
Attributable to Common Shares
(3)
|
Management fees
(4)
|
%
|
Interest expense
(5)
|
%
|
Acquired fund fees and expenses
|
%
|
Other expenses
(6)
|
%
|
Total annual expenses
|
%
|
(1) |
Offering expenses payable by the Fund will be deducted from the Proceeds, before expenses, to the Fund. Total offering expenses (other than sales load) are estimated to be $ , which will be paid by the Fund.
|
(2) |
You will pay brokerage charges if you direct the Plan Agent to sell your Common Shares held in a dividend reinvestment account. See “Automatic Dividend Reinvestment Plan” in the accompanying Prospectus.
|
(3) |
Based upon net assets
applicable
to common shares as of .
|
(4) |
The Fund pays an investment advisory fee to the Investment Adviser in an annual amount equal to 1.00% of the Fund’s average daily Managed Assets. Common Shareholders bear the portion of the investment advisory fee attributable to the assets purchased with the proceeds of Financial Leverage, which means that Common Shareholders effectively bear the entire advisory fee.
|
(5) |
Includes interest payments on borrowed funds and interest expense on reverse repurchase agreements. Interest payments on borrowed funds is based upon the Fund’s outstanding Financial Leverage as of , which included Borrowings under the Fund’s committed facility agreement in an amount equal to % of the Fund’s Managed Assets, at an annual interest rate cost to the Fund of % and Borrowings under the TALF program in an amount equal to % of the Fund’s Managed Assets, at an annual interest rate cost to the Fund of %. The actual amount of interest payments by the Fund will vary over time in accordance with the amount of Borrowings and variations in market interest rates. Interest expenses on reverse repurchase agreements assumes the use of leverage in the form of reverse repurchase agreements representing % of the Fund’s Managed Assets at an annual interest rate cost to the Fund of %. The actual amount of interest expense on reverse repurchase agreements borne by the Fund will vary over time in accordance with the level of the Fund’s use of reverse repurchase agreements and variations in market interest rates.
|
(6) |
Other expenses are estimated based upon those incurred during the fiscal year ended .
|
1 Year
|
3 Years
|
5 Years
|
10 Years
|
|
Total Expenses Incurred
(1)
|
$ |
$
|
$ |
$
|
* |
The Example should not be considered a representation of future expenses or returns. Actual expenses may be higher or lower than those assumed. Moreover, the Fund’s actual rate of return may be higher or lower than the hypothetical 5% return shown in the Example.
The Example assumes that all dividends and distributions are reinvested at net asset value.
|
(i)
|
on a historical basis;
|
(ii)
|
on an as adjusted basis to reflect the issuance of an aggregate of Common Shares pursuant to the Fund’s
Automatic Dividend Reinvestment Plan, and the application of the net proceeds from such issuances of
Common Shares; and
|
(iii)
|
on an as further adjusted basis to reflect the assumed sale of of Common Shares at a price of $ per
share in an offering under this Prospectus Supplement and the accompanying Prospectus less the aggregate
underwriting discount of $ and estimated offering expenses payable by the Fund of $ (assuming
no exercise of the underwriters’ over-allotment option).
|
As Further
|
||||
As Adjusted
|
Adjusted
|
|||
Actual
|
(unaudited)
|
(unaudited)
|
||
Short-Term Debt:
|
||||
Borrowings
|
$ |
$
|
||
Common Shareholder’s Equity:
|
||||
Common shares of beneficial interest, par value $0.01
|
||||
per share; unlimited shares authorized, shares
|
|
|||
issued and outstanding (actual),
shares issued
|
||||
and outstanding (as adjusted), and
shares issued
|
||||
and outstanding (as further adjusted)
|
||||
Additional paid-in capital
|
||||
Net unrealized appreciation on investments, net of tax
|
||||
Accumulated net realized gain on investments, net of tax
|
||||
Accumulated net investment loss, net of tax
|
||||
Net assets
|
Page
|
|
The Fund
|
B-2
|
Investment Objective and Policies
|
B-2
|
Investment Restrictions
|
B-14
|
Management of the Fund
|
B-16
|
Portfolio Transactions
|
B-27
|
U.S. Federal Income Tax Considerations
|
B-28
|
General Information
|
B-35
|
Financial Statements and Report of Independent Registered Public Accounting Firm
|
B-36
|
Appendix A: Description of Securities Ratings of Investments
|
A-1
|
Appendix B: Proxy Voting Procedures
|
BB-1
|
Number of
|
|||||
Term of
|
Portfolios
|
||||
Office
(2)
and
|
Principal
|
in Fund
|
Other Directorships
|
||
Name,
|
Position Held
|
Length of
|
Occupation
|
Complex
(3)
|
Held by Trustee
|
Business Address
(1)
|
with the
|
Time
|
During Past Five
|
Overseen
|
During the Past
|
and Age
|
Fund
|
Served
|
Years
|
by Trustee
|
Five Years
|
Ronald A. Nyberg
|
Trustee
|
Trustee since
|
Partner of Nyberg &
|
54
|
None.
|
Year of Birth: 1953
|
2007
|
Cassioppi, LLC, a law
|
|||
firm specializing in
|
|||||
corporate law, estate
|
|||||
planning and business
|
|||||
transactions (2000-
|
|||||
present). Formerly,
|
|||||
Executive Vice
|
|||||
President, General
|
|||||
Counsel and Corporate
|
|||||
Secretary of Van
|
|||||
Kampen Investments
|
|||||
(1982-1999).
|
|||||
Ronald E. Toupin Jr.
|
Trustee
|
Trustee since
|
Portfolio Consultant (2010-
|
53
|
None.
|
Year of birth: 1958
|
2007
|
present). Formerly Vice
|
|||
President, Manager and
|
|||||
Portfolio Manager of Nuveen
|
|||||
Asset Management (1998-
|
|||||
1999), Vice President
|
|||||
of Nuveen Investment
|
|||||
Advisory Corporation
|
|||||
(1992-1999), Vice
|
|||||
President and Manager
|
|||||
of Nuveen Unit Investment
|
|||||
Trusts (1991-1999), and
|
|||||
Assistant Vice President
|
|||||
and Portfolio Manager
|
|||||
of Nuveen Unit Trusts
|
|||||
(1988-1999), each of
|
|||||
John Nuveen & Company,
|
|||||
Inc. (asset manager)
|
|||||
(1982-1999).
|
|||||
INTERESTED TRUSTEE:
|
|||||
Kevin M. Robinson*
|
Trustee;
|
Trustee since
|
Senior Managing Director
|
2
|
None.
|
Year of Birth: 1959
|
Chief
|
2009; Chief
|
and General Counsel of
|
||
Executive
|
Executive
|
Guggenheim Funds Investment
|
|||
Officer
|
Officer since
|
Advisors, LLC and Guggenheim
|
|||
and Chief
|
2010; Chief
|
Funds Services Group, Inc.
|
|||
Legal
|
Legal Officer
|
(2007-present). Formerly,
|
|||
Officer
|
since 2008
|
Associate General Counsel
|
|||
and Assistant Corporate
|
|||||
Secretary of NYSE Euronext,
|
|||||
Inc. (2000-2007).
|
*
|
Mr. Robinson is an interested person of the Fund because of his position as an officer of the Investment Adviser and certain
|
its affiliates.
|
|
(1)
|
The business address of each Trustee of the Fund is 2455 Corporate West Drive, Lisle, Illinois 60532.
|
(2)
|
Each Trustee is expected to serve a two year term concurrent with the class of Trustees for which he serves.
|
● |
Messrs. Barnes, Friedrich and Robinson are the Class I Trustees. It is currently anticipated that the Class I Trustees will next stand for election at the Fund’s annual meeting of Shareholders for the Fund’s fiscal year ending May 31, 2012.
|
● |
Messrs. Karn, Nyberg and Toupin are the Class II Trustees. It is currently anticipated that the Class II Trustees will next stand for election at the Fund’s annual meeting of Shareholders for the Fund’s fiscal year ending May 31, 2011.
|
(3)
|
As of the date of this SAI, the “Fund Complex” consists of 14 closed-end funds, including the Fund, and 42 exchange-
|
funds. The Fund Complex is overseen by multiple boards of trustees.
|
Term of Office (2) and | |||
Name, Business
|
Length of Time
|
Principal Occupation
|
|
Address
(1)
and Age
|
Position
|
Served
|
During the Past Five Years
|
John Sullivan
|
Chief Financial Officer,
|
Officer since 2011
|
Senior Managing Director of Guggenheim
|
Year of birth: 1955
|
Chief Accounting Officer
|
Funds Investment Advisors, LLC and
|
|
and Treasurer
|
Guggenheim Funds Distributors, Inc.
|
||
(2010- present). Chief Financial Officer,
|
|||
Chief Accounting Officer and Treasurer of
|
|||
certain funds in the Fund Complex.
|
|||
Formerly, Chief Compliance Officer, Van
|
|||
Kampen Funds (2004–2010). Head of
|
|||
Fund Accounting, Morgan Stanley
|
|||
Investment Management (2002–2004).
|
|||
Chief Financial Officer, Treasurer, Van
|
|||
Kampen Funds (1996-2004).
|
|||
Mark E. Mathiasen
|
Secretary
|
Officer since 2008
|
Vice President, Assistant General
|
Year of Birth: 1978
|
Counsel of Guggenheim Funds Services
|
||
Group Inc. (2007- present). Secretary of
|
|||
certain funds in the Fund Complex.
|
|||
Previously, Law Clerk, Idaho State Courts
|
|||
(2003-2006).
|
|||
Bruce Saxon
|
Chief Compliance
|
Officer since 2006
|
Vice President, Fund Compliance
|
Year of Birth: 1957
|
Officer
|
Officer of Guggenheim Funds Services
|
|
Group, Inc. (2006-present). Formerly,
|
|||
Chief Compliance Officer/Assistant
|
|||
Secretary of Harris Investment
|
|||
Management, Inc. (2003-2006). Director-
|
|||
Compliance of Harrisdirect LLC
|
|||
(1999-2003).
|
|||
James Howley
|
Assistant Treasurer
|
Officer since 2007
|
Vice President, Fund Administration
|
Year of birth: 1972
|
(2004-present) of Guggenheim Funds
|
||
Investment Advisors, LLC and
|
|||
Guggenheim Funds Distributors, Inc.;
|
|||
Assistant Treasurer of certain funds in the
|
|||
Fund Complex. Previously, Manager,
|
|||
Mutual Fund Administration of Van
|
|||
Kampen Investments, Inc. (2000-2004).
|
Term of Office
(2)
and
|
|||
Name, Business
|
Length of Time
|
Principal Occupation
|
|
Address
(1)
and Age
|
Position
|
Served
|
During the Past Five Years
|
Mark J. Furjanic
|
Assistant Treasurer
|
Officer since 2008
|
Vice President, Fund Administration-
|
Year of birth: 1959
|
Tax (2005-present) of Guggenheim Funds
|
||
Investment Advisors, LLC and Guggenheim
|
|||
Funds Distributors, Inc.; Assistant
|
|||
Treasurer of certain funds in the Fund
|
|||
Complex. Formerly, Senior Manager
|
|||
(1999-2005) for Ernst & Young LLP.
|
|||
Donald P. Swade
|
Assistant Treasurer
|
Officer since 2008
|
Vice President, Fund Administration
|
Year of birth: 1972
|
(2006-present) of Guggenheim Funds
|
||
Investment Advisors, LLC and
|
|||
Guggenheim Funds Distributors, Inc.;
|
|||
Assistant Treasurer of certain funds in the
|
|||
Fund Complex. Formerly, Manager-
|
|||
Mutual Fund Financial Administration
|
|||
(2003-2006) for Morgan Stanley/Van
|
|||
Kampen Investments.
|
|||
Elizabeth H. Hudson
|
Assistant Secretary
|
Officer since 2009
|
Assistant General Counsel of Guggenheim
|
Year of birth: 1980
|
Funds Services Group, Inc. (2009-
|
||
present). Secretary of certain funds in the
|
|||
Fund Complex. Previously, associate at
|
|||
Bell, Boyd & Lloyd LLP (nka K&L Gates
|
|||
LLP) (2007-2008).
|
(1)
|
The business address of each officer of the Fund is 2455 Corporate West Drive, Lisle, Illinois 60532.
|
(2)
|
Each officer serves at the pleasure of the Board and until his or her successor is appointed and qualified or until his or her resignation or removal.
|
Aggregate
|
Pension or Retirement
|
Total Compensation
|
||
Estimated
|
Benefits Accrued
|
Estimated Annual
|
from the Fund and
|
|
Compensation
|
as Part of
|
Benefits Upon
|
Fund Complex
(3)
|
|
Name
(1)
|
from the Fund
|
Fund Expenses
(2)
|
Retirement
(2)
|
Paid to Trustee
|
Independent Trustees:
|
||||
Randall C. Barnes
|
$25,000
|
None
|
None
|
$275,000
|
Roman Friedrich III
|
$1,000
|
None
|
None
|
$43,500
|
Robert B. Karn III
|
$1,000
|
None
|
None
|
$51,000
|
Ronald A. Nyberg
|
$25,000
|
None
|
None
|
$380,500
|
Ronald E. Toupin, Jr.
|
$28,000
|
None
|
None
|
$325,000
|
(1)
|
Trustees not entitled to compensation are not included in the table.
|
(2)
|
The Fund does not accrue or pay retirement or pension benefits to Trustees as of the date of this SAI.
|
(3)
|
As of the date of this SAI, the “Fund Complex” consists of 14 closed-end funds, including the Fund, and 42 exchange- traded funds. The Fund Complex is overseen by multiple boards of trustees.
|
Aggregate Dollar Range of Equity
|
||
Securities in All Registered Investment
|
||
Dollar Range of
|
Companies Overseen by Trustee in
|
|
Name
|
Equity Securities in the Fund
|
Fund Complex
(1)s
|
Independent Trustees:
|
||
Randall C. Barnes
|
$50,001-$100,000
|
over $100,000
|
Roman Friedrich III
|
None
|
$10,001-$50,000
|
Robert B. Karn III
|
None
|
$10,001-$50,000
|
Ronald A. Nyberg
|
$10,001-$50,000
|
over $100,000
|
Ronald E. Toupin, Jr.
|
None
|
None
|
Interested Trustee:
|
||
Kevin M. Robinson
|
None
|
None
|
(1)
|
As of the date of this SAI, the “Fund Complex” consists of 14 closed-end funds, including the Fund, and 42 exchange- traded funds. The Fund Complex is overseen by multiple boards of trustees.
|
Number of
|
||||
Accounts
|
Assets
|
|||
Subject to a
|
Subject to a
|
|||
Number of
|
Assets of
|
Performance
|
Performance
|
|
Accounts
|
Accounts
|
Fee
|
Fee
|
|
Registered Investment Companies
|
0
|
$0
|
0
|
$0
|
Pooled Investment Vehicles Other Than
|
||||
Registered Investment Companies
|
3
|
$1.67 billion
|
2
|
$1.62 billion
|
Other Accounts
|
9
|
$35.82 billion
|
0
|
$0
|
Number of
|
||||
Accounts
|
Assets
|
|||
Subject to a
|
Subject to a
|
|||
Number of
|
Assets of
|
Performance
|
Performance
|
|
Accounts
|
Accounts
|
Fee
|
Fee
|
|
Registered Investment Companies
|
0
|
$0
|
0
|
$0
|
Pooled Investment Vehicles Other Than
|
||||
Registered Investment Companies
|
2
|
$1.62 billion
|
2
|
$1.62 billion
|
Other Accounts
|
15
|
$7.96 billion
|
0
|
$0
|
Fiscal Year Ended May 31,
|
All Brokers
|
Affiliated Brokers
|
2010
|
$87,239
|
$0
|
2009
|
$189,357
|
$0
|
2008
(1)
|
$316,826
|
$0
|
·
|
Likelihood of payment capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation;
|
·
|
Nature of and provisions of the obligation;
|
·
|
Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors’ rights.
|
·
|
Amortization schedule — the larger the final maturity relative to other maturities, the more likely it will be treated as a note; and
|
·
|
Source of payment — the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.
|
·
|
Preliminary ratings may be assigned to obligations, most commonly structured and project finance issues, pending receipt of final documentation and legal opinions.
|
·
|
Preliminary ratings are assigned to Rule 415 Shelf Registrations. As specific issues, with defined terms, are offered from the master registration, a final rating may be assigned to them in accordance with Standard & Poor’s policies.
|
·
|
Preliminary ratings may be assigned to obligations that will likely be issued upon the obligor’s emergence from bankruptcy or similar reorganization, based on late-stage reorganization plans, documentation and discussions with the obligor. Preliminary ratings may also be assigned to the
|
·
|
Preliminary ratings may be assigned to entities that are being formed or that are in the process of being independently established when, in S&P’s opinion, documentation is close to final.
Preliminary ratings may also be assigned to these entities’ obligations.
|
·
|
Preliminary ratings may be assigned when a previously unrated entity is undergoing a well- formulated restructuring, recapitalization, significant financing or other transformative event, generally at the point that investor or lender commitments are invited. The preliminary rating may be assigned to the entity and to its proposed obligation(s). These preliminary ratings consider the anticipated general credit quality of the obligor, as well as attributes of the anticipated obligation(s), assuming successful completion of the transformative event. Should the transformative event not occur, S&P would likely withdraw these preliminary ratings.
|
·
|
A preliminary recovery rating may be assigned to an obligation that has a preliminary issue credit rating.
|
a.
|
the issuer has entered into a grace or cure period following non-payment of a material financial obligation;
|
b.
|
the issuer has entered into a temporary negotiated waiver or standstill agreement following a payment default on a material financial obligation; or
|
c.
|
Fitch otherwise believes a condition of ‘RD’ or ‘D’ to be imminent or inevitable, including through the formal announcement of a coercive debt exchange.
|
a.
|
the selective payment default on a specific class or currency of debt;
|
b.
|
the uncured expiry of any applicable grace period, cure period or default forbearance period following a payment default on a bank loan, capital markets security or other material financial obligation;
|
c.
|
the extension of multiple waivers or forbearance periods upon a payment default on one or more material financial obligations, either in series or in parallel; or
|
d.
|
execution of a coercive debt exchange on one or more material financial obligations.
|
·
|
The ratings do not predict a specific percentage of default likelihood over any given time period.
|
·
|
The ratings do not opine on the market value of any issuer’s securities or stock, or the likelihood that this value may change.
|
·
|
The ratings do not opine on the liquidity of the issuer’s securities or stock.
|
·
|
The ratings do not opine on the possible loss severity on an obligation should an issuer default.
|
·
|
The ratings do not opine on the suitability of an issuer as counterparty to trade credit.
|
·
|
The ratings do not opine on any quality related to an issuer’s business, operational or financial profile other than the agency’s opinion on its relative vulnerability to default.
|
·
|
The ratings do not predict a specific percentage of default likelihood over any given time period.
|
·
|
The ratings do not opine on the market value of any issuer’s securities or stock, or the likelihood that this value may change.
|
·
|
The ratings do not opine on the liquidity of the issuer’s securities or stock.
|
·
|
The ratings do not opine on the possible loss severity on an obligation should an obligation default.
|
·
|
The ratings do not opine on any quality related to an issuer or transaction’s profile other than the agency’s opinion on the relative vulnerability to default of the rated issuer or obligation.
|
(i)
|
A copy of these Proxy Policies, as they may be amended from time to time;
|
(ii)
|
Copies of proxy statements received regarding client securities, unless these materials are available electronically through the SEC’s EDGAR system;
|
(iii)
|
A record of each proxy vote cast on behalf of its clients;
|
(iv)
|
A copy of internal documents created by GPAM that were material to making the decision how to vote proxies on behalf of its clients; and
|
(v)
|
Each written client request for information on how GPAM voted proxies on behalf of the client and all written responses by GPAM to oral or written client requests for such proxy voting information.
|
(a)
|
Amended and Restated Agreement and Declaration of Trust of Registrant(*)
|
||
(b)
|
Amended and Restated By-Laws of Registrant (*)
|
||
(c)
|
Not applicable
|
||
(d)
|
Not applicable
|
||
(e)
|
Dividend Reinvestment Plan of Registrant(1)
|
||
(f)
|
Not applicable
|
||
(g)
|
(i)
|
Investment Advisory Agreement between Registrant and Guggenheim Funds Investment Advisors,
|
|
LLC (the “Investment Adviser”)(2)
|
|||
(ii)
|
Investment Sub-Advisory Agreement among Registrant, the Investment
|
||
Adviser and Guggenheim Partners Asset Management, LLC (the “Sub-
|
|||
Adviser”)(2)
|
|||
(h)
|
(i)
|
Form of Underwriting Agreement and/or Sales Agreement+
|
|
(i)
|
Not applicable
|
||
(j)
|
(i)
|
Form of Custody Agreement(1)
|
|
(ii)
|
Form of Foreign Custody Manager Agreement(1)
|
||
(k)
|
(i)
|
Form of Stock Transfer Agency Agreement(1)
|
|
(ii)
|
Form of Fund Accounting Agreement(1)
|
||
(iii)
|
Form of Administration Agreement(1)
|
||
(iv) (1)
|
Committed Facility Agreement (the “Committed Facility Agreement”) between
|
||
Registrant and BNP Prime Brokerage, Inc. (“BNP Prime Brokerage”)(2)
|
|||
(2) | Amendment to Committed Facility Agreement | ||
(vi)
|
Account Agreement between Registrant and BNP Prime Brokerage(2)
|
||
(vii)
|
Special Custody and Pledge Agreement among Registrant, BNP Prime
|
||
Brokerage and The Bank of New York Mellon(2)
|
|||
(l)
|
Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom LLP(3)
|
||
(m)
|
Not applicable
|
||
(n)
|
Consent of Independent Registered Public Accounting Firm(*)
|
||
(o)
|
Not applicable
|
||
(p)
|
Form of Initial Subscription Agreement(1)
|
||
(q)
|
Not applicable
|
(r)
|
(i)
|
Code of Ethics of the Registrant and the Investment Adviser (*)
|
|
(ii)
|
Code of Ethics of the Sub-Adviser (2)
|
||
(s)
|
Power of Attorney (2)
|
*
|
Filed herewith
|
+
|
To be filed by post-effective amendment
|
(1)
|
Incorporated by reference to Pre-Effective Amendment No. 2 to the Registrant’s Registration Statement on Form N-2, filed June 26, 2007 (File No. 333-138686).
|
(2)
|
Incorporated by reference to the Registrant's Registration Statement on Form N-2, filed on July 9, 2010 (File No. 333-168044).
|
(3)
|
Incorporated by reference to Pre-Effective Amendment No. 1 to the Registrant's Registration Statement on Form N-2, filed on November 24, 2010 (File No. 333-168044).
|
NYSE Listing Fees
|
$ 10,000
|
SEC Registration Fees
|
$ 7,130
|
Printing/engraving expenses
|
$ 40,000
|
Accounting fees
|
$ 35,000
|
Legal fees
|
$280,000
|
FINRA fees
|
$ 10,500
|
Miscellaneous
|
$ 17,370
|
Total
|
$400,000
|
Title of Class
|
Number of Record Shareholders
as of March 15, 2011
|
Common shares of beneficial interest, par value $.01 per share
|
9
|
|
1.
|
Registrant undertakes to suspend the offering of Common Shares until the prospectus is amended, if subsequent to the effective date of this registration statement, its net asset value declines more than ten percent from its net asset value, as of the effective date of the registration statement or its net asset value increases to an amount greater than its net proceeds as stated in the prospectus.
|
|
2.
|
Not applicable.
|
|
3.
|
Not applicable.
|
|
4.
|
Registrant undertakes:
|
|
(a)
|
to file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
|
|
(1)
|
to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
|
|
(2)
|
to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and
|
|
(3)
|
to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.
|
|
(b)
|
that, for the purpose of determining any liability under the 1933 Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of those securities at that time shall be deemed to be the initial bona fide offering thereof; and
|
|
(c)
|
to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering;
|
|
(d)
|
that, for the purpose of determining liability under the 1933 Act to any purchaser, if the Registrant is subject to Rule 430C: Each prospectus filed pursuant to Rule 497(b), (c), (d) or (e) under the 1933 Act as part of a registration statement relating to an offering, other than prospectues filed in reliance on Rule 430A under the 1933 Act, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supercede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
|
|
(e)
|
that for the purpose of determining liability of the Registrant under the 1933 Act to any purchaser in the initial distribution of securities: The undersigned Registrant undertakes that in a primary offering of securities of the undersigned Registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned Registrant will
|
|
|
be a seller to the purchaser and will be considered to offer or sell such securities to the purchaser:
|
|
(1)
|
any preliminary prospectus or prospectus of the undersigned Registrant relating to the offering required to be filed pursuant to Rule 497 under the 1933 Act;
|
|
(2)
|
the portion of any advertisement pursuant to Rule 482 under the 1933 Act relating to the offering containing material information about the undersigned Registrant or its securities provided by or on behalf of the undersigned Registrant; and
|
|
(3)
|
any other communication that is an offer in the offering made by the undersigned Registrant to the purchaser.
|
|
5.
|
Registrant undertakes that:
|
|
(a)
|
for the purpose of determining any liability under the 1933 Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant under Rule 497(h) under the 1933 Act shall be deemed to be part of this registration statement as of the time it was declared effective; and
|
|
(b)
|
for the purpose of determining any liability under the 1933 Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering thereof.
|
|
6.
|
Registrant undertakes to send by first class mail or other means designed to ensure equally prompt delivery, within two business days of receipt of a written or oral request, any Statement of Additional Information.
|
Principal Executive Officer:
/s/
Kevin M. Robinson
Kevin M. Robinson
|
Trustee, Chief Executive Officer and Chief Legal Officer
|
|
Principal Financial Officer:
/s/ John Sullivan
John Sullivan
|
Chief Financial Officer, Chief Accounting Officer and Treasurer
|
|
Trustees:
*_____________________________
Randall C. Barnes
*_____________________________
Roman Friedrich III
*_____________________________
Robert B. Karn III
*_____________________________
Ronald E. Toupin, Jr.
|
Trustee
Trustee
Trustee
Trustee
|
(a)
|
Amended and Restated Agreement and Declaration of Trust
|
(b)
|
Amended and Restated By-Laws
|
|
(n)
|
Consent of Independent
Registered
Public Accounting Firm
|
(r)
|
(i) | Code of Ethics of the Registrant and the Investment Adviser |
1.1
|
Name
|
4
|
1.2
|
Definitions
|
4
|
2.1
|
Number and Qualification
|
6
|
2.2
|
Term and Election
|
6
|
2.3
|
Resignation and Removal
|
7
|
2.4
|
Vacancies
|
7
|
2.5
|
Meetings
|
8
|
2.6
|
Trustee Action by Written Consent
|
8
|
2.7
|
Officers and Chairman.
|
8
|
3.1
|
General
|
9
|
3.2
|
Investments
|
9
|
3.3
|
Legal Title
|
9
|
3.4
|
Issuance and Repurchase of Shares
|
10
|
3.5
|
Borrow Money or Utilize Leverage
|
10
|
3.6
|
Delegation; Committees
|
10
|
3.7
|
Collection and Payment
|
10
|
3.8
|
Expenses
|
11
|
3.9
|
By-Laws
|
11
|
3.10
|
Miscellaneous Powers
|
11
|
3.11
|
Further Powers
|
11
|
4.1
|
Advisory and Management Arrangements
|
12
|
4.2
|
Distribution Arrangements
|
12
|
5.1
|
No Personal Liability of Shareholders, Trustees, etc
|
13
|
5.2
|
Mandatory Indemnification
|
13
|
5.3
|
No Bond Required of Trustees
|
15
|
5.4
|
No Duty of Investigation; Notice in Trust Instruments, etc
|
15
|
5.5
|
Reliance on Experts, etc
|
15
|
6.1
|
Beneficial Interest
|
16
|
6.2
|
Other Securities
|
16
|
6.3
|
Rights of Shareholders
|
16
|
6.4
|
Trust Only
|
16
|
6.5
|
Issuance of Shares
|
17
|
6.6
|
Register of Shares
|
17
|
6.7
|
Transfer Agent and Registrar
|
17
|
6.8
|
Transfer of Shares
|
17
|
7.1
|
Appointment and Duties
|
18
|
7.2
|
Central Certificate System
|
19
|
8.1
|
Redemptions
|
19
|
8.2
|
Disclosure of Holding
|
19
|
9.1
|
Net Asset Value
|
19
|
9.2
|
Distributions to Shareholders
|
19
|
9.3
|
Power to Modify Foregoing Procedures
|
20
|
10.1
|
Meetings of Shareholders
|
20
|
10.2
|
Voting
|
21
|
10.3
|
Notice of Meeting and Record Date
|
21
|
10.4
|
Quorum and Required Vote
|
21
|
10.5
|
Proxies, etc
|
21
|
10.6
|
Reports
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22
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11.1
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Duration
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22
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11.2
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Termination
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23
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11.3
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Amendment Procedure
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23
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11.4
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Merger, Consolidation and Sale of Assets
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24
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11.5
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Subsidiaries
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25
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11.6
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Conversion
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25
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11.7
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Certain Transactions
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25
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12.1
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Filing
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27
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12.2
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Resident Agent
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27
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12.3
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Governing Law
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27
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12.4
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Counterparts
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27
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12.5
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Reliance by Third Parties
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28
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12.6
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Provisions in Conflict with Law or Regulation
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28
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I.
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INTRODUCTION
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1
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II.
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GENERAL STANDARDS
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1
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III.
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DEFINITIONS
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2
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IV.
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APPLICATION OF THE CODE
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4
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V.
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RESTRICTIONS
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4
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VI.
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PRE-CLEARANCE AND REPORTING PROCEDURES
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6
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VII.
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EXCEPTIONS TO PRE-CLEARANCE AND REPORTING REQUIREMENTS
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8
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VIII.
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INDEPENDENT TRUSTEES OF INVESTMENT COMPANY CLIENTS
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9
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IX.
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COMPLIANCE WITH OTHER ADVISER OR FUND CODES
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10
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X.
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ENFORCEMENT OF CODE AND CONSEQUENCES FOR FAILURE TO COMPLY
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10
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XI.
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RETENTION OF RECORDS
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11
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XII.
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AMENDMENT TO THIS CODE
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11
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·
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employ any device, scheme, or artifice to defraud the client
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·
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make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of circumstances under which they are made, not misleading or in any way mislead the client regarding a material fact
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·
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engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon the client
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·
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engage in any manipulative practice with respect to the client
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A.
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Access Person
. Any director, officer, or partner of Guggenheim Funds or an Investment Company Client or any employee of Guggenheim Funds or an Investment Company Client who (a) has access to nonpublic information regarding any clients’ purchase or sale of securities, or nonpublic information regarding the portfolio holdings of an
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1
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Federal Securities Laws means the Securities Act of 1933(15 U.S.C. 771-aa), the Securities Exchange Act of 1934 (15 U.S.C. 78a-mm), the Sarbanes-Oxley Act of 2002 (Pub. L. 107-204, 116 Stat. 745 (2002)), the Investment Company Act of 1940 (15 U.S.C. 80a), the Investment Advisers Act of 1940 (15 U.S.C. 80b), Title V of the Gramm-Leach-Bliley Act (Pub. L. No. 106-102) 113 Stat 1338 (1999), any rules adopted by the SEC under any of these statutes, the Bank Secrecy Act (31 U.S.C. 5311-5314; 5316-5332) as it applies to funds and investment advisers, and any rules adopted thereunder by the SEC or the Department of the Treasury.
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Investment Company Client or (b) is involved in making securities recommendations to clients, or who has access to such recommendations that are nonpublic. Currently all Guggenheim Funds employees are deemed access persons. See Exhibit A.
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B.
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Chief Compliance Officer
. The Code contains many references to the Chief Compliance Officer (CCO). The CCO is Anne Kochevar. References to the CCO also include, for any function, any person designated by the CCO as having responsibility for that function from time to time. If the CCO is not available, reports required to be made to the CCO, or actions permitted to be taken by the CCO, may be made to Sue Pittner, provided a copy is sent to the CCO. See Exhibit B.
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C.
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Independent Trustee
. A trustee of a closed-end fund or exchange-traded fund which is an Investment Company Client who is not an “interested person” of the closed-end fund or exchange-traded fund within the meaning of Section 2(a)(19) of the 1940 Act.
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D.
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Investment Personnel
. Any Access Person who, in connection with his or her regular functions or duties, makes or participates in making recommendations regarding the purchase or sale of securities for a client, and (2) any natural person who controls an Investment Company Client or Guggenheim Funds and who obtains information concerning recommendations made to a client regarding the purchase or sale of securities by the client, and (3) personnel involved in Guggenheim Funds index administration functions. A list of Investment Personnel is attached as Exhibit C.
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E.
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Personal Securities Transaction.
The Code regulates Personal Securities Transactions as a part of the effort by Guggenheim Funds to detect and prevent conduct that might violate the general prohibitions outlined above.
A Personal Securities Transaction is a transaction in a security, other than an exempted security (as defined below), in which a person subject to this Code has a beneficial interest.
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1.
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Security.
Security is defined very broadly, and means any note, stock, bond, debenture, investment contract, limited partnership or limited liability membership interest, and includes any right to acquire any security (an option or warrant, for example).
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2.
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Beneficial interest.
You have a beneficial interest in a security in which you have, directly or indirectly, the opportunity to profit or share in any profit derived from a transaction in the security, or in which you have an indirect interest, including beneficial ownership by your spouse or minor children or other dependents or any immediate family member living in your household, or your share of securities held by a partnership of which you are a general partner.
Technically, Rule 16a-1(a)(2) under the Securities Exchange Act of 1934 will be applied to determine if you have a beneficial interest in a security (even if the security would not be within the scope of section 16).
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·
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Portfolio managers who manage the accounts
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·
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Research analysts or research assistants who are members of the management team for the accounts
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·
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Traders who trade on behalf of clients
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Support staff and administrative assistants working directly with portfolio managers and analysts
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·
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Personnel involved in Guggenheim Funds index administration.
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A.
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No Conflicting Personal Securities Transactions.
No Access Person shall engage in a Personal Securities Transaction in a security which the person
knows or has reason to believe
(i) is being purchased or sold (i.e., a pending “buy” or “sell” order), (ii) has been purchased or sold for a client within the last seven (7) calendar days, or (iii) is being considered for purchase or sale by a client, until that client’s transactions have been completed
or
consideration of such transactions has been abandoned. A security will be treated as
“under consideration”
for a client, if the portfolio manager or investment team responsible for the management of the account of that client intends to purchase or sell the security in the next seven (7) calendar days. No Access Person shall engage in a Personal Securities Transaction in a security which the person knows or has reason to believe is under consideration for inclusion or exclusion in an index administered by Guggenheim Funds within seven (7) calendar days prior to or after the index rebalance being published.
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B.
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Private Placements.
No Access Person shall acquire
or dispose of
a beneficial interest in a security in a private placement without express prior written approval from the CCO or her designee.
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Claymore Group Stock.
No Access Person shall acquire or dispose of a beneficial interest in the stock of Guggenheim Funds Group Inc. (“Guggenheim Funds Group Stock”) without the prior written approval of the General Counsel or his designee.
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Guggenheim Capital LLC Membership Interests. Any Access Person who is granted an interest in, or receives approval to purchase or sell Guggenheim Capital membership interest (“Guggenheim Interest”) by Guggenheim Capital, must inform Guggenheim Funds Compliance of such grant or approval to purchase or sell, and disclose any initial or continued holdings of Guggenheim Interests on Schedule H.
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C.
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Initial Public Offerings.
No Access Person shall acquire a beneficial interest in a security in an initial public offering.
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D.
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Short-term trading.
Investment Personnel and Fund Trustee’s shall not profit in the purchase and sale, or sale and purchase, of the same (or equivalent) security within sixty calendar days.
Access persons shall not profit in the purchase and sale, or sale and purchase of any Guggenheim Funds Fund or Trust within sixty calendar
days.
Trades made in violation of this prohibition shall be unwound or, if that is impracticable, any profits must be disgorged to a charitable organization that is selected by the CCO or her designee.
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E.
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Gifts.
Access Persons shall not accept any gift or other thing of more than de minimus value (e.g. $100 for U.S. and $300 CDN for Claymore Investments Canada) from any person or entity that does business with or on behalf of any client of Guggenheim Funds, or seeks to do business with or on behalf of a client. Gifts in excess of this value must either be returned to the donor or paid for by the recipient. It is not the intent of the Code to prohibit the everyday courtesies of business life. Therefore, this prohibition does not include an occasional meal or ticket to a theater, entertainment or sporting event that is an incidental part of a meeting that has a clear business purpose.
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F.
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Service as Director.
Access Persons shall not serve on the board of directors of a publicly traded company, without prior authorization by the CCO. Access Persons may submit a request for authorization and such request shall state the position sought, the reason service is desired and any possible conflicts of interest known at the time of the request. Service may be authorized by the CCO only if the CCO determines that service
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in that capacity would be consistent with the interests of Guggenheim Funds and its clients. In addition, Investment Personnel who receive authorization to serve in such a capacity shall be isolated through “Information Barrier” procedures from making investment decisions regarding securities issued by the entity involved.
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1.
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Pre-clearance Requirement.
Except as provided below, all Access Persons
must receive prior approval of their Personal Securities Transactions from the CCO or her designee. Personal Securities Transactions of the CCO must be approved by the General Counsel. Any approval shall be valid for one business day.
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2.
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Personal Securities Transaction Form.
All requests for pre-clearance of Personal Securities Transactions must be made on the form attached as Exhibit G
or Exhibit G(a) for Guggenheim Funds Group Stock.
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3.
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Factors to Consider in Pre-clearing Personal Securities Transactions.
The CCO should consider:
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·
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whether the security appears on Guggenheim Funds’s Product Security List or Index Consideration List
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·
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whether the investment opportunity should be reserved for a client
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·
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whether the opportunity is being offered to an individual by virtue of his/her position with respect to Guggenheim Funds’s relationship with a client
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4.
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Subsequent Disclosure by Access Person.
If pre-clearance is granted, the Access Person must disclose the Personal Securities Transaction when he or she participates in any subsequent investment decision for a client regarding the same issuer. In such circumstances, the decision to purchase or sell securities of the issuer will be subject to an independent review by the CCO or her designee.
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5.
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Exemptions from Pre-clearance.
Access Persons do not need to seek pre-clearance for the following transactions:
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·
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Purchases or sales which are
non-volitional
on the part of either the Access Person or the Investment Company Client (e.g., transactions in corporate mergers, stock splits, tender offers); or
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·
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Purchases effected upon the
exercise of rights
issued by an issuer pro rata to all holders of a class of its securities.
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·
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Purchases or sales effected in any account (previously approved by the CCO or her designee) over which the Access Person has no direct or indirect influence or control.
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·
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Purchases which are part of ongoing participation in an automatic dividend reinvestment plan. (The initial election to participate in an automatic dividend reinvestment plan should be pre-cleared.)
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B.
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Reporting Requirements
.
Every Access Person must report to the CCO or her designee the following reports regarding the Access Persons direct or indirect beneficial ownership in securities (other than Excepted Securities):
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1.
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Initial and Annual Holdings Reports.
No later than ten days after the person becomes an Access Person, and annually thereafter as of December 31, the following information:
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·
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the title and type of security, interest rate and maturity date (if applicable), CUSIP number or exchange ticker symbol, number of shares and principal amount of each security beneficially owned
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·
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the name of any broker, dealer or bank with whom the Access Person maintained an account
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·
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the date that the report is submitted by the Access Person
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·
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the reports can be accomplished through submission of account statements or the form at Exhibit H or
Exhibit H(a) for Claymore Group Stock.
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2.
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Quarterly Transaction Reports
.
No later than thirty days after the end of the calendar quarter, the following information (a) with respect to any Personal Securities Transaction during the quarter:
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·
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The date of the transaction, the title and type of security, the CUSIP number or exchange ticker symbol (if applicable), the interest rate and maturity date (if applicable), the number of shares and the principal amount of each security
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·
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The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition)
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·
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The price at which the transaction was effected
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·
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The name of the broker, dealer or bank with or through which the transaction was effected
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·
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The date that the report is submitted by the Access Person
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·
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The name of the broker, dealer or bank with whom the Access Person established the account
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·
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The date the account was established
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·
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The date that the report is submitted by the Access Person
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C.
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Execution of Personal Securities Transactions Through Disclosed Brokerage Accounts; Duplicate Confirmations.
All Personal Securities Transactions must be conducted through brokerage or other accounts that have been identified to the CCO or her designee. Each such account must be set up to deliver or mail duplicate copies of all confirmations and statements to: Guggenheim Funds Distributors, Inc., Attention: Compliance Department, 2455 Corporate West Drive, Lisle, IL 60532.
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Excepted Securities.
Access Persons
do not need to report transactions or holdings, or seek pre-clearance for transactions, in the following securities.
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·
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shares of open-end investment companies that are not Investment Company Clients (open-end funds for which Guggenheim Funds is not the investment adviser or distributor)
Please note that all ETFs must be pre-cleared.
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·
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direct obligations of the U.S. government (U.S. treasury bills, notes and bonds);
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·
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money market instruments, including bank certificates of deposit, bankers’ acceptances, commercial paper and repurchase agreements
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·
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shares of money market funds;
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·
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shares issued by unit investment trusts that are invested exclusively in one or more open-end investment companies, none of whom are Investment Company Clients. Note: All purchases and sales of Guggenheim Funds sponsored Unit Investment Trusts must be pre-cleared.
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1.
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Independent Trustees shall be subject to Sections V.A. “Restrictions-No Conflicting Personal Securities Transactions”, V.B. “Restrictions-Private Placements” and VI.B.2. “Pre-Clearance and Reporting Procedures-Reporting Requirements-Quarterly Transaction Reports” only if the Independent Trustee knew or, in the ordinary course of fulfilling his or her official duties as a trustee, should have known that during the 15-day period immediately before or after the trustee’s transaction in a security (except for Excepted Securities described in Section VII “Exceptions to Preclearance and Reporting Requirements”), the closed-end fund or ETF of which such person is an Independent Trustee, purchased or sold the security, or a purchase or sale was considered on behalf of the closed-end fund or ETF.
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2.
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Although not strictly prohibited, it is recommended that Independent Trustees refrain from trading in shares of the relevant closed-end fund or ETF for a period of seven calendar days before and after meetings of the Board of Trustees of such fund.
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3.
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Independent Trustees shall not accept any gift or other thing of more than de minimis value (e.g. $100) from any person or entity that the Independent Trustee knows or should know does business with or on behalf of, or seeks to do business with or on behalf of a closed-end fund or ETF on whose board the Trustee serves. Gifts in excess of this value must either be returned to the donor or paid for by the
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recipient. It is not the intent of the Code to prohibit the everyday courtesies of business life. Therefore, this prohibition does not include an occasional meal or ticket to a theater, entertainment or sporting event that is an incidental part of a meeting that has a clear business purpose.
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4.
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In lieu of the sanctions contemplated by Section X.D. hereof, Independent Trustees shall be subject to sanctions as determined by the Board of Trustees of the relevant closed-end fund or ETF.
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A.
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Certification
. All persons subject to the Code (other than Independent Trustees) shall certify annually that they have read and understood the Code and recognized that they are subject thereto, and that they have complied with the requirements of the Code. See Exhibit F.
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B.
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Review of Reports.
The CCO or her designee shall review all reports submitted under the Code.
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C.
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Notification of Reporting Obligation.
The CCO or her designee shall update Exhibits A, B, C as necessary to include new Access Persons and Investment Personnel and shall notify those persons of their obligations under the Code.
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D.
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Sanctions for Violations.
Upon discovery of a violation of this Code, including either violations of the enumerated provisions or the general principles provided, Guggenheim Funds may impose such sanctions as it deems appropriate, including,
inter alia
, a letter of censure or suspension or termination of the employment of the violator.
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E.
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Annual Review.
Pursuant to Rule 17j-1(c)(2)(ii), Guggenheim Funds will at least annually review this Code of Ethics to determine whether it is reasonably designed to prevent persons subject to the Code from engaging in fraudulent activities prohibited by paragraph (b) of the rule. The CCO or General Counsel will certify annually that Guggenheim Funds has adopted procedures reasonably necessary to prevent Guggenheim Funds Access Persons from violating this Code of Ethics.
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1.
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I have read and understood the Code of Ethics and recognize that I am subject to its provisions;
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2.
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In accordance with Section VI of the Code of Ethics, I will report all securities transactions in which I have a beneficial interest, except for transactions exempt from reporting under Section VII of the Code of Ethics.
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3.
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I will comply with the Code of Ethics in all other respects.
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