As filed with the Securities and Exchange Commission on August 22, 2002
1933 Act File No. 333-91678
1940 Act File No. 811-21137
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-2
(Check appropriate box or boxes)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] Pre-Effective Amendment No. 1
[ ] Post-Effective Amendment No. _
and
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 1
Nuveen Quality Preferred Income Fund 2
Exact Name of Registrant as Specified in Declaration of Trust
333 West Wacker Drive, Chicago, Illinois 60606
Address of Principal Executive Offices (Number, Street, City, State, Zip Code)
(800) 257-8787
Registrant's Telephone Number, including Area Code
Gifford R. Zimmerman
Vice President and Secretary
333 West Wacker Drive
Chicago, Illinois 60606
Name and Address (Number, Street, City, State, Zip Code) of Agent for Service
Copies of Communications to:
Stacy H. Winick Eric F. Fess Sarah E. Cogan Bell, Boyd & Lloyd LLC Chapman and Cutler Simpson Thacher & Bartlett 70 W. Madison St. 111 W. Monroe 425 Lexington Ave. Chicago, IL 60602 Chicago, IL 60603 New York, New York 10017 |
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of this Registration Statement
If any of the securities being registered on this form are offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, other than securities offered in connection with a dividend reinvestment plan, check the following box. [ ]
It is proposed that this filing will become effective (check appropriate box)
[X] when declared effective pursuant to section 8(c)
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
=========================================================================================================================
Proposed Maximum
Title of Securities Being Amount Proposed Maximum Aggregate Offering Amount of
Registered Being Registered Offering Price Per Unit Price (1) Registration Fee (2)
-------------------------------------------------------------------------------------------------------------------------
Common Shares, $0.01 par value 4,000,000 Shares $15.00 $ 60,000,000 $5,520
=========================================================================================================================
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) Of which $1.38 has already been paid.
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such dates as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this Prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED AUGUST 22, 2002
PROSPECTUS
[LOGO] Nuveen Logo
4,000,000 Shares
Nuveen Quality Preferred Income Fund 2
Common Shares
$15.00 per share
Investment Objectives. The Fund is a newly organized, non-diversified, closed-end management investment company.
. The Fund's primary investment objective is high current income consistent
with capital preservation; and
. The Fund's secondary objective is to enhance portfolio value relative to
the market for preferred securities by investing in (i) securities that
the Fund's subadviser believes are underrated or undervalued or (ii)
sectors that the Fund's subadviser believes are undervalued.
(continued on following page)
Investing in common shares involves certain risks. See "Risks" beginning on page 27.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Per Share Total
--------- -----
Public Offering Price $15.000 $
Sales Load/(1)/ $ 0.675 $
Estimated Offering Expenses/(2)/ $ 0.030 $
Proceeds to the Fund $14.295 $
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(1)Certain underwriters that may also participate in any future offering of preferred shares of the Fund may receive additional compensation in that offering based on their participation in this offering. See "Underwriting."
(2)Total expenses of issuance and distribution (other than underwriting discounts and commissions) are estimated to be $ . Nuveen has agreed to reimburse offering expenses in excess of $0.03 per share.
The underwriters expect to deliver the common shares to purchasers on or about , 2002.
Salomon Smith Barney Nuveen Investments
A.G. Edwards & Sons, Inc. Prudential Securities UBS Warburg
Advest, Inc. H&R Block Financial Advisors, Inc. Fahnestock & Co. Inc.
Ferris, Baker Watts Janney Montgomery Scott LLC Legg Mason Wood Walker
Incorporated Quick & Reilly, Inc. Incorporated
McDonald Investments Inc. Ryan, Beck & Co. Raymond James
RBC Capital Markets Including the Gruntal Division SunTrust Robinson Humphrey
Wachovia Securities Wells Fargo Securities, LLC
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, 2002
Portfolio Contents. Under normal circumstances, the Fund will invest:
. at least 80% of its net assets in preferred securities;
. up to 20% of its net assets in debt securities, including convertible debt securities and convertible preferred securities; and
. 100% of its total assets in securities that, at the time of investment, are investment grade quality, which may include up to 10% in securities that are rated investment grade by at least one nationally recognized statistical rating organization and lower by another.
The Fund intends to invest primarily in fully taxable preferred securities. There can be no assurance that the Fund will achieve its investment objectives. See "The Fund's Investments" and "Risks."
No Prior History. Because the Fund is newly organized, its common shares have no history of public trading. Shares of closed-end investment companies frequently trade at a discount from their net asset value. This risk may be greater for investors who expect to sell their shares in a relatively short period after completion of the public offering. The common shares have been approved for listing on the New York Stock Exchange, subject to notice of issuance. The trading or "ticker" symbol of the common shares is "JPS".
Adviser and Subadviser. Nuveen Institutional Advisory Corp. will be the Fund's investment adviser and Spectrum Asset Management, Inc. will be the Fund's subadviser. Spectrum Asset Management, Inc. had approximately $2.4 billion in assets under management as of June 30, 2002.
You should read this Prospectus, which contains important information about the Fund, before deciding whether to invest and retain it for future reference. A Statement of Additional Information, dated , 2002, and as it may be supplemented, containing additional information about the Fund, has been filed with the Securities and Exchange Commission and is incorporated by reference in its entirety into this Prospectus. You may request a free copy of the Statement of Additional Information, the table of contents of which is on page 51 of this Prospectus, by calling (800) 257-8787 or by writing to the Fund, or you may obtain a copy (and other information regarding the Fund) from the Securities and Exchange Commission web site (http://www.sec.gov).
The Fund's common shares do not represent a deposit or obligation of, and are not guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.
The underwriters named in this Prospectus may purchase up to additional common shares from the Fund under certain circumstances.
You should rely only on the information contained or incorporated by reference in this Prospectus. The Fund has not authorized anyone to provide you with different information. The Fund is not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information contained in this Prospectus is accurate as of any date other than the date on the front of this Prospectus.
TABLE OF CONTENTS
Page
----
Prospectus Summary........................................... 4
Summary of Fund Expenses..................................... 14
The Fund..................................................... 16
Use of Proceeds.............................................. 16
The Fund's Investments....................................... 16
Use of Leverage.............................................. 23
Hedging Transactions......................................... 25
Risks........................................................ 27
How the Fund Manages Risk.................................... 33
Management of the Fund....................................... 34
Net Asset Value.............................................. 37
Distributions................................................ 37
Dividend Reinvestment Plan................................... 38
Description of Shares........................................ 39
Certain Provisions in the Declaration of Trust............... 41
Repurchase of Fund Shares; Conversion to Open-End Fund....... 43
Tax Matters.................................................. 43
Other Matters................................................ 45
Underwriting................................................. 47
Custodian and Transfer Agent................................. 50
Legal Opinions............................................... 50
Table of Contents for the Statement of Additional Information 51
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Until , 2002 (25 days after the date of this Prospectus), all dealers that buy, sell or trade the common shares, whether or not participating in this offering, may be required to deliver a Prospectus. This is in addition to the dealers' obligation to deliver a Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
PROSPECTUS SUMMARY
This is only a summary. You should review the more detailed information contained elsewhere in this Prospectus and in the Statement of Additional Information to understand the offering fully.
The Fund.............. Nuveen Quality Preferred Income Fund 2 (the "Fund") is
a newly organized, non-diversified, closed-end
management investment company.
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The Offering.......... The Fund is offering common shares of beneficial interest at $15.00 per share through a group of underwriters (the "Underwriters") led by Salomon Smith Barney Inc., Nuveen Investments ("Nuveen"), A.G. Edwards & Sons, Inc., Prudential Securities Incorporated, UBS Warburg LLC, Advest, Inc., H&R Block Financial Advisors, Inc., Fahnestock & Co. Inc., Ferris, Baker Watts, Incorporated, Janney Montgomery Scott LLC, Legg Mason Wood Walker, Incorporated, McDonald Investments Inc., a KeyCorp Company, Quick & Reilly, Inc. A FleetBoston Financial Company, Raymond James & Associates, Inc., RBC Dain Rauscher, Inc., Ryan, Beck & Co., LLC, SunTrust Capital Markets, Inc., Wachovia Securities, Inc. and Wells Fargo Securities, LLC. The common shares of beneficial interest are called "Common Shares" in the rest of this Prospectus. You must purchase at least 100 Common Shares in this offering. The Fund has given the Underwriters an option to purchase up to additional Common Shares to cover orders in excess of Common Shares. See "Underwriting." Nuveen has agreed to pay (i) all organizational expenses and (ii) offering costs (other than sales load) that exceed $0.03 per Common Share.
Investment Objectives
and Policies.......... The Fund's primary investment objective is high
current income consistent with capital preservation.
The Fund's secondary investment objective is to
enhance portfolio value relative to the market for
preferred securities by investing in (i) securities
that the Fund's subadviser believes are underrated
or undervalued or (ii) sectors that the Fund's
subadviser believes are undervalued. The Fund's
investment objectives and certain investment
policies are considered fundamental and may not be
changed without shareholder approval. The Fund
cannot assure you that it will attain its investment
objectives. See "The Fund's Investments."
Under normal circumstances, the Fund will invest at
least 80% of its net assets in preferred securities.
The Fund intends to invest primarily in fully
taxable preferred securities. Under normal
circumstances, the Fund's portfolio of preferred
securities is expected to consist of both fixed rate
preferred and adjustable rate preferred securities.
The Fund will only invest in securities that, at the
time of investment, are investment grade quality.
Investment grade quality securities are
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those rated by at least one nationally recognized
statistical rating organization ("NRSRO") within the
four highest grades (Baa or BBB or better by Moody's
Investors Service, Inc. ("Moody's"), Standard &
Poor's Corporation, a division of The McGraw-Hill
Companies ("S&P") or Fitch Ratings ("Fitch")), and
securities that are unrated but judged to be of
comparable quality by the Fund's subadviser.
Investment grade securities may include securities
that, at the time of investment, are rated below
investment grade by Moody's, S&P or Fitch, so long
as at least one NRSRO rates such securities within
the four highest grades (such securities are called
"split-rated securities"). The Fund may invest up to
10% of its total assets in split-rated securities.
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See "The Fund's Investments--Investment Objectives and Policies."
In addition, under normal circumstances:
. The Fund intends to invest at least 25% of its
net assets in the securities of companies
principally engaged in financial services. See
"The Fund's Investments--Portfolio
Composition--Financial Services Company
Securities."
. The Fund may invest up to 20% of its net assets
in debt securities, including convertible debt
securities and convertible preferred
securities. See "The Fund's
Investments--Portfolio Composition--Debt
Securities and Convertible Securities." Common
stock acquired by the Fund pursuant to a
convertible feature will be subject to this 20%
limitation.
. While the Fund does not currently intend to
invest in illiquid securities (i.e., securities
that are not readily marketable), it may invest
up to 10% of its net assets in illiquid
securities.
. The Fund may invest up to 35% of its net assets
in U.S. dollar denominated securities of
non-U.S. issuers offered, traded or listed in
U.S. markets.
The taxable preferred securities in which the Fund
intends to invest do not qualify for the dividends
received deduction (the "Dividends Received
Deduction") under Section 243 of the Internal
Revenue Code of 1986, as amended (the "Code"). The
Dividends Received Deduction generally allows
corporations to deduct from their income 70% of
dividends received. Accordingly, any corporate
shareholder who otherwise would qualify for the
Dividends Received Deduction should assume that none
of the distributions it receives from the Fund will
qualify for the Dividends Received Deduction.
Proposed Use of
Leverage.............. The Fund may use leverage through the issuance of
preferred stock ("FundPreferred/TM/ shares"),
commercial paper or notes and/or
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borrowing in an aggregate amount of approximately
33% of the Fund's capital after such issuance and/or
borrowing. There is no assurance that the Fund will
issue FundPreferred shares, commercial paper or
notes or engage in borrowing transactions.
Subject to market conditions and the Fund's receipt of
a AA/Aa credit rating or better from a NRSRO
(typically, Moody's, S&P, and/or Fitch) on
FundPreferred shares, within approximately one and
one-half to two months after completion of this
offering, the Fund intends to offer FundPreferred
shares. FundPreferred shares will have seniority
over the Common Shares and any interest rate
transactions the Fund enters into. The issuance of
FundPreferred shares will leverage your investment
in Common Shares.
Any issuance of commercial paper or notes or borrowing
will have seniority over the Common Shares.
Throughout this Prospectus, commercial paper, notes
or borrowings sometimes may be collectively referred
to as "Borrowings."
There is no guarantee that the Fund's leverage
strategy will be successful. See "Risks--Leverage
Risk." FundPreferred shares will pay dividends based
on short-term rates, which will be reset frequently.
Borrowings may be at a fixed or floating rate and
generally will be based on short-term rates. So long
as the rate of return, net of applicable Fund
expenses, on the Fund's portfolio investments
exceeds the FundPreferred share dividend rate, as
reset periodically, or the interest rate on any
Borrowings, the investment of the proceeds of
FundPreferred shares or Borrowings will generate
more income than will be needed to pay such
dividends or interest payment. If so, the excess
will be available to pay higher dividends to holders
of Common Shares ("Common Shareholders").
Proposed Use of Hedging
Transactions.......... The use of derivatives for purposes of hedging the
portfolio will be restricted to reducing the
portfolio's exposure to increases in interest rates.
The specific derivative instruments will be limited
to (A) U.S. Treasury security or U.S. Government
Agency security futures contracts and (B) options on
U.S. Treasury security or U.S. Government Agency
security futures contracts. All such instruments
must be traded and listed on an exchange. The
positions in derivatives will be marked-to-market
daily at the closing price established on the
relevant exchange. The Fund, in implementing its
hedging strategies, may enter into futures
transactions with a notional principal amount that
will not exceed 35% of its Managed Assets (as
defined below), and may invest in options on futures
the purchase price for which will not exceed 0.5% of
Managed Assets in any calendar quarter. See "The
Fund's Investments--Portfolio Composition--Hedging
Transactions."
Interest Rate
Transactions.......... In connection with the Fund's anticipated use of
leverage through the
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sale of FundPreferred shares or Borrowings, the Fund
may enter into interest rate swap or cap
transactions. The use of interest rate swaps and
caps is a highly specialized activity that involves
investment techniques and risks different from those
associated with ordinary portfolio security
transactions.
In an interest rate swap, the Fund would agree to pay
to the other party to the interest rate swap (which
is known as the "counterparty") a fixed rate payment
in exchange for the counterparty agreeing to pay to
the Fund a variable rate payment obligation on
FundPreferred shares or any variable rate
Borrowings. The payment obligations would be based
on the notional amount of the swap.
In an interest rate cap, the Fund would pay a premium
to the counterparty to the interest rate cap and, to
the extent that a specified variable rate index
exceeds a predetermined fixed rate, would receive
from the counterparty payments of the difference
based on the notional amount of such cap. Depending
on the state of interest rates in general, the
Fund's use of interest rate swaps or caps could
enhance or harm the overall performance of the
Common Shares. To the extent there is a decline in
interest rates, the value of the interest rate swap
or cap could decline, and could result in a decline
in the net asset value of the Common Shares. In
addition, if the counterparty to an interest rate
swap or cap defaults, the Fund would not be able to
use the anticipated net receipts under the swap or
cap to offset the dividend payments on FundPreferred
shares or interest payments on Borrowings.
Depending on whether the Fund would be entitled to
receive net payments from the counterparty on the
swap or cap, which in turn would depend on the
general state of short-term interest rates at that
point in time, such a default could negatively
impact the performance of the Common Shares. In
addition, at the time an interest rate swap or cap
transaction reaches its scheduled termination date,
there is a risk that the Fund would not be able to
obtain a replacement transaction or that the terms
of the replacement would not be as favorable as on
the expiring transaction. If this occurs, it could
have a negative impact on the performance of the
Common Shares. If the Fund fails to maintain a
required 200% asset coverage of the liquidation
value of the outstanding FundPreferred shares or if
the Fund loses its expected rating on FundPreferred
shares of at least AA/Aa or fails to maintain other
covenants, the Fund may be required to redeem some
or all of the FundPreferred shares. Similarly, the
Fund could be required to prepay the principal
amount of any Borrowings. Such redemption or
prepayment would likely result in the Fund seeking
to terminate early all or a portion of any swap or
cap transaction. Early termination of a swap could
result in a
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termination payment by or to the Fund. Early
termination of a cap could result in a termination
payment to the Fund. The Fund intends to maintain in
a segregated account with its custodian cash or
liquid securities having a value at least equal to
the Fund's net payment obligations under any swap
transaction, marked-to-market daily. The Fund will
not enter into interest rate swap or cap
transactions having a notional amount that exceeds
the outstanding amount of the Fund's leverage.
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See "Use of Leverage" and "Hedging Transactions" for additional information.
Investment Adviser and
Subadviser............ Nuveen Institutional Advisory Corp. ("NIAC") will be
the Fund's investment adviser and Spectrum Asset
Management, Inc. ("Spectrum") will be the Fund's
subadviser. NIAC is a wholly owned subsidiary of The
John Nuveen Company and Spectrum is an independently
managed subsidiary of Principal Capital Management
LLC. Founded in 1898, The John Nuveen Company and
its affiliates had over $74 billion of net assets
under management or surveillance as of July 31,
2002. According to Thomson Wealth Management, Nuveen
is the leading sponsor of closed-end exchange-traded
funds as measured by the number of funds (90) and
the amount of assets under management ($35 billion)
as of July 31, 2002.
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Spectrum is a registered investment adviser and as of June 30, 2002 had approximately $2.4 billion in assets under management. Spectrum was founded in 1987 and specializes in the management of diversified preferred security portfolios primarily for institutional clients. Collectively, subsidiaries and affiliates of Principal Capital Management LLC manage over $102 billion in combined assets worldwide as of June 30, 2002.
NIAC will receive an annual fee, payable monthly, in a maximum amount equal to .90% of the Fund's average daily net assets (including assets attributable to any FundPreferred shares that may be outstanding and the principal amount of Borrowings (sometimes referred to herein as "Managed Assets")), with lower fee levels for assets that exceed $500 million. NIAC will pay a portion of that fee to Spectrum. NIAC and Spectrum have contractually agreed to reimburse the Fund for fees and expenses in the amount of .32% of average daily Managed Assets of the Fund for the first five full years of the Fund's operations (through September 30, 2007), and for a declining amount for an additional three years (through September 30, 2010). See "Management of the Fund."
Distributions......... Commencing with the Fund's first dividend, the Fund
intends to make regular monthly cash distributions
to Common Shareholders at a level rate (stated in
terms of a fixed cents per Common Share dividend
rate) based on the projected performance of the
Fund. The
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Fund's ability to maintain a level Common Share
dividend rate will depend on a number of factors,
including dividends payable on the FundPreferred
shares. As portfolio and market conditions change,
the rate of dividends on the Common Shares and the
Fund's dividend policy could change. Over time, the
Fund will distribute all of its net investment
income (after it pays accrued dividends on any
outstanding FundPreferred shares). In addition, at
least annually, the Fund intends to distribute net
capital gain and taxable ordinary income, if any, to
you so long as the net capital gain and taxable
ordinary income are not necessary to pay accrued
dividends on, or redeem or liquidate, any
FundPreferred shares. Your initial distribution is
expected to be declared approximately 45 days, and
paid approximately 60 to 90 days, from the
completion of this offering, depending on market
conditions. You may elect to automatically reinvest
some or all of your distributions in additional
Common Shares under the Fund's Dividend Reinvestment
Plan. See "Distributions" and "Dividend Reinvestment
Plan."
Listing............... The Common Shares have been approved for listing on
the New York Stock Exchange, subject to notice of
issuance. See "Description of Shares--Common
Shares." The trading or "ticker" symbol of the
Common Shares is "JPS". Because of this exchange
listing, the Fund may sometimes be referred to in
public communications as a "closed-end
exchange-traded fund" or "exchange-traded fund."
Custodian............. State Street Bank and Trust Company will serve as
custodian of the Fund's assets. See "Custodian and
Transfer Agent."
Market Discount from
Net Asset Value....... Shares of closed-end investment companies frequently
trade at prices lower than net asset value. This
characteristic is separate and distinct from the
risk that net asset value could decrease as a result
of investment activities and may be a greater risk
to investors expecting to sell their shares in a
relatively short period of time following the
completion of this offering. The Fund cannot predict
whether Common Shares will trade at, above or below
net asset value. Net asset value will be reduced
immediately following the offering by the sales load
and the amount of organization and offering expenses
paid by the Fund. See "Use of Proceeds," "Use of
Leverage," "Risks," "Description of Shares,"
"Repurchase of Fund Shares; Conversion to Open-End
Fund" and the Statement of Additional Information
under "Repurchase of Fund Shares; Conversion to
Open-End Fund." The Common Shares are designed
primarily for long-term investors, and you should
not view the Fund as a vehicle for trading purposes.
Special Risk
Considerations........ No Operating History. The Fund is a newly organized,
non-diversified, closed-end management investment
company with no history of operations.
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Investment and Market Risk. An investment in the
Fund's Common Shares is subject to investment risk,
including the possible loss of the entire principal
amount that you invest. Your investment in Common
Shares represents an indirect investment in the
securities owned by the Fund, substantially all of
which are traded on a national securities exchange
or in the over-the-counter markets. The value of
these securities, like other market investments, may
move up or down, sometimes rapidly and unpredictably.
Your Common Shares at any point in time may be worth
less than what you invested, even after taking into
account the reinvestment of Fund dividends and
distributions. The Fund intends to utilize leverage,
which magnifies the stock market and interest rate
risks. See "Use of Leverage."
Interest Rate Risk. Interest rate risk is the risk
that fixed-income securities such as preferred and
debt securities will decline in value because of
changes in market interest rates. When market
interest rates rise, the market value of such
securities generally will fall. The Fund's
investment in such securities means that the net
asset value and market price of Common Shares will
tend to decline if market interest rates rise.
During periods of declining interest rates, an issuer
may exercise its option to prepay principal earlier
than scheduled, forcing the Fund to reinvest in
lower yielding securities. This is known as call or
prepayment risk. During periods of rising interest
rates, the average life of certain types of
securities may be extended because of slower than
expected principal payments. This may lock in a
below market interest rate, increase the security's
duration and reduce the value of the security. This
is known as extension risk. See "Risks--Investment
and Market Risk and Interest Rate Risk."
Credit Risk; Subordination. Credit risk is the risk
that a preferred or debt security in the Fund's
portfolio will decline in price or fail to make
dividend payments when due because the issuer of the
security experiences a decline in its financial
status. Preferred securities are subordinated
borrowing to bonds and other debt instruments in a
company's capital structure, in terms of priority to
corporate income, and therefore will be subject to
greater credit risk than those debt instruments.
Special Risks Related to Preferred Securities. There
are special risks associated with investing in
preferred securities:
Limited Voting Rights. Generally, preferred security
holders (such as the Fund) have no voting rights
with respect to the issuing company unless preferred
dividends have been in arrears for a specified
number of periods at which time the preferred
security holders may elect a number of directors to
the issuer's board. Generally, once all
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the arrearages have been paid, the preferred security holders no longer have voting rights.
In the case of taxable preferred securities (as described under "The Fund's Investments--Portfolio Composition"), holders generally have no voting rights, except if (i) the issuer fails to pay dividends for a specified period of time or (ii) a declaration of default occurs and is continuing.
Special Redemption Rights. In certain varying circumstances, an issuer of preferred securities may redeem the securities prior to a specified date. For instance, for certain types of preferred securities, a redemption may be triggered by a change in federal income tax or securities laws. As with call provisions, a special redemption by the issuer may negatively impact the return of the security held by the Fund.
See "Risks--Special Risks Related to Preferred Securities."
Leverage Risk. The use of leverage through the issuance of FundPreferred shares or Borrowings creates an opportunity for increased Common Share net income and returns, but also creates special risks for Common Shareholders. There is no assurance that the Fund's leveraging strategy will be successful. The Fund will pay (and Common Shareholders will bear) any costs and expenses relating to the issuance and ongoing maintenance of FundPreferred shares (for example, distribution related expenses such as a participation fee paid at what it expects will be an annual rate of 0.25% of FundPreferred share liquidation preference to broker-dealers participating in FundPreferred share auctions).
Leverage creates two major types of risks for Common Shareholders:
. the likelihood of greater volatility of net asset value and market price of Common Shares because changes in the value of the Fund's portfolio investments, including investments purchased with the proceeds of the issuance of FundPreferred shares or Borrowings, are borne entirely by the Common Shareholders; and
. the possibility either that Common Share income will fall if the dividend rate on FundPreferred shares or the interest rate on any Borrowings rises, or that Common Share income will fluctuate because the dividend rate on FundPreferred shares or the interest rate on any Borrowings varies.
See "Risks--Leverage Risk."
Concentration Risk. The Fund intends to invest at least 25% of its Managed Assets in the preferred securities of companies principally engaged in financial services. This policy makes the Fund more
susceptible to adverse economic or regulatory occurrences affecting that sector.
A company is "principally engaged" in financial services if it owns financial services-related assets that constitute at least 50% of its revenues from providing financial services. Companies in the financial services sector include commercial banks, industrial banks, savings institutions, finance companies, diversified financial services companies, investment banking firms, securities brokerage houses, investment advisory companies, leasing companies, insurance companies and companies providing similar services. Concentration of investments in the financial services sector includes the following risks:
. financial services companies may suffer a setback if regulators change the rules under which they operate;
. unstable interest rates can have a disproportionate effect on the financial services sector;
. financial services companies whose securities the Fund may purchase may themselves have concentrated portfolios, such as a high level of loans to real estate developers, which makes them vulnerable to economic conditions that affect that sector; and
. financial services companies have been affected by increased competition, which could adversely affect the profitability or viability of such companies.
See "Risks--Concentration Risk."
Non-Diversification. Because the Fund is classified as "non-diversified" under the Investment Company Act of 1940, as amended (the "1940 Act"), it can invest a greater portion of its assets in obligations of a single issuer than a "diversified" fund. As a result, the Fund will be more susceptible than a more widely diversified fund to any single corporate, economic, political or regulatory occurrence. See "The Fund's Investments" and "Risks--Non-Diversification."
Non-U.S. Securities Risk. Investments in securities of non-U.S. issuers involve special risks not presented by investments in securities of U.S. issuers, including the following: less publicly available information about companies due to less rigorous disclosure or accounting standards or regulatory practices; the impact of political, social or diplomatic events; possible seizure, expropriation or nationalization of the company or its assets; and possible imposition of currency exchange controls. These risks are more pronounced to the extent that the Fund invests a significant amount of its investments in companies located in one region. See "Risks--Non-U.S. Securities Risks."
Hedging Risk. The Fund's use of hedging and other transactions to reduce the portfolio's exposure to increases in interest rates could result in poorer overall performance for the Fund. The Fund's use of hedging and other transactions to reduce risk involves costs and will be subject to Spectrum's ability to predict correctly changes in interest rate relationships or other factors. No assurance can be given that Spectrum's judgment in this respect will be correct.
Interest Rate Transactions Risk. The Fund may enter into an interest rate swap or cap transaction to attempt to protect itself from increasing dividend or interest expenses resulting from increasing short-term interest rates. A decline in interest rates may result in a decline in the value of the swap or cap, which may result in a decline in the net asset value of the Fund. See "Hedging Transactions."
Tax Risk. The Fund may invest in preferred securities or other securities the federal income tax treatment of which may not be clear or may be subject to recharacterization by the Internal Revenue Service. It could be more difficult for the Fund to comply with the tax requirements applicable to regulated investment companies (see "Tax Matters") if the tax characterization of the Fund's investments or the tax treatment of the income from such investments were successfully challenged by the Internal Revenue Service.
Inflation Risk. Inflation risk is the risk that the value of assets or income from investment 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, FundPreferred share dividend rates would likely increase, which would tend to further reduce returns to Common Shareholders.
Anti-Takeover Provisions. The Fund's Declaration of Trust (the "Declaration") includes provisions that could limit the ability of other entities or persons to acquire control of the Fund or convert the Fund to open-end status. 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 "Certain Provisions in the Declaration of Trust" and "Risks--Anti-Takeover Provisions."
SUMMARY OF FUND EXPENSES
The Annual Expenses table below assumes the issuance of FundPreferred shares in an amount equal to 33 1/3% of the Fund's capital (after their issuance), and shows Fund expenses as a percentage of net assets attributable to Common Shares.
Shareholder Transaction Expenses Sales Load Paid by You (as a percentage of offering price)..................... 4.50% Offering Expenses Borne by the Fund (as a percentage of offering price)/(1)(2)/ .20% Dividend Reinvestment Plan Fees................................................ None/(3)/ |
Percentage of
Net Assets
Attributable to
Common Shares /(5)/
------------------
Annual Expenses
Management Fees/(4)/...................... 1.35%
Other Expenses/(4)/....................... .30%
Interest Payments on Borrowed Funds/(4)/.. None
------
Total Annual Expenses/(4)/................ 1.65%
Fee and Expense Reimbursement (Years 1-5). (.48)%/(6)/
------
Total Net Annual Expenses (Years 1-5)/(4)/ 1.17%/(6)/
======
|
(1)Nuveen has agreed to pay offering costs (other than sales load) that exceed $0.03 per Common Share.
(2)If the Fund offers FundPreferred shares, costs of that offering, estimated to be slightly more than 2% of the total amount of the FundPreferred share offering, will effectively be borne by the Common Shareholders and result in a reduction of the paid-in-capital attributable to the Common Shares.
(3)You will be charged a $2.50 service charge and pay brokerage charges if you direct State Street Bank and Trust Company, as agent for the Common Shareholders (the "Plan Agent") to sell your Common Shares held in a dividend reinvestment account.
(4)In the event the Fund, as an alternative to issuing FundPreferred shares, utilizes leverage through Borrowings in an amount equal to 33 1/3% of the Fund's total assets (including the amount obtained from leverage), it is estimated that, as a percentage of net assets attributable to Common Shares, the Management Fee would be 1.35%, Other Expenses would be .30%, Interest Payments on Borrowed Funds (assuming an interest rate of 5.00%, which interest rate is subject to change based on prevailing market conditions) would be 2.50%, Total Annual Expenses would be 4.15% and Total Net Annual Expenses would be 3.67%. Based on the total net annual expenses and in accordance with the example below, the expenses for years 1, 3, 5 and 10 would be $80, $152, $226 and $436, respectively.
(5)Stated as percentages of net assets attributable to Common Shares. Assuming no issuance of FundPreferred shares or Borrowings, the Fund's expenses would be estimated to be as follows:
Percentage of
Net Assets
Attributable to
Common Shares
---------------
Annual Expenses
Management Fees........................... .90%
Other Expenses............................ .20%
Interest Payments on Borrowed Funds....... None
----
Total Annual Expenses..................... 1.10%
Fees and Expense Reimbursement (Years 1-5) (.32)%/(6)/
----
Total Net Annual Expenses (Years 1-5)..... .78%/(6)/
====
|
(6)NIAC and Spectrum have contractually agreed to reimburse the Fund for fees and expenses in the amount of .32% of average daily Managed Assets for the first 5 full years of the Fund's operations, .24% of average daily Managed Assets in year 6, .16% in year 7 and .08% in year 8. Assuming the issuance of FundPreferred shares or Borrowings in an amount equal to 33 1/3% of the Fund's total assets (including the amount obtained from leverage) and calculated as a percentage of net assets attributable to Common Shares, those amounts would be .48% for the first 5 full years, .36% in year 6, .24% in year 7 and .12% in year 8. Without the reimbursement, "Total Net Annual Expenses" would be estimated to be 1.65% of average daily net assets attributable to Common Shares (or, assuming no issuance of Fund Preferred shares or Borrowings, 1.10% of average daily net assets).
The purpose of the table above is to help you understand all fees and expenses that you, as a Common Shareholder, would bear directly or indirectly. The expenses shown in the table are based on estimated amounts for the Fund's first year of operations and assume that the Fund issues approximately 20,000,000 Common Shares. See "Management of the Fund" and "Dividend Reinvestment Plan."
The following example illustrates the expenses (including the sales load of $45) that you would pay on a $1,000 investment in Common Shares, assuming (1) total net annual expenses of 1.17% of net assets attributable to Common Shares in years 1 through 5, increasing to 1.65% in years 9 and 10 and (2) a 5% annual return:/(1)/
1 Year 3 Years 5 Years 10 Years/(2)/ ------ ------- ------- ------------ $56 $80 $106 $202 |
(1)The example assumes that the estimated Other Expenses set forth in the Annual Expenses table are accurate, that fees and expenses increase as described in note 2 below and that all dividends and distributions are reinvested at Common Share net asset value. Actual expenses may be greater or less than those assumed. Moreover, the Fund's actual rate of return may be greater or less than the hypothetical 5% return shown in the example.
(2)Assumes reimbursement of fees and expenses of .24% of average daily Managed Assets in year 6, .16% in year 7 and .08% in year 8. NIAC and Spectrum have not agreed to reimburse the Fund for any portion of its fees and expenses beyond September 30, 2010. See footnote 6 above and "Management of the Fund--Investment Management Agreement."
THE FUND
The Fund is a newly organized, non-diversified, closed-end management investment company registered under the 1940 Act. The Fund was organized as a Massachusetts business trust on June 24, 2002, pursuant to a Declaration governed by the laws of the Commonwealth of Massachusetts. As a newly organized entity, the Fund has no operating history. The Fund's principal office is located at 333 West Wacker Drive, Chicago, Illinois 60606, and its telephone number is (800) 257-8787.
USE OF PROCEEDS
The net proceeds of the offering of Common Shares will be approximately $ ($ if the Underwriters exercise the over-allotment option in full) after payment of the estimated organization and offering costs. Nuveen has agreed to pay (i) all organizational expenses and (ii) offering costs (other than sales load) that exceed $0.03 per Common Share. The Fund will invest the net proceeds of the offering in accordance with the Fund's investment objectives and policies as stated below. It is presently anticipated that the Fund will be able to invest substantially all of the net proceeds in preferred and debt securities that meet those investment objectives and policies within approximately two to three months after the completion of the offering. Pending such investment, it is anticipated that the proceeds will be invested in short-term or long-term securities issued by the U.S. Government or its agencies or instrumentalities or in high quality, short-term money market instruments.
THE FUND'S INVESTMENTS
Investment Objectives and Policies
The Fund's primary investment objective is high current income consistent
with capital preservation. The Fund's secondary objective is to enhance
portfolio value relative to the market for preferred securities by investing in
(i) securities that the Fund's subadviser believes are underrated or
undervalued or (ii) sectors that the Fund's subadviser believes are
undervalued. There can be no assurance that the Fund's investment objectives
will be achieved.
Under normal circumstances, the Fund will invest:
. at least 80% of its Managed Assets in preferred securities;
. up to 20% of its Managed Assets in debt securities, including convertible debt securities and convertible preferred securities; and
. 100% of its total assets in securities that, at the time of investment, are investment grade quality, which may include up to 10% in split-rated securities.
While the Fund does not currently intend to invest in illiquid securities (i.e., securities that are not readily marketable), it may invest up to 10% of its Managed Assets in illiquid securities. In addition, the Fund may invest up to 35% of its Managed Assets in U.S. dollar denominated securities of non-U.S. issuers that are offered, traded or listed in U.S. markets.
Investment grade quality securities are those rated within the four highest grades by at least one of the NRSROs (Baa or BBB or better by Moody's, S&P or Fitch), and securities that are unrated but
judged to be of comparable quality by Spectrum. Investment grade securities may include split-rated securities. The Fund may invest up to 10% of its total assets in split-rated securities. See Appendix A in the Statement of Additional Information for a description of security ratings.
The Fund cannot change its investment objectives without the approval of the holders of a "majority of the outstanding" Common Shares and FundPreferred shares voting together as a single class, and of the holders of a "majority of the outstanding" FundPreferred shares voting as a separate class. When used with respect to particular shares of the Fund, a "majority of the outstanding" shares means (i) 67% or more of the shares present at a meeting, if the holders of more than 50% of the shares are present or represented by proxy, or (ii) more than 50% of the shares, whichever is less. See "Description of Shares--FundPreferred Shares--Voting Rights" and the Statement of Additional Information under "Description of Shares--FundPreferred Shares--Voting Rights" for additional information with respect to the voting rights of holders of FundPreferred shares.
Investment Philosophy and Process
Investment Philosophy. Spectrum's investment philosophy is centered on several underlying themes:
Income Orientation. Over time the primary contributor to the total return of Spectrum's strategy comes from providing high levels of current income.
High Quality Credit Focus. Spectrum believes there is a potential advantage to investing in subordinated preferred securities of strong, highly rated issuers as opposed to owning the senior debt of what Spectrum considers to be weak, deteriorating issuers.
The Preferred Securities Market. Since its founding in 1987, Spectrum has focused on utilizing preferred securities, which during some periods have been the highest yielding investment grade issues in the U.S. capital markets, to meet its clients' investment objectives. Past performance of preferred securities is no guarantee of future results of such securities or of the Fund.
Investment Process. Spectrum's investment process focuses on:
Macroeconomic and Credit Analysis. Spectrum's process begins by utilizing its in-house research capabilities and external credit sources such as Moody's, Fitch and S&P to identify economic sectors, industries and companies that Spectrum believes have a stable or improving credit profile.
Security Selection. Spectrum employs a value-oriented style with a focus on choosing preferred securities that it believes are attractive relative to both other preferred securities and to the same issuer's senior debt. Features such as yield, call protection, subordination and liquidity are analyzed to justify inclusion within the portfolio.
Diversification. Spectrum will seek to invest in a large number of different industries and issuers within both the financial services sector and within other areas of the economy in order to help to insulate the portfolio from events that affect any particular company or sector.
Trading Opportunities. While income is the primary objective of the Fund, Spectrum will also seek to enhance portfolio value by trading to take advantage of inefficiencies found in the preferred securities market. This often entails selling issues Spectrum deems to be overvalued and buying what Spectrum considers to be undervalued securities.
Full Investment. Spectrum's general strategy is to remain primarily invested in taxable preferred securities, although, it may at times use permitted temporary investments to adopt a defensive strategy if in its opinion such strategy is warranted by market conditions.
Portfolio Composition
The Fund's portfolio will be composed principally of the following investments. A more detailed description of the Fund's investment policies and restrictions and more detailed information about the Fund's portfolio investments are contained in the Statement of Additional Information.
Preferred Securities. Under normal circumstances, the Fund will invest at least 80% of its Managed Assets in preferred securities, not including convertible preferred securities. The Fund intends to invest primarily in taxable preferred securities that do not qualify for the Dividends Received Deduction. Preferred securities generally pay fixed or adjustable rate dividends to investors, and have a "preference" over common stock in the payment of dividends and the liquidation of a company's assets. This means that a company must pay dividends on preferred stock before paying any dividends on its common stock. Preferred stockholders usually have no right to vote for corporate directors or on other matters.
The Fund intends to invest at least 25% of its Managed Assets in the securities of companies principally engaged in financial services (which are prominent issuers of preferred securities) and is subject to the risks of such concentration (See "--Financial Services Company Securities").
Taxable Preferred Securities. Pursuant to the Dividends Received Deduction, corporations may generally deduct 70% of the dividend income they receive. Corporate shareholders of a regulated investment company like the Fund generally are permitted to claim a deduction with respect to that portion of their distributions attributable to amounts received by the regulated investment company that qualify for the Dividends Received Deduction. However, not all preferred securities pay dividends that are eligible for the Dividends Received Deduction. Spectrum intends to invest primarily in taxable preferred securities (often referred to as "hybrid" preferred securities) that do not qualify for the Dividends Received Deduction. These types of taxable preferred securities typically offer additional yield spread versus other types of preferred securities due to this lack of special tax treatment.
Taxable preferred securities are a comparatively new asset class. Taxable
preferred securities are typically issued by corporations, generally in the
form of interest-bearing notes or preferred securities, or by an affiliated
business trust of a corporation, generally in the form of beneficial interests
in subordinated debentures or similarly structured securities. The taxable
preferred securities market consists of both fixed and adjustable coupon rate
securities that are either perpetual in nature or have stated maturity dates.
The taxable preferred securities market is divided into the "$25 par" and the
"institutional" segments. The $25 par segment is typified by securities that
are listed on the New York Stock Exchange, which trade and are quoted "flat",
i.e., without accrued dividend income, and which are typically callable at par
value five years after their original issuance date. The institutional segment
is typified by $1,000 par value securities that are not exchange-listed, which
trade and are quoted on an "accrued income" basis, and which typically have a
minimum of 10 years of call protection (at premium prices) from the date of
their original issuance.
Taxable preferred securities are typically junior and fully subordinated liabilities of an issuer or the beneficiary of a guarantee that is junior and fully subordinated to the other liabilities of the guarantor. In addition, taxable preferred securities typically permit an issuer to defer the payment of income for eighteen months or more without triggering an event of default. Generally, the deferral period is five years or more. Because of their subordinated position in the capital structure of an issuer, the ability to defer payments for extended periods of time without adverse consequence to the issuer, and certain other features (such as restrictions on common dividend payments by the issuer or ultimate guarantor when cumulative payments on the taxable preferred securities have not been made), these taxable preferred securities are often treated as close substitutes for traditional preferred securities, both by issuers and investors. Taxable preferred securities have many of the key characteristics of equity due to their subordinated position in an issuer's capital structure and because their quality and value are heavily dependent on the profitability of the issuer rather than on any legal claims to specific assets or cash flows.
Taxable preferred securities include but are not limited to:/(1)/
. trust originated preferred securities ("TOPRS(R)");
. monthly income preferred securities ("MIPS(R)");
. quarterly income bond securities ("QUIBS(R)");
. quarterly income debt securities ("QUIDS(R)");
. quarterly income preferred securities ("QUIPS/SM/");
. corporate trust securities ("CORTS(R)");
. public income notes ("PINES(R)"); and
Taxable preferred securities are typically issued with a final maturity date, although some are perpetual in nature. In certain instances, a final maturity date may be extended and/or the final payment of principal may be deferred at the issuer's option for a specified time without any adverse consequence to the issuer. No redemption can typically take place unless all cumulative payment obligations have been met, although issuers may be able to engage in open-market repurchases without regard to any cumulative dividends payable. A portion of the portfolio may include investments in non-cumulative preferred securities, whereby the issuer does not have an obligation to make up any arrearages to its shareholders. Should an issuer default on its obligations under such a security, the amount of dividends the Fund pays may be adversely affected.
Many taxable preferred securities are issued by trusts or other special purpose entities established by operating companies, and are not a direct obligation of an operating company. At the time a trust or special purpose entity sells its preferred securities to investors, the trust or special purpose entity purchases debt of the operating company (with terms comparable to those of the trust or special purpose entity securities), which enables the operating company to deduct for tax purposes the interest paid on the debt held by the trust or special purpose entity. The trust or special purpose entity is generally required to be treated as transparent for federal income tax purposes such that the holders of the taxable preferred securities are treated as owning beneficial interests in the underlying debt of the operating company. Accordingly, payments of the taxable preferred securities are treated as interest
rather than dividends for federal income tax purposes and, as such, are not eligible for the Dividends Received Deduction. The trust or special purpose entity in turn would be a holder of the operating company's debt and would have priority with respect to the operating company's earnings and profits over the operating company's common shareholders, but would typically be subordinated to other classes of the operating company's debt. Typically a taxable preferred share has a rating that is slightly below that of its corresponding operating company's senior debt securities.
Non-U.S. Securities. The Fund may invest up to 35% of its Managed Assets in U.S. dollar denominated securities of non-U.S. issuers offered, traded or listed in U.S. markets. The Fund may invest in any region of the world and invests in companies operating in developed countries such as Canada, Japan, Australia, New Zealand and most Western European countries. The Fund does not intend to invest in companies based in emerging markets such as the Far East, Latin America and Eastern Europe. The World Bank and other international agencies define emerging markets based on such factors as trade initiatives, per capita income and level of industrialization. For purposes of this 35% limitation, non-U.S. securities include securities represented by American Depository Receipts.
Financial Services Company Securities. The Fund intends to invest at least 25% of its Managed Assets in securities issued by companies "principally engaged" in financial services. A company is "principally engaged" in financial services if it owns financial services-related assets that constitute at least 50% of its revenues from providing financial services. Companies in the financial services sector include commercial banks, industrial banks, savings institutions, finance companies, diversified financial services companies, investment banking firms, securities brokerage houses, investment advisory companies, leasing companies, insurance companies and companies providing similar services.
Debt Securities and Convertible Securities. The Fund may invest up to 20% of its Managed Assets in debt securities, including convertible debt securities and convertible preferred securities. Common stock acquired pursuant to a conversion feature will be subject to this 20% limitation. The Fund's investments in debt securities may include investments in U.S. dollar denominated corporate debt securities issued by domestic and non-U.S. corporations (subject to the requirements noted above) and U.S. dollar denominated government debt securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities or a non-U.S. government or its agencies or instrumentalities (subject to the requirements noted above). Convertible securities are debt securities or preferred stock that are exchangeable for common stock of the issuer at a predetermined price (the "conversion price"). Depending upon the relationship of the conversion price to the market value of the underlying securities, convertible securities may trade more like common stock than debt instruments.
Common Stock. Common Stock acquired by the Fund pursuant to a convertible feature will be subject to the 20% limitation noted above. Common stock generally represents an ownership interest in an issuer.
Hedging Transactions. The Fund may engage in hedging and other transactions from time to time for the purpose of hedging some of its portfolio. The use of derivatives for purposes of hedging the portfolio will be restricted to reducing the portfolio's exposure to increases in interest rates. The specific derivative instruments will be limited to (A) U.S. Treasury security or U.S. Government Agency security futures contracts and (B) options on U.S. Treasury security or U.S. Government Agency security futures contracts. All such instruments must be traded and listed on an exchange. The positions
in derivatives will be marked-to-market daily at the closing price established on the exchange. The Fund, in implementing its hedging strategies, may enter into futures transactions with a notional principal amount that will not exceed 35% of its Managed Assets, and may invest in options on futures the purchase price for which will not exceed 0.5% of Managed Assets in any calendar quarter. See "Other Investment Policies and Techniques" in the Fund's Statement of Additional Information for further information on hedging transactions.
Illiquid Securities. While the Fund does not currently intend to invest in illiquid securities (i.e., securities that are not readily marketable), it may invest up to 10% of its Managed Assets in illiquid securities. For this purpose, illiquid securities include, but are not limited to, restricted securities (securities the disposition of which is restricted under the federal securities laws), securities that may only be resold pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act") but that are deemed to be illiquid, and repurchase agreements with maturities in excess of seven days. The Board of Trustees or its delegate has the ultimate authority to determine, to the extent permissible under the federal securities laws, which securities are liquid or illiquid for purposes of this 10% limitation. The Board of Trustees has delegated to Spectrum and NIAC the day-to-day determination of the illiquidity of any security held by the Fund, although it has retained oversight and ultimate responsibility for such determinations. Although no definitive liquidity criteria are used, the Board of Trustees has directed Spectrum and NIAC to look for such factors as (i) the nature of the market for a security (including the institutional private resale market; the frequency of trades and quotes for the security; the number of dealers willing to purchase or sell the security; the amount of time normally needed to dispose of the security; and the method of soliciting offers and the mechanics of transfer), (ii) the terms of certain securities or other instruments allowing for the disposition to a third party or the issuer thereof (e.g., certain repurchase obligations and demand instruments), and (iii) other permissible relevant factors.
Restricted securities may be sold only in privately negotiated transactions or in a public offering with respect to which a registration statement is in effect under the Securities Act. Where registration is required, the Fund may be obligated to pay all or part of the registration expenses and a considerable period may elapse between the time of the decision to sell and the time the Fund may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the Fund might obtain a less favorable price than that which prevailed when it decided to sell. Illiquid securities will be priced at fair value as determined in good faith by the Board of Trustees or its delegate. If, through the appreciation of illiquid securities or the depreciation of liquid securities, the Fund should be in a position where more than 10% of the value of its Managed Assets is invested in illiquid securities, including restricted securities that are not readily marketable, the Fund will take such steps as are deemed advisable, if any, to protect liquidity.
Short-Term Debt Securities; Defensive Position; Invest-Up Period. Upon Spectrum's recommendation, during temporary defensive periods and in order to keep the Fund's cash fully invested, including the period during which the net proceeds of the offering of Common Shares or FundPreferred shares are being invested, the Fund may deviate from its investment objectives and invest all or any portion of its Managed Assets in short-term investment grade debt securities. In such a case, the Fund may not pursue or achieve its investment objectives. In addition, during the temporary periods when the net proceeds of the offering of Common Shares or FundPreferred shares are being invested, the Fund may invest all or a portion of its assets in debt securities of long-term maturities issued by the U.S. Government or its agencies or instrumentalities.
When-Issued and Delayed Delivery Transactions. The Fund may buy and sell securities on a when-issued or delayed delivery basis, making payment or taking delivery at a later date, normally within 15 to 45 days of the trade date. This type of transaction may involve an element of risk because no interest accrues on the securities prior to settlement and, because securities are subject to market fluctuations, the value of the securities at time of delivery may be less (or more) than cost. A separate account of the Fund will be established with its custodian consisting of cash equivalents or liquid securities having a market value at all times at least equal to the amount of the commitment.
Other Investment Companies. The Fund may invest up to 10% of its Managed Assets in securities of other open- or closed-end investment companies that invest primarily in preferred securities of the types in which the Fund may invest directly, or short-term debt securities. The Fund generally expects to invest in other investment companies either during periods when it has large amounts of uninvested cash, such as the period shortly after the Fund receives the proceeds of the offering of its Common Shares or FundPreferred shares, or during periods when there is a shortage of attractive, preferred securities available in the market. As an investor in an investment company, the Fund will bear its ratable share of that investment company's expenses, and would remain subject to payment of the Fund's advisory and administrative fees with respect to assets so invested. Common Shareholders would therefore be subject to duplicative expenses to the extent the Fund invests in other investment companies. Spectrum will take expenses into account when evaluating the investment merits of an investment in the investment company relative to available preferred securities. In addition, the securities of other investment companies also may be leveraged and therefore will be subject to the same leverage risks described herein. As described in the section entitled "Risks," the net asset value and market value of leveraged shares will be more volatile and the yield to shareholders will tend to fluctuate more than the yield generated by unleveraged shares.
Initial Portfolio Composition. If current market conditions persist, the
Fund expects that its initial portfolio of preferred securities and debt
securities will be comprised of securities with the following ratings, or in
unrated securities judged by Spectrum to be of comparable credit quality:
40-45% in A or better and 55-60% in Baa. The Fund does not intend to invest any
of its portfolio in securities that are, at the time of investment, either
rated below investment grade by all of the NRSROs or that are unrated but
judged to be below investment grade quality by Spectrum. In addition, the Fund
will not invest more than 10% of its total assets in split-rated securities.
The average call protection of the Fund's portfolio is expected to be
approximately three to four years.
Lending of Portfolio Securities. The Fund may lend its portfolio securities to broker-dealers and banks. Any such loan must be continuously secured by collateral in cash or cash equivalents maintained on a current basis in an amount at least equal to the market value of the securities loaned by the Fund. The Fund would continue to receive the equivalent of the interest or dividends paid by the issuer on the securities loaned, and would also receive an additional return that may be in the form of a fixed fee or a percentage of the collateral. The Fund may pay reasonable fees to persons unaffiliated with the Fund for services in arranging these loans. The Fund would have the right to call the loan and obtain the securities loaned at any time on notice of not more than five business days. The Fund would not have the right to vote the securities during the existence of the loan but would call the loan to permit voting of the securities, if, in Spectrum's judgment, a material event requiring a shareholder vote would otherwise occur before the loan was repaid. In the event of bankruptcy or other default of the borrower, the Fund could experience both delays in liquidating the loan collateral or recovering the loaned securities and losses, including (a) possible decline in the value of the collateral or in the value of the securities loaned during the period while the Fund seeks to enforce its rights thereto, (b) possible
subnormal levels of income and lack of access to income during this period, and
(c) expenses of enforcing its rights.
Portfolio Turnover. The Fund may engage in portfolio trading when considered appropriate, but short-term trading will not be used as the primary means of achieving the Fund's investment objectives. Although the Fund cannot accurately predict its annual portfolio turnover rate, it is not expected to exceed 50% under normal circumstances. However, there are no limits on the rate of portfolio turnover, and investments may be sold without regard to length of time held when, in the opinion of Spectrum, investment considerations warrant such action. A higher portfolio turnover rate results in correspondingly greater brokerage commissions and other transactional expenses that are borne by the Fund. High portfolio turnover may result in the realization of net short-term capital gains by the Fund which, when distributed to shareholders, will be taxable as ordinary income. See "Tax Matters."
USE OF LEVERAGE
The Fund may use leverage through the issuance of FundPreferred shares, commercial paper or notes and/or borrowing in an aggregate amount of approximately 33% of the Fund's capital after such issuance and/or borrowing.
The Fund intends to apply for ratings for the FundPreferred shares from an NRSRO (most likely Moody's, S&P and/or Fitch). The Fund presently anticipates that any FundPreferred shares that it intends to issue initially would be given ratings of at least AA/Aa by such NRSROs as Moody's ("Aa"), S&P ("AA") or Fitch ("AA").
Subject to market conditions and the Fund's receipt of at least a AA/Aa credit rating on FundPreferred shares, within approximately one and one-half to two months after the completion of the offering of the Common Shares, the Fund intends to offer FundPreferred shares representing approximately 33% of the Fund's capital immediately after their issuance. FundPreferred shares will have seniority over the Common Shares and any interest rate transactions the Fund enters into. The issuance of FundPreferred shares will leverage the Common Shares. Any Borrowings would also leverage, and have seniority over, the Common Shares. There is no assurance that the Fund's leveraging strategy will be successful.
Changes in the value of the Fund's portfolio securities, including costs attributable to FundPreferred shares or Borrowings, will be borne entirely by the Common Shareholders. If there is a net decrease (or increase) in the value of the Fund's investment portfolio, the leverage will decrease (or increase) the net asset value per Common Share to a greater extent than if the Fund were not leveraged. During periods in which the Fund uses leverage, the fees paid to NIAC (and to Spectrum) for advisory services will be higher than if the Fund did not use leverage because the fees paid will be calculated on the basis of the Fund's Managed Assets.
Under the 1940 Act, the Fund is not permitted to issue its own preferred shares unless immediately after the issuance the value of the Fund's asset coverage is at least 200% of the liquidation value of the outstanding preferred shares (i.e., such liquidation value may not exceed 50% of the Fund's asset coverage less liabilities other than borrowings). In addition, the Fund is not permitted to declare any cash dividend or other distribution on its Common Shares unless, at the time of such declaration, the value of the Fund's asset coverage less liabilities other than borrowings is at least 200% of such liquidation value. If FundPreferred shares are issued, the Fund intends, to the extent possible, to purchase or redeem
FundPreferred shares from time to time to the extent necessary in order to maintain coverage of any FundPreferred shares of at least 200%. If FundPreferred shares are outstanding, two of the Fund's trustees will be elected by the holders of FundPreferred shares, voting separately as a class. The remaining trustees of the Fund will be elected by holders of Common Shares and FundPreferred shares voting together as a single class. In the event the Fund failed to pay dividends on FundPreferred shares for two years, FundPreferred shares would be entitled to elect a majority of the trustees of the Fund. The failure to pay dividends or make distributions could result in the Fund ceasing to qualify as a regulated investment company under the Code, which could have a material adverse effect on the value of the Common Shares.
Under the 1940 Act, the Fund generally is not permitted to issue commercial paper or notes or borrow unless immediately after the borrowing or commercial paper or note issuance the value of the Fund's total assets less liabilities other than the principal amount represented by commercial paper, notes or borrowings, is at least 300% of such principal amount. In addition, the Fund is not permitted to declare any cash dividend or other distribution on its Common Shares unless, at the time of such declaration, the value of the Fund's total assets, less liabilities other than the principal amount represented by commercial paper, notes or borrowings, is at least 300% of such principal amount. If the Fund borrows, the Fund intends, to the extent possible, to prepay all or a portion of the principal amount of any outstanding commercial paper, notes or borrowing to the extent necessary in order to maintain the required asset coverage. Failure to maintain certain asset coverage requirements could result in an event of default and entitle the debt holders to elect a majority of the Board of Trustees.
The Fund may be subject to certain restrictions imposed by either guidelines of one or more NRSROs which may issue ratings for FundPreferred shares or, if the Fund borrows from a lender, by the lender. These guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed on the Fund by the 1940 Act. It is not anticipated that these covenants or guidelines will impede Spectrum from managing the Fund's portfolio in accordance with the Fund's investment objectives and policies. In addition to other considerations, to the extent that the Fund believes that the covenants and guidelines required by the NRSROs would impede its ability to meet its investment objectives, or if the Fund is unable to obtain the rating on FundPreferred shares (expected to be AA/Aa), the Fund will not issue FundPreferred shares.
Assuming that FundPreferred shares or Borrowings will represent in the aggregate approximately 33% of the Fund's capital and pay dividends or interest or a payment rate set by an interest rate transaction at an annual average rate of 4.75%, the income generated by the Fund's portfolio (net of estimated expenses) must exceed 1.57% in order to cover such dividend payments or interest or payment rates and other expenses specifically related to FundPreferred shares or Borrowings. Of course, these numbers are merely estimates, used for illustration. Actual FundPreferred share dividend rates, interest or payment rates may vary frequently and may be significantly higher or lower than the rate estimated above.
The following table is furnished in response to requirements of the Securities and Exchange Commission. It is designed to illustrate the effect of leverage on Common Share total return, assuming investment portfolio total returns (comprised of income and changes in the value of investments held in the Fund's portfolio) of -10%, -5%, 0%, 5% and 10%. These assumed investment portfolio returns are hypothetical figures and are not necessarily indicative of the investment portfolio returns expected to be experienced by the Fund. The table further reflects the issuance of FundPreferred shares or Borrowings representing approximately 33% of the Fund's total capital, and the Fund's currently
projected annual FundPreferred share dividend rate, borrowing interest rate or payment rate set by an interest rate transaction of 4.75%. See "Risks" and "Use of Leverage."
Assumed Portfolio Total Return (10.00)% (5.00)% 0.00 % 5.00% 10.00% Common Share Total Return..... (17.26)% (9.80)% (2.34)% 5.12% 12.59% |
Common Share total return is comprised of two elements -- the Common Share dividends paid by the Fund (the amount of which is largely determined by the net investment income of the Fund after paying dividends on FundPreferred shares) and gains or losses on the value of the securities the Fund owns. As required by the Securities and Exchange Commission rules, the table assumes that the Fund is more likely to suffer capital losses than to enjoy capital appreciation.
Unless and until the Fund issues FundPreferred shares or, alternatively, uses leverage through Borrowings, the Common Shares will not be leveraged and this section will not apply.
HEDGING TRANSACTIONS
The Fund may engage in hedging and other transactions from time to time for the purpose of hedging a portion of its portfolio holdings or in connection with the Fund's anticipated use of leverage through its sale of FundPreferred shares or Borrowings.
Portfolio Hedging Transactions. The use of derivatives for purposes of hedging the portfolio will be restricted to reducing the portfolio's exposure to increases in interest rates. The specific derivative instruments will be limited to (A) U.S. Treasury security or U.S. Government Agency security futures contracts and (B) options on U.S. Treasury security or U.S. Government Agency security futures contracts. All such instruments must be traded and listed on an exchange. The positions in derivatives will be marked-to-market daily at the closing price established on the relevant exchange. The Fund, in implementing its hedging strategies, may enter into futures transactions with a notional principal amount that will not exceed 35% of its Managed Assets, and may invest in options on futures the premiums for which will not exceed 0.5% of Managed Assets in any calendar quarter.
U.S. Treasury and U.S. Government Agency futures contracts are standardized contracts for the future delivery of a U.S. Treasury Bond or U.S. Treasury Note or a U.S. Government Agency security or their equivalent at a future date at a price set at the time of the contract. An option on a U.S. Treasury or U.S. Government Agency futures contract, as contrasted with the direct investment in such a contract, gives the purchaser of the option the right, in return for the premium paid, to assume a position in a U.S. Treasury or U.S. Government Agency futures contract at a specified exercise price at any time on or before the expiration date of the option. Upon exercise of an option, the delivery of the futures position by the writer of the option to the holder of the option will be accompanied by delivery of the accumulated balance in the writer's futures margin account, which represents the amount by which the market price of the futures contract exceeds the exercise price of the option on the futures contract.
Under regulations of the Commodity Futures Trading Commission currently in effect, which may change from time to time, with respect to futures contracts to purchase securities and call options on futures contracts purchased by the Fund, the Fund will set aside in a segregated account liquid securities with a value at least equal to the value of instruments underlying such futures contracts less the amount of initial margin on deposit for such contracts. The current view of the staff of the Securities and Exchange Commission is that the Fund's long and short positions in futures contracts must be collateralized with cash or certain liquid assets held in a segregated account or "covered" in order to counter the impact of any potential leveraging.
There are several risks associated with the use of futures contracts and futures options. A purchase or sale of a futures contract may result in losses in excess of the amount invested in the futures contract. While the Fund may enter into futures contracts and options on futures contracts for hedging purposes, the use of futures contracts and options on futures contracts might result in a poorer overall performance for the Fund than if it had not engaged in any such transactions. There may be an imperfect correlation between the Fund's portfolio holdings and futures contracts or options on futures contracts entered into by the Fund, which may prevent the Fund from achieving the intended hedge or expose the Fund to risk of loss. The degree of imperfection of correlation depends on circumstances such as: variations in speculative market demand for futures, futures options and the related securities, including technical influences in futures and futures options trading and differences between the securities markets and the securities underlying the standard contracts available for trading. Further, the Fund's use of futures contracts and options on futures contracts to reduce risk involves costs and will be subject to Spectrum's ability to predict correctly changes in interest rate relationships or other factors.
The Fund also may invest in relatively new instruments without a significant trading history. See "Other Investment Policies and Techniques" in the Fund's Statement of Additional Information for further information on hedging transactions.
Interest Rate Transactions. In connection with the Fund's anticipated use of leverage through its sale of FundPreferred shares or Borrowings, the Fund may enter into interest rate swap or cap transactions. Interest rate swaps involve the Fund's agreement with the swap counterparty to pay a fixed rate payment in exchange for the counterparty paying the Fund a variable rate payment that is intended to approximate the Fund's variable rate payment obligation on FundPreferred shares or any variable rate borrowing. The payment obligation would be based on the notional amount of the swap.
The Fund may use an interest rate cap, which would require it to pay a premium to the cap counterparty and would entitle it, to the extent that a specified variable rate index exceeds a predetermined fixed rate, to receive from the counterparty payment of the difference based on the notional amount. The Fund would use interest rate swaps or caps only with the intent to reduce or eliminate the risk that an increase in short-term interest rates could have on Common Share net earnings as a result of leverage.
The Fund will usually enter into swaps or caps on a net basis; that is, the two payment streams will be netted out in a cash settlement on the payment date or dates specified in the instrument, with the Fund receiving or paying, as the case may be, only the net amount of the two payments. The Fund intends to maintain in a segregated account with its custodian cash or liquid securities having a value at least equal to the Fund's net payment obligations under any swap transaction, marked-to-market daily.
The use of interest rate swaps and caps is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio security transactions. Depending on the state of interest rates in general, the Fund's use of interest rate swaps or caps could enhance or harm the overall performance of the Common Shares. To the extent there is a decline in interest rates, the value of the interest rate swap or cap could decline, and could result in a decline in the net asset value of the Common Shares. In addition, if short-term interest rates are lower than the Fund's fixed rate of payment on the interest rate swap, the swap will reduce Common Share net earnings. If, on the other hand, short-term interest rates are higher than the fixed rate of payment on the
interest rate swap, the swap will enhance Common Share net earnings. Buying interest rate caps could enhance the performance of the Common Shares by providing a maximum leverage expense. Buying interest rate caps could also decrease the net earnings of the Common Shares in the event that the premium paid by the Fund to the counterparty exceeds the additional amount the Fund would have been required to pay had it not entered into the cap agreement. The Fund has no current intention of selling an interest rate swap or cap. The Fund will not enter into interest rate swap or cap transactions in an aggregate notional amount that exceeds the outstanding amount of the Fund's leverage.
Interest rate swaps and caps do not involve the delivery of securities or other underlying assets or principal. Accordingly, the risk of loss with respect to interest rate swaps is limited to the net amount of interest payments that the Fund is contractually obligated to make. If the counterparty defaults, the Fund would not be able to use the anticipated net receipts under the swap or cap to offset the dividend payments on FundPreferred shares or interest payments on Borrowings. Depending on whether the Fund would be entitled to receive net payments from the counterparty on the swap or cap, which in turn would depend on the general state of short-term interest rates at that point in time, such a default could negatively impact the performance of the Common Shares.
Although this will not guarantee that the counterparty does not default, the Fund will not enter into an interest rate swap or cap transaction with any counterparty that NIAC believes does not have the financial resources to honor its obligation under the interest rate swap or cap transaction. Further, NIAC will continually monitor the financial stability of a counterparty to an interest rate swap or cap transaction in an effort to proactively protect the Fund's investments.
In addition, at the time the interest rate swap or cap transaction reaches its scheduled termination date, there is a risk that the Fund will not be able to obtain a replacement transaction or that the terms of the replacement will not be as favorable as on the expiring transaction. If this occurs, it could have a negative impact on the performance of the Common Shares.
The Fund may choose or be required to redeem some or all FundPreferred shares or prepay any Borrowings. This redemption would likely result in the Fund seeking to terminate early all or a portion of any swap or cap transaction. Such early termination of a swap could result in a termination payment by or to the Fund. An early termination of a cap could result in a termination payment to the Fund.
RISKS
The Fund is a non-diversified, closed-end management investment company designed primarily as a long-term investment and not as a trading vehicle. The Fund is not intended to be a complete investment program and, due to the uncertainty inherent in all investments, there can be no assurance that the Fund will achieve its investment objectives. Your Common Shares at any point in time may be worth less than you invested, even after taking into account the reinvestment of Fund dividends and distributions.
No Operating History
The Fund is a newly organized, non-diversified, closed-end management investment company and has no operating history.
Investment and Market Risk
An investment in the Fund's Common Shares is subject to investment risk, including the possible loss of the entire principal amount that you invest. Your investment in Common Shares represents an indirect investment in the securities owned by the Fund, substantially all of which are traded on a national securities exchange or in the over-the-counter markets. The value of these securities, like other market investments, may move up or down, sometimes rapidly and unpredictably.
Your Common Shares at any point in time may be worth less than what you invested, even after taking into account the reinvestment of Fund dividends and distributions. The Fund intends to utilize leverage, which magnifies the stock market and interest rate risks. See "Use of Leverage."
Interest Rate Risk
Interest rate risk is the risk that fixed-income securities such as preferred and debt securities will decline in value because of changes in market interest rates. When market interest rates rise, the market value of such securities generally will fall. The Fund's investment in such securities means that the net asset value and market price of Common Shares will tend to decline if market interest rates rise.
During periods of declining interest rates, the issuer of a security may exercise its option to prepay principal earlier than scheduled, forcing the Fund to reinvest in lower yielding securities. This is known as call or prepayment risk. Preferred and debt securities frequently have call features that allow the issuer to repurchase the security prior to its stated maturity. An issuer may redeem an obligation if the issuer can refinance the debt at a lower cost due to declining interest rates or an improvement in the credit standing of the issuer. During periods of rising interest rates, the average life of certain types of securities may be extended because of slower than expected principal payments. This may lock in a below market interest rate, increase the security's duration and reduce the value of the security. This is known as extension risk.
Credit Risk; Subordination
Credit risk is the risk that a preferred or debt security in the Fund's portfolio will decline in price or fail to make dividend payments when due because the issuer of the security experiences a decline in its financial status. The Fund may invest up to 10% of its total assets in split-rated securities. Split-rated securities are those securities that, at the time of investment, are rated below investment grade by Moody's, S&P or Fitch, so long as at least one NRSRO rates such securities within the four highest grades (i.e., investment grade quality). This means that a split-rated security may be regarded by one NRSRO (but by definition not by all NRSROs or by Spectrum) as having predominately speculative characteristics with respect to the issuer's capacity to pay interest and repay principal, and accordingly subject to a greater risk of default. The prices of split-rated securities, in the view of one but not all NRSROs, may be more sensitive than securities without a split-rating to negative developments, such as a decline in the issuer's revenues or a general economic downturn. Preferred securities are subordinated borrowing to bonds and other debt instruments in a company's capital structure, in terms of priority to corporate income, and therefore will be subject to greater credit risk than those debt instruments.
Special Risks Related to Preferred Securities
There are special risks associated with investing in preferred securities:
Limited Voting Rights. Generally, preferred security holders (such as the Fund) have no voting rights with respect to the issuing company unless preferred dividends have been in arrears for a specified number of periods, at which time the preferred security holders may elect a number of directors to the issuer's board. Generally, once all the arrearages have been paid, the preferred security holders no longer have voting rights.
In the case of certain taxable preferred securities, holders generally have no voting rights, except (i) if the issuer fails to pay dividends for a specified period of time or (ii) if a declaration of default occurs and is continuing. In such an event, rights of preferred security holders generally would include the right to appoint and authorize a trustee to enforce the trust or special purpose entity's rights as a creditor under the agreement with its operating company.
Special Redemption Rights. In certain varying circumstances, an issuer of preferred securities may redeem the securities prior to a specified date. For instance, for certain types of preferred securities, a redemption may be triggered by a change in federal income tax or securities laws. As with call provisions, a redemption by the issuer may negatively impact the return of the security held by the Fund.
Supply of Taxable Preferred Securities. The Financial Accounting Standards Board currently is reviewing accounting guidelines relating to taxable preferred securities. To the extent that a change in the guidelines could adversely affect the market for, and availability of, these securities, the Fund may be adversely affected.
New Types of Securities. From time to time, preferred securities, including taxable preferred securities, have been, and may in the future be, offered having features other than those described herein. The Fund reserves the right to invest in these securities if Spectrum believes that doing so would be consistent with the Fund's investment objectives and policies. Since the market for these instruments would be new, the Fund may have difficulty disposing of them at a suitable price and time. In addition to limited liquidity, these instruments may present other risks, such as high price volatility. Spectrum believes that the unavailability of such innovative securities would not adversely affect the Fund's ability to achieve its investment objectives.
Leverage Risk
Utilization of leverage is a speculative investment technique and involves certain risks to the holders of Common Shares. These include the possibility of higher volatility of the net asset value of the Common Shares and potentially more volatility in the market value of the Common Shares. So long as the Fund is able to realize a higher net return on its investment portfolio than the then current cost of any leverage together with other related expenses, the effect of the leverage will be to cause holders of Common Shares to realize higher current net investment income than if the Fund were not so leveraged. On the other hand, to the extent that the then current cost of any leverage, together with other related expenses, approaches the net return on the Fund's investment portfolio, the benefit of leverage to holders of Common Shares will be reduced, and if the then current cost of any leverage were to exceed
the net return on the Fund's portfolio, the Fund's leveraged capital structure would result in a lower rate of return to Common Shareholders than if the Fund were not so leveraged. There can be no assurance that the Fund's leverage strategy will be successful. The Fund will pay (and Common Shareholders will bear) any costs and expenses relating to the issuance and ongoing maintenance of FundPreferred shares (for example, distribution related expenses such as a participation fee paid at what it expects will be an annual rate of 0.25% of FundPreferred share liquidation preference to broker-dealers participating in FundPreferred share auctions).
Any decline in the net asset value of the Fund's investments will be borne entirely by Common Shareholders. Therefore, if the market value of the Fund's portfolio declines, the leverage will result in a greater decrease in net asset value to Common Shareholders than if the Fund were not leveraged. Such greater net asset value decrease also will tend to cause a greater decline in the market price for the Common Shares. To the extent that the Fund is required or elects to redeem any FundPreferred shares or prepay any Borrowings, the Fund may need to liquidate investments to fund such redemptions or prepayments. Liquidation at times of adverse economic conditions may result in capital loss and reduce returns to Common Shareholders.
In addition, such redemption or prepayment would likely result in the Fund seeking to terminate early all or a portion of any interest rate swap or cap transaction. Early termination of the interest rate swap could result in a termination payment by or to the Fund. Early termination of a cap could result in a termination payment to the Fund. See "Hedging Transactions."
Concentration Risk
The Fund intends to invest at least 25% of its Managed Assets in preferred securities of companies principally engaged in financial services. This policy makes the Fund more susceptible to adverse economic or regulatory occurrences affecting that sector.
Concentration of investments in the financial services sector includes the following risks:
. regulatory actions--financial services companies may suffer a setback if regulators change the rules under which they operate;
. changes in interest rates--unstable interest rates can have a disproportionate effect on the financial services sector;
. concentration of loans--financial services companies whose securities the Fund may purchase may themselves have concentrated portfolios, such as a high level of loans to real estate developers, which makes them vulnerable to economic conditions that affect that sector; and
. competition--financial services companies have been affected by increased competition, which could adversely affect the profitability or viability of such companies.
Non-Diversification
Because the Fund is classified as "non-diversified" under the 1940 Act it can invest a greater portion of its assets in obligations of a single issuer than a "diversified" fund. As a result, the Fund will be more susceptible than a more widely diversified fund to any single corporate, economic, political or regulatory occurrence. See "The Fund's Investments."
Non-U.S. Securities Risk
Investments in securities of non-U.S. issuers involve special risks not presented by investments in securities of U.S. issuers, including the following: less publicly available information about companies due to less rigorous disclosure or accounting standards or regulatory practices; the impact of political, social or diplomatic events; possible seizure, expropriation or nationalization of the company or its assets; and possible imposition of currency exchange controls. These risks are more pronounced to the extent that the Fund invests a significant amount of its investments in companies located in one region.
Hedging Risk
The Fund's use of hedging and other transactions to reduce the portfolio's exposure to increases in interest rates could result in poorer overall performance for the Fund. There may be an imperfect correlation between the Fund's portfolio holdings and such hedging and other transactions entered into by the Fund, which may prevent the Fund from achieving the intended consequences of the applicable transaction or expose the Fund to risk of loss. Further, the Fund's use of hedging and other transactions to reduce risk involves costs and will be subject to Spectrum's ability to predict correctly changes in interest rate relationships or other factors. No assurance can be given that Spectrum's judgment in this respect will be correct. See "Hedging Transactions" and "Other Investment Policies and Techniques" in the Fund's Statement of Additional Information.
Interest Rate Transactions Risk
The Fund may enter into an interest rate swap or cap transaction to attempt to protect itself from increasing dividend or interest expenses resulting from increasing short-term interest rates. A decline in interest rates may result in a decline in the value of the swap or cap, which may result in a decline in the net asset value of the Fund. See "Hedging Transactions" and "Other Investment Policies and Techniques" in the Fund's Statement of Additional Information.
Convertible Security Risk
Convertible securities generally offer lower interest or dividend yields than non-convertible securities of similar quality. The market values of convertible securities tend to decline as interest rates increase and, conversely, to increase as interest rates decline. However, a convertible security's market value tends to reflect the market price of the common stock of the issuing company when the stock price is greater than the convertible security's conversion price. The conversion price is defined as the predetermined price at which the convertible could be exchanged for the associated stock. A convertible security may lose all of its value if the value of the underlying stock falls below the conversion price of the security. As the market price of the underlying common stock declines, the price of the convertible security tends to be influenced more by the yield of the convertible security. Thus, it may not decline in price to the same extent as the underlying common stock. In the event of a liquidation of the issuing company, holders of convertible securities would be paid before the company's common stock holders. Consequently, the issuer's convertible securities generally entail less risk than its common stock.
Common Stock Risk
While common stock has historically generated higher average returns than fixed income securities, common stock has also experienced significantly more volatility in those returns. An adverse event, such as an unfavorable earnings report, may depress the value of common stock held by the Fund. Also, the price of common stock is sensitive to general movements in the stock market. A drop in the stock market may depress the price of common stock held by the Fund.
Market Discount From Net Asset Value
Shares of closed-end investment companies frequently trade at a discount from their net asset value. This characteristic is a risk separate and distinct from the risk that the Fund's net asset value could decrease as a result of its investment activities and may be greater for investors expecting to sell their shares in a relatively short period following completion of this offering. The net asset value of the Common Shares will be reduced immediately following the offering as a result of the payment of certain offering costs. Whether investors will realize gains or losses upon the sale of the Common Shares will depend not upon the Fund's net asset value but entirely upon whether the market price of the Common Shares at the time of sale is above or below the investor's purchase price for the Common Shares. Because the market price of the Common Shares will be determined by factors such as relative supply of and demand for the Common Shares in the market, general market and economic conditions, and other factors beyond the control of the Fund, the Fund cannot predict whether the Common Shares will trade at, below or above net asset value or at, below or above the initial public offering price.
Restricted and Illiquid Securities
The Fund may invest, on an ongoing basis, in restricted securities and other investments which may be illiquid. Illiquid securities are securities that are not readily marketable and may include some restricted securities, which are securities that may not be resold to the public without an effective registration statement under the Securities Act of 1933 or, if they are unregistered, may be sold only in a privately negotiated transaction or pursuant to an exemption from registration. Illiquid investments involve the risk that the securities will not be able to be sold at the time desired by the Fund or at prices approximating the value at which the Fund is carrying the securities on its books.
Inflation Risk
Inflation risk is the risk that the value of assets or income from investment 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, FundPreferred share dividend rates would likely increase, which would tend to further reduce returns to Common Shareholders.
Anti-Takeover Provisions
The Fund's Declaration includes provisions that could limit the ability of other entities or persons to acquire control of the Fund or convert the Fund to open-end status. 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 "Certain Provisions in the Declaration of Trust."
HOW THE FUND MANAGES RISK
Investment Limitations
The Fund has adopted certain investment limitations designed to limit investment risk and maintain portfolio diversification. These limitations are fundamental and may not be changed without the approval of the holders of a "majority of the outstanding" Common Shares and, if issued, FundPreferred shares voting together as a single class, and the approval of the holders of a "majority of the outstanding" FundPreferred shares voting as a separate class. When used with respect to particular shares of the Fund, a "majority of the outstanding" shares means (i) 67% or more of the shares present at a meeting, if the holders of more than 50% of the shares are present or represented by proxy, or (ii) more than 50% of the shares, whichever is less.
The Fund may become subject to guidelines that are more limiting than the investment restrictions set forth herein and in the Statement of Additional Information in order to obtain and maintain ratings from Moody's, S&P or Fitch on the FundPreferred shares that it intends to issue. The Fund does not anticipate that such guidelines would have a material adverse effect on the Fund's Common Shareholders or the Fund's ability to achieve its investment objectives. See "Investment Objectives" in the Statement of Additional Information for information about these guidelines and a complete list of the fundamental and non-fundamental investment policies of the Fund.
Quality Investments
The Fund will invest its net assets in securities that are investment grade quality at the time of investment. Investment grade quality securities are those rated within the four highest grades by at least one of the NRSROs (Baa or BBB or better by Moody's, S&P or Fitch), and securities that are unrated but judged to be of comparable quality by Spectrum. Investment grade securities may include split-rated securities. The Fund may invest up to 10% of its total assets in split-rated securities.
Limited Issuance of FundPreferred Shares
Under the 1940 Act, the Fund could issue FundPreferred shares having a total liquidation value (original purchase price of the shares being liquidated plus any accrued and unpaid dividends) of up to one-half of the value of the asset coverage of the Fund. If the total liquidation value of the FundPreferred shares was ever more than one-half of the value of the Fund's asset coverage, the Fund would not be able to declare dividends on the Common Shares until the liquidation value, as a percentage of the Fund's assets, was reduced. The Fund intends to issue FundPreferred shares representing about 33% of the Fund's total capital immediately after the time of issuance. This higher than required margin of net asset value provides a cushion against later fluctuations in the value of the Fund's portfolio and will subject Common Shareholders to less income and net asset value volatility than if the Fund were more leveraged. The Fund intends to purchase or redeem FundPreferred shares, if necessary, to keep the liquidation value of the FundPreferred shares below one-half of the value of the Fund's asset coverage.
Limited Borrowings
Under the requirements of the 1940 Act, the Fund, immediately after any Borrowings, must have an asset coverage of at least 300%. With respect to any such Borrowings, asset coverage means the ratio
which the value of the total assets of the Fund, less all liabilities and indebtedness not represented by senior securities (as defined in the 1940 Act), bears to the aggregate amount of such Borrowings represented by senior securities issued by the Fund. Certain types of Borrowings may result in the Fund being subject to covenants in credit agreements relating to asset coverages or portfolio composition or otherwise. In addition, the Fund may be subject to certain restrictions imposed by guidelines of one or more NRSROs which may issue ratings for commercial paper or notes issued by the Fund. Such restrictions may be more stringent than those imposed by the 1940 Act.
Other
Currently, the Fund may not invest in inverse floating rate securities, which are securities that pay interest at rates that vary inversely with changes in prevailing interest rates and which represent a leveraged investment in an underlying security. This restriction is a non-fundamental policy of the Fund that may be changed by vote of the Fund's Board of Trustees.
While the Fund does not currently intend to invest in illiquid securities (i.e., securities that are not readily marketable), it may invest up to 10% of its Managed Assets in illiquid securities.
MANAGEMENT OF THE FUND
Trustees and Officers
The Board of Trustees is responsible for the management of the Fund, including supervision of the duties performed by NIAC and Spectrum. The names and business addresses of the trustees and officers of the Fund and their principal occupations and other affiliations during the past five years are set forth under "Management of the Fund" in the Statement of Additional Information.
Investment Adviser and Subadviser
NIAC, 333 West Wacker Drive, Chicago, Illinois 60606, serves as the investment adviser to the Fund. NIAC serves as investment adviser to investment portfolios with approximately $3.9 billion in assets under management as of July 31, 2002. See the Statement of Additional Information under "Investment Advisers."
NIAC is responsible for the selection of the subadviser and ongoing monitoring of the subadviser, managing the Fund's business affairs and providing certain clerical, bookkeeping and other administrative services.
NIAC is a wholly owned subsidiary of The John Nuveen Company, 333 West Wacker Drive, Chicago, Illinois 60606. Founded in 1898, The John Nuveen Company and its affiliates had over $74 billion of net assets under management or surveillance as of July 31, 2002. The John Nuveen Company is a majority-owned subsidiary of The St. Paul Companies, Inc., a publicly-traded company which is principally engaged in providing property-liability insurance through subsidiaries.
Spectrum, 4 High Ridge Park, Stamford, Connecticut 06905, is the subadviser to the Fund. Spectrum specializes in the management of diversified preferred security portfolios for institutional investors
including Fortune 500 companies, pension funds, insurance companies and foundations. Spectrum, which is registered as an investment adviser with the Securities and Exchange Commission, commenced operations in 1987 and had approximately $2.4 billion in assets under management as of June 30, 2002.
Spectrum is an independently managed subsidiary of Principal Capital Management LLC which is part of Principal Financial Group Inc., a publicly traded, diversified, insurance and financial services company. Collectively, subsidiaries and affiliates of Principal Capital Management LLC manage over $102 billion in combined assets worldwide as of June 30, 2002.
A team of full-time Spectrum professionals, working together as the Fund's Investment Committee, is primarily responsible for overseeing the day-to-day operations of the Fund. Mark A. Lieb, Bernard M. Sussman and L. Phillip Jacoby, IV are co-portfolio managers of the Fund. Mr. Lieb is an Executive Director and the Chief Financial Officer of Spectrum. Mr. Sussman is an Executive Director and the Chief Investment Officer of Spectrum and is Chairman of Spectrum's Investment Committee. Mr. Jacoby is a Senior Vice President of Spectrum. As a subsidiary of Principal Capital Management LLC, Spectrum also can take advantage of Principal's extensive staff of internal credit analysts. See "The Fund's Investments--Investment Philosophy and Process."
Spectrum may act as broker for the Fund in connection with the purchase or sale of securities by or to the Fund if and to the extent permitted by procedures adopted from time to time by the Board of Trustees of the Fund. The Board of Trustees, including a majority of the trustees who are not "interested" trustees, has determined that portfolio transactions for the Fund may be executed through Spectrum if, in the judgment of NIAC and Spectrum, the use of Spectrum is likely to result in prices and execution at least as favorable to the Fund as would be available from other qualified brokers and if, in such transactions, Spectrum charges the Fund commission rates at least as favorable to the Fund as those charged by Spectrum to comparable unaffiliated customers in similar transactions. The Board of Trustees also has adopted procedures that are reasonably designed to provide that any commission, fee or other remuneration paid to Spectrum is consistent with the foregoing standard. The Fund will not effect principal transactions with Spectrum. In executing transactions through Spectrum, the Fund will be subject to, and intends to comply with, Section 17(e) of the 1940 Act and the rules thereunder. See "Portfolio Transactions and Brokerage" in the Statement of Additional Information.
Investment Management Agreement
Pursuant to an investment management agreement between NIAC and the Fund, the Fund has agreed to pay for the services and facilities provided by NIAC an annual management fee, payable on a monthly basis, according to the following schedule:
Management
Average Daily Managed Assets// Fee
------------------------------ ----------
Up to $500 million............ .9000%
$500 million to $1 billion.... .8750%
$1 billion to $1.5 billion.... .8500%
$1.5 billion to $2.0 billion.. .8250%
Over $2.0 billion............. .8000%
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If the Fund utilizes leverage through the issuance of FundPreferred shares in an amount equal to 33 1/3% of the Fund's total assets (including the amount obtained from leverage), the management fee calculated as a percentage of net assets attributable to Common Shares would be as follows:
Management
Net Assets Attributable to Common Shares Fee
---------------------------------------- ----------
Up to $500 million................ 1.3500%
$500 million to $1 billion........ 1.3125%
$1 billion to $1.5 billion........ 1.2750%
$1.5 billion to $2.0 billion...... 1.2375%
Over $2.0 billion................. 1.2000%
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Pursuant to an investment sub-advisory agreement between NIAC and Spectrum, Spectrum will receive from NIAC a management fee equal to 40% of the management fee payable by the Fund to NIAC (net of the reimbursements described below).
In addition to the fee of NIAC, the Fund pays all other costs and expenses of its operations, including compensation of its trustees (other than those affiliated with NIAC), custodian, transfer agency and dividend disbursing expenses, legal fees, expenses of independent auditors, expenses of repurchasing shares, expenses of issuing any FundPreferred shares, expenses of preparing, printing and distributing shareholder reports, notices, proxy statements and reports to governmental agencies, and taxes, if any.
For the first eight full years of the Fund's operation, NIAC and Spectrum have contractually agreed to reimburse the Fund for fees and expenses in the amounts, and for the time periods, set forth below:
Percentage Percentage
Reimbursed Reimbursed
Year Ending (as a percentage of (as a percentage of
September 30 Managed Assets) Year Ending September 30 Managed Assets)
-------- --------------- ------------------------ ---------------
2002/(1)/ .32% 2007 .32%
2003 .32% 2008 .24%
2004 .32% 2009 .16%
2005 .32% 2010 .08%
2006 .32%
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(1)From the commencement of operations.
NIAC and Spectrum have not agreed to reimburse the Fund for any portion of its fees and expenses beyond September 30, 2010.
NET ASSET VALUE
The Fund will determine the net asset value of its shares daily, as of the
close of regular session trading on the New York Stock Exchange (normally 4:00
p.m. eastern time). Net asset value is computed by dividing the value of all
assets of the Fund (including accrued interest and dividends), less all
liabilities (including accrued expenses and dividends declared but unpaid), by
the total number of shares outstanding. Any swap transaction that the Fund
enters into may, depending on the applicable interest rate environment, have a
positive or negative value for purposes of calculating net asset value. Any cap
transaction that the Fund enters into may, depending on the applicable interest
rate environment, have no value or a positive value. In addition, accrued
payments to the Fund under such transactions will be assets of the Fund and
accrued payments by the Fund will be liabilities of the Fund.
For purposes of determining the net asset value of the Fund, readily marketable portfolio securities listed on the New York Stock Exchange are valued, except as indicated below, at the last sale price reflected on the consolidated tape at the close of the New York Stock Exchange on the business day as of which such value is being determined. If there has been no sale on such day, the securities are valued at the mean of the closing bid and asked prices on such day. If no bid or asked prices are quoted on such day, then the security is valued by such method as the Board of Trustees shall determine in good faith to reflect its fair market value. Readily marketable securities not listed on the New York Stock Exchange but listed on other domestic exchanges or admitted to trading on the National Association of Securities Dealers Automated Quotations, Inc. ("NASDAQ") National List are valued in a like manner. Portfolio securities traded on more than one securities exchange are valued at the last sale price on the business day as of which such value is being determined as reflected on the tape at the close of the exchange representing the principal market for such securities.
Readily marketable securities traded in the over-the-counter market, including listed securities whose primary market is believed by the investment adviser to be over-the-counter, but excluding securities admitted to trading on the NASDAQ National List, are valued at the mean of the current bid and asked prices as reported by NASDAQ or, in the case of securities not quoted by NASDAQ, the National Quotation Bureau or such other comparable source as the Trustees deem appropriate to reflect their fair market value. However, certain fixed income securities may be valued on the basis of prices provided by a pricing service when such prices are believed by the Board of Trustees to reflect the fair market value of such securities. The prices provided by a pricing service take into account institutional size trading in similar groups of securities and any developments related to specific securities. Where securities are traded on more than one exchange and also over-the-counter, the securities will generally be valued using the quotations the Board of Trustees believes reflect most closely the value of such securities.
DISTRIBUTIONS
Commencing with the first dividend, the Fund intends to make regular monthly cash distributions to Common Shareholders at a level rate (stated in terms of a fixed cents per Common Share dividend rate) that reflects the past and projected performance of the Fund. Distributions can only be made from net investment income after paying any accrued dividends to FundPreferred shareholders. The Fund's ability to maintain a level dividend rate will depend on a number of factors, including dividends payable on the FundPreferred shares. The net income of the Fund consists of all interest income accrued on portfolio assets less all expenses of the Fund. Expenses of the Fund are accrued each day. Over time, all
the net investment income of the Fund will be distributed. At least annually, the Fund also intends to distribute net capital gain and ordinary taxable income, if any, after paying any accrued dividends or making any liquidation payments to FundPreferred shareholders. Initial distributions to Common Shareholders are expected to be declared approximately 45 days, and paid approximately 60 to 90 days, from the completion of this offering, depending on market conditions. Although it does not now intend to do so, the Board of Trustees may change the Fund's dividend policy and the amount or timing of the distributions, based on a number of factors, including the amount of the Fund's undistributed net investment income and historical and projected investment income and the amount of the expenses and dividend rates on the outstanding FundPreferred shares.
To permit the Fund to maintain a more stable monthly distribution, the Fund will initially distribute less than the entire amount of net investment income earned in a particular period. The undistributed net investment income would be available to supplement future distributions. As a result, the distributions paid by the Fund for any particular monthly period may be more or less than the amount of net investment income actually earned by the Fund during the period. Undistributed net investment income will be added to the Fund's net asset value and, correspondingly, distributions from undistributed net investment income will be deducted from the Fund's net asset value.
DIVIDEND REINVESTMENT PLAN
You may elect to have all dividends, including any capital gain dividends, on your Common Shares automatically reinvested by the Plan Agent, in additional Common Shares under the Dividend Reinvestment Plan (the "Plan"). You may elect to participate in the Plan by completing the Dividend Reinvestment Plan Application Form. If you do not participate, you will receive all distributions in cash paid by check mailed directly to you by State Street Bank and Trust Company, as dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will receive will be determined as follows:
(1) If on the payment date of the dividend, the Common Shares are trading at or above net asset value at the time of valuation, the Fund will issue new shares at a price equal to the greater of (i) net asset value per Common Share on that date or (ii) 95% of the market price on that date.
(2) If Common Shares are trading below net asset value at the time of valuation, the Plan Agent will receive the dividend or distribution in cash and will purchase Common Shares in the open market, on the New York Stock Exchange or elsewhere, for the participants' accounts. It is possible that the market price for the Common Shares may increase before the Plan Agent has completed its purchases. Therefore, the average purchase price per share paid by the Plan Agent may exceed the market price at the time of valuation, resulting in the purchase of fewer shares than if the dividend or distribution had been paid in Common Shares issued by the Fund. The Plan Agent will use all dividends and distributions received in cash to purchase Common Shares in the open market within 30 days of the dividend payment date. Interest will not be paid on any uninvested cash payments.
You may withdraw from the Plan at any time by giving written notice to the Plan Agent. If you withdraw or the Plan is terminated, you will receive a certificate for each whole share in your account under the Plan and you will receive a cash payment for any fraction of a share in your account. If you wish, the Plan Agent will sell your shares and send you the proceeds, minus brokerage commissions and a $2.50 service fee.
The Plan Agent maintains all shareholders' accounts in the Plan and gives written confirmation of all transactions in the accounts, including information you may need for tax records. Common Shares in your account will be held by the Plan Agent in non-certificated form. Any proxy you receive will include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions in Common Shares. However, all participants will pay a pro rata share of brokerage commissions incurred by the Plan Agent when it makes open market purchases.
Automatically reinvesting dividends and distributions does not mean that you do not have to pay income taxes due upon receiving dividends and distributions.
The Fund reserves the right to amend or terminate the Plan if in the judgment of the Board of Trustees the change is warranted. There is no direct service charge to participants in the Plan; however, the Fund reserves the right to amend the Plan to include a service charge payable by the participants. Additional information about the Plan may be obtained from State Street Bank and Trust Company, Attn: Equiserve, P.O. Box 43010, Providence, Rhode Island 02940-3010, (800) 290-4390.
DESCRIPTION OF SHARES
Common Shares
The Declaration authorizes the issuance of an unlimited number of Common Shares. The Common Shares being offered have a par value of $0.01 per share and, subject to the rights of holders of FundPreferred shares if issued, have equal rights to the payment of dividends and the distribution of assets upon liquidation. The Common Shares being offered will, when issued, be fully paid and, subject to matters discussed in "Certain Provisions in the Declaration of Trust," non-assessable, and will have no preemptive or conversion rights or rights to cumulative voting. At any time when FundPreferred shares are outstanding, Common Shareholders will not be entitled to receive any cash distributions from the Fund unless all accrued dividends on FundPreferred shares have been paid, and unless asset coverage (as defined in the 1940 Act) with respect to FundPreferred shares would be at least 200% after giving effect to the distributions. See "--FundPreferred Shares" below.
The Common Shares have been approved for listing on the New York Stock Exchange, subject to notice of issuance. The Fund intends to hold annual meetings of shareholders so long as the Common Shares are listed on a national securities exchange and such meetings are required as a condition to such listing.
The Fund's net asset value per share generally increases when interest rates decline, and decreases when interest rates rise, and these changes are likely to be greater because the Fund intends to have a leveraged capital structure. Net asset value will be reduced immediately following the offering by the amount of the sales load and offering expenses paid by the Fund. Nuveen has agreed to pay (i) all organizational expenses and (ii) offering costs (other than sales load) that exceed $0.03 per Common Share. See "Use of Proceeds."
Unlike open-end funds, closed-end funds like the Fund do not continuously offer shares and do not provide daily redemptions. Rather, if a shareholder determines to buy additional Common Shares or sell
shares already held, the shareholder may conveniently do so by trading on the exchange through a broker or otherwise. Shares of closed-end investment companies may frequently trade on an exchange at prices lower than net asset value. Shares of closed-end investment companies like the Fund have during some periods traded at prices higher than net asset value and during other periods have traded at prices lower than net asset value. Because the market value of the Common Shares may be influenced by such factors as dividend levels (which are in turn affected by expenses), call protection, dividend stability, portfolio credit quality, net asset value, relative demand for and supply of such shares in the market, general market and economic conditions, and other factors beyond the control of the Fund, the Fund cannot assure you that Common Shares will trade at a price equal to or higher than net asset value in the future. The Common Shares are designed primarily for long-term investors, and investors in the Common Shares should not view the Fund as a vehicle for trading purposes. See "Use of Leverage" and the Statement of Additional Information under "Repurchase of Fund Shares; Conversion to Open-End Fund."
FundPreferred Shares
The Declaration authorizes the issuance of an unlimited number of FundPreferred shares in one or more classes or series, with rights as determined by the Board of Trustees, by action of the Board of Trustees without the approval of the Common Shareholders.
The Fund's Board of Trustees has indicated its intention to authorize an offering of FundPreferred shares (representing approximately 33% of the Fund's capital immediately after the time the FundPreferred shares are issued) within approximately one and one-half to two months after completion of the offering of Common Shares. Any such decision is subject to market conditions and to the Board's continuing belief that leveraging the Fund's capital structure through the issuance of FundPreferred shares is likely to achieve the benefits to the Common Shareholders described in this Prospectus. Although the terms of the FundPreferred shares will be determined by the Board of Trustees (subject to applicable law and the Fund's Declaration) if and when it authorizes a FundPreferred shares offering, the Board has determined that the FundPreferred shares, at least initially, would likely pay cumulative dividends at rates determined over relatively shorter-term periods (such as 7 days), by providing for the periodic redetermination of the dividend rate through an auction or remarketing procedure. The Board of Trustees has indicated that the preference on distribution, liquidation preference, voting rights and redemption provisions of the FundPreferred shares will likely be as stated below.
Limited Issuance of FundPreferred Shares. Under the 1940 Act, the Fund can issue FundPreferred shares with an aggregate liquidation value of up to one-half of the value of the Fund's total net assets, measured immediately after issuance of the FundPreferred shares. "Liquidation value" means the original purchase price of the shares being liquidated plus any accrued and unpaid dividends. In addition, the Fund is not permitted to declare any cash dividend or other distribution on its Common Shares unless the liquidation value of the FundPreferred shares is less than one-half of the value of the Fund's total net assets (determined after deducting the amount of such dividend or distribution) immediately after the distribution. If the Fund sells all the Common Shares and FundPreferred shares discussed in this Prospectus, the liquidation value of the FundPreferred shares is expected to be approximately 33% of the value of the Fund's total net assets. The Fund intends to purchase or redeem FundPreferred shares, if necessary, to keep that fraction below one-half.
Distribution Preference. The FundPreferred shares have complete priority over the Common Shares as to distribution of assets.
Liquidation Preference. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Fund, holders of FundPreferred shares will be entitled to receive a preferential liquidating distribution (expected to equal the original purchase price per share plus accumulated and unpaid dividends thereon, whether or not earned or declared) before any distribution of assets is made to holders of Common Shares.
Voting Rights. FundPreferred shares are required to be voting shares and to have equal voting rights with Common Shares. Except as otherwise indicated in this Prospectus or the Statement of Additional Information and except as otherwise required by applicable law, holders of FundPreferred shares will vote together with Common Shareholders as a single class.
Holders of FundPreferred shares, voting as a separate class, will be entitled to elect two of the Fund's trustees (following the establishment of the Fund by an initial trustee, the Declaration provides for a total of no less than two and no more than twelve trustees). The remaining trustees will be elected by Common Shareholders and holders of FundPreferred shares, voting together as a single class. In the unlikely event that two full years of accrued dividends are unpaid on the FundPreferred shares, the holders of all outstanding FundPreferred shares, voting as a separate class, will be entitled to elect a majority of the Fund's trustees until all dividends in arrears have been paid or declared and set apart for payment. In order for the Fund to take certain actions or enter into certain transactions, a separate class vote of holders of FundPreferred shares will be required, in addition to the single class vote of the holders of FundPreferred shares and Common Shares. See the Statement of Additional Information under "Description of Shares--FundPreferred Shares--Voting Rights."
Redemption, Purchase and Sale of FundPreferred Shares. The terms of the FundPreferred shares provide that they may be redeemed by the issuer at certain times, in whole or in part, at the original purchase price per share plus accumulated dividends. Any redemption or purchase of FundPreferred shares by the Fund will reduce the leverage applicable to Common Shares, while any issuance of shares by the Fund will increase such leverage. See "Use of Leverage."
The discussion above describes the Board of Trustees' present intention with respect to a possible offering of FundPreferred shares. If the Board of Trustees determines to authorize such an offering, the terms of the FundPreferred shares may be the same as, or different from, the terms described above, subject to applicable law and the Fund's Declaration.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders could, under certain circumstances, be held personally liable for the obligations of the Fund. However, the Declaration contains an express disclaimer of shareholder liability for debts or obligations of the Fund and requires that notice of such limited liability be given in each agreement, obligation or instrument entered into or executed by the Fund or the trustees. The Declaration further provides for indemnification out of the assets and property of the Fund for all loss and expense of any shareholder held personally liable for the obligations of the Fund.
Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the Fund would be unable to meet its obligations. The Fund believes that the likelihood of such circumstances is remote.
The Declaration includes provisions that could limit the ability of other entities or persons to acquire control of the Fund or to convert the Fund to open-end status. Specifically, the Declaration requires a vote by holders of at least two-thirds of the Common Shares and FundPreferred shares, voting together as a single class, except as described below, to authorize (1) a conversion of the Fund from a closed-end to an open-end investment company, (2) a merger or consolidation of the Fund, or a series or class of the Fund, with any corporation, association, trust or other organization or a reorganization of the Fund, or a series or class of the Fund, (3) a sale, lease or transfer of all or substantially all of the Fund's assets (other than in the regular course of the Fund's investment activities), (4) in certain circumstances, a termination of the Fund, or a series or class of the Fund, or (5) a removal of trustees by shareholders, and then only for cause, unless, with respect to (1) through (4), such transaction has already been authorized by the affirmative vote of two-thirds of the total number of trustees fixed in accordance with the Declaration or the By-laws, in which case the affirmative vote of the holders of at least a majority of the Fund's Common Shares and FundPreferred shares outstanding at the time, voting together as a single class, is required, provided, however, that where only a particular class or series is affected (or, in the case of removing a trustee, when the trustee has been elected by only one class), only the required vote by the applicable class or series will be required. Approval of shareholders is not required, however, for any transaction, whether deemed a merger, consolidation, reorganization or otherwise whereby the Fund issues shares in connection with the acquisition of assets (including those subject to liabilities) from any other investment company or similar entity. None of the foregoing provisions may be amended except by the vote of at least two-thirds of the Common Shares and FundPreferred shares, voting together as a single class. In the case of the conversion of the Fund to an open-end investment company, or in the case of any of the foregoing transactions constituting a plan of reorganization which adversely affects the holders of FundPreferred shares, the action in question will also require the affirmative vote of the holders of at least two-thirds of the FundPreferred shares outstanding at the time, voting as a separate class, or, if such action has been authorized by the affirmative vote of two-thirds of the total number of trustees fixed in accordance with the Declaration or the By-laws, the affirmative vote of the holders of at least a majority of the FundPreferred shares outstanding at the time, voting as a separate class. The votes required to approve the conversion of the Fund from a closed-end to an open-end investment company or to approve transactions constituting a plan of reorganization which adversely affects the holders of FundPreferred shares are higher than those required by the 1940 Act. The Board of Trustees believes that the provisions of the Declaration relating to such higher votes are in the best interest of the Fund and its shareholders. See the Statement of Additional Information under "Certain Provisions in the Declaration of Trust."
The provisions of the Declaration described above 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 by discouraging a third party from seeking to obtain control of the Fund in a tender offer or similar transaction. The overall effect of these provisions is to render more difficult the accomplishment of a merger or the assumption of control by a third party. They provide, however, the advantage of potentially requiring persons seeking control of the Fund to negotiate with its management regarding the price to be paid and facilitating the continuity of the Fund's investment objectives and policies. The Board of Trustees of the Fund has considered the foregoing anti-takeover provisions and concluded that they are in the best interests of the Fund and its Common Shareholders.
Reference should be made to the Declaration on file with the Securities and Exchange Commission for the full text of these provisions.
REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its shareholders will not have the right to cause the Fund to redeem their shares. Instead, the Common Shares will trade in the open market at a price that will be a function of several factors, including dividend levels (which are in turn affected by expenses), net asset value, call protection, dividend stability, portfolio credit quality, relative demand for and supply of such shares in the market, general market and economic conditions and other factors. Because shares of closed-end investment companies may frequently trade at prices lower than net asset value, the Fund's Board of Trustees has currently determined that, at least annually, it will consider action that might be taken to reduce or eliminate any material discount from net asset value in respect of Common Shares, which may include the repurchase of such shares in the open market or in private transactions, the making of a tender offer for such shares at net asset value, or the conversion of the Fund to an open-end investment company. The Fund cannot assure you that its Board of Trustees will decide to take any of these actions, or that share repurchases or tender offers will actually reduce market discount.
If the Fund converted to an open-end investment company, it would be required to redeem all FundPreferred shares then outstanding (requiring in turn that it liquidate a portion of its investment portfolio), and the Common Shares would no longer be listed on the New York Stock Exchange. In contrast to a closed-end investment company, shareholders of an open-end investment company may require the company to redeem their shares at any time (except in certain circumstances as authorized by or under the 1940 Act) at their net asset value, less any redemption charge that is in effect at the time of redemption. See the Statement of Additional Information under "Certain Provisions in the Declaration of Trust" for a discussion of the voting requirements applicable to the conversion of the Fund to an open-end investment company.
Before deciding whether to take any action if the Common Shares trade below net asset value, the Board would consider all relevant factors, including the extent and duration of the discount, the liquidity of the Fund's portfolio, the impact of any action that might be taken on the Fund or its shareholders, and market considerations. Based on these considerations, even if the Fund's shares should trade at a discount, the Board of Trustees may determine that, in the interest of the Fund and its shareholders, no action should be taken. See the Statement of Additional Information under "Repurchase of Fund Shares; Conversion to Open-End Fund" for a further discussion of possible action to reduce or eliminate such discount to net asset value.
TAX MATTERS
The following discussion of federal income tax matters is based on the advice of Bell, Boyd & Lloyd LLC, special counsel to the Fund.
The discussions below and in the Statement of Additional Information provide general tax information related to an investment in the Common Shares. Because tax laws are complex and often
change, you should consult your tax advisor about the tax consequences of an investment in the Fund. The following tax discussion assumes that you are a U.S. shareholder and that you hold the Common Shares as a capital asset.
Dividends paid to you out of the Fund's "investment company taxable income" (which includes dividends the Fund receives, interest income, and net short-term capital gain) will be taxable to you as ordinary income to the extent of the Fund's earnings and profits. Distributions of net capital gain (the excess of net long-term capital gain over net short-term capital loss), if any, are taxable to you as long-term capital gains, regardless of how long you have held the Common Shares. A distribution of an amount in excess of the Fund's earnings and profits is treated as a non-taxable return of capital that reduces your tax basis in your Common Shares; any such distributions in excess of your basis are treated as gain from a sale of your shares. The tax treatment of your dividends and distributions will be the same regardless of whether they were paid to you in cash or reinvested in additional Common Shares.
Because the Fund does not intend to invest its assets in securities a significant portion of which would qualify for the Dividends Received Deduction, any corporate shareholder who otherwise would qualify for the Dividends Received Deduction should assume that dividends paid to it out of the Fund generally will not qualify for the Dividends Received Deduction.
A distribution will be treated as paid to you on December 31 of the current calendar year if it is declared by the Fund in October, November or December with a record date in such a month and paid during January of the following year.
Each year, we will notify you of the tax status of dividends and other distributions.
If you sell Common Shares, you may realize a capital gain or loss which will be long-term or short-term, depending on your holding period for the shares.
We may be required to withhold U.S. federal income tax from all taxable distributions payable if you
. fail to provide us with your correct taxpayer identification number;
. fail to make required certifications; or
. have been notified by the IRS that you are subject to backup withholding.
The withholding percentage is 30% for 2002 and 2003, and will decrease to 29% in 2004 and 2005 and 28% thereafter until 2011, when the percentage will revert to 31% unless amended by Congress. This withholding is not an additional tax. Any amounts withheld may be credited against your U.S. federal income tax liability.
Federal tax law imposes an alternative minimum tax with respect to individuals and corporations. Under current law, it is not expected that you will be subject to alternative minimum tax as a result of your investment in the Fund.
The Fund intends to elect to be treated and to qualify as a regulated investment company under the Code. If the Fund so qualifies and distributes each year to its shareholders at least 90% of its investment
company taxable income, the Fund will not be required to pay federal income taxes on any income it distributes to shareholders. If the Fund distributes less than an amount equal to the sum of 98% of its ordinary income and 98% of its capital gain net income and such amounts from previous years that were not distributed, then the Fund will be subject to a 4% excise tax on the undistributed amounts. Fund distributions also may be subject to state and local taxes. You should consult with your own tax advisor regarding the particular consequences to you of investing in the Fund.
The Fund may invest in preferred securities or other securities the federal income tax treatment of which is uncertain or subject to recharacterization by the Internal Revenue Service. To the extent the tax treatment of such securities or their income differs from the tax treatment expected by the Fund, it could affect the timing or character of income recognized by the Fund, requiring the Fund to purchase or sell securities, or otherwise change its portfolio, in order to comply with the tax rules applicable to regulated investment companies under the Code.
OTHER MATTERS
A lawsuit was brought in June 1996 (Green et al. v. Nuveen Advisory Corp., et al.) by certain individual common shareholders of six leveraged closed-end funds sponsored by Nuveen in the federal district court for the Seventh Circuit Court of Appeals. The suit was originally brought against Nuveen, Nuveen Advisory Corp. ("Nuveen Advisory"), six Nuveen investment companies (the "leveraged closed-end funds") managed by Nuveen Advisory and two of the leveraged closed-end funds' former directors seeking unspecified damages, an injunction and other relief. The suit also sought certification of a defendant class consisting of all Nuveen-managed leveraged funds.
The plaintiffs alleged that the leveraged closed-end funds engaged in certain practices that violated various provisions of the 1940 Act and common law. The plaintiffs also alleged, among other things, breaches of fiduciary duty by the funds' directors and Nuveen Advisory and various misrepresentations and omissions in prospectuses and shareholder reports relating to the use of leverage through the issuance and periodic auctioning of preferred stock and the basis of the calculation and payment of management fees to Nuveen Advisory and Nuveen. Plaintiffs also filed a motion to certify defendant and plaintiff classes.
The defendants filed motions to dismiss the entire lawsuit asserting that the claims are without merit and to oppose certification of any classes. On March 30, 1999, the court entered a memorandum opinion and order (1) granting the defendants' motion to dismiss all of plaintiffs' counts against the defendants other than Nuveen Advisory, (2) granting Nuveen Advisory's motion to dismiss all of plaintiffs' counts against it other than breach of fiduciary duty under Section 36(b) of the 1940 Act, and (3) denying the plaintiffs' motion to certify a plaintiff class and a defendant class. No appeal was made by plaintiffs of this decision, and the remaining Section 36(b) count against Nuveen Advisory is discussed below.
As to alleged damages, plaintiffs have claimed as damages the portion of all advisory compensation received by Nuveen Advisory from the funds during the period from June 21, 1995 to the present that is equal to the proportion of each of such fund's preferred stock to its total assets. The preferred stock constitutes approximately one third of the funds' assets so the amount claimed would equal
approximately one third of management fees received by Nuveen Advisory for managing the funds during this period, or more than $60 million. Nuveen Advisory believes that it has no liability and the plaintiffs have suffered no damages and filed a motion for summary judgment as to both liability and damages.
Plaintiffs filed a partial motion for partial summary judgment as to liability only. In a memorandum opinion and order dated September 6, 2001, the court granted Nuveen Advisory's motion for summary judgment and denied plaintiffs' motion for partial summary judgment, thereby terminating the litigation before the court. Plaintiffs appealed this decision on October 8, 2001. In an opinion dated July 8, 2002, the Seventh Circuit Court of Appeals affirmed the opinion of the district court dismissing the plaintiffs' lawsuit. Any petition for a writ of certiorari to the United States Supreme Court seeking to appeal the Seventh Circuit's opinion would need to be filed within ninety days of the Seventh Circuit's July 8, 2002 opinion.
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement dated the date hereof, each Underwriter named below has severally agreed to purchase, and the Fund has agreed to sell to such Underwriter, the number of Common Shares set forth opposite the name of such Underwriter.
Number of
Underwriters Shares
------------ ---------
Salomon Smith Barney Inc............................
Nuveen Investments..................................
A.G. Edwards & Sons, Inc............................
Prudential Securities Incorporated..................
UBS Warburg LLC.....................................
Advest, Inc.........................................
H&R Block Financial Advisors, Inc...................
Fahnestock & Co. Inc................................
Ferris, Baker Watts, Incorporated...................
Janney Montgomery Scott LLC.........................
Legg Mason Wood Walker, Incorporated................
McDonald Investments Inc., a KeyCorp Company........
Quick & Reilly, Inc. A FleetBoston Financial Company
Raymond James & Associates, Inc.....................
RBC Dain Rauscher, Inc..............................
Ryan, Beck & Co., LLC...............................
SunTrust Capital Markets, Inc.......................
Wachovia Securities, Inc............................
Wells Fargo Securities, LLC.........................
-------
Total............................................
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The underwriting agreement provides that the obligations of the several Underwriters to purchase the Common Shares included in this offering are subject to approval of certain legal matters by counsel and to certain other conditions. The Underwriters are obligated to purchase all the Common Shares (other than those covered by the over-allotment option described below) if they purchase any of the Common Shares. The representatives have advised the Fund that the Underwriters do not intend to confirm any sales to any accounts over which they exercise discretionary authority.
The Underwriters, for whom Salomon Smith Barney Inc., Nuveen Investments,
A.G. Edwards & Sons, Inc., Prudential Securities Incorporated, UBS Warburg LLC,
Advest, Inc., H&R Block Financial Advisors, Inc., Fahnestock & Co. Inc.,
Ferris, Baker Watts, Incorporated, Janney Montgomery Scott LLC, Legg Mason Wood
Walker, Incorporated, McDonald Investments Inc., a KeyCorp Company, Quick &
Reilly, Inc. A FleetBoston Financial Company, Raymond James & Associates, Inc.,
RBC Dain Rauscher, Inc., Ryan, Beck & Co., LLC, SunTrust Capital Markets, Inc.,
Wachovia Securities, Inc. and Wells Fargo Securities, LLC , are acting as
representatives, propose to offer some of the Common Shares directly to the
public at the public offering price set forth on the cover page of this
Prospectus and some of the Common Shares to certain dealers at the public
offering price less a concession not in excess of $0.45 per Common Share. The
sales load the Fund will pay of $0.675 per share is equal to 4.5% of the
initial offering price. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $0.10 per Common Share on sales to
certain other dealers. Certain dealers acting in the capacity of
sub-underwriters may receive additional compensation for acting in such a
capacity. If all of the Common Shares are not sold at the initial offering
price, the representatives may change the public
offering price and other selling terms. Investors must pay for any Common Shares purchased on or before , 2002. In connection with this offering, Nuveen may perform clearing services without charge for brokers and dealers for whom it regularly provides clearing services that are participating in the offering as members of the selling group.
The Fund has granted to the Underwriters an option, exercisable for 45 days from the date of this Prospectus, to purchase up to additional Common Shares at the public offering price less the sales load. The Underwriters may exercise such option solely for the purpose of covering over-allotments, if any, in connection with this offering. To the extent such option is exercised, each Underwriter will be obligated, subject to certain conditions, to purchase a number of additional Common Shares approximately proportionate to such Underwriter's initial purchase commitment.
The Fund, NIAC and Spectrum have agreed that, for a period of 180 days from the date of this Prospectus, they will not, without the prior written consent of Salomon Smith Barney Inc. on behalf of the Underwriters, dispose of or hedge any Common Shares or any securities convertible into or exchangeable for Common Shares. Salomon Smith Barney Inc. in its sole discretion may release any of the securities subject to these agreements at any time without notice.
Prior to the offering, there has been no public market for the Common Shares. Consequently, the initial public offering price for the Common Shares was determined by negotiation among the Fund, NIAC and the representatives. There can be no assurance, however, that the price at which the Common Shares will sell in the public market after this offering will not be lower than the price at which they are sold by the Underwriters or that an active trading market in the Common Shares will develop and continue after this offering. The Common Shares have been approved for listing on the New York Stock Exchange, subject to official notice of issuance.
The Fund, NIAC and Spectrum have each agreed to indemnify the several Underwriters or contribute to losses arising out of certain liabilities, including liabilities under the Securities Act of 1933, as amended.
Nuveen has agreed to pay (i) all organizational expenses and (ii) offering costs (other than sales load) that exceed $0.03 per share.
In addition, the Fund has agreed to reimburse the Underwriters for certain expenses incurred by the Underwriters in the offering.
Certain Underwriters participating in the Common Share offering may be invited, some period of time after completion of this offering, to participate in the offering of the FundPreferred shares and will receive compensation for their participation in that FundPreferred share offering. The number of Common Shares purchased by each Underwriter in this offering may be a factor in determining (i) whether that Underwriter is selected to participate in the offering of the FundPreferred shares, (ii) the number of FundPreferred shares allocated to that Underwriter in that offering, and (iii) the amount of certain additional FundPreferred share underwriting compensation available to that Underwriter. The offering costs associated with the issuance of FundPreferred shares are currently estimated to be slightly more than 2% of the total amount of the FundPreferred share offering. These costs will effectively be borne by the Common Shareholders.
In connection with the requirements for listing the Fund's Common Shares on the New York Stock Exchange, the Underwriters have undertaken to sell lots of 100 or more Common Shares to a
minimum of 2,000 beneficial owners in the United States. The minimum investment requirement is 100 Common Shares.
Certain Underwriters may make a market in the Common Shares after trading in the Common Shares has commenced on the New York Stock Exchange. No Underwriter is, however, obligated to conduct market-making activities and any such activities may be discontinued at any time without notice, at the sole discretion of the Underwriter. No assurance can be given as to the liquidity of, or the trading market for, the Common Shares as a result of any market-making activities undertaken by any Underwriter. This Prospectus is to be used by any Underwriter in connection with the offering and, during the period in which a prospectus must be delivered, with offers and sales of the Common Shares in market-making transactions in the over-the-counter market at negotiated prices related to prevailing market prices at the time of the sale.
The Underwriters have advised the Fund that, pursuant to Regulation M under the Securities Exchange Act of 1934, as amended, certain persons participating in the offering may engage in transactions, including stabilizing bids, covering transactions or the imposition of penalty bids, which may have the effect of stabilizing or maintaining the market price of the Common Shares on the New York Stock Exchange at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or purchase of the Common Shares on behalf of an Underwriter for the purpose of fixing or maintaining the price of the Common Shares. A "covering transaction" is a bid for or purchase of the Common Shares on behalf of an Underwriter to reduce a short position incurred by the Underwriters in connection with the offering. A "penalty bid" is a contractual arrangement whereby if, during a specified period after the issuance of the Common Shares, the Underwriters purchase Common Shares in the open market for the account of the underwriting syndicate and the Common Shares purchased can be traced to a particular Underwriter or member of the selling group, the underwriting syndicate may require the Underwriter or selling group member in question to purchase the Common Shares in question at the cost price to the syndicate or may recover from (or decline to pay to) the Underwriter or selling group member in question any or all compensation (including, with respect to a representative, the applicable syndicate management fee) applicable to the Common Shares in question. As a result, an Underwriter or selling group member and, in turn, brokers may lose the fees that they otherwise would have earned from a sale of the Common Shares if their customer resells the Common Shares while the penalty bid is in effect. The Underwriters are not required to engage in any of these activities, and any such activities, if commenced, may be discontinued at any time.
The underwriting agreement provides that it may be terminated in the absolute discretion of the representatives without liability on the part of the Underwriters to the Fund or NIAC or Spectrum if, prior to the delivery of and payment for the Common Shares, (i) trading in the Fund's Common Shares shall have been suspended by the Securities and Exchange Commission or the New York Stock Exchange or trading in securities generally on the New York Stock Exchange shall have been suspended or limited or minimum prices for trading in securities generally shall have been established on the New York Stock Exchange, (ii) a commercial banking moratorium shall have been declared by either federal or New York state authorities or (iii) there shall have occurred any outbreak or escalation of hostilities, declaration by the United States of a national emergency or war, or other calamity or crisis the effect of which on financial markets in the United States is such as to make it, in the sole judgment of the representatives, impracticable or inadvisable to proceed with the offering or delivery of the Common Shares as contemplated by the Prospectus (exclusive of any supplement thereto).
The Fund anticipates that from time to time the representatives of the Underwriters and certain other Underwriters may act as brokers or dealers in connection with the execution of the Fund's
portfolio transactions after they have ceased to be Underwriters and, subject to certain restrictions, may act as brokers while they are Underwriters.
Prior to the public offering of Common Shares, NIAC purchased Common Shares from the Fund in an amount satisfying the net worth requirements of Section 14(a) of the 1940 Act. As of the date of this Prospectus, NIAC owned 100% of the outstanding Common Shares. NIAC may be deemed to control the Fund until such time as it owns less than 25% of the outstanding Common Shares which is expected to occur as of the completion of the offering of Common Shares.
Nuveen, 333 West Wacker Drive, Chicago, Illinois, 60606, one of the representatives of the Underwriters, is the parent company of NIAC.
The principal business address of Salomon Smith Barney Inc. is 388 Greenwich Street, New York, New York 10013.
CUSTODIAN AND TRANSFER AGENT
The custodian of the assets of the Fund is State Street Bank and Trust Company, One Federal Street, Boston, Massachusetts 02110. The Custodian performs custodial, fund accounting and portfolio accounting services. The Fund's transfer, shareholder services and dividend paying agent is also State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110.
LEGAL OPINIONS
Certain legal matters in connection with the Common Shares will be passed upon for the Fund by Bell, Boyd & Lloyd LLC, Chicago, Illinois, and for the Underwriters by Simpson Thacher & Bartlett, New York, New York. Bell, Boyd & Lloyd LLC and Simpson Thacher & Bartlett may rely as to certain matters of Massachusetts law on the opinion of Bingham McCutchen LLP, Boston, Massachusetts.
TABLE OF CONTENTS FOR THE
STATEMENT OF ADDITIONAL INFORMATION
Page
----
Use of Proceeds............................................ 3
Investment Objectives...................................... 3
Investment Policies and Techniques......................... 6
Other Investment Policies and Techniques................... 9
Management of the Fund..................................... 17
Investment Advisers........................................ 22
Portfolio Transactions and Brokerage....................... 26
Distributions.............................................. 28
Description of Shares...................................... 28
Certain Provisions in the Declaration of Trust............. 32
Repurchase of Fund Shares; Conversion to Open-End Fund..... 34
Tax Matters................................................ 36
Performance Related and Comparative Information............ 40
Experts.................................................... 43
Custodian.................................................. 43
Additional Information..................................... 43
Report of Independent Auditors............................. 44
Financial Statements....................................... 45
Appendix A--Ratings of Investments......................... A-1
Appendix B--Performance Related and Comparative Information B-1
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4,000,000 Shares
Nuveen Quality Preferred
Income Fund 2
Common Shares
PROSPECTUS
, 2002
Salomon Smith Barney
Nuveen Investments
A.G. Edwards & Sons, Inc.
Prudential Securities
UBS Warburg
Advest, Inc.
H&R Block Financial Advisors, Inc.
Fahnestock & Co. Inc.
Ferris, Baker Watts
Incorporated
Janney Montgomery Scott LLC
Legg Mason Wood Walker
Incorporated
McDonald Investments Inc.
Quick & Reilly, Inc.
Raymond James
RBC Capital Markets
Ryan, Beck & Co.
Including the Gruntal Division
SunTrust Robinson Humphrey
Wachovia Securities
Wells Fargo Securities, LLC
FRH-PQ9-0902
The information in this statement of Additional Information is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Statement of Additional Information is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED AUGUST 22, 2002
NUVEEN QUALITY PREFERRED INCOME FUND 2
STATEMENT OF ADDITIONAL INFORMATION
Nuveen Quality Preferred Income Fund 2 (the "Fund") is a newly organized, non-diversified closed-end management investment company.
This Statement of Additional Information relating to common shares of the Fund ("Common Shares") does not constitute a prospectus, but should be read in conjunction with the Fund's Prospectus relating thereto dated , 2002, (the "Prospectus"). This Statement of Additional Information does not include all information that a prospective investor should consider before purchasing Common Shares. Investors should obtain and read the Fund's Prospectus prior to purchasing such shares. A copy of the Fund's Prospectus may be obtained without charge by calling (800) 257-8787. You may also obtain a copy of the Fund's Prospectus on the Securities and Exchange Commission's web site (http://www.sec.gov). Capitalized terms used but not defined in this Statement of Additional Information have the meanings ascribed to them in the Prospectus.
TABLE OF CONTENTS
Page
----
Use of Proceeds.............................................................. 3
Investment Objectives.........................................................3
Investment Policies and Techniques............................................6
Other Investment Policies and Techniques......................................9
Management of the Fund.......................................................17
Investment Advisers..........................................................22
Portfolio Transactions and Brokerage.........................................26
Distributions ...............................................................28
Description of Shares........................................................28
Certain Provisions in the Declaration of Trust...............................32
Repurchase of Fund Shares; Conversion to Open-End Fund.......................34
Tax Matters..................................................................36
Performance Related and Comparative Information..............................40
Experts......................................................................43
Custodian....................................................................43
Additional Information.......................................................43
Report of Independent Auditors...............................................44
Financial Statements.........................................................45
Ratings of Investments (Appendix A)........................................ A-1
Performance Related and Comparative Information (Appendix B)............... B-1
|
This Statement of Additional Information is dated , 2002.
USE OF PROCEEDS
The net proceeds of the offering of Common Shares of the Fund will be approximately: $ ($ if the Underwriters exercise the over-allotment option in full) after payment of organization and offering costs.
For the Fund, NIAC has agreed to pay (i) all organizational expenses and (ii) offering costs (other than sales load) that exceed $0.03 per Common Share.
Pending investment in preferred and debt securities that meet the Fund's investment objectives and policies, the net proceeds of the offering will be invested in U.S. government securities or high quality, short-term money market instruments.
INVESTMENT OBJECTIVES
The Fund's primary objective is high current income consistent with
capital preservation. The Fund's secondary objective is to enhance portfolio
value relative to the market for preferred securities by investing in (i)
securities that the Fund's subadviser believes are underrated or undervalued or
(ii) sectors that the Fund's subadviser believes are undervalued. There can be
no assurance that the Fund's investment objectives will be achieved.
The Fund cannot change its investment objectives without the approval of the holders of a "majority of the outstanding" Common Shares and FundPreferred shares voting together as a single class, and of the holders of a "majority of the outstanding" FundPreferred shares voting as a separate class. When used with respect to particular shares of the Fund, a "majority of the outstanding" shares means (i) 67% or more of the shares present at a meeting, if the holders of more than 50% of the shares are present or represented by proxy, or (ii) more than 50% of the shares, whichever is less. See "Description of Shares--FundPreferred Shares--Voting Rights" in the Fund's Prospectus and "Description of Shares--FundPreferred Shares--Voting Rights" in this Statement of Additional Information for additional information with respect to the voting rights of holders of FundPreferred shares.
INVESTMENT RESTRICTIONS
Except as described below, the Fund, as a fundamental policy, may not, without the approval of the holders of a majority of the outstanding Common Shares and, if issued, FundPreferred shares voting together as a single class, and of the holders of a majority of the outstanding FundPreferred shares voting as a separate class:
(1) Issue senior securities, as defined in the Investment Company Act of 1940, other than (i) preferred shares which immediately after issuance will have asset coverage of at least 200%, (ii) indebtedness which immediately after issuance will have asset coverage of at least 300%, or (iii) the borrowings permitted by investment restriction (2) set forth below;
(2) Borrow money, except as permitted by the Investment Company Act of 1940;
(3) Act as underwriter of another issuer's securities, except to the extent that the Fund may be deemed to be an underwriter within the meaning of the Securities Act of 1933 in connection with the purchase and sale of portfolio securities;
(4) Invest more than 25% of its total assets in securities of issuers in any one industry other than the financial services industry; provided, however, that such limitation shall not apply to obligations issued or guaranteed by the United States Government or by its agencies or instrumentalities;
(5) Purchase or sell real estate, but this shall not prevent the Fund from investing in securities of companies that deal in real estate or are engaged in the real estate business, including real estate investment trusts, and securities secured by real estate or interests therein and the Fund may hold and sell real estate or mortgages on real estate acquired through default, liquidation, or other distributions of an interest in real estate as a result of the Fund's ownership of such securities;
(6) Purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments (but this shall not prevent the Fund from purchasing or selling options, futures contracts, derivative instruments or from investing in securities or other instruments backed by physical commodities);
(7) Make loans of funds or other assets, other than by entering into repurchase agreements, lending portfolio securities and through the purchase of debt securities in accordance with its investment objectives, policies and limitations; and
(8) Purchase any securities (other than obligations issued or guaranteed by the United States Government or by its agencies or instrumentalities), if as a result more than 5% of the Fund's total assets would then be invested in securities of a single issuer or if as a result the Fund would hold more than 10% of the outstanding voting securities of any single issuer; provided that, with respect to 50% of the Fund's assets, the Fund may invest up to 25% of its assets in the securities of any one issuer.
For purposes of the foregoing and "Description of Shares-- FundPreferred Shares--Voting Rights" below, "majority of the outstanding," when used with respect to particular shares of the Fund, means (i) 67% or more of the shares present at a meeting, if the holders of more than 50% of the shares are present or represented by proxy, or (ii) more than 50% of the shares, whichever is less.
For the purpose of applying the limitation set forth in subparagraph
(8) above, an issuer shall be deemed the sole issuer of a security when its
assets and revenues are separate from other governmental entities and its
securities are backed only by its assets and revenues. Similarly, in the case of
a non-governmental issuer, such as an industrial corporation or a privately
owned or operated hospital, if the security is backed only by the assets and
revenues of the non-governmental issuer, then such non-governmental issuer would
be deemed to be the sole issuer. Where a security is also backed by the
enforceable obligation of a superior or unrelated governmental or other entity
(other than a bond insurer), it shall also be included in the
computation of securities owned that are issued by such governmental or other entity. Where a security is guaranteed by a governmental entity or some other facility, such as a bank guarantee or letter of credit, such a guarantee or letter of credit would be considered a separate security and would be treated as an issue of such government, other entity or bank. When a municipal bond is insured by bond insurance, it shall not be considered a security that is issued or guaranteed by the insurer; instead, the issuer of such municipal bond will be determined in accordance with the principles set forth above.
Under the Investment Company Act of 1940, the Fund may invest only up to 10% of its Managed Assets in the aggregate in shares of other investment companies and only up to 5% of its Managed Assets in any one investment company, provided the investment does not represent more than 3% of the voting stock of the acquired investment company at the time such shares are purchased. As a stockholder in any investment company, the Fund will bear its ratable share of that investment company's expenses, and will remain subject to payment of the Fund's management, advisory and administrative fees with respect to assets so invested. Holders of Common Shares would therefore be subject to duplicative expenses to the extent the Fund invests in other investment companies. In addition, the securities of other investment companies may also be leveraged and will therefore be subject to the same leverage risks described herein. As described in the Prospectus in the section entitled "Risks", the net asset value and market value of leveraged shares will be more volatile and the yield to shareholders will tend to fluctuate more than the yield generated by unleveraged shares.
In addition to the foregoing fundamental investment policies, the Fund is also subject to the following non-fundamental restrictions and policies, which may be changed by the Board of Trustees. The Fund may not:
(1) Sell securities short, unless the Fund owns or has the right to obtain securities equivalent in kind and amount to the securities sold at no added cost, and provided that transactions in options, futures contracts, options on futures contracts, or other derivative instruments are not deemed to constitute selling securities short.
(2) Purchase securities of open-end or closed-end investment companies except in compliance with the Investment Company Act of 1940 or any exemptive relief obtained thereunder.
(3) Purchase securities of companies for the purpose of exercising control.
The restrictions and other limitations set forth above will apply only at the time of purchase of securities and will not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of an acquisition of securities.
The Fund intends to apply for ratings for its FundPreferred shares from a nationally recognized statistical rating organization ("NRSRO") (typically, Moody's, S&P or Fitch). In order to obtain and maintain the required ratings, the Fund may be required to comply with investment quality, diversification and other guidelines established by the NRSRO. Such guidelines will likely be more restrictive than the restrictions set forth above. The Fund may also be subject to certain restrictions and guidelines imposed by
lenders if the Fund engages in Borrowings. The Fund does not anticipate that such guidelines would have a material adverse effect on its Common Shareholders or the Fund's ability to achieve its investment objectives. The Fund presently anticipates that any FundPreferred shares that it intends to issue initially would be given at least a AA/Aa rating by such NRSRO -- Moody's ("Aa"), S&P ("AA") or Fitch ("AA") -- but no assurance can be given that such ratings will be obtained. NRSROs receive fees in connection with their ratings issuances.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Fund's investment objectives, policies, and techniques that are described in the Fund's Prospectus.
The Fund's primary investment objective is high current income consistent with capital preservation. The Fund's secondary objective is to enhance portfolio value relative to the market for preferred securities by investing in (i) securities that the Fund's subadviser believes are underrated or undervalued or (ii) sectors that the Fund's subadviser believes are undervalued. There can be no assurance that the Fund's investment objectives will be achieved.
Under normal circumstances, the Fund will invest:
. at least 80% of its Managed Assets in preferred securities;
. up to 20% of its Managed Assets in debt securities, including convertible debt securities and convertible preferred securities; and
. 100% of its total assets in securities that, at the time of investment, are investment grade quality or better.
Investment grade quality securities are those rated within the four highest grades by at least one of the NRSROs (Baa or BBB or better by Moody's, S&P or Fitch), and securities that are unrated but judged to be of comparable quality by Spectrum. Investment grade securities may include securities that, at the time of investment, are rated below investment grade by Moody's, S&P or Fitch, so long as at least one NRSRO rates such securities within the four highest grades (such securities are called "split-rated securities"). The Fund may invest up to 10% of its total assets in split-rated securities. See Appendix A in this Statement of Additional Information for a description of security ratings.
While the Fund does not currently intend to invest in illiquid securities (i.e., securities that are not readily marketable), it may invest up to 10% of its Managed Assets in illiquid securities. In addition, the Fund may invest up to 35% of its Managed Assets in U.S. dollar-denominated securities of non-U.S. companies offered, traded or listed in U.S. markets.
INVESTMENT PHILOSOPHY AND PROCESS
Investment Philosophy. Spectrum's investment philosophy is centered on several underlying themes:
Income Orientation. Over time the primary contributor to the total return of Spectrum's strategy comes from providing high levels of current income.
High Quality Credit Focus. Spectrum believes there is a potential advantage to investing in subordinated preferred securities of strong, highly rated issuers, as opposed to owning the senior debt of what Spectrum considers to be weak, deteriorating issuers.
The Preferred Securities Market. Since its founding in 1987, Spectrum has focused on utilizing preferred securities, which during some periods have been the highest yielding investment grade issues in the U.S. capital markets, to meet its clients' investment objectives. Past performance of preferred securities is no guarantee of future results of such securities or of the Fund.
Investment Process. Spectrum's investment process focuses on:
Macroeconomic and Credit Analysis. Spectrum's process begins by utilizing its in-house research capabilities and external credit sources such as Moody's, Fitch and S&P to identify economic sectors, industries and companies that Spectrum believes have a stable or improving credit profile.
Security selection. Spectrum employs a value-oriented style with a focus on choosing preferred securities that it believes are attractive relative to both other preferred securities and to the same issuer's senior debt. Features such as yield, call protection, subordination and liquidity are analyzed to justify inclusion within the portfolio.
Diversification. Spectrum will seek to invest in a large number of different industries and issuers within both the financial services sector and within other areas of the economy in order to help to insulate the portfolio from events that affect any particular company or sector.
Trading Opportunities. While income is the primary objective of the Fund, Spectrum will also seek to enhance portfolio value by trading to take advantage of inefficiencies found in the preferred securities market. This often entails selling issues Spectrum deems to be overvalued and buying what Spectrum considers to be undervalued securities.
Full Investment. Spectrum's general strategy is to remain primarily invested in taxable preferred securities, although, it may at times use permitted temporary investments to adopt a defensive strategy if in its opinion such strategy is warranted by market conditions.
PORTFOLIO COMPOSITION
Preferred Securities. Under normal circumstances, the Fund will invest at least 80% of its Managed Assets in preferred securities. The Fund will notify shareholders at least 60 days prior to any change in the 80% policy. The Fund intends to invest primarily in taxable preferred securities.
Preferred securities pay fixed or adjustable rate dividends to investors, and have a "preference" over common stock in the payment of dividends and the liquidation of a company's assets. This means that a company must pay dividends on preferred stock before paying any dividends on its common stock. In order to be payable, distributions on preferred securities must be declared by the issuer's board of directors. Income payments on typical preferred securities currently outstanding are cumulative, causing dividends and distributions to accrue even if not declared by the board of directors or otherwise made payable. There is no assurance that dividends or distributions on the preferred securities in which the Fund invests will be declared or otherwise made payable.
Preferred stockholders usually have no right to vote for corporate directors or on other matters.
Shares of preferred securities have a liquidation value that generally equals the original purchase price at the date of issuance. The market value of preferred securities may be affected by favorable and unfavorable changes impacting companies in the utilities and financial services sectors, which are prominent issuers of preferred securities, and by actual and anticipated changes in tax laws, such as changes in corporate income tax rates and in the Dividends Received Deduction.
Because the claim on an issuer's earnings represented by preferred securities may become onerous when interest rates fall below the rate payable on such securities, the issuer may redeem the securities. Thus, in declining interest rate environments in particular, the Fund's holdings of higher rate-paying fixed rate preferred securities may be reduced and the Fund would be unable to acquire securities paying comparable rates with the redemption proceeds.
Taxable preferred securities are treated in a similar fashion to traditional preferred securities by several regulatory agencies, including the Federal Reserve Bank, and by credit rating agencies, for various purposes, such as the assignment of minimum capital ratios, over-collateralization rates and diversification limits.
Convertible Securities. Traditional convertible preferred securities permit the holder to convert into a specified number of shares at the holder's option at any time prior to some specified date. Such securities are often less liquid than fixed preferred securities. As with traditional preferred securities, taxable preferred securities may be convertible into underlying common stock of the issuer or associated grantor.
Temporary Investments and Defensive Position. Upon Spectrum's recommendation and for temporary defensive purposes or to keep cash on hand fully invested, including the period during which the net proceeds of the offering are being invested, the Fund may invest up to 100% of its net assets in cash equivalents and investment grade fixed income securities. In such a case, the Fund may not pursue or achieve its investment objectives. These investments are defined to include, without limitation, the following:
(1) U.S. government securities, including bills, notes and bonds differing as to maturity and rates of interest that are either issued or guaranteed by the U.S. Treasury or by U.S. government agencies or instrumentalities. U.S. government agency securities include securities issued by (a) the Federal Housing Administration, Farmers Home Administration, Export-Import Bank of the United States, Small Business Administration, and the Government National Mortgage Association, whose securities are supported by the full faith and credit of the United States; (b) the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the Tennessee Valley Authority, whose securities are supported by the right of the agency to borrow from the U.S. Treasury; (c) the Federal National Mortgage Association, whose securities are supported by the discretionary authority of the U.S. government to purchase certain obligations of the agency or instrumentality; and (d) the Student Loan Marketing Association, whose securities are supported only by its credit. While the U.S. government provides financial support to such U.S. government-sponsored agencies or instrumentalities, no assurance can be given that it always will do so since it is not so obligated by law. The U.S. government, its agencies, and instrumentalities do not guarantee the market value of their securities. Consequently, the value of such securities may fluctuate.
(2) Certificates of Deposit issued against funds deposited in a bank or a savings and loan association. Such certificates are for a definite period of time, earn a specified rate of return, and are normally negotiable. The issuer of a certificate of deposit agrees to pay the amount deposited plus interest to the bearer of the certificate on the date specified thereon. Under current FDIC regulations, the maximum insurance payable as to any one certificate of deposit is $100,000; therefore, certificates of deposit purchased by the Fund may not be fully insured.
(3) Repurchase agreements, which involve purchases of debt securities. At the time the Fund purchases securities pursuant to a repurchase agreement, it simultaneously agrees to resell and redeliver such securities to the seller, who also simultaneously agrees to buy back the securities at a fixed price and time. This assures a predetermined yield for the Fund during its holding period, since the resale price is always greater than the purchase price and reflects an agreed-upon market rate. Such actions afford an opportunity for the Fund to invest temporarily available cash. The Fund may enter into repurchase agreements only with respect to obligations of the U.S. government, its agencies or instrumentalities; certificates of deposit; or bankers' acceptances in which the Fund may invest. Repurchase agreements may be considered loans to the seller, collateralized by the underlying securities. The risk to the Fund is limited to the ability of the seller to pay the agreed-upon sum on the repurchase date; in the event of default, the repurchase agreement provides that the Fund is entitled to sell the underlying collateral. If the seller defaults under a repurchase agreement when the value of the underlying collateral is less than the repurchase price, the Fund could incur a loss of both principal and interest. The Fund's investment adviser monitors the value of the collateral at the time the action is entered into and at all times during the term of the repurchase agreement. The investment adviser does so in an effort to determine that the value of the collateral always equals or exceeds the agreed-upon repurchase price to be paid to the Fund. If the seller were to be subject to a federal bankruptcy proceeding, the ability of
the Fund to liquidate the collateral could be delayed or impaired because of certain provisions of the bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured promissory notes, including variable rate master demand notes issued by corporations to finance their current operations. Master demand notes are direct lending arrangements between the Fund and a corporation. There is no secondary market for such notes. However, they are redeemable by the Fund at any time. Spectrum will consider the financial condition of the corporation (e.g., earning power, cash flow, and other liquidity measures) and will continuously monitor the corporation's ability to meet all of its financial obligations, because the Fund's liquidity might be impaired if the corporation were unable to pay principal and interest on demand. Investments in commercial paper will be limited to commercial paper rated in the highest categories by a NRSRO and which mature within one year of the date of purchase or carry a variable or floating rate of interest.
OTHER INVESTMENT POLICIES AND TECHNIQUES
NON-U.S. SECURITIES
The Fund may invest up to 35% of its Managed Assets in U.S. dollar denominated securities of non-U.S. issuers offered, traded or listed in U.S. markets. For this purpose, securities of non-U.S. issuers include American Depository Receipts (ADRs), Global Depositary Receipts (GDRs) or other securities representing underlying shares of non-U.S. issuers. Positions in those securities are not necessarily denominated in the same currency as the common stocks into which they may be converted. ADRs are receipts typically issued by an American bank or trust company evidencing ownership of the underlying securities. GDRs are U.S. dollar-denominated receipts evidencing ownership of non-U.S. securities. Generally, ADRs, in registered form, are designed for the U.S. securities markets and GDRs, in bearer form, are designed for use in non-U.S. securities markets. The Fund may invest in sponsored or unsponsored ADRs. In the case of an unsponsored ADR, the Fund is likely to bear its proportionate share of the expenses of the depository and it may have greater difficulty in receiving shareholder communications than it would have with a sponsored ADR.
Investors should understand and consider carefully the risks involved in investing in securities of non-U.S. issuers. Investing in securities of non-U.S. issuers involves certain considerations comprising both risks and opportunities not typically associated with investing in securities of U.S. issuers. These considerations include: less publicly available information about companies due to less rigorous disclosure or accounting standards or regulatory practices; the impact of political, social or diplomatic events; possible seizure, expropriation or nationalization of the company or its assets; and possible imposition of currency exchange controls. These risks are more pronounced to the extent that the Fund invests a significant amount of its investments in issuers located in one region.
Although the Fund intends to invest in companies and government securities of countries having stable political environments, there is the possibility of expropriation or confiscatory taxation, seizure or nationalization of non-U.S. bank deposits or other assets,
establishment of exchange controls, the adoption of non-U.S. government restrictions, or other adverse political, social or diplomatic developments that could affect investment in non-U.S. issuers.
Debt Obligations of Non-U.S. Governments. An investment in debt obligations of non-U.S. governments and their political subdivisions (sovereign debt) involves special risks that are not present in corporate debt obligations. The non-U.S. issuer of the sovereign debt or the non-U.S. governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal or interest when due, and the Fund may have limited recourse in the event of a default. During periods of economic uncertainty, the market prices of sovereign debt may be more volatile than prices of debt obligations of U.S. issuers. In the past, certain non-U.S. countries have encountered difficulties in servicing their debt obligations, withheld payments of principal and interest and declared moratoria on the payment of principal and interest on their sovereign debt.
A sovereign debtor's willingness or ability to repay principal and pay interest in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its non-U.S. currency reserves, the availability of sufficient non-U.S. currency, the relative size of the debt service burden, the sovereign debtor's policy toward its principal international lenders and local political constraints. Sovereign debtors may also be dependent on expected disbursements from non-U.S. governments, multilateral agencies and other entities to reduce principal and interest arrearages on their debt. The failure of a sovereign debtor to implement economic reforms, achieve specified levels of economic performance or repay principal or interest when due may result in the cancellation of third-party commitments to lend funds to the sovereign debtor, which may further impair such debtor's ability or willingness to service its debts.
Eurodollar Instruments and Yankee Bonds. The Fund may invest in Eurodollar instruments and Yankee bonds. Yankee bonds are U.S. dollar denominated bonds typically issued in the U.S. by non-U.S. governments and their agencies and non-U.S. banks and corporations. The Fund may also invest in Eurodollar Certificates of Deposit ("ECDs") and Yankee Certificates of Deposit ("Yankee CDs"). ECDs are U.S. dollar denominated certificates of deposit issued by non-U.S. branches of domestic banks and Yankee CDs are U.S. dollar denominated certificates of deposit issued by a U.S. branch of a non-U.S. bank and held in the U.S. These investments involve risks that are different from investments in securities issued by U.S. issuers, including potential unfavorable political and economic developments, non-U.S. withholding or other taxes, seizure of non-U.S. deposits, currency controls, interest limitations or other governmental restrictions which might affect payment of principal or interest.
SPLIT-RATED SECURITIES
The Fund may invest up to 10% of its total assets in split-rated securities. Split-rated securities are those securities that, at the time of investment, are rated below investment grade by Moody's, S&P or Fitch, so long as at least one NRSRO rates such securities within the four highest grades (i.e., investment grade quality). This means that a split-rated security may be regarded by one NRSRO (but by definition not by all NRSROs or by Spectrum) as having predominately speculative characteristics with respect to the issuer's capacity to pay interest and repay principal, and accordingly subject to a greater risk of default. The prices of split-rated securities, in the view of one but not all NRSROs, may be more sensitive than securities without a split-rating to negative developments, such as a decline in the issuer's revenues or a general economic downturn.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Fund may enter into U.S. Treasury security or U.S. Government Agency security futures contracts and may purchase options on such futures contracts. The Fund will enter into such transactions for hedging and other appropriate risk-management purposes, in accordance with the rules and regulations of the Commodity Futures Trading Commission ("CFTC") and the Securities and Exchange Commission (the "Commission"). As a non-fundamental policy that can be changed by the Board of Trustees, the use of derivatives for purposes of hedging the portfolio will be restricted to reducing the portfolio's exposure to increases in interest rates. In addition, the Fund, in implementing its hedging strategies, may enter into futures transactions with a notional principal amount that will not exceed 35% of its Managed Assets, and may invest in options on futures the premiums for which will not exceed 0.5% of Managed Assets in any calendar quarter.
A U.S. Treasury security or U.S. Government Agency security futures contract is a standardized contract for the future delivery of a U.S. Treasury Bond or U.S. Treasury Note or its equivalent at a future date at a price set at the time of the contract. The Fund may only enter into futures contracts traded on regulated commodity exchanges.
Parties to a futures contract must make "initial margin" deposits to
secure performance of the contract. There are also requirements to make
"variation margin" deposits from time to time as the value of the futures
contract fluctuates. The Fund is not a commodity pool and, in compliance with
CFTC regulations currently in effect, may enter into any futures contracts and
related options for "bona fide hedging" purposes and, in addition, for other
purposes, provided that aggregate initial margin and premiums required to
establish positions other than those considered by the CFTC to be "bona fide
hedging" will not exceed 0.5% of the Fund's Managed Assets, after taking into
account unrealized profits and unrealized losses on any such contracts. The Fund
reserves the right to engage in transactions involving futures and options
thereon to the extent allowed by CFTC regulations in effect from time to time
and in accordance with the Fund's policies. In addition, certain provisions of
the Code may limit the extent to which the Fund may enter into futures contracts
or engage in options transactions.
See "Tax Matters."
Under regulations of the CFTC currently in effect, which may change from time to time, with respect to futures contracts to purchase securities and call options on futures contracts purchased by the Fund, the Fund will set aside in a segregated account liquid securities with a value at least equal to the value of instruments underlying such futures contracts less the amount of initial margin on deposit for such contracts. The current view of the staff of the Commission is that the Fund's long and short positions in futures contracts must be collateralized with cash or certain liquid assets held in a segregated account or "covered" in order to counter the impact of any potential leveraging.
The Fund may either accept or make delivery of cash or the underlying instrument specified at the expiration of an interest rate futures contract or cash at the expiration of a stock index futures contract or, prior to expiration, enter into a closing transaction involving the purchase or sale of an offsetting contract. Closing transactions with respect to futures contracts are effected on the exchange on which the contract was entered into (or a linked exchange).
The Fund may purchase call options on U.S. Treasury security or U.S. Government Agency security futures contracts in order to hedge a portion of its investments. Daily limits on price fluctuations on exchanges on which the Fund conducts its futures and options transactions may prevent the prompt liquidation of positions at the optimal time, thus subjecting the Fund to the potential of greater losses.
An option on a U.S. Treasury security or U.S. Government Agency security futures contract, as contrasted with the direct investment in such a contract, gives the purchaser of the option the right, in return for the premium paid, to assume a position in a U.S. Treasury security or U.S. Government Agency security futures contract at a specified exercise price at any time on or before the expiration date of the option. Upon exercise of an option, the delivery of the futures position by the writer of the option to the holder of the option will be accompanied by delivery of the accumulated balance in the writer's futures margin account, which represents the amount by which the market price of the futures contract exceeds the exercise price of the option on the futures contract.
The potential loss related to the purchase of an option on a futures contract is limited to the premium paid for the option (plus transaction costs).
With respect to options purchased by the Fund, there are no daily cash payments made by the Fund to reflect changes in the value of the underlying contract; however, the value of the option does change daily and that change would be reflected in the net asset value of the Fund.
Risks Associated with Futures Contracts and Options on Futures Contracts. There are several risks associated with the use of futures contracts and futures options. A purchase or sale of a futures contract may result in losses in excess of the amount invested in the futures contract. While the Fund may enter into futures contracts and options on futures contracts for hedging purposes, the use of futures contracts and options on futures contracts might result in a poorer overall performance for the Fund than if it had not engaged in any such transactions. If, for example, the Fund had insufficient cash, it might have to sell a portion of its underlying portfolio of securities in order to meet daily variation margin requirements on its futures contracts or options on futures contracts at a time when it might be disadvantageous to do so. There may be an imperfect correlation between the Fund's portfolio holdings and futures contracts or options on futures contracts entered into by the Fund, which may prevent the Fund from achieving the intended hedge or expose the Fund to risk of loss. The degree of imperfection of correlation depends on circumstances such as: variations in speculative market demand for futures, futures options and the related securities, including technical influences in futures and futures options trading and differences between the securities markets and the securities underlying the standard contracts available for trading. Further, the Fund's use of futures contracts and options on futures contracts to reduce risk involves costs and will be subject to Spectrum's ability to predict correctly changes in interest rate relationships or other factors. A decision as to whether, when and how to use futures contracts 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 stock price or interest rate trends. No assurance can be given that Spectrum's judgment in this respect will be correct.
Futures exchanges may limit the amount of fluctuation permitted in certain futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of the current trading session. Once the daily limit has been reached in a futures contract subject to the limit, no more trades may be made on that day at a price beyond that limit. The daily limit governs only price movements during a particular trading day and therefore does not limit potential losses because the limit may work to prevent the liquidation of unfavorable positions. For example, futures prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of positions and subjecting some holders of futures contracts to substantial losses. Stock index futures contracts are not normally subject to such daily price change limitations.
In the future, the Fund may invest in relatively new instruments without a significant trading history. As a result, there can be no assurance that an active secondary market will develop or continue to exist.
INTEREST RATE TRANSACTIONS
In connection with the Fund's anticipated use of leverage through its sale of FundPreferred shares or Borrowings, the Fund may enter into interest rate swap or cap transactions. Interest rate swaps involve the Fund's agreement with the swap counterparty to pay a fixed rate payment in exchange for the counterparty paying the Fund a variable rate payment that is intended to approximate the Fund's variable rate payment obligation on FundPreferred shares or any variable rate Borrowings. The payment obligation would be based on the notional amount of the swap. The Fund may use an interest rate cap, which would require it to pay a premium to the cap counterparty and would entitle it, to the extent that a specified variable rate index exceeds a predetermined fixed rate, to receive from the counterparty payment of the difference based on the notional amount. The Fund would use interest rate swaps or caps only with the intent to reduce or eliminate the risk that an increase in short-term interest rates could have on Common Share net earnings as a result of leverage.
The Fund will usually enter into swaps or caps on a net basis; that is, the two payment streams will be netted out in a cash settlement on the payment date or dates specified in the instrument, with the Fund receiving or paying, as the case may be, only the net amount of the two payments. The Fund intends to maintain in a segregated account with its custodian cash or liquid securities having a value at least equal to the Fund's net payment obligations under any swap transaction, marked-to-market daily.
The use of interest rate swaps and caps is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio security transactions. Depending on the state of interest rates in general, the Fund's use of interest rate swaps or caps could enhance or harm the overall performance on the Common Shares. To the extent there is a decline in interest rates, the value of the interest rate swap or cap could decline, and could result in a decline in the net asset value of the Common Shares. In addition, if short-term interest rates are lower than the Fund's fixed rate of payment on the interest rate swap, the swap will reduce Common Share net earnings. If, on the other hand, short-term interest rates are higher than the fixed rate of payment on the interest rate swap, the swap will enhance Common Share net earnings. Buying interest rate caps could enhance the performance of the Common Shares by providing a maximum leverage expense. Buying interest rate caps could also decrease the net earnings of the Common Shares in the event that the premium paid by the Fund to the counterparty exceeds the additional amount the Fund would have been required to pay had it not entered into the cap agreement. The Fund has no current intention of selling an interest rate swap or cap. The Fund will not enter into interest rate swap or cap transactions in an aggregate notional amount that exceeds the outstanding amount of the Fund's leverage.
Interest rate swaps and caps do not involve the delivery of securities or other underlying assets or principal. Accordingly, the risk of loss with respect to interest rate swaps is limited to
the net amount of interest payments that the Fund is contractually obligated to make. If the counterparty defaults, the Fund would not be able to use the anticipated net receipts under the swap or cap to offset the dividend payments on the FundPreferred shares or interest payments on Borrowings. Depending on whether the Fund would be entitled to receive net payments from the counterparty on the swap or cap, which in turn would depend on the general state of short-term interest rates at that point in time, such a default could negatively impact the performance of the Common Shares. Although this will not guarantee that the counterparty does not default, the Fund will not enter into an interest rate swap or cap transaction with any counter-party that NIAC believes does not have the financial resources to honor its obligation under the interest rate swap or cap transaction. Further, NIAC will continually monitor the financial stability of a counterparty to an interest rate swap or cap transaction in an effort to proactively protect the Fund's investments. In addition, at the time the interest rate swap or cap transaction reaches its scheduled termination date, there is a risk that the Fund would not be able to obtain a replacement transaction or that the terms of the replacement would not be as favorable as on the expiring transaction. If this occurs, it could have a negative impact on the performance of the Fund's Common Shares.
The Fund may choose or be required to redeem some or all of the FundPreferred shares or prepay any Borrowings. This redemption would likely result in the Fund seeking to terminate early all or a portion of any swap or cap transaction. Such early termination of a swap could result in termination payment by or to the Fund. An early termination of a cap could result in a termination payment to the Fund.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may buy and sell securities on a when-issued or delayed delivery basis, making payment or taking delivery at a later date, normally within 15-45 days of the trade date. On such transactions the payment obligation and the interest rate are fixed at the time the buyer enters into the commitment. Beginning on the date the Fund enters into a commitment to purchase securities on a when-issued or delayed delivery basis, the Fund is required under rules of the Commission to maintain in a separate account liquid assets, consisting of cash, cash equivalents or liquid securities having a market value at all times of at least equal to the amount of the commitment. Income generated by any such assets which provide taxable income for federal income tax purposes is includable in the taxable income of the Fund. The Fund may enter into contracts to purchase securities on a forward basis (i.e., where settlement will occur more than 60 days from the date of the transaction) only to the extent that the Fund specifically collateralizes such obligations with a security that is expected to be called or mature within sixty days before or after the settlement date of the forward transaction. The commitment to purchase securities on a when-issued, delayed delivery or forward basis may involve an element of risk because no interest accrues on the bonds prior to settlement and at the time of delivery the market value may be less than cost.
REPURCHASE AGREEMENTS
As temporary investments, the Fund may invest in repurchase agreements. A repurchase agreement is a contractual agreement whereby the seller of securities (U.S. Government securities or municipal bonds) agrees to repurchase the same security at a specified price on a future date agreed upon by the parties. The agreed-upon repurchase price determines the yield during the Fund's holding period. Repurchase agreements are considered to be loans collateralized by the underlying security that is the subject of the repurchase contract. Income generated from transactions in repurchase agreements will be taxable. See "Tax Matters" for information relating to the allocation of taxable income between Common Shares and FundPreferred shares, if any. The Fund will only enter into repurchase agreements with registered securities dealers or domestic banks that, in the opinion of Spectrum, present minimal credit risk. The risk to the Fund is limited to the ability of the issuer to pay the agreed-upon repurchase price
on the delivery date; however, although the value of the underlying collateral at the time the transaction is entered into always equals or exceeds the agreed-upon repurchase price, if the value of the collateral declines there is a risk of loss of both principal and interest. In the event of default, the collateral may be sold but the Fund might incur a loss if the value of the collateral declines, and might incur disposition costs or experience delays in connection with liquidating the collateral. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, realization upon the collateral by the Fund may be delayed or limited. Spectrum will monitor the value of the collateral at the time the transaction is entered into and at all times subsequent during the term of the repurchase agreement in an effort to determine that such value always equals or exceeds the agreed-upon repurchase price. In the event the value of the collateral declines below the repurchase price, Spectrum will demand additional collateral from the issuer to increase the value of the collateral to at least that of the repurchase price, including interest.
ZERO COUPON BONDS
The Fund may invest in zero coupon bonds. A zero coupon bond is a bond that does not pay interest for its entire life. When held to its maturity, its return comes from the difference between the purchase price and its maturity value. The market prices of zero coupon bonds are affected to a greater extent by changes in prevailing levels of interest rates and thereby tend to be more volatile in price than securities that pay interest periodically and may be more speculative than such securities. In addition, the Fund's investments in zero coupon bonds will result in special tax consequences. Although zero coupon bonds do not make interest payments, for tax purposes, a portion of the difference between a zero coupon security's maturity value and its purchase price is taxable income of the Fund each year. Because the Fund accrues income with respect to these securities prior to the receipt of such interest, it may have to dispose of portfolio securities under disadvantageous circumstances in order to obtain cash needed to pay income dividends in amounts necessary to avoid unfavorable tax consequences.
LENDING OF PORTFOLIO SECURITIES
The Fund may lend its portfolio securities to broker-dealers and banks.
Any such loan must be continuously secured by collateral in cash or cash
equivalents maintained on a current basis in an amount at least equal to the
market value of the securities loaned by the Fund. The Fund would continue to
receive the equivalent of the interest or dividends paid by the issuer on the
securities loaned, and would also receive an additional return that may be in
the form of a fixed fee or a percentage of the collateral. The Fund may pay
reasonable fees to persons unaffiliated with the Fund for services in arranging
these loans. The Fund would have the right to call the loan and obtain the
securities loaned at any time on notice of not more than five business days. The
Fund would not have the right to vote the securities during the existence of the
loan but would call the loan to permit voting of the securities, if, in
Spectrum's judgment, a material event requiring a shareholder vote would
otherwise occur before the loan was repaid. In the event of bankruptcy or other
default of the borrower, the Fund could experience both delays in liquidating
the loan collateral or recovering the loaned securities and losses, including
(a) possible decline in the value of the collateral or in the value of the
securities loaned during the period while the Fund seeks to enforce its rights
thereto, (b) possible subnormal levels of income and lack of access to income
during this period, and (c) expenses of enforcing its rights.
PORTFOLIO TRADING AND TURNOVER RATE
Portfolio trading may be undertaken to accomplish the investment objectives of the Fund in relation to actual and anticipated movements in interest rates. In addition, a security may be sold and another of comparable quality purchased at approximately the same time to take advantage of what Spectrum believes to be a temporary price disparity between the two securities. Temporary price disparities between two comparable securities may result from supply and demand imbalances where, for example, a temporary oversupply of certain securities may cause a temporarily low price for such securities, as compared with other securities of like quality and characteristics.
The Fund may also engage to a limited extent in short-term trading consistent with its investment objectives. Securities may be sold in anticipation of a market decline (a rise in interest rates) or purchased in anticipation of a market rise (a decline in interest rates) and later sold, but the Fund will not engage in trading solely to recognize a gain. Subject to the foregoing, the Fund will attempt to achieve its investment objectives by prudent selection of preferred securities with a view to holding them for investment. While there can be no assurance thereof, the Fund anticipates that its annual portfolio turnover rate will generally not exceed 50%. However, the rate of turnover will not be a limiting factor when the Fund deems it desirable to sell or purchase securities. Therefore, depending upon market conditions, the annual portfolio turnover rate of the Fund may exceed 50% in particular years.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The management of the Fund, including general supervision of the duties performed for the Fund under the Management Agreement, is the responsibility of the Board of Trustees of the Fund. The number of trustees of the Fund is currently set at seven. None of the trustees who are not "interested persons" of the Fund has ever been a director or employee of, or consultant to, Nuveen or Spectrum or their affiliates. The names and business addresses of the trustees and officers of the Fund, their principal occupations and other affiliations during the past five years, the number of portfolios each oversees and other directorships they hold are set forth below.
Positions and Offices Principal Occupations, Including Number of Portfolios
with the Fund and Year First Other Directorships Held, During in Fund Complex
Name and Address Birthdate Elected or Appointed Past Five Years Overseen by Trustee
---------------- --------- -------------------- --------------- -------------------
Trustee who is an "interested person" of the Fund:
Timothy R. Schwertfeger* 03/28/49 Chairman of the Board, Chairman and Director (since July 130
333 West Wacker Drive President and Trustee, 1996) of The John Nuveen Company,
Chicago, IL 60606 2002 Nuveen Investments, Nuveen Advisory
Corp. and
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* Mr. Schwertfeger is an "interested person" of the Fund, as defined in the Investment Company Act of 1940, because he is an officer and director of The John Nuveen Company, Nuveen Investments and NIAC.
Positions and Offices Principal Occupations, Including Number of Portfolios
with the Fund and Year First Other Directorships Held, During in Fund Complex
Name and Address Birthdate Elected or Appointed Past Five Years Overseen by Trustee
---------------- --------- -------------------- --------------- -------------------
Nuveen Institutional Advisory Corp.;
prior thereto, Executive Vice
President and Director of The John
Nuveen Company and Nuveen Investments;
Director (since 1992) and Chairman
(since 1996) of Nuveen Advisory Corp.
and Nuveen Institutional Advisory
Corp.; Chairman and Director (since
January 1997) of Nuveen Asset Management
Inc.; Director (since 1996) of
Institutional Capital Corporation;
Chairman and Director (since 1999) of
Rittenhouse Financial Services Inc.;
Chief Executive Officer (since
1999) of Nuveen Senior Loan
Asset Management Inc.
Trustees who are not "interested persons" of the Fund:
James E. Bacon 2/27/31 Trustee, 2002 Treasurer, Cathedral of St. John the Devine 18
114 W. 47th St. (New York City) (since 1997); formerly,
New York, NY 10036 Director of Lone Star Industries, Inc.
(1992-1999); previously, Director and
Executive Vice President of U.S. Trust
Corporation and Trustee of United States
Trust Company of New York.
William E. Bennett** 10/16/46 Trustee, 2002 Private Investor; previously, 18
55 W. Monroe President and Chief Executive
Chicago, IL 60606 Officer, Draper & Kramer, Inc.,
a private company that handles
mortgage banking, real estate
development, pension advisory
and real estate management
(1995 - 1998).
Jack B. Evans 10/22/48 Trustee, 2002 President, The Hall-Perrine 18
115 Third Street, S.E. Foundation, a private philanthropic
Cedar Rapids, IA 52401 corporation (since 1996); Director,
Alliant Energy; Director and Vice
Chairman, United Fire & Casualty
Company; Director, Federal Reserve
Bank of Chicago; formerly, President and
Chief Operating Officer, SCI
Financial Group, Inc., a regional
financial services firm.
William L. Kissick 7/29/32 Trustee, 2002 Professor Emeritus, School of Medicine 18
50 Johnson's Point and the Wharton School of Management and
Branford, CT 06405 former Chairman, Leonard Davis
Institute of Health Economics,
University of Pennsylvania; Adjunct Professor,
Health Policy and Management, Yale University.
Thomas E. Leafstrand 11/11/31 Trustee, 2002 Retired; previously, Vice President 18
412 W. Franklin in charge of Municipal Underwriting
Wheaton, IL 60187 and Dealer Sales at The Northern
Trust Company.
Sheila W. Wellington** 2/24/32 Trustee, 2002 President (since 1993) of Catalyst (a 18
250 Park Avenue not-for-profit organization focusing
New York, NY 10003 on women's leadership development in
business and the professions).
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** As a result of their ownership of securities issued by Citigroup, the parent company of Salomon Smith Barney Inc., one of the principal underwriters of the Fund, the Fund believes that Mr. Bennett and Ms. Wellington may be deemed to be interested persons for as long as Salomon Smith Barney Inc. serves as principal underwriter to the Fund and, therefore, for purposes of this offering they are being treated as interested persons. Mr. Bennett and Ms. Wellington own less than 1% of such securities outstanding and have abstained from voting on any items involving the appointment of Salomon Smith Barney Inc. as principal underwriter to the Fund.
Positions and Offices Principal Occupations, Including Number of Portfolios
with the Fund and Year First Directorships Held, During in Fund Complex
Name and Address Birthdate Elected or Appointed Past Five Years Overseen by Officer
---------------- --------- -------------------- --------------- -------------------
Officers of the Fund:
Michael T. Atkinson 2/3/66 Vice President and Vice President (since January 2002), 130
333 West Wacker Drive Assistant Secretary, formerly Assistant Vice President
Chicago, IL 60606 2002 (since 2000), previously, Associate
of Nuveen Investments.
Peter H. D'Arrigo 11/28/67 Vice President and Vice President of Nuveen Investment 130
333 West Wacker Drive Treasurer, 2002 (since 1999), prior thereto, Assistant
Chicago, IL 60606 Vice President (from 1997); formerly,
Associate of Nuveen Investment;
Vice President and Treasurer (since
1999) of Nuveen Senior Loan
Asset Management Inc.; Chartered
Financial Analyst.
Susan M. DeSanto 9/8/54 Vice President, 2002 Vice President of Nuveen Advisory 130
333 West Wacker Drive Corp. (since 2001); previously, Vice
Chicago, IL 60606 President of Van Kampen Investment
Advisory Corp. (since 1998); prior
thereto, Assistant Vice President of
Van Kampen Investment Advisory Corp.
(since 1994).
Jessica R. Droeger 9/24/64 Vice President and Vice President (since January 2002) 130
333 West Wacker Drive Assistant Secretary, and Assistant General Counsel (since
Chicago, IL 60606 2002 1998); formerly, Assistant Vice
President (since 1998), of Nuveen Investments;
Vice President (since May 2002), formerly
Assistant Vice President and Assistant
Secretary (since 1998), of Nuveen Advisory
Corp. and Nuveen Institutional Advisory Corp.;
prior thereto, Associate at the law firm
D'Ancona Partners LLC.
Lorna C. Ferguson 10/24/45 Vice President, 2002 Vice President of Nuveen Investments; 130
333 West Wacker Drive Vice President (since 1998) of
Chicago, IL 60606 Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp.
William M. Fitzgerald 3/2/64 Vice President, 2002 Managing Director (since 2001), formerly, 130
333 West Wacker Drive Vice President
Chicago, IL 60606 of Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp. (since 1995);
Chartered Financial Analyst.
Stephen D. Foy 5/31/54 Vice President and Vice President of Nuveen Investments 130
333 West Wacker Drive Controller, 2002 and The John Nuveen Company; Vice President
Chicago, IL 60606 (since 1999) of Nuveen Senior Loan Asset
Management Inc.; Certified Public Accountant.
David J. Lamb 3/22/63 Vice President, 2002 Vice President (since 2000) of 130
333 West Wacker Drive Nuveen Investments, previously
Chicago, IL 60606 Assistant Vice President (since
1999); prior thereto, Associate
of Nuveen Investments; Certified
Public Accountant.
Tina M. Lazar 8/27/61 Vice President, 2002 Vice President (since 1999), previously 130
333 West Wacker Drive Assistant Vice President (since 1993)
Chicago, IL 60606 of Nuveen Investments.
Larry W. Martin 7/27/51 Vice President and Vice President, Assistant Secretary 130
333 West Wacker Drive Assistant Secretary, and Assistant General Counsel of
Chicago, IL 60606 2002 Nuveen Investments; Vice President and
Assistant Secretary of Nuveen Advisory
Corp. and
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Positions and Offices Principal Occupations, Including Number of Portfolios
with the Fund and Year First Directorships Held, During in Fund Complex
Name and Address Birthdate Elected or Appointed Past Five Years Overseen by Officer
---------------- --------- -------------------- --------------- -------------------
Nuveen Institutional Advisory Corp.;
Assistant Secretary of The John Nuveen
Company and (since 1997) of Nuveen Asset
Management Inc.; Vice President and
Assistant Secretary (since 1999) of Nuveen
Senior Loan Asset Management Inc.
Gifford R. Zimmerman 9/9/56 Vice President and Managing Director (since 2002), Assistant 130
333 West Wacker Drive Secretary, 2002 Secretary and Associate General Counsel,
Chicago, IL 60606 formerly, Vice President and Assistant General
Counsel of Nuveen Investments; Managing
Director (since 2002), General Counsel
and Assistant Secretary, formerly, Vice
President of Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp.; Managing Director
(since 2002), Assistant Secretary, formerly,
Vice President (since 1999) of Nuveen Senior
Loan Asset Management Inc.; Managing Director
(since 2002), Assistant Secretary and Associate
General Counsel, formerly, Vice President (since
2000), of Nuveen Asset Management Inc.; Vice
President and Assistant Secretary of The John
Nuveen Company (since 1994); Chartered Financial
Analyst.
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The Board of Trustees has four standing committees: the executive committee, the audit committee, the nominating and governance committee and the dividend and valuation committee. Because the Fund is newly organized, none of the committees have met during the Fund's last fiscal year. The executive committee met once prior to the commencement of the Fund's operations.
William L. Kissick and Timothy R. Schwertfeger, Chair, serve as members of the executive committee of the Board of Trustees of the Fund. The executive committee, which meets between regular meetings of the Board of Trustees, is authorized to exercise all of the powers of the Board of Trustees.
The audit committee monitors the accounting and reporting policies and practices of the Funds, the quality and integrity of the financial statements of the Funds, compliance by the Funds with legal and regulatory requirements and the independence and performance of the external and internal auditors. The members of the audit committee are James E. Bacon, William E. Bennett, Jack B. Evans, William L. Kissick and Thomas E. Leafstrand.
The nominating and governance committee is responsible for Board selection and tenure; selection and review of committees; and Board education and operations. In addition, the committee monitors performance of legal counsel and other service providers; periodically reviews and makes recommendations about any appropriate changes to trustee compensation; and has the resources and authority to discharge its responsibilities--including retaining special counsel and other experts or consultants at the expense of the Fund. In the event of a vacancy on the Board, the nominating and governance committee receives suggestions from various sources as to suitable candidates. Suggestions should be sent in writing to Lorna Ferguson, Vice President for Board Relations, Nuveen Investments, 333 West Wacker Drive, Chicago, IL 60606. The nominating and governance committee sets appropriate standards and requirements for nominations for new trustees and reserves the right to interview all candidates and to make
the final selection of any new trustees. The members of the nominating and governance committee are James E. Bacon, William E. Bennett, Jack B. Evans, William L. Kissick, Thomas E. Leafstrand and Sheila W. Wellington.
The dividend committee is authorized to declare distributions on the Fund's shares including, but not limited to, regular and special dividends, capital gains and ordinary income distributions. The members of the dividend committee are Timothy R. Schwertfeger, Chair, William E. Bennett and Thomas E. Leafstrand.
The valuation committee oversees the Fund's Pricing Procedures including, but not limited to, the review and approval of fair value pricing determinations made by Nuveen's Valuation Group. The members of the valuation committee are William E. Bennett and Thomas E. Leafstrand.
The trustees of the Fund are also trustees of ten Nuveen open-end funds and eight Nuveen closed-end funds advised by NIAC. Mr. Schwertfeger also is a director or trustee, as the case may be, of 30 Nuveen open-end and 82 closed-end funds advised by Nuveen Advisory Corp. None of the independent trustees, nor any of their immediate family members, has ever been a director, officer, or employee of, or a consultant to, NIAC, Nuveen or their affiliates. In addition, none of the independent trustees owns beneficially or of record, any security of NIAC, Nuveen or any person (other than a registered investment company) directly or indirectly controlling, controlled by or under common control with NIAC or Nuveen.
The Common Shareholders of the Fund will elect trustees at the next annual meeting of Common Shareholders, unless any FundPreferred shares are outstanding at that time, in which event holders of FundPreferred shares, voting as a separate class, will elect two trustees, and the remaining trustees shall be elected by Common Shareholders and holders of FundPreferred shares, voting together as a single class. Holders of FundPreferred shares will be entitled to elect a majority of the Fund's trustees under certain circumstances. See "Description of Shares - FundPreferred Shares - Voting Rights." The following table sets forth the dollar range of equity securities beneficially owned by each trustee as of December 31, 2001:
Aggregate Dollar Range of Equity Securities in All
Dollar Range of Equity Securities Registered Investment Companies Overseen by Trustee
Name of Trustee in the Fund in Family of Investment Companies
--------------- ----------- ------------------------------
Timothy R. Schwertfeger $0 Over $100,000
James E. Bacon $0 $50,001 - $100,000
William E. Bennett $0 $10,001 - $50,000
Jack B. Evans $0 Over $100,000
William L. Kissick $0 $50,001 - $100,000
Thomas E. Leafstrand $0 Over $100,000
Sheila W. Wellington $0 Over $100,000
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The following table sets forth estimated compensation to be paid by the Fund projected during the Fund's first full fiscal year after commencement of operation. The Fund does not have a retirement or pension plan. The officers and trustees affiliated with Nuveen serve without any compensation from the Fund. The Fund has a deferred compensation plan (the "Plan") that
permits any trustee who is not an "interested person" of the Fund to elect to defer receipt of all or a portion of his or her compensation as a trustee. The deferred compensation of a participating trustee is credited to a book reserve account of the Trust when the compensation would otherwise have been paid to the trustee. The value of the trustee's deferral account at any time is equal to the value that the account would have had if contributions to the account had been invested and reinvested in shares of one or more of the eligible Nuveen funds. At the time for commencing distributions from a trustee's deferral account, the trustee may elect to receive distributions in a lump sum or over a period of five years. The Fund will not be liable for any other fund's obligations to make distributions under the Plan.
Estimated Aggregate Total Compensation from Amount of Total Compensation
Name of Trustee Compensation from Fund* Fund and Fund Complex** That Has Been Deferred
--------------- ----------------------- ----------------------- ----------------------------
Timothy R. Schwertfeger $ 0 $ 0 $ 0
James E. Bacon 4,820 44,500 37,100
William E. Bennett 4,984 38,650 26,963
Jack B. Evans 4,820 48,000 28,658
William L. Kissick 4,820 47,500 18,000
Thomas E. Leafstrand 4,984 51,000 24,440
Sheila W. Wellington 4,820 48,000 46,308
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* Based on the estimated compensation to be earned by the independent trustees for the period from inception through the end of the Fund's first full fiscal year for services to the Fund.
**Based on the compensation paid to the trustees for the one year period ending 12/31/01 for services to the open-end and closed-end funds advised by NIAC.
The Fund has no employees. Its officers are compensated by NIAC or The John Nuveen Company.
INVESTMENT ADVISERS
NIAC acts as investment adviser to the Fund, with responsibility for the overall management of the Fund. Its address is 333 West Wacker Drive, Chicago, Illinois 60606. NIAC is responsible for selection of the Fund's subadviser, managing the Fund's business affairs and providing day-to-day administrative services to the Fund. For additional information regarding the management services performed by NIAC, see "Management of the Fund" in the Fund's Prospectus.
NIAC is a wholly owned subsidiary of The John Nuveen Company. Founded in 1898, The John Nuveen Company brings over a century of expertise to the municipal bond market. According to data from Thomson Wealth Management, The John Nuveen Company is the leading sponsor of exchange-traded funds as measured by number of funds (90) and fund assets under
management ($35 billion) as of July 31, 2002. Overall, The John Nuveen Company and its affiliates had over $74 billion in assets under management or surveillance as of July 31, 2002. The John Nuveen Company is approximately 77% owned by The St. Paul Companies, Inc. ("St. Paul"). St. Paul is a publicly-traded company located in St. Paul, Minnesota, and is principally engaged in providing property-liability insurance through subsidiaries.
The John Nuveen Company, through Nuveen Investments, provides high- quality investment services that are essential to building balanced core invesment portfolios. Nuveen Investments serves financial advisors, and their high-net-worth clients, as well as a growing number of institutional clients. The Company today markets its capabilities under four distinct brands: Nuveen, NWQ, Rittenhouse and Symphony. In total, the Company now manages approximately $74 billion in assets. The John Nuveen Company is listed on The New York Stock Exchange and trades under the symbol "JNC."
Spectrum, 4 High Ridge Park, Stamford, Connecticut 06905, is the subadviser to the Fund. As one of the leading managers of preferred securities in the U.S., Spectrum specializes in the management of diversified preferred security portfolios for institutional investors including Fortune 500 companies, pension funds, insurance companies and foundations. Spectrum also serves as a sub-adviser for a large offshore fund. Spectrum, which is registered as an investment adviser with the Securities and Exchange Commission, commenced operations in 1987 and had approximately $2.4 billion in assets under management as of June 30, 2002.
Spectrum is an independently managed subsidiary of Principal Capital Management LLC, which is part of Principal Financial Group Inc., a publicly traded, diversified, insurance and financial services company. Collectively, subsidiaries and affiliates of Principal Capital Management LLC manage over $102 billion in combined assets worldwide. As a subsidiary of Principal Capital Management LLC, Spectrum also can take advantage of Principal's extensive staff of internal credit analysts.
A team of full-time Spectrum professionals, working together as the Fund's Investment Committee, is primarily responsible for overseeing the day-to-day operations of the Fund. Mark A. Lieb, Bernard M. Sussman and L. Phillip Jacoby, IV are co-portfolio managers of the Fund.
Mr. Lieb is an Executive Director and the Chief Financial Officer of Spectrum. Mr. Lieb is responsible for business development of Spectrum. Prior to founding Spectrum in 1987, Mr. Lieb was a founder, director and partner of DBL Preferred Management, Inc., a wholly owned corporate cash management subsidiary of Drexel Burnham Lambert, Inc. Mr. Lieb was instrumental in the formation and continual development of all aspects of DBL Preferred Management, Inc., including the daily management of preferred stock portfolio for institutional clients, general hedging strategies, and market strategies employed by the firm. Mr. Lieb's prior employment included the development of the preferred stock trading desk at Mosley Hallgarten & Estabrook. Mr. Lieb has a B.A. in economics from Central Connecticut State College and an M.B.A. in finance from the University of Hartford.
Mr. Sussman is an Executive Director and the Chief Investment Officer of Spectrum and is Chairman of Spectrum's Investment Committee. Prior to joining Spectrum in 1995, Mr. Sussman was employed by Goldman Sachs & Co. for nearly 18 years. A general partner and head of the Preferred Stock Department, he was in charge of sales, trading and underwriting for all preferred products and was instrumental in the development of the hybrid (MIPS) market. Mr. Sussman was a limited partner at Goldman Sachs from December 1994 through November 1996. He has a B.S. in industrial relations and an M.B.A. in finance from Cornell University.
Mr. Jacoby is a Senior Vice President of Spectrum. He joined Spectrum in 1995 as a Portfolio Manager. Previously, Mr. Jacoby worked as a senior investment officer at USL Capital Corporation (a subsidiary of Ford Motor Corporation) and was a co-manager of a $600 million preferred stock portfolio. Mr. Jacoby has a B.S. in finance from Boston University.
Pursuant to an investment management agreement between NIAC and the Fund, the Fund has agreed to pay for the services and facilities provided by NIAC an annual management fee, payable on a monthly basis, according to the following schedule:
Average Daily Managed Assets Management
Fee
---
Up to $500 million.................................................. .9000%
$500 million to $1 billion.......................................... .8750%
$1 billion to $1.5 billion.......................................... .8500%
$1.5 billion to $2.0 billion........................................ .8250%
Over $2.0 billion................................................... .8000%
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If the Fund utilizes leverage through the issuance of FundPreferred shares in an amount equal to 33 1/3% of the Fund's total assets (including the amount obtained from leverage). The management fee calculated as a percentage of net assets attributable to Common Shares would be as follows:
Net Assets Attributable to Common Shares Management
---------------------------------------- Fee
---
Up to $500 million ....................................................1.350%
$500 million to $1 billion ............................................1.313%
$1 billion to $1.5 billion ............................................1.275%
$1.5 billion to $2.0 billion ..........................................1.238%
Over $2.0 billion .....................................................1.200%
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Pursuant to an investment sub-advisory agreement between NIAC and Spectrum, Spectrum will receive from NIAC a management fee equal to 40% of the management fee payable by the Fund to NIAC (net of the reimbursements described below).
In addition to the fee of NIAC, the Fund pays all other costs and expenses of its operations, including compensation of its trustees (other than those affiliated with NIAC), custodian, transfer agency and dividend disbursing expenses, legal fees, expenses of independent auditors, expenses of repurchasing shares, expenses of issuing any FundPreferred shares, expenses of preparing, printing and distributing shareholder reports, notices, proxy statements and reports to governmental agencies, and taxes, if any. All fees and expenses are accrued daily and deducted before payment of dividends to investors.
For the first eight full years of the Fund's operation, NIAC and Spectrum have contractually agreed to reimburse the Fund for fees and expenses in the amounts, and for the time periods, set forth below:
Percentage Percentage
Reimbursed Reimbursed
(as a percentage (as a percentage
Year Ending of Managed Year Ending of Managed
September 30 Assets) September 30 Assets)
------------ ------------ ------------ ------------
2002(1) 0.32% 2007 0.32%
2003 0.32% 2008 0.24%
2004 0.32% 2009 0.16%
2005 0.32% 2010 0.08%
2006 0.32%
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(1) From the commencement of operations.
Reducing Fund expenses in this manner will tend to increase the amount of income available for the Common Shareholders. NIAC and Spectrum have not agreed to reimburse the Fund for any portion of its fees and expenses beyond September 30, 2010.
Unless earlier terminated as described below, the Fund's investment management agreement with NIAC and the Fund's investment sub-advisory agreement (the "management agreements") will remain in effect until August 1, 2003. The management agreements continue in effect from year to year so long as such continuation is approved at least annually by (1) the Board of Trustees or the vote of a majority of the outstanding voting securities of the Fund, and (2) a majority of the trustees who are not interested persons of any party to the investment management agreement, cast in person at a meeting called for the purpose of voting on such approval. The investment management agreement may be terminated at any time, without penalty, by either the Fund or NIAC upon 60 days written notice, and is automatically terminated in the event of its assignment as defined in the 1940 Act. The investment sub-advisory agreement may be terminated at any time, without penalty, by the Fund, NIAC or Spectrum upon 60 days written notice, and is automatically terminated in the event of its assignment as defined in the 1940 Act.
The management agreements have been approved by a majority of the independent trustees of the Fund and the sole shareholder of the Fund. The independent trustees have determined that the terms of the Fund's management agreements are fair and reasonable and that the agreements are in the Fund's best interests. The independent trustees believe that the management agreements will enable the Fund to obtain high quality investment management services at a cost that they deem appropriate, reasonable, and in the best interests of the Fund and its shareholders. In making such determination, the independent trustees met independently from the interested trustee of the Fund and any officers of NIAC, Spectrum and their affiliates. The independent trustees also relied upon the assistance of counsel to the independent trustees.
In evaluating the investment management agreement, the independent trustees reviewed materials furnished by NIAC and Spectrum, including information regarding NIAC, Spectrum, their affiliates and their personnel, operations and financial condition. The independent trustees discussed with representatives of NIAC and Spectrum the Fund's operations and each of NIAC's and Spectrum's ability to provide advisory and other services to the Fund. The independent trustees also reviewed, among other things, the nature and quality of services to be provided by NIAC and Spectrum, the proposed fees to be charged by NIAC and Spectrum for investment management services, the profitability to NIAC and Spectrum of their relationships with the Fund, fall-out benefits to NIAC and Spectrum from that relationship, economies of scale achieved by NIAC and Spectrum, the experience of the investment advisory and other personnel providing services to the Fund,
the historical quality of the services provided by NIAC and Spectrum and comparative fees and expense ratios of investment companies with similar objectives and strategies managed by other investment advisers, and other factors that the independent trustees deemed relevant.
The Fund, NIAC, Nuveen, Spectrum, Salomon Smith Barney Inc. and other related entities have adopted codes of ethics which essentially prohibit certain of their personnel, including the Fund's portfolio managers, from engaging in personal investments which compete or interfere with, or attempt to take advantage of a client's, including the Fund's, anticipated or actual portfolio transactions, and are designed to assure that the interests of clients, including Fund shareholders, are placed before the interests of personnel in connection with personal investment transactions. Text-only versions of the codes of ethics of the Fund, NIAC, Nuveen and Spectrum can be viewed online or downloaded from the EDGAR Database on the SEC's internet web site at www.sec.gov. You may also review and copy those documents by visiting the SEC's Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 202-942-8090. In addition, copies of those codes of ethics may be obtained, after mailing the appropriate duplicating fee, by writing to the SEC's Public Reference Section, 450 5th Street, N.W., Washington, DC 20549-0102 or by e-mail request at publicinfo@sec.gov.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the supervision of the Board of Trustees, Spectrum is responsible for decisions to buy and sell securities for the Fund and the negotiation of brokerage commissions to be paid. Transactions on stock exchanges involve the payment by the Fund of brokerage commissions. There generally is no stated commission in the case of securities traded in the over-the-counter market but the price paid by the Fund usually includes an undisclosed dealer commission or mark-up. In certain instances, the Fund may make purchases of underwritten issues at prices which include underwriting fees.
In selecting a broker to execute each particular transaction, Spectrum will take the following into consideration: the best net price available; the reliability, integrity and financial condition of the broker; the size and difficulty in executing the order; and the value of the expected contribution of the broker to the investment performance of a Fund on a continuing basis.
Spectrum may act as broker for the Fund in connection with the purchase or sale of securities by or to the Fund if and to the extent permitted by procedures adopted from time to time by the Board of Trustees of the Fund. The Board of Trustees, including a majority of the trustees who are not "interested" trustees, has determined that portfolio transactions for the Fund may be executed through Spectrum if, in the judgment of NIAC and Spectrum, the use of Spectrum is likely to result in prices and execution at least as favorable to the Fund as would be available from other qualified brokers and if, in such transactions, Spectrum charges the Fund commission rates at least as favorable to the Fund as those charged by Spectrum to comparable unaffiliated customers in similar transactions. The Board of Trustees also has adopted procedures that are reasonably designed to provide that any commission, fee or other remuneration paid to Spectrum is consistent with the foregoing standard. The Fund will not effect principal transactions with Spectrum. In executing transactions through Spectrum, the
Fund will be subject to, and intends to comply with, Section 17(e) of the 1940 Act and the rules thereunder.
The cost of the brokerage commissions to the Fund in any transaction (other than those effected by Spectrum) may be greater than that available from other brokers if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to such policies and procedures as the trustees may determine, Spectrum shall not be deemed to have acted unlawfully or to have breached any duty solely by reason of it having caused the Fund to pay a broker (other than Spectrum) that provides research services an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker would have charged for effecting that transaction if Spectrum determines in good faith that such amount of commission was reasonable in relation to the value of the research service provided by such broker viewed in terms of either that particular transaction or Spectrum's ongoing responsibilities with respect to the Fund. Research and investment information may be provided by these and other brokers at no cost to Spectrum and is available for the benefit of other accounts advised by Spectrum and its affiliates, and not all of the information will be used in connection with the Fund. While this information may be useful in varying degrees and may tend to reduce Spectrum's expenses, it is not possible to estimate its value and in the opinion of Spectrum it does not reduce Spectrum's expenses in a determinable amount. The extent to which Spectrum makes use of statistical, research and other services furnished by brokers is considered by Spectrum in the allocation of brokerage business but there is no formula by which such business is allocated. Spectrum does so in accordance with its judgment of the best interests of the Fund and its shareholders. Spectrum may also take into account payments made by brokers effecting transactions for the Fund to other persons on behalf of the Fund for services provided to it for which it would be obligated to pay (such as custodial and professional fees). In addition, consistent with the Conduct Rules of the National Association of Securities Dealers, Inc., and subject to seeking best price and execution, Spectrum may consider sales of shares of the Fund as a fact in the selection of brokers and dealers to enter into portfolio transactions with the Fund.
Certain other clients of Spectrum may have investment objectives and policies similar to those of the Fund. Spectrum may, from time to time, make recommendations which result in the purchase or sale of a particular security by its other clients simultaneously with the Fund. If transactions on behalf of more than one client during the same period increase the demand for securities being sold, there may be an adverse effect on the price of such securities. It is the policy of Spectrum to allocate advisory recommendations and the placing of orders in a manner which Spectrum deems equitable to the accounts involved, including the Fund. When two or more of the clients of Spectrum (including the Fund) are purchasing or selling the same security on a given day through the same broker-dealer, such transactions may be averaged as to price.
DISTRIBUTIONS
As described in the Fund's Prospectus, initial distributions to Common Shareholders are expected to be declared approximately 45 days, and paid approximately 60 to 90 days, from the completion of the offering of the Common Shares, depending on market conditions. To permit the Fund to maintain a more stable monthly distribution, the Fund will initially (prior to its first distribution), and may from time to time thereafter, distribute less than the entire amount of net investment income earned in a particular period. Such undistributed net investment income would be available to supplement future distributions, including distributions that might otherwise have been reduced by a decrease in the Fund's monthly net income due to fluctuations in investment income or expenses, or due to an increase in the dividend rate on the Fund's outstanding FundPreferred shares. As a result, the distributions paid by the Fund for any particular period may be more or less than the amount of net investment income actually earned by the Fund during such period. Undistributed net investment income will be added to the Fund's net asset value and, correspondingly, distributions from undistributed net investment income will be deducted from the Fund's net asset value.
For tax purposes, the Fund is currently required to allocate net capital gain and other taxable income, if any, between Common Shares and FundPreferred shares in proportion to total dividends paid to each class for the year in which such net capital gain or other taxable income is realized. For information relating to the impact of the issuance of FundPreferred shares on the distributions made by a Fund to Common Shareholders, see the Fund's Prospectus under "FundPreferred Shares and Leverage."
While any FundPreferred shares are outstanding, the Fund may not
declare any cash dividend or other distribution on its Common Shares unless at
the time of such declaration (1) all accumulated dividends on the FundPreferred
shares have been paid and (2) the net asset value of the Fund's portfolio
(determined after deducting the amount of such dividend or other distribution)
is at least 200% of the liquidation value of any outstanding FundPreferred
shares. This latter limitation on the Fund's ability to make distributions on
its Common Shares could under certain circumstances impair the ability of the
Fund to maintain its qualification for taxation as a regulated investment
company. See "Tax Matters."
DESCRIPTION OF SHARES
COMMON SHARES
The Fund's Declaration of Trust (the "Declaration") authorizes the issuance of an unlimited number of Common Shares. The Common Shares being offered have a par value of $0.01 per share and, subject to the rights of holders of FundPreferred shares if issued, have equal rights as to the payment of dividends and the distribution of assets upon liquidation of the Fund. The Common Shares being offered will, when issued, be fully paid and, subject to matters discussed in "Certain Provisions in the Declaration of Trust," non-assessable, and will have no pre-emptive or conversion rights or rights to cumulative voting. At any time when the Fund's FundPreferred
shares are outstanding, Common Shareholders will not be entitled to receive any cash distributions from the Fund unless all accrued dividends on FundPreferred shares have been paid, and unless asset coverage (as defined in the 1940 Act) with respect to FundPreferred shares would be at least 200% after giving effect to such distributions. See "FundPreferred Shares" below.
The Common Shares have been approved for listing on the New York Stock Exchange, subject to notice of issuance. The Fund intends to hold annual meetings of shareholders so long as the Common Shares are listed on a national securities exchange and such meetings are required as a condition to such listing.
Shares of closed-end investment companies may frequently trade at prices lower than net asset value. Shares of closed-end investment companies like the Fund have during some periods traded at prices higher than net asset value and during other periods have traded at prices lower than net asset value. There can be no assurance that Common Shares or shares of other municipal funds will trade at a price higher than net asset value in the future. Net asset value will be reduced immediately following the offering after payment of the sales load and organization and offering expenses. Net asset value generally increases when interest rates decline, and decreases when interest rates rise, and these changes are likely to be greater in the case of a fund having a leveraged capital structure. Whether investors will realize gains or losses upon the sale of Common Shares will not depend upon a Fund's net asset value but will depend entirely upon whether the market price of the Common Shares at the time of sale is above or below the original purchase price for the shares. Since the market price of the Fund's Common Shares will be determined by factors beyond the control of the Fund, the Fund cannot predict whether the Common Shares will trade at, below, or above net asset value or at, below or above the initial public offering price. Accordingly, the Common Shares are designed primarily for long-term investors, and investors in the Common Shares should not view the Fund as a vehicle for trading purposes. See "Repurchase of Fund Shares; Conversion to Open-End Fund" and the Fund's Prospectus under "FundPreferred Shares and Leverage" and "The Fund's Investments--Municipal Bonds."
FUNDPREFERRED SHARES
The Declaration authorizes the issuance of an unlimited number of FundPreferred shares in one or more classes or series, with rights as determined by the Board of Trustees of the Fund, by action of the Board of Trustees without the approval of the Common Shareholders. The Fund's Board of Trustees has authorized an offering of FundPreferred shares (representing approximately 33% of the Fund's capital immediately after the time the FundPreferred shares are issued) within approximately one and one-half to two months after completion of the offering of Common Shares, subject to market conditions and to the Board's continuing belief that leveraging the Fund's capital structure through the issuance of FundPreferred shares is likely to achieve the benefits to the Common Shareholders described in this Statement of Additional Information. Although the terms of the FundPreferred shares, including their dividend rate, voting rights, liquidation preference and redemption provisions, will be determined by the Board of Trustees (subject to applicable law and the Fund's Declaration) if and when it authorizes a FundPreferred shares offering, the Board has stated that the initial series of FundPreferred shares would likely pay cumulative dividends at relatively shorter-term periods (such as 7 days); by providing for the periodic redetermination of the
dividend rate through an auction or remarketing procedure. The Board of Trustees of the Fund has indicated that the liquidation preference, preference on distribution, voting rights and redemption provisions of the FundPreferred shares will be as stated below.
Limited Issuance of FundPreferred Shares. Under the 1940 Act, the Fund could issue FundPreferred shares with an aggregate liquidation value of up to one-half of the value of the Fund's total net assets, measured immediately after issuance of the FundPreferred shares. "Liquidation value" means the original purchase price of the shares being liquidated plus any accrued and unpaid dividends. In addition, the Fund is not permitted to declare any cash dividend or other distribution on its Common Shares unless the liquidation value of the FundPreferred shares is less than one-half of the value of the Fund's total net assets (determined after deducting the amount of such dividend or distribution) immediately after the distribution. If the Fund sells all the Common Shares and FundPreferred shares discussed in this Prospectus, the liquidation value of the FundPreferred shares is expected to be approximately 33% of the value of the Fund's total net assets. The Fund intends to purchase or redeem FundPreferred shares, if necessary, to keep that fraction below one-half.
Distribution Preference. The FundPreferred shares have complete priority over the Common Shares as to distribution of assets.
Liquidation Preference. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Fund, holders of FundPreferred shares will be entitled to receive a preferential liquidating distribution (expected to equal the original purchase price per share plus accumulated and unpaid dividends thereon, whether or not earned or declared) before any distribution of assets is made to holders of Common Shares. After payment of the full amount of the liquidating distribution to which they are entitled, holders of FundPreferred shares will not be entitled to any further participation in any distribution of assets by the Fund. A consolidation or merger of the Fund with or into any Massachusetts business trust or corporation or a sale of all or substantially all of the assets of the Fund shall not be deemed to be a liquidation, dissolution or winding up of the Fund.
Voting Rights. In connection with any issuance of FundPreferred shares, the Fund must comply with Section 18(i) of the 1940 Act, which requires, among other things, that FundPreferred shares be voting shares and have equal voting rights with Common Shares. Except as otherwise indicated in this Statement of Additional Information and except as otherwise required by applicable law, holders of FundPreferred shares will vote together with Common Shareholders as a single class.
In connection with the election of the Fund's trustees, holders of FundPreferred shares, voting as a separate class, will be entitled to elect two of the Fund's trustees, and the remaining trustees shall be elected by Common Shareholders and holders of FundPreferred shares, voting together as a single class. In addition, if at any time dividends on the Fund's outstanding FundPreferred shares shall be unpaid in an amount equal to two full years' dividends thereon, the holders of all outstanding FundPreferred shares, voting as a separate class, will be entitled to elect a majority of the Fund's trustees until all dividends in arrears have been paid or declared and set apart for payment.
The affirmative vote of the holders of a majority of the Fund's outstanding FundPreferred shares of any class or series, as the case may be, voting as a separate class, will be required to, among other things, (1) take certain actions which would affect the preferences, rights, or powers of such class or series or (2) authorize or issue any class or series ranking prior to the FundPreferred shares. Except as may otherwise be required by law, (1) the affirmative vote of the holders of at least two-thirds of the Fund's FundPreferred shares outstanding at the time, voting as a separate class, will be required to approve any conversion of the Fund from a closed-end to an open-end investment company and (2) the affirmative vote of the holders of at least two-thirds of the outstanding FundPreferred shares, voting as a separate class, shall be required to approve any plan of reorganization (as such term is used in the 1940 Act) adversely affecting such shares, provided however, that such separate class vote shall be a majority vote if the action in question has previously been approved, adopted or authorized by the affirmative vote of two-thirds of the total number of trustees fixed in accordance with the Declaration or the By-laws. The affirmative vote of the holders of a majority of the outstanding FundPreferred shares, voting as a separate class, shall be required to approve any action not described in the preceding sentence requiring a vote of security holders under Section 13(a) of the 1940 Act including, among other things, changes in a Fund's investment objectives or changes in the investment restrictions described as fundamental policies under "Investment Objectives and Policies--Investment Restrictions." The class or series vote of holders of FundPreferred shares described above shall in each case be in addition to any separate vote of the requisite percentage of Common Shares and FundPreferred shares necessary to authorize the action in question.
The foregoing voting provisions will not apply with respect to the Fund's FundPreferred shares if, at or prior to the time when a vote is required, such shares shall have been (1) redeemed or (2) called for redemption and sufficient funds shall have been deposited in trust to effect such redemption.
Redemption, Purchase and Sale of FundPreferred Shares by the Fund. The terms of the FundPreferred shares may provide that they are redeemable at certain times, in whole or in part, at the original purchase price per share plus accumulated dividends, that the Fund may tender for or purchase FundPreferred shares and that the Fund may subsequently resell any shares so tendered for or purchased. Any redemption or purchase of FundPreferred shares by the Fund will reduce the leverage applicable to Common Shares, while any resale of shares by the Fund will increase such leverage.
BORROWINGS
The Declaration authorizes the Fund, without prior approval of the Common Shareholders, to borrow money. In this connection, the Fund may issue notes or other evidence of indebtedness (including bank borrowings or commercial paper) ("Borrowings") and may secure any such borrowings by mortgaging, pledging or otherwise subjecting as security the Fund's assets. In connection with such borrowing, the Fund may be required to maintain average balances with the lender or to pay a commitment or other fee to maintain a line of credit. Any such requirements will increase the cost of borrowing over the stated interest rate.
Limitations on Borrowings. Under the requirements of the 1940 Act, the Fund, immediately after any Borrowings, must have an asset coverage of at least 300%. With respect
to any Borrowings, asset coverage means the ratio which the value of the total assets of the Fund, less all liabilities and indebtedness not represented by senior securities (as defined in the 1940 Act), bears to the aggregate amount of such Borrowings represented by senior securities issued by the Fund. Certain types of Borrowings may result in the Fund being subject to covenants in credit agreements relating to asset coverages or portfolio composition or otherwise. In addition, the Fund may be subject to certain restrictions imposed by guidelines of one or more NRSROs which may issue ratings for commercial paper or notes issued by the Fund. Such restrictions may be more stringent than those imposed by the 1940 Act.
Distribution Preference. The rights of lenders to the Fund to receive interest on and repayment of principal of any such Borrowings will be senior to those of the Common Shareholders, and the terms of any such Borrowings may contain provisions which limit certain activities of the Fund, including the payment of dividends to Common Shareholders in certain circumstances.
Voting Rights. The 1940 Act does (in certain circumstances) grant to the lenders to the Fund certain voting rights in the event of default in the payment of interest on or repayment of principal. In the event that such provisions would impair the Fund's status as a regulated investment company under the Code, the Fund, subject to its ability to liquidate its relatively illiquid portfolio, intends to repay the Borrowings. Any Borrowings will likely be ranked senior or equal to all other existing and future borrowings of the Fund.
The discussion above describes the Fund's Board of Trustees' present intention with respect to an offering of FundPreferred shares or Borrowings. The terms of the FundPreferred shares and, if authorized by the Board of Trustees, the terms of any Borrowings may be the same as, or different from, the terms described above, subject to applicable law and the Fund's Declaration.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders could, under certain circumstances, be held personally liable for the obligations of the Fund. However, the Declaration contains an express disclaimer of shareholder liability for debts or obligations of the Fund and requires that notice of such limited liability be given in each agreement, obligation or instrument entered into or executed by the Fund or the trustees. The Declaration further provides for indemnification out of the assets and property of the Fund for all loss and expense of any shareholder held personally liable for the obligations of the Fund. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the Fund would be unable to meet its obligations. The Fund believes that the likelihood of such circumstances is remote.
The Declaration includes provisions that could limit the ability of other entities or persons to acquire control of the Fund or to convert the Fund to open-end status. Specifically, the Declaration requires a vote by holders of at least two-thirds of the Common Shares and FundPreferred shares, voting together as a single class, except as described below, to authorize (1) a conversion of the Fund from a closed-end to an open-end investment company, (2) a merger or consolidation of the Fund, or a series or class of the Fund, with any corporation, association, trust or other organization or a reorganization of the Fund, or a series or class of the Fund, (3) a sale, lease or transfer of all or substantially all of the Fund's assets (other than in the
regular course of the Fund's investment activities), (4) in certain
circumstances, a termination of the Fund, or a series or class of the Fund or
(5) removal of trustees, and then only for cause, unless, with respect to (1)
through (4), such transaction has already been authorized by the affirmative
vote of two-thirds of the total number of trustees fixed in accordance with the
Declaration or the By-laws, in which case the affirmative vote of the holders
of at least a majority of the Fund's Common Shares and FundPreferred shares
outstanding at the time, voting together as a single class, is required,
provided, however, that where only a particular class or series is affected
(or, in the case of removing a trustee, when the trustee has been elected by
only one class), the required vote by only the applicable class or series will
be required. Approval of shareholders is not required, however, for any
transaction, whether deemed a merger, consolidation, reorganization or
otherwise whereby the Fund issues shares in connection with the acquisition of
assets (including those subject to liabilities) from any other investment
company or similar entity. None of the foregoing provisions may be amended
except by the vote of at least two-thirds of the Common Shares and
FundPreferred shares, voting together as a single class. In the case of the
conversion of the Fund to an open-end investment company, or in the case of any
of the foregoing transactions constituting a plan of reorganization which
adversely affects the holders of FundPreferred shares, the action in question
will also require the affirmative vote of the holders of at least two-thirds of
the Fund's FundPreferred shares outstanding at the time, voting as a separate
class, or, if such action has been authorized by the affirmative vote of
two-thirds of the total number of trustees fixed in accordance with the
Declaration or the Bylaws, the affirmative vote of the holders of at least a
majority of the Fund's FundPreferred shares outstanding at the time, voting as
a separate class. The votes required to approve the conversion of the Fund from
a closed-end to an open-end investment company or to approve transactions
constituting a plan of reorganization which adversely affects the holders of
FundPreferred shares are higher than those required by the 1940 Act. The Board
of Trustees believes that the provisions of the Declaration relating to such
higher votes are in the best interest of the Fund and its shareholders.
The provisions of the Declaration described above could have the effect of depriving the Common Shareholders of opportunities to sell their Common Shares at a premium over market value by discouraging a third party from seeking to obtain control of the Fund in a tender offer or similar transaction. The overall effect of these provisions is to render more difficult the accomplishment of a merger or the assumption of control by a third party. They provide, however, the advantage of potentially requiring persons seeking control of a Fund to negotiate with its management regarding the price to be paid and facilitating the continuity of the Fund's investment objectives and policies. The Board of Trustees of the Fund has considered the foregoing anti-takeover provisions and concluded that they are in the best interests of the Fund and its Common Shareholders.
Reference should be made to the Declaration on file with the Commission for the full text of these provisions.
The Declaration provides that the obligations of the Fund are not binding upon the trustees of the Fund individually, but only upon the assets and property of the Fund, and that the trustees shall not be liable for errors of judgment or mistakes of fact or law. Nothing in the Declaration, however, protects a trustee against any liability to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office.
REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its shareholders will not have the right to cause the Fund to redeem their shares. Instead, the Fund's Common Shares will trade in the open market at a price that will be a function of several factors, including dividend levels (which are in turn affected by expenses), net asset value, call protection, price, dividend stability, relative demand for and supply of such shares in the market, general market and economic conditions and other factors. Because shares of a closed-end investment company may frequently trade at prices lower than net asset value, the Fund's Board of Trustees has currently determined that, at least annually, it will consider action that might be taken to reduce or eliminate any material discount from net asset value in respect of Common Shares, which may include the repurchase of such shares in the open market or in private transactions, the making of a tender offer for such shares at net asset value, or the conversion of the Fund to an open-end investment company. There can be no assurance, however, that the Board of Trustees will decide to take any of these actions, or that share repurchases or tender offers, if undertaken, will reduce market discount.
Notwithstanding the foregoing, at any time when the Fund's FundPreferred shares are outstanding, the Fund may not purchase, redeem or otherwise acquire any of its Common Shares unless (1) all accrued FundPreferred shares dividends have been paid and (2) at the time of such purchase, redemption or acquisition, the net asset value of the Fund's portfolio (determined after deducting the acquisition price of the Common Shares) is at least 200% of the liquidation value of the outstanding FundPreferred shares (expected to equal the original purchase price per share plus any accrued and unpaid dividends thereon). The staff of the Commission currently requires that any tender offer made by a closed-end investment company for its shares must be at a price equal to the net asset value of such shares on the close of business on the last day of the tender offer. Any service fees incurred in connection with any tender offer made by the Fund will be borne by the Fund and will not reduce the stated consideration to be paid to tendering shareholders.
Subject to its investment limitations, the Fund may borrow to finance the repurchase of shares or to make a tender offer. Interest on any borrowings to finance share repurchase transactions or the accumulation of cash by the Fund in anticipation of share repurchases or tenders will reduce the Fund's net income. Any share repurchase, tender offer or borrowing that might be approved by the Board of Trustees would have to comply with the Securities Exchange Act of 1934, as amended, and the 1940 Act and the rules and regulations thereunder.
Although the decision to take action in response to a discount from net asset value will be made by the Board of the Fund at the time it considers such issue, it is the Board's present policy, which may be changed by the Board, not to authorize repurchases of Common Shares or a tender offer for such shares if (1) such transactions, if consummated, would (a) result in the delisting of the Common Shares from the New York Stock Exchange, or (b) impair status as a regulated investment company under the Code (which would make the Fund's status as a regulated investment company under the code (which would make the Fund a taxable entity, causing the Fund's income to be taxed at the corporate level in addition to the taxation of
shareholders who receive dividends from the Fund) or as a registered closed-end investment company under the 1940 Act; (2) the Fund would not be able to liquidate portfolio securities in an orderly manner and consistent with the Fund's investment objectives and policies in order to repurchase shares; or (3) there is, in the Board's judgment, any (a) material legal action or proceeding instituted or threatened challenging such transactions or otherwise materially adversely affecting the Fund, (b) general suspension of or limitation on prices for trading securities on the New York Stock Exchange, (c) declaration of a banking moratorium by Federal or state authorities or any suspension of payment by United States or state banks in which the Fund invests, (d) material limitation affecting the Fund or the issuers of its portfolio securities by Federal or state authorities on the extension of credit by lending institutions or on the exchange of non-U.S. currency, (e) commencement of war, armed hostilities or other international or national calamity directly or indirectly involving the United States, or (f) other event or condition which would have a material adverse effect (including any adverse tax effect) on the Fund or its shareholders if shares were repurchased. The Board of Trustees of the Fund may in the future modify these conditions in light of experience.
Conversion to an open-end company would require the approval of the holders of at least two-thirds of the Fund's Common Shares and FundPreferred shares outstanding at the time, voting together as a single class, and of the holders of at least two-thirds of the Fund's FundPreferred shares outstanding at the time, voting as a separate class, provided however, that such separate class vote shall be a majority vote if the action in question has previously been approved, adopted or authorized by the affirmative vote of two-thirds of the total number of trustees fixed in accordance with the Declaration or By-laws. See the Prospectus under "Certain Provisions in the Declaration of Trust" for a discussion of voting requirements applicable to conversion of the Fund to an open-end company. If the Fund converted to an open-end company, it would be required to redeem all FundPreferred shares then outstanding, and the Fund's Common Shares would no longer be listed on the New York Stock Exchange. Shareholders of an open-end investment company may require the company to redeem their shares on any business day (except in certain circumstances as authorized by or under the 1940 Act) at their net asset value, less such redemption charge, if any, as might be in effect at the time of redemption. In order to avoid maintaining large cash positions or liquidating favorable investments to meet redemptions, open-end companies typically engage in a continuous offering of their shares. Open-end companies are thus subject to periodic asset in-flows and out-flows that can complicate portfolio management. The Board of Trustees of the Fund may at any time propose conversion of the Fund to an open-end company depending upon their judgment as to the advisability of such action in light of circumstances then prevailing.
The repurchase by the Fund of its shares at prices below net asset value will result in an increase in the net asset value of those shares that remain outstanding. However, there can be no assurance that share repurchases or tenders at or below net asset value will result in the Fund's shares trading at a price equal to their net asset value. Nevertheless, the fact that the Fund's shares may be the subject of repurchase or tender offers at net asset value from time to time, or that the Fund may be converted to an open-end company, may reduce any spread between market price and net asset value that might otherwise exist.
In addition, a purchase by the Fund of its Common Shares will decrease the Fund's total assets which would likely have the effect of increasing the Fund's expense ratio. Any purchase
by the Fund of its Common Shares at a time when FundPreferred shares are outstanding will increase the leverage applicable to the outstanding Common Shares then remaining. See the Fund's Prospectus under "Risks--Concentration Risk" and "Risks--Leverage Risk."
Before deciding whether to take any action if the Fund's Common Shares trade below net asset value, the Board of the Fund would consider all relevant factors, including the extent and duration of the discount, the liquidity of the Fund's portfolio, the impact of any action that might be taken on the Fund or its shareholders and market considerations. Based on these considerations, even if the Fund's shares should trade at a discount, the Board of Trustees may determine that, in the interest of the Fund and its shareholders, no action should be taken.
TAX MATTERS
FEDERAL INCOME TAX MATTERS
The following discussion of federal income tax matters is based upon the advice of Bell, Boyd & Lloyd LLC, special counsel to the Fund.
Set forth below is a discussion of certain U.S. federal income tax issues concerning the Fund and the purchase, ownership and disposition of Fund shares. This discussion does not purport to be complete or to deal with all aspects of federal income taxation that may be relevant to shareholders in light of their particular circumstances. Unless otherwise noted, this discussion assumes you are a U.S. shareholder and that you hold your shares as a capital asset. This discussion is based upon present provisions of the Code, the regulations promulgated thereunder, and judicial and administrative ruling authorities, all of which are subject to change, which change may be retroactive. Prospective investors should consult their own tax advisors with regard to the federal tax consequences of the purchase, ownership, or disposition of Fund shares, as well as the tax consequences arising under the laws of any state, non-U.S. country, or other taxing jurisdiction.
The Fund intends to qualify annually and to elect to be treated as a regulated investment company under the Code.
To qualify for the favorable U.S. federal income tax treatment generally accorded to regulated investment companies, the Fund must, among other things, (a) derive in each taxable year at least 90% of its gross income from dividends, interest, payments with respect to securities loans and gains from the sale or other disposition of stock, securities or foreign currencies or other income derived with respect to its business of investing in such stock, securities or currencies; (b) diversify its holdings so that, at the end of each quarter of the taxable year, (i) at least 50% of the market value of the Fund's assets is represented by cash and cash items (including receivables), U.S. Government securities, the securities of other regulated investment companies and other securities, with such other securities of any one issuer limited for the purposes of this calculation to an amount not greater than 5% of the value of the Fund's total assets and not greater than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its total assets is invested in the securities (other than U.S. Government securities or the securities of other regulated investment companies) of a single issuer, or two or more issuers which the Fund controls and are engaged in the same, similar or
related trades or businesses; and (c) distribute at least 90% of its investment company taxable income (which includes, among other items, dividends, interest and net short-term capital gains in excess of net long-term capital losses) each taxable year.
As a regulated investment company, the Fund generally will not be subject to U.S. federal income tax on its investment company taxable income (as that term is defined in the Code, but without regard to the deduction for dividends paid) and net capital gain (the excess of net long-term capital gain over net short-term capital loss), if any, that it distributes to shareholders. The Fund intends to distribute to its shareholders, at least annually, substantially all of its investment company taxable income and net capital gain. Amounts not distributed on a timely basis in accordance with a calendar year distribution requirement are subject to a nondeductible 4% excise tax. To prevent imposition of the excise tax, the Fund must distribute during each calendar year an amount equal to the sum of (1) at least 98% of its ordinary income (not taking into account any capital gains or losses) for the calendar year, (2) at least 98% of its capital gains in excess of its capital losses (adjusted for certain ordinary losses) for the one-year period ending October 31 of the calendar year, and (3) any ordinary income and capital gains for previous years that were not distributed during those years. To prevent application of the excise tax, the Fund intends to make its distributions in accordance with the calendar year distribution requirement. A distribution will be treated as paid on December 31 of the current calendar year if it is declared by the Fund in October, November or December with a record date in such a month and paid by the Fund during January of the following calendar year. Such distributions will be taxable to shareholders in the calendar year in which the distributions are declared, rather than the calendar year in which the distributions are received.
If the Fund failed to qualify as a regulated investment company or failed to satisfy the 90% distribution requirement in any taxable year, the Fund would be taxed as an ordinary corporation on its taxable income (even if such income were distributed to its shareholders) and all distributions out of earnings and profits would be taxed to shareholders as ordinary income.
DISTRIBUTIONS
Dividends paid out of the Fund's investment company taxable income will be taxable to a shareholder as ordinary income to the extent of the Fund's earnings and profits, whether paid in cash or reinvested in additional shares. Because Spectrum does not intend to invest with a view to maximizing the portion of the Fund's distributions qualifying for the Dividends Received Deduction, any corporate shareholder who otherwise would qualify for the Dividends Received Deduction should assume that dividends paid to it out of the Fund generally will not qualify for the Dividends Received Deduction.
Distributions of net capital gain (the excess of net long-term capital gain over net short-term capital loss), if any, designated as capital gain dividends are taxable to a shareholder as long-term capital gains, regardless of how long the shareholder has held Fund shares. Shareholders receiving distributions in the form of additional shares, rather than cash, generally will have a cost basis in each such share equal to the net asset value of a share of the Fund on the reinvestment date. A distribution of an amount in excess of the Fund's current and accumulated earnings and profits will be treated by a shareholder as a return of capital which is applied against and reduces the shareholder's basis in his or her shares. To the extent that the amount of
any such distribution exceeds the shareholder's basis in his or her shares, the excess will be treated by the shareholder as gain from a sale or exchange of the shares.
Shareholders will be notified annually as to the U.S. federal tax status of distributions, and shareholders receiving distributions in the form of additional shares will receive a report as to the net asset value of those shares.
SALE OR EXCHANGE OF FUND SHARES
Upon the sale or other disposition of shares of the Fund, which a shareholder holds as a capital asset, such a shareholder may realize a capital gain or loss which will be long-term or short-term, depending upon the shareholder's holding period for the shares. Generally, a shareholder's gain or loss will be a long-term gain or loss if the shares have been held for more than one year.
Any loss realized on a sale or exchange will be disallowed to the extent that shares disposed of are replaced (including through reinvestment of dividends) within a period of 61 days beginning 30 days before and ending 30 days after disposition of shares. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. Any loss realized by a shareholder on a disposition of Fund shares held by the shareholder for six months or less will be treated as a long-term capital loss to the extent of any distributions of net capital gain received by the shareholder with respect to such shares.
NATURE OF FUND'S INVESTMENTS
Certain of the Fund's investment practices are subject to special and
complex federal income tax provisions that may, among other things, (i)
disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (ii) convert lower taxed long-term capital gain into higher taxed
short-term capital or ordinary income, (iii) convert an ordinary loss or a
deduction into a capital loss (the deductibility of which is more limited),
(iv) cause the Fund to recognize income or gain without a corresponding receipt
of cash, (v) adversely affect the time as to when a purchase or sale of stock
or securities is deemed to occur and (vi) adversely alter the characterization
of certain complex financial transactions.
FUTURES CONTRACTS AND OPTIONS
The Fund's transactions in futures contracts and options will be subject to special provisions of the Code that, among other things, may affect the character of gains and losses realized by the Fund (i.e., may affect whether gains or losses are ordinary or capital), may accelerate recognition of income to the Fund and may defer Fund losses. These rules could, therefore, affect the character, amount and timing of distributions to shareholders. These provisions also (a) will require the Fund to mark-to-market certain types of the positions in its portfolio (i.e., treat them as if they were closed out), and (b) may cause the Fund to recognize income without receiving cash with which to make distributions in amounts necessary to satisfy the 90% distribution requirement for qualifying to be taxed as a regulated investment company and the 98% distribution requirement for avoiding excise taxes. The Fund will monitor its transactions, will make the appropriate tax elections and will make the appropriate entries in its books and records when it acquires any futures contract, option or hedged investment in order to
mitigate the effect of these rules and prevent disqualification of the Fund from being taxed as a regulated investment company.
RECOGNITION OF INCOME IN THE ABSENCE OF CASH
Investments by the Fund in zero coupon or other discount securities will result in income to the Fund equal to a portion of the excess of the face value of the securities over their issue price (the "original issue discount") each year that the securities are held, even though the Fund receives no cash interest payments. In other circumstances, whether pursuant to the terms of a security or as a result of other factors outside the control of the Fund, the Fund may recognize income without receiving a commensurate amount of cash. Such income is included in determining the amount of income which the Fund must distribute to maintain its status as a regulated investment company and to avoid the payment of federal income tax and the 4% excise tax. Because such income may not be matched by a corresponding cash distribution to the Fund, the Fund may be required to borrow money or dispose of other securities to be able to make distributions to its shareholders.
INVESTMENTS IN SECURITIES OF UNCERTAIN TAX CHARACTER
The Fund may invest in preferred securities or other securities the federal income tax treatment of which is uncertain or subject to recharacterization by the Internal Revenue Service. To the extent the tax treatment of such securities or income differs from the tax treatment expected by the Fund, it could affect the timing or character of income recognized by the Fund, requiring the Fund to purchase or sell securities, or otherwise change its portfolio, in order to comply with the tax rules applicable to regulated investment companies under the Code.
BACKUP WITHHOLDING
The Fund may be required to withhold U.S. federal income tax from all taxable distributions and redemption proceeds payable to shareholders who fail to provide the Fund with their correct taxpayer identification number or to make required certifications, or who have been notified by the Internal Revenue Service that they are subject to backup withholding. The withholding percentage is 30% for 2002 and 2003, and will decrease to 29% in 2004 and 2005, and 28% thereafter until 2011, when the percentage will revert to 31% unless amended by Congress. Corporate shareholders and certain other shareholders specified in the Code generally are exempt from such backup withholding. This withholding is not an additional tax. Any amounts withheld may be credited against the shareholder's U.S. federal income tax liability.
NON-U.S. SHAREHOLDERS
U.S. taxation of a shareholder who, as to the United States, is a nonresident alien individual, a foreign trust or estate, a foreign corporation or foreign partnership ("non-U.S. shareholder") depends on whether the income of the Fund is "effectively connected" with a U.S. trade or business carried on by the shareholder.
Income Not Effectively Connected. If the income from the Fund is not "effectively connected" with a U.S. trade or business carried on by the non-U.S. shareholder, distributions of
investment company taxable income will be subject to a U.S. tax of 30% (or lower treaty rate), which tax is generally withheld from such distributions.
Distributions of capital gain dividends and any amounts retained by the Fund which are designated as undistributed capital gains will not be subject to U.S. tax at the rate of 30% (or lower treaty rate) unless the non-U.S. shareholder is a nonresident alien individual and is physically present in the United States for more than 182 days during the taxable year and meets certain other requirements. However, this 30% tax on capital gains of nonresident alien individuals who are physically present in the United States for more than the 182 day period only applies in exceptional cases because any individual present in the United States for more than 182 days during the taxable year is generally treated as a resident for U.S. income tax purposes; in that case, he or she would be subject to U.S. income tax on his or her worldwide income at the graduated rates applicable to U.S. citizens, rather than the 30% U.S. tax. In the case of a non-U.S. shareholder who is a nonresident alien individual, the Fund may be required to withhold U.S. income tax from distributions of net capital gain unless the non-U.S. shareholder certifies his or her non-U.S. status under penalties of perjury or otherwise establishes an exemption. See "Tax Matters--Backup Withholding," above. If a non-U.S. shareholder is a nonresident alien individual, any gain such shareholder realizes upon the sale or exchange of such shareholder's shares of the Fund in the United States will ordinarily be exempt from U.S. tax unless the gain is U.S. source income and such shareholder is physically present in the United States for more than 182 days during the taxable year and meets certain other requirements, or is otherwise considered to be a resident alien of the United States.
Income Effectively Connected. If the income from the Fund is "effectively connected" with a U.S. trade or business carried on by a non-U.S. shareholder, then distributions of investment company taxable income and capital gain dividends, any amounts retained by the Fund which are designated as undistributed capital gains and any gains realized upon the sale or exchange of shares of the Fund will be subject to U.S. income tax at the graduated rates applicable to U.S. citizens, residents and domestic corporations. Non-U.S. corporate shareholders may also be subject to the branch profits tax imposed by the Code. The tax consequences to a non-U.S. shareholder entitled to claim the benefits of an applicable tax treaty may differ from those described herein. Non-U.S. shareholders are advised to consult their own tax advisors with respect to the particular tax consequences to them of an investment in the Fund.
OTHER TRANSACTIONS
Fund shareholders may be subject to state, local and foreign taxes on their Fund distributions. Shareholders are advised to consult their own tax advisors with respect to the particular tax consequences to them of an investment in the Fund.
PERFORMANCE RELATED AND COMPARATIVE INFORMATION
The Fund may quote certain performance-related information and may compare certain aspects of its portfolio and structure to other substantially similar closed-end funds. In reports or other communications to shareholders of the Fund or in advertising materials, the Fund may compare its performance with that of (i) other investment companies listed in the rankings prepared by Lipper, Inc. ("Lipper"), Morningstar Inc. or other independent services;
publications such as Barrons, Business Week, Forbes, Fortune, Institutional Investor, Kiplinger's Personal Finance, Money, Morningstar Mutual Fund Values, The New York Times, The Wall Street Journal and USA Today; or other industry or financial publications or (ii) the Standard and Poor's Index of 500 Stocks, the Dow Jones Industrial Average, Dow Jones Utility Index, the Merril Lynch Hybrid Preferred Securities Index, the Lehman Brothers Aggregate Bond Index, the Lehman Brothers Government Bond Index, the NAREIT Equity REIT Index, the Lehman Brothers High Yield Index, the Lehman Brothers Credit Index and other relevant indices and industry publications. The Fund may also compare the historical volatility of its portfolio to the volatility of such indices during the same time periods. (Volatility is a generally accepted barometer of the market risk associated with a portfolio of securities and is generally measured in comparison to the stock market as a whole - the beta - or in absolute terms - the standard deviation.) Comparison of the Fund to an alternative investment should be made with consideration of differences in features and expected performance. The Fund may obtain data from sources or reporting services, such as Bloomberg Financial ("Bloomberg") and Lipper, that the Fund believes to be generally accurate.
From time to time, the Fund may quote the Fund's total return, aggregate total return or yield in advertisements or in reports and other communications to shareholders. The Fund's performance will vary depending upon market conditions, the composition of its portfolio and its operating expenses. Consequently any given performance quotation should not be considered representative of the Fund's performance in the future. In addition, because performance will fluctuate, it may not provide a basis for comparing an investment in the Fund with certain bank deposits or other investments that pay a fixed yield for a stated period of time. Investments comparing the Fund's performance with that of other investment companies should give consideration to the quality and maturity of the respective investment companies' portfolio securities.
The Fund's "average annual total return" is computed according to a formula prescribed by the Commission. The formula can be expressed as follows:
Average Annual Total Return will be computed as follows:
ERV = P(1+T)/n/
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
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payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion).
The Funds may also quote after-tax total returns to show the impact of assumed federal income taxes on an investment in a Fund. A Fund's total return "after taxes on distributions" shows the effect of taxable distributions, but not any taxable gain or loss, on an investment in shares of the Fund for a specified period of time. A Fund's total return "after taxes on distributions and sale of Fund shares" shows the effect of both taxable distributions and any taxable gain or loss realized by the shareholder upon the sale of fund shares at the end of a specified period. To determine these figures, all income, short-term capital gain distributions, and long-term capital gains distributions are assumed to have been taxed at the highest marginal individualized federal tax rate then in effect. Those maximum tax rates are applied to distributions prior to reinvestment and the after-tax portion is assumed to have been reinvested in the Fund. State and local taxes are ignored.
Actual after-tax returns depend on a shareholder's tax situation and may differ from those shown. After-tax returns reflect past tax effects and are not predictive of future tax effects.
Average Annual Total Return (After Taxes on Distributions) will be computed as follows:
ATV/D/ = P(1+T)/n/
Where: P = a hypothetical initial investment of $1,000
T = average annual total return (after taxes on distributions)
n = number of years
ATV/D/ = ending value of a hypothetical $1,000 investment
made at the beginning of the period, at the end of
the period (or fractional portion thereof), after
taxes on fund distributions but not after taxes on
redemptions.
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Average Annual Total Return (After Taxes on Distributions and Sale of Fund Shares) will be computed as follows:
ATV/DR/ = P(1+T)/n/
Where: P = a hypothetical initial investment of $1,000
T = average annual total return (after taxes on
distributions and redemption)
n = number of years
ATV/DR/ = ending value of a hypothetical $1,000 investment
made at the beginning periods, at the end of the
periods (or fractional portion thereof), after taxes
on fund distributions and redemptions.
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Quotations of yield for the Fund will be based on all investment income per share earned during a particular 30-day period (including dividends and interest), less expenses accrued during the period ("net investment income") and are computed by dividing net investment income by the maximum offering price per share on the last day of the period, according to the following formula:
Yield = 2 [( a-b/cd +1)/6/ - 1]
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends
d = the maximum offering price per share on the last day of
the period
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Past performance is not indicative of future results. At the time Common Shareholders sell their shares, they may be worth more or less than their original investment. See Appendix B for additional performance related and comparative information.
EXPERTS
The Financial Statements of the Fund as of _______, 2002, appearing in this Statement of Additional Information have been audited by Ernst & Young LLP, 233 South Wacker Drive, Chicago, Illinois 60606, independent auditors, as set forth in their report thereon appearing elsewhere herein, and is included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. Ernst & Young LLP provides accounting and auditing services to the Fund.
CUSTODIAN
The custodian of the assets of the Fund is State Street Bank and Trust Company, One Federal Street, Boston, Massachusetts 02101. The custodian performs custodial, fund accounting and portfolio accounting services.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto, relating to the shares of the Fund offered hereby, has been filed by the Fund with the Commission, Washington, D.C. The Fund's Prospectus and this Statement of Additional Information do not contain all of the information set forth in the Registration Statement, including any exhibits and schedules thereto. For further information with respect to the Fund and the shares offered hereby, reference is made to the Fund's Registration Statement. Statements contained in the Fund's Prospectus and this Statement of Additional Information as to the contents of any contract or other document referred to are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. Copies of the Registration Statement may be inspected without charge at the Commission's principal office in Washington, D.C., and copies of all or any part thereof may be obtained from the Commission upon the payment of certain fees prescribed by the Commission.
REPORT OF INDEPENDENT AUDITORS
[TO COME]
NUVEEN QUALITY PREFERRED INCOME FUND 2
FINANCIAL STATEMENTS
Nuveen Quality Preferred Income Fund 2
Statement of Assets and Liabilities
_______, 2002
[TO COME]
NUVEEN QUALITY PREFERRED INCOME FUND 2
Statement of Operations
Period from June 24, 2002 (date of organization) through , 2002
[TO COME]
APPENDIX A
Ratings of Investments
Standard & Poor's Corporation --A brief description of the applicable Standard & Poor's Corporation, a division of The McGraw-Hill Companies ("Standard & Poor's" or "S&P") rating symbols and their meanings (as published by S&P) follows:
A Standard & Poor's issue credit rating is a current opinion of the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program. It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation. The issue credit rating is not a recommendation to purchase, sell, or hold a financial obligation, inasmuch as it does not comment as to market price or suitability for a particular investor.
Issue credit ratings are based on current information furnished by the obligors or obtained by Standard & Poor's from other sources it considers reliable. Standard & Poor's does not perform an audit in connection with any credit rating and may, on occasion, rely on unaudited financial information. Credit ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances.
Issue credit ratings can be either long-term or short-term. Short-term ratings are generally assigned to those obligations considered short-term in the relevant market. In the U.S., for example, that means obligations with an original maturity of no more than 365 days - including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor with respect to put features on long-term obligations. The result is a dual rating, in which the short-term ratings address the put feature, in addition to the usual long-term rating. Medium-term notes are assigned long-term ratings.
LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based in varying degrees, on the following considerations:
1. 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;
2. Nature of and provisions of the obligation; and
3. 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. The issue ratings definitions are expressed in terms of default risk. As such, they pertain to senior obligations of an entity. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above.
AAA
An obligation rated 'AAA' has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.
AA
An obligation rated 'AA' differs from the highest-rated obligations only in small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.
A
An obligation rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong.
BBB
An obligation rated 'BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
BB, B, CCC, CC, And C
Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as having significant speculative characteristics. 'BB' indicates the least degree of speculation and 'C' the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
BB
An obligation rated 'BB' is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions, which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
B
An obligation rated 'B' is more vulnerable to nonpayment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.
CCC
An obligation rated 'CCC' is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC
An obligation rated 'CC' is currently highly vulnerable to nonpayment.
C
The 'C' rating may be used to cover a situation where a bankruptcy petition has been filed or similar action has been taken, but payments on this obligation are being continued.
D
An obligation rated 'D' is in payment default. The 'D' rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The 'D' rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
Plus (+) or minus (-)
The ratings from 'AA' to 'CCC' may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
C
The 'c' subscript is used to provide additional information to investors that the bank may terminate its obligation to purchase tendered bonds if the long-term credit rating of the issuer is below an investment-grade level and/or the issuer's bonds are deemed taxable.
p
The letter 'p' indicates that the rating is provisional. A provisional rating assumes the successful completion of the project financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful, timely completion of the project. This rating, however, while addressing credit quality subsequent to completion of the project, makes no comment on the likelihood of or the risk of default upon failure of such completion. The investor should exercise his own judgment with respect to such likelihood and risk.
*
Continuance of the ratings is contingent upon Standard & Poor's receipt of an executed copy of the escrow agreement or closing documentation confirming investments and cash flows.
r
The 'r' highlights derivative, hybrid, and certain other obligations that Standard & Poor's believes may experience high volatility or high variability in expected returns as a result of noncredit risks. Examples of such obligations are securities with principal or interest return indexed to equities, commodities, or currencies; certain swaps and options; and interest-only and principal-only mortgage securities. The absence of an 'r' symbol should not be taken as an indication that an obligation will exhibit no volatility or variability in total return.
N.R.
Not rated.
Debt obligations of issuers outside the United States and its territories are rated on the same basis as domestic corporate and municipal issues. The ratings measure the creditworthiness of the obligor but do not take into account currency exchange and related uncertainties.
Bond Investment Quality Standards
Under present commercial bank regulations issued by the
Comptroller of the Currency, bonds rated in the top four categories
('AAA', 'AA', 'A', 'BBB', commonly known as investment-grade ratings)
generally are regarded as eligible for bank investment. Also, the laws
of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings
banks, trust companies, insurance companies, and fiduciaries in
general.
Short-Term Issue Credit Ratings
Notes
A Standard & Poor's note ratings reflects the liquidity factors and market access risks unique to notes. Notes due in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment:
. 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.
Note rating symbols are as follows:
SP-1
Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+) designation.
SP-2
Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes.
SP-3
Speculative capacity to pay principal and interest.
A note rating is not a recommendation to purchase, sell, or hold a security inasmuch as it does not comment as to market price or suitability for a particular investor. The ratings are based on current information furnished to S&P by the issuer or obtained by S&P from other sources it considers reliable. S&P does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended, or withdrawn as a result of changes in or unavailability of such information or based on other circumstances.
Commercial Paper
An S&P commercial paper rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days. Ratings are graded into several categories, ranging from 'A-1' for the highest quality obligations to 'D' for the lowest. These categories are as follows:
A short-term obligation rated 'A-1' is rated in the highest category by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor's capacity to meet its financial commitment on these obligations is extremely strong.
A short-term obligation rated 'A-2' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial commitment on the obligation is satisfactory.
A short-term obligation rated 'A-3' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
B
A short-term obligation rated 'B' is regarded as having significant speculative characteristics. The obligor currently has the capacity to meet its financial commitment on the obligation; however, it faces major ongoing uncertainties which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
C
A short-term obligation rated 'C' is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation.
D
A short-term obligation rated 'D' is in payment default. The 'D' rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The 'D' rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
A commercial rating is not a recommendation to purchase, sell, or hold a security inasmuch as it does not comment as to market price or suitability for a particular investor. The ratings are based on current information furnished to S&P by the issuer or obtained by S&P from other sources it considers reliable. S&P does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended, or withdrawn as a result of changes in or unavailability of such information or based on other circumstances.
Moody's Investors Service, Inc.-- A brief description of the applicable Moody's Investors Service, Inc. ("Moody's") rating symbols and their meanings (as published by Moody's) follows:
Municipal Bonds
Aaa
Bonds which are rated 'Aaa' are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
Aa
Bonds which are rated 'Aa' are judged to be of high quality by all standards. Together with the 'Aaa' group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in 'Aaa' securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in 'Aaa' securities.
A
Bonds which are rated 'A' possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future.
Baa
Bonds which are rated 'Baa' are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba
Bonds which are rated 'Ba' are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class.
B
Bonds which are rated 'B' generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Caa
Bonds which are rated 'Caa' are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest.
Ca
Bonds which are rated 'Ca' represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
C
Bonds which are rated 'C' are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.
Issues that are secured by escrowed funds held in trust, reinvested in direct, non-callable U.S. government obligations or non-callable obligations unconditionally guaranteed by the U.S. Government or Resolution Funding Corporation are identified with a # (hatchmark) symbol, e.g., #Aaa.
Con. (...): Bonds for which the security depends upon the completion of some act or the fulfillment of some condition are rated conditionally. These are bonds secured by (a) earnings of projects under construction, (b) earnings of projects unseasoned in operation experience, (c) rentals which begin when facilities are completed, or (d) payments to which some other limiting condition attaches. The parenthetical rating denotes probable credit stature upon completion of construction or elimination of the basis of the condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.
Short-Term Loans
MIG 1/VMIG 1
This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2
This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group.
MIG 3/VMIG 3
This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely to be less well-established.
SG
This designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection.
Commercial Paper
Issuers rated Prime-1 (or related supporting institutions) have a superior ability for repayment of senior short-term debt obligations. Prime-1 repayment ability will normally be evidenced by the following characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structures with moderate reliance on debt and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high internal cash generation.
-- Well-established access to a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an acceptable ability for repayment of senior short-term debt obligations. The effect of industry characteristics and market composition may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and the requirement for relatively high financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
Fitch Ratings --A brief description of the applicable Fitch Ratings ("Fitch") ratings symbols and meanings (as published by Fitch) follows:
Long-Term Credit Ratings
Investment Grade
AAA
Highest credit quality. 'AAA' ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
AA
Very high credit quality. 'AA' ratings denote a very low expectation of credit risk. They indicate very strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
A
High credit quality. 'A' ratings denote a low expectation of credit risk. The capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings.
BBB
Good credit quality. 'BBB' ratings indicate that there is currently a low expectation of credit risk. The capacity for timely payment of financial commitments is considered adequate, but adverse changes in circumstances and in economic conditions are more likely to impair this capacity. This is the lowest investment-grade category.
Speculative Grade
BB
Speculative. 'BB' ratings indicate that there is a possibility of credit risk developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade.
B
Highly speculative. 'B' ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment.
CCC, CC, C
High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic developments. A 'CC' rating indicates that default of some kind appears probable. 'C' ratings signal imminent default.
DDD, DD, and D Default
The ratings of obligations in this category are based on their prospects for achieving partial or full recovery in a reorganization or liquidation of the obligor. While expected recovery values are highly speculative and cannot be estimated with any precision, the following serve as general guidelines. 'DDD' obligations have the highest potential for recovery, around 90%-100% of outstanding amounts and accrued interest. `DD' indicates potential recoveries in the range of 50%-90%, and 'D' the lowest recovery potential, i.e., below 50%. Entities rated in this category have defaulted on some or all of their obligations. Entities rated 'DDD' have the highest prospect for resumption of performance or continued operation with or without a formal reorganization process. Entities rated 'DD' and 'D' are generally undergoing a formal reorganization or liquidation process; those rated 'DD' are likely to satisfy a higher portion of their outstanding obligations, while entities rated 'D' have a poor prospect for repaying all obligations.
Short-Term Credit Ratings
A short-term rating has a time horizon of less than 12 months for most obligations, or up to three years for U.S. public finance securities, and thus places greater emphasis on the liquidity necessary to meet financial commitments in a timely manner.
Highest credit quality. Indicates the strongest capacity for timely payment of financial commitments; may have an added "+" to denote any exceptionally strong credit feature.
Good credit quality. A satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings.
Fair credit quality. The capacity for timely payment of financial commitments is adequate; however, near-term adverse changes could result in a reduction to non-investment grade. B Speculative. Minimal capacity for timely payment of financial commitments, plus vulnerability to near-term adverse changes in financial and economic conditions.
C
High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon a sustained, favorable business and economic environment.
D
Default. Denotes actual or imminent payment default.
Notes: "+" or "-" may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the 'AAA' long-term rating category, to categories below 'CCC', or to short-term ratings other than 'F1'. 'NR' indicates that Fitch does not rate the issuer or issue in question. 'Withdrawn': A rating is withdrawn when Fitch deems the amount of information available to be inadequate for rating purposes, or when an obligation matures, is called, or refinanced.
Rating Watch: Ratings are placed on Rating Watch to notify investors that there is a reasonable probability of a rating change and the likely direction of such change. These are designated as "Positive", indicating a potential upgrade, "Negative", for a potential downgrade, or "Evolving", if ratings may be raised, lowered or maintained. Rating Watch is typically resolved over a relatively short period.
A Rating Outlook indicates the direction a rating is likely to move over a one to two year period. Outlooks may be positive, stable, or negative. A positive or negative Rating Outlook does not imply a rating change is inevitable. Similarly, companies whose outlooks are `stable' could be downgraded before an outlook moves to positive or negative if circumstances warrant such an action. Occasionally, Fitch may be unable to identify the fundamental trend. In these cases, the Rating Outlook may be described as evolving.
APPENDIX B
PERFORMANCE RELATED AND COMPARATIVE INFORMATION
The Fund is subadvised by Spectrum, which is led by two principals with a combined 50 years of preferred securities experience. The investment team averages more than 15 years each in the preferred securities market.
As of July 31, 2002, investment-grade quality taxable preferred securities offered attractive market yields when compared with other income investments. The Fund anticipates that substantially all of its portfolio will be invested in taxable investment-grade quality preferred securities.
[Bar Chart Appears Here]
Attractive Current Yield from a Quality Investment
As of 7/31/02 Yield Lehman Aggregate Bond Index 4.96% Lehman Government Index 3.62% Lehman U.S. Credit Bond Index 5.96% Taxable Preferred Securities 7.40% |
Source: Merrill Lynch, Lehman Brothers, Bloomberg
All yields shown are as of July 31, 2002. Preferred securities are represented by the Merrill Lynch Preferred Stock Hybrid Securities Index, an unmanaged index of investment-grade, exchange-traded preferred stocks with outstanding market values of at least $30 million and at least one year to maturity. The Lehman Brothers Aggregate Bond Index is an unmanaged index that includes all investment-grade, publicly issued, fixed-rate, dollar-denominated, nonconvertible debt issues and commercial mortgage backed securities with maturities of at least one year and outstanding par values of $150 million or more. The Lehman Brothers U.S. Credit Index is an unmanaged index that includes all publicly-issued, fixed rate, non-convertible, investment grade, dollar-denominated SEC-registered corporate debt having at least one year to maturity and an outstanding par value of $100 million. The Lehman Brothers Government Bond Index is an unmanaged index that includes all public obligations of the U.S. Treasury and all publicly-issued debt of U.S. Government agencies and quasi-federal corporations, and corporate debt guaranteed by the U.S. Government, excluding foreign-targeted issues. It is not possible to invest directly in any of these indexes. The Fund differs from the Merrill Lynch Preferred Stock Hybrid Securities Index in several important respects. The Merrill Lynch index consists only of exchange-traded preferred securities, while the Fund may invest in over-the-counter preferred securities. The Fund expects to employ leverage, although there is no assurance leverage will be employed. Unlike an index, the Fund will charge management fees and expenses. The yields shown here are for comparison purposes only, and none of these yields is intended to be predictive of the future yields of these asset classes or of the Fund.
Historically, investment-grade quality taxable preferred securities have shown low return correlations with a number of asset classes commonly found in individual investors' portfolios. Nuveen believes that adding a low correlation investment to an investor's portfolio has the potential to enhance the capital preservation of the investor's portfolio over time.
[Bar Chart Appears Here]
Low Correlations May Help Preserve Capital by Reducing Overall Portfolio Risk
July 1997 through July 2002
5 years
Corporate Bonds 0.44
Government Bonds 0.37
REITS 0.27
S&P 500 0.00
Taxable Preferred Securities 1.00
|
Source: Merrill Lynch, Lehman Brothers, NAREIT, Ibbotson Associates
Correlation coefficients are based on monthly return data from July 1997 through July 2002. Past correlations are not necessarily predictive of future correlations between any of these asset classes and the Fund. Taxable preferred securities are represented by the Merrill Lynch Preferred Stock Hybrid Securities Index, an unmanaged index of investment-grade, exchange-traded preferred stocks with outstanding market values of at least $30 million and at least one year to maturity. Corporate Bonds are represented by the Lehman Brothers Aggregate Bond Index, an unmanaged index that includes all investment-grade, publicly issued, fixed-rate, dollar-denominated, nonconvertible debt issues and commercial mortgage backed securities with maturities of at least one year and outstanding par values of $150 million or more. Government Bonds are represented by the Lehman Brothers Government Bond Index, an unmanaged index that includes all public obligations of the U.S. Treasury and all publicly-issued debt of U.S. Government agencies and quasi-federal corporations, and corporate debt guaranteed by the U.S. Government, excluding foreign-targeted issues. REITs are represented by the NAREIT Equity REIT Index, an unmanaged index of publicly-traded U.S. tax-qualified REITs that have 75% or more of their invested book assets in the equity ownership of real estate. The S&P 500 is an unmanaged index of 500 large-capitalization, publicly-traded common stocks representing various industries. It is not possible to invest directly in any of these indexes.
The Fund's managers will seek attractive yields by investing only in securities that, at the time of investment are investment-grade quality. Spectrum believes there is a potential advantage in seeking higher yields by investing in the subordinated preferred securities of strong, highly rated issuers rather than the senior debt of the same companies.
Preferred Securities May Offer Attractive Yields Relative to the Yields on Bonds Issued by the Same Company
Same Same
Company's Company's
(as of 7/31/02) Preferred Preferred 10-Year 10-Year Yield
Security Security Rating Security Yield Rating Bond Yield Pick-up
------------------------------------------------------------------------------------------------
Bank of New York A- 7.80% A 6.03% 1.77%
Barclays Bank A+ 7.93% AA 6.04% 1.89%
Citigroup A 7.36% AA- 5.70% 1.66%
Financial Security Assurance AA 7.40% AA 5.14% 2.26%
Harris Bankcorp A 7.48% AA- 5.52% 1.96%
Hartford Financial Services BBB+ 7.83% A 5.84% 1.99%
HRPT Properties Trust BBB- 9.52% BBB 6.10% 3.42%
National Australia Bank A 7.81% AA- 5.37% 2.44%
US Bancorp BBB+ 7.64% A 5.47% 2.17%
------------------------------------------------------------------------------------------------
Source: Bloomberg
|
This table is for illustrative purposes only, and is designed to highlight one of the criteria the Fund's managers may use when evaluating securities for the Fund. The Fund managers will use other criteria as well when selecting the Fund's investments. There can be no assurance the Fund will or will not invest in the securities of any of the companies shown here. Yields on these securities do not represent yield on the Fund's Common Shares. This is not a recommendation to purchase any of these securities.
This type of preferred security, relatively rare before 1995, has grown to a total outstanding amount of approximately $182.3 billion as of June 30, 2002.
[Line Graph Appears Here]
$billions
2Q 91 0
4Q 91 0.575
2Q 92 0.8
4Q 92 1.1956
2Q 93 3.4944
4Q 93 5.7522
2Q 94 7.4007
4Q 94 10.1853
2Q 95 14.8693
4Q 95 22.824
2Q 96 31.329
4Q 96 36
2Q 97 85.4577
4Q 97 94.1
2Q 98 116.5
4Q 98 133
2Q 99 144
4Q 99 153.5
2Q 00 156.9
4Q 00 164.0
2Q 01 166.0
4Q 01 178
2Q 02 182.3
|
Source: Merrill Lynch, Lehman Brothers, Bloomberg
This graph tracks the cumulative par value of the outstanding amount of U.S. dollar denominated non-dividend received deduction preferred securities, the asset class in which the Fund intends to invest primarily all of its assets. It is derived from quarterly issuance data supplied to Spectrum Asset Management by Merrill Lynch and Lehman Brothers, and then corroborated by Spectrum using data retrieved through Bloomberg.
Many investors have found income-producing closed-end exchange-traded funds to be a valuable addition to their portfolios. The Fund shares a number of features found in many income-oriented closed-end exchange-traded funds, including:
. Monthly dividends
. Enhanced income potential through leverage
. Exchange-listing and liquidity
. Ability to remain fully invested at all times
. Widespread price visibility
. Convenient intra-day trading
. Professional management
. Dividend reinvestment
. Low minimum investment
For Which Accounts is this Fund Appropriate?
While this Fund may be appropriate for a wide range of investors and accounts, it may be particularly attractive for investors with:
. tax-deferred or tax-advantaged accounts such as retirement plans
. taxable accounts of affluent investors with relatively low current taxable income
. accounts that now contain individual preferred securities
Who Might Be Interested?
The features and objectives of this Fund might be especially appealing to those:
. Already investing in taxable preferred securities
. Looking for high current income potential from an investment-grade quality fund
. Seeking additional diversification within their portfolios
. Interested in trading convenience and flexibility
. Reassured by the experience of Nuveen and Spectrum
Nuveen believes investors can take advantage of several benefits by purchasing shares during the initial public offering, including:
- Known price - $15 per share
- The same price for all shares in an order - no matter what the order size, all orders are filled at the same $15 per share (100 per share minimum)
Nuveen Quality Preferred Income Fund 2 4,000,000 Common Shares |
STATEMENT OF ADDITIONAL INFORMATION
, 2002
PART C - OTHER INFORMATION
Item 24: Financial Statements and Exhibits
1. Financial Statements:
Registrant has not conducted any business as of the date of this filing, other than in connection with its organization. Financial Statements indicating that the Registrant has met the net worth requirements of Section 14(a) of the 1940 Act are filed with this Pre-effective Amendment to the Registration Statement.
2. Exhibits:
a. Declaration of Trust dated June 24, 2002. Filed July 1, 2002 as Exhibit a
to the Registrant's Registration Statement on Form N-2 (File No. 333-91678)
and incorporated herein by reference.*
b. By-Laws of Registrant. Filed July 1, 2002 as Exhibit b to the Registrant's
Registration Statement on Form N-2 (File No. 333-91678) and incorporated
herein by reference.*
c. None.
d. Form of Share Certificate.
e. Terms and Conditions of the Dividend Reinvestment Plan.
f. None.
g.1 Investment Management Agreement between Registrant and Nuveen Institutional
Advisory Corp. dated June 1, 2002.
g.2 Form of Investment Sub-Advisory Agreement between Nuveen Institutional
Advisory Corp. and Spectrum Asset Management, Inc. dated ______, 2002.**
h.1 Form of Underwriting Agreement.**
h.2 Form of Master Selected Dealer Agreement.
h.3 Form of Master Agreement Among Underwriters.
h.4 Form of Dealer Letter Agreement.**
i. Nuveen Open-End and Closed-End Funds Deferred Compensation Plan for
Independent Directors and Trustees.
j. Exchange Traded Fund Custody Agreement between Registrant and State Street
Bank & Trust Company dated _______, 2002.**
k.1 Shareholder Transfer Agency Agreement between Registrant and State Street
Bank & Trust Company dated _______, 2002.**
k.2 Expense Reimbursement Agreement between Registrant and Nuveen Institutional
Advisory Corp. dated June 1, 2002.
|
l.1 Opinion and consent of Bell, Boyd & Lloyd LLC.
l.2 Opinion and consent of Bingham McCutchen LLP.
m. None.
n. Consent of Ernst & Young LLP.
o. None.
p. Subscription Agreement of Nuveen Institutional Advisory Corp. dated
______, 2002.**
q. None.
r.1 Code of Ethics of Nuveen Institutional Advisory Corp.
r.2 Code of Ethics of Spectrum Asset Management, Inc.
s. Powers of Attorney.
-------------------
|
* Previously filed. ** To be filed by amendment.
Item 25: Marketing Arrangements
Sections 2, 3 and 5(n) of the Underwriting Agreement to be filed as Exhibit h.1 to this Registration Statement.
See the Introductory Paragraph and Sections 2 and 3(d) of the Form of Master Selected Dealer Agreement filed as Exhibit h.2 to this Registration Statement.
See Introductory Paragraph and Sections 1.2, 3.1, 3.2, 3.4-3.8, 4.1, 4.2, 5.1-5.4, 6.1, 10.9 and 10.10 of the Form of Master Agreement Among Underwriters filed as Exhibit h.3 to this Registration Statement.
See Paragraph e of the Form of Dealer Letter Agreement between Nuveen and the Underwriters to be filed as Exhibit h.4 to this Registration Statement.
Item 26: Other Expenses of Issuance and Distribution
Securities and Exchange Commission fees $ 5,520
National Association of Securities Dealers, Inc. fees 6,500
Printing and engraving expenses *
Legal Fees *
New York Stock Exchange listing fees *
Accounting expenses *
Blue Sky filing fees and expenses *
Transfer agent fees *
Miscellaneous expenses *
----------
Total $ *
==========
|
*To be completed by amendment. Nuveen Institutional Advisory Corp. and
Spectrum Asset Management have contractually agreed to reimburse the Fund for
fees and expenses in the amount of .32% of average daily Managed Assets of the
Fund for the first five full years of the Fund's operations, .24% of average
daily Managed Assets in year six, .16% in year 7 and .08% in year 8. Without the
reimbursement, "Total Net Annual Expenses" would be estimated to be 1.65% of
average daily net assets attributable to Common Shares. Nuveen has agreed to pay
(i) all organizational expenses and (ii) offering costs (other than sales load)
that exceed $0.03 per Common Share (.20% of offering price).
Item 27: Persons Controlled by or under Common Control with Registrant
Not applicable.
Item 28: Number of Holders of Securities
At August 22, 2002
Number of
Title of Class Record Holders
-------------- --------------
Common Shares, $0.01 par value 0
|
Item 29: Indemnification
Section 4 of Article XII of the Registrant's Declaration of Trust provides as follows:
Subject to the exceptions and limitations contained in this Section 4, every person who is, or has been, a Trustee, officer, employee or agent of the Trust, including persons who serve at the request of the Trust as directors, trustees, officers, employees or agents of another organization in which the Trust has an interest as a shareholder, creditor or otherwise (hereinafter referred to as a "Covered Person"), shall be indemnified by the Trust to the fullest extent permitted by law against liability and against all expenses reasonably incurred or paid by him in connection with any claim, action, suit or proceeding in which he becomes involved as a party or otherwise by virtue of his being or having been such a Trustee, director, officer, employee or agent and against amounts paid or incurred by him in settlement thereof.
No indemnification shall be provided hereunder to a Covered Person:
(a) against any liability to the Trust or its Shareholders by reason of a final adjudication by the court or other body before which the proceeding was brought that he engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office;
(b) with respect to any matter as to which he shall have been finally adjudicated not to have acted in good faith in the reasonable belief that his action was in the best interests of the Trust; or
(c) in the event of a settlement or other disposition not involving a final adjudication (as provided in paragraph (a) or (b)) and resulting in a payment by a Covered Person, unless there has been either a determination that such Covered Person did not engage in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office by the court or other body approving the settlement or other disposition or a reasonable determination, based on a review of readily available facts (as opposed to a full trial-type inquiry), that he did not engage in such conduct:
(i) by a vote of a majority of the Disinterested Trustees acting on the matter (provided that a majority of the Disinterested Trustees then in office act on the matter); or
(ii) by written opinion of independent legal counsel.
The rights of indemnification herein provided may be insured against by policies maintained by the Trust, shall be severable, shall not affect any other rights to which any Covered Person may now or hereafter be entitled, shall continue as to a person who has ceased to be such a Covered Person and shall inure to the benefit of the heirs, executors and administrators of such a person. Nothing contained herein shall affect any rights to indemnification to which Trust personnel other than Covered Persons may be entitled by contract or otherwise under law.
Expenses of preparation and presentation of a defense to any claim, action,
suit or proceeding subject to a claim for indemnification under this Section 4
shall be advanced by the Trust prior to final disposition thereof upon receipt
of an undertaking by or on behalf of the recipient to repay such amount if it is
ultimately determined that he is not entitled to indemnification under this
Section 4, provided that either:
(a) such undertaking is secured by a surety bond or some other appropriate security or the Trust shall be insured against losses arising out of any such advances; or
(b) a majority of the Disinterested Trustees acting on the matter (provided that a majority of the Disinterested Trustees then in office act on the matter) or independent legal counsel in a written opinion shall determine, based upon a review of the readily available facts (as opposed to a full trial-type inquiry), that there is reason to believe that the recipient ultimately will be found entitled to indemnification.
As used in this Section 4, a "Disinterested Trustee" is one (x) who is not an Interested Person of the Trust (including anyone, as such Disinterested Trustee, who has been exempted from being an Interested Person by any rule, regulation or order of the Commission), and (y) against whom none of such actions, suits or other proceedings or another action, suit or other proceeding on the same or similar grounds is then or has been pending.
As used in this Section 4, the words "claim," "action," "suit" or "proceeding" shall apply to all claims, actions, suits, proceedings (civil, criminal, administrative or other, including appeals), actual or threatened; and the words "liability" and "expenses" shall include without limitation, attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties and other liabilities.
The trustees and officers of the Registrant are covered by Investment Trust Directors and Officers and Errors and Omission policies in the aggregate amount of $50,000,000 against liability and expenses of claims of wrongful acts arising out of their position with the Registrant, except for matters which involve willful acts, bad faith, gross negligence and willful disregard of duty (i.e., where the insured did not act in good faith for a purpose he or she reasonably believed to be in the best interest of Registrant or where he or she had reasonable cause to believe this conduct was unlawful). The policy has a $500,000 deductible which does not apply to individual trustees or officers.
Section 8 of the Underwriting Agreement filed as Exhibit h.1 to this Registration Statement provides for each of the parties thereto, including the Registrant and the Underwriters, to indemnify the others, their trustees, directors, certain of their officers, trustees, directors and persons who control them against certain liabilities in connection with the offering described herein, including liabilities under the federal securities laws.
Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.
Item 30: Business and Other Connections of Investment Advisers
Nuveen Institutional Advisory Corp. serves as investment adviser to the following open-end and closed-end management type investment companies: Nuveen Investment Trust, Nuveen Investment Trust II, Nuveen Investment Trust III, Nuveen Floating Rate Fund, Nuveen Senior Income Fund, Nuveen Select Tax-Free Income Portfolio, Nuveen Select Tax-Free Income Portfolio 2, Nuveen California Select Tax-Free Income, Nuveen New York Select Tax-Free Income Portfolio, Nuveen Real Estate Income Fund, Nuveen Select Tax-Free Income Portfolio 3 and Nuveen Quality Preferred Income Fund.
Nuveen Advisory Corp. has no other clients or business at the present time. For a description of other business, profession, vocation or employment of a substantial nature in which any director or officer of the investment adviser who serve as officers or Trustees of the Registrant has engaged during the last two years for his or her account or in the capacity of director, officer, employee, partner or trustee, see the descriptions under "Management of the Fund" in Part B of this Registration Statement. Such information for the remaining senior officers of NAC appears below:
Other Business Profession, Vocation or
Name and Position with NAC Employment During Past Two Years
-------------------------- --------------------------------------
John P. Amboian, President.................... President, formerly Executive Vice President
of The John Nuveen Company, Nuveen Investments,
Nuveen Institutional Advisory Corp., Nuveen Asset
Management, Inc. and Nuveen Senior Loan Asset
Management, Inc. and Executive Vice President
and Director of Rittenhouse Financial Services, Inc.
Alan G. Berkshire, Senior Vice President,
Secretary and General Counsel................. Senior Vice President and General Counsel (since
September 1997) and Secretary (since May 1998) of
The John Nuveen Company, Nuveen Investsments, and
Nuveen Institutional Advisory Corp. Senior Vice
President and Secretary (since September 1999)
of Nuveen Senior Loan Management Inc., prior thereto,
Partner in the law firm of Kirkland & Ellis.
Margaret E. Wilson, Senior Vice President,
Finance....................................... Vice President and Controller of the John Nuveen
Company, Nuveen Investments and Nuveen Institutional
Advisory Corp. and Senior Vice President and Controller
of Nuveen Senior Loan Asset Management, Inc.;
formerly CFO of Sara Lee Corp., Bakery Division.
|
Spectrum Asset Management, Inc. ("Spectrum") serves as an investment adviser to a non-U.S. fund and offers separate account management for certain institutions and high net worth individuals. Spectrum also is a registered broker-dealer. See "Management of the Fund" in Part A of the Registration Statement.
Set forth below is a list of each director and officer of Spectrum Asset Management, Inc., indicating each business profession, vocation or employment of a substantial nature in which such person has been, at any time during the past two fiscal years, engaged for his or her own account or in the capacity of director, officer, partner or trustee.
Other Business Profession, Vocation or Employment
Name and Position with Spectrum During Past Two Fiscal Years
------------------------------- -------------------------------------------------
Fernando Diaz, Vice President Vice President of Spectrum since February 2000. Previously,
head of preferred trading at both Spear, Leeds & Kellog and
Pershing, a division of DLJ.
Nancy K. Dray, Legal and Compliance --
Officer
Patrick G. Hurley, Senior Vice President --
and Chief Information Officer
L. Philip Jacoby, IV, Senior Vice --
President and Portfolio Manager
Mark A. Lieb, Executive Director and --
Chief Financial Officer
Jean M. Orlando, Vice President and --
Controller
Bernard M. Sussman, Executive Director
and Chief Investment Officer
Albano Tunnera, Assistant Vice President --
and Operations Manager
Joseph J. Urciuoli, Vice President and --
Director of Research
|
Item 31: Location of Accounts and Records
Nuveen Institutional Advisory Corp., 333 West Wacker Drive, Chicago, Illinois 60606, maintains the Declaration of Trust, By-Laws, minutes of trustees and shareholders meetings and contracts of the Registrant and all advisory material of the investment adviser.
Spectrum Asset Management, Inc., 4 High Ridge Park, Stamford, CT 06905, maintains certain advisory material of the subadviser.
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110, maintains all general and subsidiary ledgers, journals, trial balances, records of all portfolio purchases and sales, and all other required records not maintained by Nuveen Institutional Advisory Corp.
Item 32: Management Services
Not applicable.
Item 33: Undertakings
1. Registrant undertakes to suspend the offering of its shares until it
amends its prospectus if (1) subsequent to the effective date of its
Registration Statement, the net asset value declines more than 10 percent from
its net asset value as of the effective date of the Registration Statement, or
(2) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. The Registrant undertakes that:
a. For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant under Rule 497(h) under the Securities Act of 1933 shall be deemed to be part of the Registration Statement as of the time it was declared effective.
b. For the purpose of determining any liability under the Securities Act of 1933, 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. The 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.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in this City of Chicago, and State of Illinois, on the 22nd day of August, 2002.
NUVEEN QUALITY PREFERRED INCOME FUND 2
/s/ Gifford R. Zimmerman ________________________________________ Gifford R. Zimmerman, Vice President and Secretary |
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ Stephen D. Foy Vice President and Controller August 22, 2002
-------------------- (Principal Financial and
Stephen D. Foy Accounting Officer)
Chairman of the Board and
Timothy R. Schwertfeger* Trustee (Principal Executive By: /s/ Gifford R. Zimmerman
Officer) --------------------------
Gifford R. Zimmerman
Attorney-In-Fact
August 22, 2002
James E. Bacon* Trustee
William E. Bennett* Trustee
Jack B. Evans* Trustee
William L. Kissick* Trustee
Thomas E. Leafstrand* Trustee
Shelia W. Wellington* Trustee
|
*Original powers of attorney authorizing Jessica R. Droeger and Gifford R. Zimmerman, among others, to execute this Registration Statement, and Amendments thereto, for the trustees of the Registrant on whose behalf this Registration Statement is filed, have been executed and filed as an exhibit.
INDEX TO EXHIBITS
a. Declaration of Trust dated June 24, 2002.*
b. By-Laws of Registrant.*
c. None.
d. Form of Share Certificate.
e. Terms and Conditions of the Dividend Reinvestment Plan.
f. None.
g.1 Investment Management Agreement between Registrant and Nuveen Institutional
Advisory Corp. dated June 1, 2002.
g.2 Form of Investment Sub-Advisory Agreement between Nuveen Institutional
Advisory Corp. and Spectrum Asset Management, Inc. dated ______, 2002.**
h.1 Form of Underwriting Agreement.**
h.2 Form of Master Selected Dealer Agreement.
h.3 Form of Master Agreement Among Underwriters.
h.4 Form of Dealer Letter Agreement.**
i. Nuveen Open-End and Closed-End Funds Deferred Compensation Plan for
Independent Directors and Trustees.
j. Exchange Traded Fund Custody Agreement between Registrant and State Street
Bank & Trust Company dated _______, 2002.**
k.1 Shareholder Transfer Agency Agreement between Registrant and State Street
Bank & Trust Company dated _______, 2002.**
k.2 Expense Reimbursement Agreement between Registrant and Nuveen Institutional
Advisory Corp. dated June 1, 2002.
l.1 Opinion and consent of Bell, Boyd & Lloyd LLC.
l.2 Opinion and consent of Bingham McCutchen LLP.
m. None.
n. Consent of Ernst & Young LLP.
o. None.
p. Subscription Agreement of Nuveen Institutional Advisory Corp. dated
________, 2002.**
q. None.
r.1 Code of Ethics of Nuveen Institutional Advisory Corp.
r.2 Code of Ethics of Spectrum Asset Management, Inc.
s. Powers of Attorney.
------------------
|
* Previously filed. ** To be filed by amendment.
COMMON SHARES [INSERT PICTURE] COMMON SHARES
------------ -----------------
NUMBER ORGANIZED UNDER THE LAWS SHARES
OF THE COMMONWEALTH
U- OF MASSACHUSETTS
------------ -----------------
THIS CERTIFICATE IS TRANSFERABLE SEE REVERSE FOR
IN CANTON, MA, JERSEY CITY, NJ AND NEW YORK, NY CERTAIN DEFINITIONS
CUSIP
------------
|
Nuveen Quality Preferred Income Fund 2
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE COMMON SHARES OF BENEFICIAL INTEREST $.01 PAR
VALUE OF
Nuveen Quality Preferred Income Fund 2 (herein called the "Fund") transferable on the books of the Fund by the holder hereof in person or by duly authorized attorney, upon surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are issued and shall be held subject to all of the provisions of the Declaration of Trust of the Fund establishing the Fund as a Massachusetts business trust, and all amendments thereto (copies of which are on file with the Secretary of the Commonwealth of Massachusetts) and the Fund's By-Laws, as amended (copies of which are on file at the principal office of the Fund), to all of which the holder by acceptance hereof expressly assents. This Certificate is executed on behalf of the Fund by the officers as officers and not individually and the obligations hereof are not binding upon any of the Trustees, officers or shareholders individually but are binding only upon the assets and property of the Fund. This Certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar.
Witness the facsimile signatures of the duly authorized officers of the Fund.
Dated
Nuveen Quality Preferred Income Fund 2
COUNTERSIGNED AND REGISTERED:
STATE STREET BANK AND TRUST COMPANY
TRANSFER AGENT
AND REGISTRAR
BY /s/ Julie Lantucchio /s/ G. R. Zimmerman /s/ Timothy R. Schwertfeger
AUTHORIZED OFFICER SECRETARY CHAIRMAN OF THE BOARD
|
Nuveen Quality Preferred Income Fund 2
Nuveen Quality Preferred Income Fund 2 (the "Fund") will furnish to any shareholder, upon request and without charge, a full statement of the designations, preferences, limitations and relative rights of the shares of beneficial interest of each class or series of the Fund authorized to be issued, so far as they have been determined, and the authority of the Board of Trustees to determine the relative rights and preferences of subsequent classes or series. Any such request should be addressed to the Secretary of the Fund.
The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - .......Custodian.......
TEN ENT - as tenants by the (Cust) (Minor)
entireties under Uniform Gifts to
JT TEN - as joint tenants with Minors Act.............
right of survivorship and (State)
not as tenants in common
|
Additional abbreviations may also be used though not in the above list.
For value Received _________________ hereby sell, assign and transfer unto
of Beneficial Interest represented by the within Certificate and do hereby irrevocably constitute and appoint
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
NOTICE: CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
NUVEEN QUALITY PREFERRED INCOME FUND 2
This Dividend Reinvestment Plan ("Plan") for the Nuveen Quality Preferred Income Fund 2 (the "Fund") provides for reinvestment of Fund distributions, consisting of income dividends, returns of capital and capital gain distributions paid by the Fund, on behalf of all shareholders electing to participate in the Plan ("Participants"), by State Street Bank and Trust Company ("State Street"), the Plan Agent, in accordance with the following terms:
1. State Street will act as Agent for Participants and will open an account for each Participant under the Dividend Reinvestment Plan in the same name as the Participant's shares are registered, and will put into effect for each Participant the distribution reinvestment option of the Plan as of the first record date for a distribution to shareholders after State Street receives the Participant's authorization so to do, either in writing duly executed by the Participant or by telephone notice satisfying such reasonable requirements as State Street and the Fund may agree. In the case of shareholders who hold shares for others who are the beneficial owners, State Street will administer the Plan on the basis of the number of Shares certified from time to time by the record shareholder as representing the total amount registered in the record shareholder's name and held for the account of beneficial owners who are Participants.
2. Whenever the Fund declares a distribution payable in shares or cash at the option of the shareholders, each Participant shall take such distribution entirely in shares and State Street shall automatically receive such shares, including fractions, for the Participant's account, except in circumstances described in Paragraph 3 below. Except in such circumstances, the number of additional shares to be credited to each Participant's account shall be determined by dividing the dollar amount of the distribution payable on the Participant's shares by the greater of net asset value or 95% of current market price per share on the payable date for such distribution.
3. Should the net asset value per Fund share exceed the market price per share on the day for which trades will settle on the payment date for such distribution (the "Valuation Date"), for a distribution payable in shares or in cash at the option of the shareholder, or should the Fund declare a distribution payable only in cash, each Participant shall take such distribution in cash and State Street shall apply the amount of such distribution to the purchase on the open market of shares of the Fund for the Participant's account. Such Plan purchases shall be made as early as the Valuation Date, under the supervision of the investment adviser. State Street shall complete such Plan purchases no more than 30 days after the Valuation Date, except where temporary curtailment or suspension of purchases is necessary to comply with applicable provisions of federal securities law.
4. For the purpose of this Plan, the market price of the Fund's shares on a particular date shall be the last sale price on the Exchange where it is traded on that date, or if there is no sale on such
Exchange on that date, then the mean between the closing bid and asked quotations for such shares on such Exchange on such date.
5. Open-market purchases provided for above may be made on any securities exchange where the Fund's shares are traded, in the over-the-counter market or in negotiated transactions and may be on such terms as to price, delivery and otherwise as State Street shall determine. Participants' funds held uninvested by State Street will not bear interest, and it is understood that, in any event, State Street shall have no liability in connection with any inability to purchase shares within 30 days after the Valuation Date as herein provided, or with the timing of any purchases affected. State Street shall have no responsibility as to the value of the Fund's shares acquired for Participants' accounts. State Street may commingle all Participants' amounts to be used for open-market purchases of Fund shares and the price per share allocable to each Participant in connection with such purchases shall be the average price (including brokerage commissions and other related costs) of all Fund shares purchased by State Street as Agent.
6. State Street may hold each Participant's shares acquired pursuant to this Plan, together with the shares of other Participants, in non-certificated form in State Street's name or that of its nominee. State Street will forward to each Participant any proxy solicitation material and will vote any shares so held only in accordance with proxies returned to the Fund.
7. State Street will confirm to each Participant each acquisition made for the Participant's account as soon as practicable but not later than 60 days after the date thereof. State Street will deliver to any Participant upon request, without charge, a certificate or certificates for his full shares. Although a Participant may from time to time have an undivided fractional interest (computed to three decimal places) in a share of the Fund, and distributions on fractional shares will be credited to the Participant's account, no certificates for a fractional share will be issued. In the event of termination of a Participant's account under the Plan, State Street will adjust for any such undivided fractional interest at the market value of the Fund's shares at the time of termination.
8. Any stock dividends or split shares distributed by the Fund on full and fractional shares held by State Street for a Participant will be credited to the Participant's account. In the event that the Fund makes available to its shareholders rights to purchase additional shares or other securities, the shares held for each Participant under the Plan will be added to other shares held by the Participant in calculating the number of rights to be issued to that Participant.
9. State Street's service fee for handling reinvestment of distributions pursuant hereto will be paid by the Fund. Participants will be charged their pro rata shares of brokerage commissions on all open market purchases.
10. Each Participant may terminate his account under the Plan by notifying State Street of his intent so to do, such notice to be provided either in writing duly executed by the Participant or by telephone in accordance with such reasonable requirements as State Street and the Fund may agree. Such termination will be effective immediately if notice is received by State Street not less than ten days prior to any distribution record date for the next succeeding distribution; otherwise such termination will be effective shortly after the investment of such distribution with respect to all subsequent distributions. The Plan may be terminated by the Fund or State Street upon at least 90 days prior notice. Upon any termination, State Street will cause a certificate or certificates for the full shares held for each Participant under the Plan and cash adjustment for any fraction to be delivered to the Participant without charge. If any Participant elects in advance of such termination to have State Street sell part or all of his shares, State Street is authorized to deduct from the proceeds a $2.50 fee plus the brokerage commissions incurred for the transaction.
11. These terms and conditions may be amended or supplemented by State Street or the Fund at any time or times but, except when necessary or appropriate to comply with applicable law or the rules or policies of the Securities and Exchange Commission or any other regulatory authority, only by mailing to each Participant appropriate written notice at least 90 days prior to the effective date thereof. The amendment or supplement shall be deemed to be accepted by each Participant unless, prior to the effective date thereof, State Street receives notice of the termination of such Participant's account under the Plan in accordance with the terms hereof. Any such amendment may include an appointment by State Street in its place and stead of a successor Agent under these terms and conditions. Upon any such appointment of any Agent for the purpose of receiving distributions, the Fund will be authorized to pay to such successor Agent, for each Participant's account, all dividends and distributions payable on shares of the Fund held in the Participant's name or under the Plan for retention or application by such successor Agent as provided in these terms and conditions.
12. State Street shall at all times act in good faith and agree to use its best efforts within reasonable limits to insure the accuracy of all services performed under this Agreement and to comply with applicable law, but assumes no responsibility and shall not be liable for loss or damage due to errors unless such error is caused by its negligence, bad faith or willful misconduct or that of its employees.
13. These terms and conditions shall be governed by the laws of the Commonwealth of Massachusetts.
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT made this 1st day of August, 2002, by and between NUVEEN QUALITY PREFERRED INCOME FUND 2, a Massachusetts business trust (the "Fund"), and NUVEEN INSTITUTIONAL ADVISORY CORP., a Delaware corporation (the "Adviser").
In consideration of the mutual covenants hereinafter contained, it is hereby agreed by and between the parties hereto as follows:
1. The Fund hereby employs the Adviser to act as the investment adviser for, and to manage the investment and reinvestment of the assets of the Fund in accordance with the Fund's investment objective and policies and limitations, and to administer the Fund's affairs to the extent requested by and subject to the supervision of the Board of Trustees of the Fund for the period and upon the terms herein set forth. The investment of the Fund's assets shall be subject to the Fund's policies, restrictions and limitations with respect to securities investments as set forth in the Fund's then current registration statement under the Investment Company Act of l940, and all applicable laws and the regulations of the Securities and Exchange Commission relating to the management of registered closed-end, non-diversified management investment companies.
The Adviser accepts such employment and agrees during such period to render such services, to furnish office facilities and equipment and clerical, bookkeeping and administrative services (other than such services, if any, provided by the Fund's transfer agent) for the Fund, to permit any of its officers or employees to serve without compensation as trustees or officers of the Fund if elected to such positions, and to assume the obligations herein set forth for the compensation herein provided. The Adviser shall, for all purposes herein provided, be deemed to be an independent contractor and, unless otherwise expressly provided or authorized, shall have no authority to act for nor represent the Fund in any way, nor otherwise be deemed an agent of the Fund.
2. For the services and facilities described in Section l, the Fund will pay to the Adviser, at the end of each calendar month, an investment management fee computed by applying the following annual rate to the average total daily net assets of the Fund:
Rate Average Total Daily Net Assets/(1)/ ----- --------------------------------- .900% Up to $500 million .875% $500 to $1 billion .850% $1 billion to $1.5 billion .825% $1.5 billion to $2 billion .800% $2 billion and over |
/(1)/Including net assets attributable to the Fund's Preferred Shares and the principal amount of borrowings.
For the month and year in which this Agreement becomes effective, or terminates, there shall be an appropriate proration on the basis of the number of days that the Agreement shall have been
in effect during the month and year, respectively. The services of the Adviser to the Fund under this Agreement are not to be deemed exclusive, and the Adviser shall be free to render similar services or other services to others so long as its services hereunder are not impaired thereby.
3. The Adviser shall arrange for officers or employees of the Adviser to serve, without compensation from the Fund, as trustees, officers or agents of the Fund, if duly elected or appointed to such positions, and subject to their individual consent and to any limitations imposed by law.
4. Subject to applicable statutes and regulations, it is understood that officers, trustees, or agents of the Fund are, or may be, interested in the Adviser as officers, directors, agents, shareholders or otherwise, and that the officers, directors, shareholders and agents of the Adviser may be interested in the Fund otherwise than as trustees, officers or agents.
5. The Adviser shall not be liable for any loss sustained by reason of the purchase, sale or retention of any security, whether or not such purchase, sale or retention shall have been based upon the investigation and research made by any other individual, firm or corporation, if such recommendation shall have been selected with due care and in good faith, except loss resulting from willful misfeasance, bad faith, or gross negligence on the part of the Adviser in the performance of its obligations and duties, or by reason of its reckless disregard of its obligations and duties under this Agreement.
6. The Adviser currently manages other investment accounts and funds, including those with investment objectives similar to the Fund, and reserves the right to manage other such accounts and funds in the future. Securities considered as investments for the Fund may also be appropriate for other investment accounts and funds that may be managed by the Adviser. Subject to applicable laws and regulations, the Adviser will attempt to allocate equitably portfolio transactions among the portfolios of its other investment accounts and funds purchasing securities whenever decisions are made to purchase or sell securities by the Fund and one or more of such other accounts or funds simultaneously. In making such allocations, the main factors to be considered by the Adviser will be the respective investment objectives of the Fund and such other accounts and funds, the relative size of portfolio holdings of the same or comparable securities, the availability of cash for investment by the Fund and such other accounts and funds, the size of investment commitments generally held by the Fund and such accounts and funds, and the opinions of the persons responsible for recommending investments to the Fund and such other accounts and funds.
7. This Agreement shall continue in effect until August l, 2003, unless and until terminated by either party as hereinafter provided, and shall continue in force from year to year thereafter, but only as long as such continuance is specifically approved, at least annually, in the manner required by the Investment Company Act of 1940.
This Agreement shall automatically terminate in the event of its assignment, and may be terminated at any time without the payment of any penalty by the Fund or by the Adviser upon no less than sixty (60) days' written notice to the other party. The Fund may effect termination by action of the Board of Trustees or by vote of a majority of the outstanding voting securities of
the Fund, accompanied by appropriate notice.
This Agreement may be terminated, at any time, without the payment of any penalty, by the Board of Trustees of the Fund, or by vote of a majority of the outstanding voting securities of the Fund, in the event that it shall have been established by a court of competent jurisdiction that the Adviser, or any officer or director of the Adviser, has taken any action which results in a breach of the covenants of the Adviser set forth herein.
Termination of this Agreement shall not affect the right of the Adviser to receive payments on any unpaid balance of the compensation, described in Section 2, earned prior to such termination.
8. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule, or otherwise, the remainder shall not be thereby affected.
9. Any notice under this Agreement shall be in writing, addressed and delivered or mailed, postage prepaid, to the other party at such address as such other party may designate for receipt of such notice.
10. The Fund's Declaration of Trust is on file with the Secretary of the Commonwealth of Massachusetts. This Agreement is executed on behalf of the Fund by the Fund's officers as officers and not individually and the obligations imposed upon the Fund by this Agreement are not binding upon any of the Fund's Trustees, officers or shareholders individually but are binding only upon the assets and property of the Fund.
11. This Agreement shall be construed in accordance with applicable federal law and (except as to Section 10 hereof which shall be construed in accordance with the laws of Massachusetts) the laws of the State of Illinois.
IN WITNESS WHEREOF, the Fund and the Adviser have caused this Agreement to be executed on the day and year above written.
NUVEEN QUALITY PREFERRED INCOME FUND 2
by: /s/ Gifford R. Zimmerman
---------------------------------
Vice President
Attest: /s/ Virginia L. O'Neal
----------------------------
Assistant Secretary
|
NUVEEN INSTITUTIONAL ADVISORY CORP.
by: /s/ William M. Fitzgerald
----------------------------------
Managing Director
Attest: /s/ Jessica R. Droeger
----------------------------
Assistant Secretary
|
MASTER SELECTED DEALER AGREEMENT
July 1, 1999
Ladies and Gentlemen:
In connection with registered public offerings of securities for which we are acting as manager or co-manager of an underwriting syndicate or unregistered offerings of securities for which we are acting as manager or co-manager of the initial purchasers, you may be offered the right as a selected dealer to purchase as principal a portion of such securities. This will confirm our mutual agreement as to the general terms and conditions applicable to your participation in any such selected dealer group.
1. Applicability of this Agreement. The terms and conditions of this Agreement shall be applicable to any offering of securities ("Securities"), whether pursuant to a registration statement filed under the Securities Act of 1933, as amended (the "Securities Act"), or exempt from registration thereunder, in respect of which Salomon Smith Barney Inc. (acting for its own account or for the account of any underwriting or similar group or syndicate) is responsible for managing or otherwise implementing the sale of the Securities to selected dealers ("Selected Dealers") and has expressly informed you that such terms and conditions shall be applicable. Any such offering of Securities to you as a Selected Dealer is hereinafter called an "Offering". In the case of any Offering where we are acting for the account of any underwriting or similar group or syndicate ("Underwriters"), the terms and conditions of this Agreement shall be for the benefit of, and binding upon, such Underwriters, including, in the case of any Offering where we are acting with others as representatives of Underwriters, such other representatives.
2. Conditions of Offering; Acceptance and Purchases. Any Offering will be
subject to delivery of the Securities and their acceptance by us and any other
Underwriters, may be subject to the approval of all legal matters by counsel and
the satisfaction of other conditions, and may be made on the basis of
reservation of Securities or an allotment against subscription. We will advise
you by telecopy, telex or other form of written communication ("Written
Communication", which term, in the case of any Offering described in Section
3(a) or 3(b) hereof, may include a prospectus or offering circular) of the
particular method and supplementary terms and conditions (including, without
limitation, the information as to prices and the offering date referred to in
Section 3(c) hereof) of any Offering in which you are invited to participate. To
the extent such supplementary terms and conditions are inconsistent with any
provision herein, such terms and conditions shall supersede any such provision.
Unless otherwise indicated in any such Written Communication, acceptances and
other communications
by you with respect to an Offering should be sent to the appropriate Syndicate Department of Salomon Smith Barney Inc. We may close the subscription books at any time in our sole discretion without notice, and we reserve the right to reject any acceptance in whole or in part.
Unless notified otherwise by us, Securities purchased by you shall be paid for on such date as we shall determine, on one day's prior notice to you, by wire transfer payable in immediately available funds to the order of Salomon Smith Barney Inc., in an amount equal to the Public Offering Price (as hereinafter defined) or, if we shall so advise you, at such Public Offering Price less the Concession (as hereinafter defined). If Securities are purchased and paid for at such Public Offering Price, such Concession will be paid after the termination of the provisions of Section 3(c) hereof with respect to such Securities. Unless notified otherwise by us, payment for and delivery of Securities purchased by you shall be made through the facilities of The Depository Trust Company, if you are a member, unless you have otherwise notified us prior to the date specified in a Written Communication to you from us or, if you are not a member, settlement may be made through a correspondent who is a member pursuant to instructions which you will send to us prior to such specified date.
3. Representations, Warranties and Agreements.
(a) Registered Offerings. In the case of any Offering of Securities which are registered under the Securities Act ("Registered Offering"), we will make available to you as soon as practicable after sufficient copies are made available to us by the issuer of the Securities such number of copies of each preliminary prospectus and of the final prospectus relating thereto as you may reasonably request for the purposes contemplated by the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the applicable rules and regulations of the Securities and Exchange Commission thereunder.
You represent and warrant that you are familiar with Rule 15c2-8 under the Exchange Act relating to the distribution of preliminary and final prospectuses and agree that you will comply therewith. You agree to make a record of your distribution of each preliminary prospectus and when furnished with copies of any revised preliminary prospectus, you will promptly forward copies thereof to each person to whom you have theretofore distributed a preliminary prospectus.
You agree that in purchasing Securities in a Registered Offering you will rely upon no statement whatsoever, written or oral, other than the statements in the final prospectus delivered to you by us. You will not be authorized by the issuer or other seller of Securities offered pursuant to a prospectus or by any Underwriters to give any information or to make any representation not contained in the prospectus in connection with the sale of such Securities.
(b) Offerings Pursuant to Offering Circular. In the case of any Offering of Securities, other than a Registered Offering, which is made pursuant to an offering circular or other document comparable to a prospectus in a Registered Offering, we will make available to you as soon as practicable after sufficient copies are made available to us by the issuer of the Securities such number of copies of each preliminary offering circular and of the final offering circular relating thereto as you may reasonably request. You agree that you will comply with applicable Federal, state and other laws, and the
applicable rules and regulations of any regulatory body promulgated thereunder, governing the use and distribution of offering circulars by brokers or dealers.
You agree that in purchasing Securities pursuant to an offering circular you will rely upon no statements whatsoever, written or oral, other than the statements in the final offering circular delivered to you by us. You will not be authorized by the issuer or other seller of Securities offered pursuant to an offering circular or by any Underwriters to give any information or to make any representation not contained in the offering circular in connection with the sale of such Securities.
(c) Offer and Sale to the Public. The Offering of Securities is made
subject to the conditions referred to the prospectus or offering circular
relating to the Offering and to the terms and conditions set forth in this
Agreement. With respect to any Offering of Securities, we will inform you by a
Written Communication of the public offering price, the selling concession, the
reallowance (if any) to dealers and the time when you may commence selling
Securities to the public. After such public offering has commenced, we may
change the public offering price, the selling concession and the reallowance to
dealers. The offering price, selling concession and reallowance (if any) to
dealers at any time in effect with respect to an Offering are hereinafter
referred to, respectively, as the "Public Offering Price", the "Concession" and
the "Reallowance". With respect to each Offering of Securities, until the
provisions of this Section 3(c) shall be terminated pursuant to Section 4
hereof, you agree to offer Securities to the public only at the Public Offering
Price, except that if a Reallowance is in effect, a Reallowance from the Public
Offering Price not in excess of such Reallowance may be allowed as consideration
for services rendered in distribution to dealers who are actually engaged in the
investment banking or securities business who are either members in good
standing of the NASD who agree to abide by the applicable rules of the NASD (see
Section 3(e) below) or foreign banks, dealers or institutions not eligible for
membership in the NASD who represent to you that they will promptly reoffer such
Securities at the Public Offering Price and will abide by the conditions with
respect to foreign banks, dealers and institutions set forth in Section 3(e)
hereof.
(d) Over-allotment; Stabilization; Unsold Allotments. We may, with respect to any Offering, be authorized to over-allot in arranging sales to Selected Dealers, to purchase and sell Securities for long or short account and to stabilize or maintain the market price of the Securities. You agree that upon our request at any time and from time to time prior to the termination of the provisions of Section 3(c) hereof with respect to any Offering, you will report to us the amount of Securities purchased by you pursuant to such Offering which then remain unsold by you and will, upon our request at any such time, sell to us for our account or the account of one or more Underwriters such amount of such unsold Securities as we may designate at the Public Offering Price less an amount to be determined by us not in excess of the Concession. If, prior to the later of (a) the termination of the provisions of Section 3(c) hereof with respect to any Offering, or (b) the covering by us of any short position created by us in connection with such Offering for our account or the account of one or more Underwriters, we purchase or contract to purchase for our account or the account of one or more Underwriters in the open market or otherwise any Securities purchased by you under this Agreement as part of such Offering, you agree to pay us on demand for the account of the Underwriters an amount equal to the Concession with respect to such Securities (unless you shall have purchased such Securities pursuant to Section 2 hereof at the Public Offering Price and you have not received or been credited with any Concession, in which case we shall not
be obligated to pay such Concession to you pursuant to Section 2) plus transfer taxes and broker's commissions or dealer's mark-up, if any, paid in connection with such purchase or contract to purchase.
(e) NASD. You represent and warrant that you are actually engaged in the investment banking or securities business and either are a member in good standing of the NASD or, if you are not such a member, you are a foreign bank, dealer or institution not eligible for membership in the NASD which agrees to make no sales within the United State, its territories or its possessions or to persons who are citizens thereof or residents therein, and in making other sales to comply with the NASD's interpretation with respect to free-riding and withholding. You further represent, by your participation in an Offering, that you have provided to us all documents and other information required to be filed with respect to you, any related person or any person associated with you or any such related person pursuant to the supplementary requirements of the NASD's interpretation with respect to review of corporate financing as such requirements relate to such Offering.
You agree that, in connection with any purchase or sale of the Securities wherein a selling concession, discount or other allowance is received or granted, you will (a) if you are a member of the NASD, comply with all applicable interpretive material ("IM") and Conduct Rules of the NASD, including, without limitation, IM 2110-1 (relating to Free-Riding and Withholding) and Conduct Rule 2740 (relating to Selling Concessions, Discounts and Other Allowances) or (b) if you are a foreign bank or dealer or institution not eligible for such membership, comply with IM 2110-1 and with Conduct Rules 2730 (relating to Securities Taken in Trade), 2740 (relating to Selling Concessions) and 2750 (relating to Transactions With Related Persons) as though you were such a member and Conduct Rule 2420 (relating to Dealing with Non-Members) as it applies to a non-member broker or dealer in a foreign country.
You further agree that, in connection with any purchase of securities from us that is not otherwise covered by the terms of this Agreement (whether we are acting as manager, as member of an underwriting syndicate or a selling group or otherwise), if a selling concession, discount or other allowance is granted to you, clauses (a) and (b) of the preceding paragraph will be applicable.
(f) Relationship among Underwriters and Selected Dealers. We may buy Securities from or sell Securities to any Underwriter or Selected Dealer and, with our consent, the Underwriters (if any) and the Selected Dealers may purchase Securities from and sell Securities to each other at the Public Offering Price less all or any part of the Concession. We shall have full authority to take such action as we deem advisable in all matters pertaining to any Offering under this Agreement. You are not authorized to act as agent for us, any Underwriter or the issuer or other seller of any Securities in offering Securities to the public or otherwise. Neither we nor any Underwriter shall be under any obligation to you except for obligations assumed hereby or in any Written Communication from us in connection with any Offering. Nothing contained herein or in any Written Communication from us shall constitute the Selected Dealers an association or partners with us or any Underwriter or with one another. If the Selected Dealers, among themselves or with the Underwriters, should be deemed to constitute a partnership for Federal income tax purposes, then you elect to be excluded from the application of Subchapter K, Chapter 1, Subtitle A of the Internal Revenue Code of 1986 and agree not to take any position inconsistent with that election. You authorize us, in
our discretion, to execute and file on your behalf such evidence of that election as may be required by the Internal Revenue Service. In connection with any Offering you shall be liable for your proportionate amount of any tax, claim, demand or liability that may be asserted against you alone or against one or more Selected Dealers participating in such Offering, or against us or the Underwriters, based upon the claim that the Selected Dealers, or any of them constitute an association, an unincorporated business or other entity, including, in each case, your proportionate amount of any expense incurred in defending against any such tax, claim, demand or liability.
(g) Blue Sky Laws. Upon application to us, we shall inform you as to any advice we have received from counsel concerning the jurisdictions in which Securities have been qualified for sale or are exempt under the securities or blue sky laws of such jurisdictions, but we do not assume any obligation or responsibility as to your right to sell Securities in any such jurisdiction.
(h) Compliance with Law. You agree that in selling Securities pursuant to any Offering (which agreement shall also be for the benefit of the issuer or other seller of such Securities), you will comply with all applicable laws, rules and regulations, including the applicable provisions of the Securities Act and the Exchange Act, the applicable rules and regulations of the Securities and Exchange Commission thereunder, the applicable rules and regulations of the NASD, the applicable rules and regulations of any securities exchange or other regulatory authority having jurisdiction over the Offering and the applicable laws, rules and regulations specified in Section 3(b) hereof. Without limiting the foregoing, (a) you agree that, at all times since you were invited to participate in an Offering of Securities, you have complied with the provisions of Regulation M applicable to such Offering, in each case after giving effect to any applicable exemptions and (b) you represent that your incurrence of obligations hereunder in connection with any Offering of Securities will not result in the violation by you of Rule 15c3-1 under the Exchange Act, if such requirements are applicable to you.
4. Termination; Supplements and Amendments. This Agreement shall continue in full force and effect until terminated by a written instrument executed by each of the parties hereto. This Agreement may be supplemented or amended by us by written notice thereof to you, and any such supplement or amendment to this Agreement shall be effective with respect to any Offering to which this Agreement applies after the date of such supplement or amendment. Each reference to "this Agreement" herein shall, as appropriate, be to this Agreement as so amended and supplemented. The terms and conditions set forth in Section 3(c) hereof with regard to any Offering will terminate at the close of business on the 30th day after the commencement of the public offering of the Securities to which such Offering relates, but in our discretion may be extended by us for a further period not exceeding 30 days and in our discretion, whether or not extended, may be terminated at any earlier time.
5. Successors and Assigns. This Agreement shall be binding on, and
inure to the benefit of, the parties hereto and other persons specified in
Section 1 hereof, and the respective successors and assigns of each of them.
6. Governing Law. This Agreement and the terms and conditions set forth herein with respect to any Offering together with such supplementary terms and conditions with respect to such Offering as may be contained in any Written Communication from us to you in connection therewith shall be governed by, and construed in accordance with, the
laws of the State of New York applicable to contracts made and to be performed within the State of New York.
Please confirm by signing and returning to us the enclosed copy of this Agreement that your subscription to or your acceptance of any reservation of any Securities pursuant to an Offering shall constitute (i) acceptance of and agreement to the terms and conditions of this Agreement (as supplemented and amended pursuant to Section 4 hereof; together with and subject to any supplementary terms and conditions contained in any Written Communication from us in connection with such Offering, all of which shall constitute a binding agreement between you and us, individually or as representative of any Underwriters, (ii) confirmation that your representations and warranties set forth in Section 3 hereof are true and correct at that time, (iii) confirmation that your agreements set forth in Sections 2 and 3 hereof have been and will be fully performed by you to the extent and at the times required thereby and (iv) in the case of any Offering described in Section 3(a) or 3(b) hereof, acknowledgment that you have requested and received from us sufficient copies of the final prospectus or offering circular, as the case may be, with respect to such Offering in order to comply with your undertakings in Section 3(a) or 3(b) hereof.
Very truly yours,
Salomon Smith Barney Inc.
By:________________________
Name:
Title:
CONFIRMED:_______________________________1999
by:__________________________________________
Name:
Title:
Address: ____________________________________
Telephone:
Fax: ____________________________________
MASTER AGREEMENT AMONG UNDERWRITERS
Registered SEC Offerings
(including Multiple Syndicate Offerings),
Standby Underwritings and Exempt Offerings
(other than Offerings of Municipal Securities)
July 1, 1999
Ladies and Gentlemen:
From time to time Salomon Smith Barney Inc. ("Salomon Smith Barney") may invite you (and others) to participate on the terms set forth herein as an underwriter or an initial purchaser, or in a similar capacity, in connection with certain offerings of securities that are managed solely by us or with one or more other co-managers. If we invite you to participate in a specific offering and sale (an "Offering") to which this Master Agreement Among Underwriters (the "Salomon Smith Barney Master AAU") shall apply, we will send the information set forth below in Section 1.1 to you by one or more wires, telexes, facsimile or electronic data transmissions or other written communications (each a "Wire" and collectively, an "AAU"). Each Wire will indicate that it is a Wire pursuant to the Salomon Smith Barney Master AAU. The Wire inviting you to participate in an Offering is referred to herein as the "Invitation Wire". You and we hereby agree that by the terms hereof the provisions of this Salomon Smith Barney Master AAU automatically shall be incorporated by reference in each AAU, except that any such AAU may also exclude or revise any provision of this Salomon Smith Barney Master AAU or may contain such additional provisions as may be specified in such AAU.
I. GENERAL
1.1. Terms of AAU; Certain Definitions; Construction. Each AAU shall relate to an Offering and shall identify (i) the securities to be offered in the Offering (the "Securities"), their principal terms, the issuer or issuers (each an "Issuer") and any guarantor (each a "Guarantor") thereof and, if different from the Issuer, the seller or sellers (each a "Seller") of the Securities, (ii) the underwriting agreement, purchase agreement, standby underwriting agreement, distribution agreement or similar agreement (as identified in such AAU and as amended or supplemented, including a terms agreement or pricing agreement pursuant to any of the foregoing, collectively, the "Underwriting Agreement") providing for the purchase, on a several and not joint basis, of the Securities by the several underwriters, initial purchasers or others acting in a similar capacity on whose behalf the Manager (as defined below) executes the Underwriting Agreement (including the Manager and the Co-Managers (as defined
below), the "Underwriters"), (iii) if applicable, that the Underwriting Agreement includes an option (an "Over-allotment Option") to purchase Additional Securities (as defined below) to cover over-allotments, if any, (iv) if applicable, that the Offering is part of an offering that includes concurrent offerings by two or more syndicates (an "International Offering"), each of which will offer and sell Securities subject to such restrictions as shall be specified in any Intersyndicate Agreement (as defined below) referred to in such AAU, (v) the price at which the Securities are to be purchased by the several Underwriters from any Issuer or Seller thereof (the "Purchase Price"), (vi) the offering terms, including, if applicable, the price or prices at which the Securities initially will be offered by the Underwriters (the "Offering Price"), any selling concession to dealers (the "Selling Concession"), reallowance (the "Reallowance"), management fee, global coordinators' fee, praecipium or other similar fees, discounts or commissions (collectively, the "Fees and Commissions") with respect to the Securities, (vii) the proposed pricing date ("Pricing Date") and settlement date (the "Settlement Date"), (viii) any contractual restrictions on the offer and sale of the Securities pursuant to the Underwriting Agreement, Intersyndicate Agreement or otherwise, (ix) any co-managers for such Offering (the "Co-Managers"), (x) your proposed participation in the Offering, (xi) if applicable, the trustee, fiscal agent or similar agent (the "Trustee") for the indenture, trust agreement, fiscal agency agreement or similar agreement (the "Indenture") under which such Securities will be issued and (xii) any other principal terms of the Offering.
The term "Manager" means Salomon Smith Barney. The term "Underwriters" includes the Manager and the Co-Managers. The term "Firm Securities" means the number or amount of Securities that the several Underwriters are initially committed to purchase under the Underwriting Agreement (which may be expressed as a percentage of an aggregate number or amount of Securities to be purchased by the Underwriters as in the case of a standby Underwriting Agreement). The term "Additional Securities" means the Securities, if any, that the several Underwriters have an option to purchase under the Underwriting Agreement to cover over-allotments, if any. The number, amount or percentage of Firm Securities set forth opposite each Underwriter's name in the Underwriting Agreement plus any additional Firm Securities that such Underwriter has become obligated to purchase under the Underwriting Agreement or Article XI hereof is hereinafter referred to as the "Original Purchase Obligation" of such Underwriter and the ratio which such Original Purchase Obligation bears to the total of all Firm Securities set forth in the Underwriting Agreement (or, in the case of a standby Underwriting Agreement, to 100%) is hereinafter referred to as the "Underwriting Percentage" of such Underwriter.
References herein to statutory sections, rules, regulations, forms and interpretive materials shall be deemed to include any successor provisions.
1.2. Acceptance of AAU. You shall have accepted an AAU for an Offering if we receive your acceptance, prior to the time specified in the Invitation Wire for such Offering, by wire, telex, facsimile or electronic data transmission or other written communication (any such manner of communication being deemed "In Writing") (or orally, if promptly confirmed In Writing) in the manner specified in the Invitation Wire, of our invitation to participate in the Offering. If we receive your timely acceptance of the invitation to participate, such AAU shall constitute a valid and binding contract between us. Your acceptance of the Invitation Wire shall also constitute acceptance by you of the terms of subsequent Wires to you relating to the Offering unless we receive In Writing,
within the time and in the manner specified in such subsequent Wire, a notice from you to the effect that you do not accept the terms of such subsequent Wire, in which case you shall be deemed to have elected not to participate in the Offering.
1.3. Underwriters' Questionnaire. Your acceptance of the Invitation Wire shall confirm that you have no exceptions to the Underwriters' Questionnaire attached as Exhibit A hereto (or to any other questions addressed to you in any Wires relating to the Offering previously sent to you), other than exceptions noted by you In Writing in connection with the Offering and received from you by us before the time specified in the Invitation Wire or any subsequent Wire.
II. OFFERING MATERIALS
2.1. Registered Offerings. In the case of an Offering that will be registered in whole or in part (a "Registered Offering") under the United States Securities Act of 1933, as amended (the "1933 Act"), you understand that the Issuer has filed with the Securities and Exchange Commission (the "Commission") a registration statement including a prospectus relating to the Securities. The term "Registration Statement" means such registration statement as amended or deemed to be amended to the effective date of the Underwriting Agreement and, in the event that the Issuer files an abbreviated registration statement to register additional Securities pursuant to Rule 462(b) under the 1933 Act, such abbreviated registration statement. The term "Prospectus" means the prospectus, together with the final prospectus supplement, if any, relating to the Offering first used to confirm sales of Securities and, in the case of a Registered Offering that is an International Offering, the term "Prospectus" shall mean, collectively, each prospectus or offering circular, together with each final prospectus supplement or final offering circular supplement, if any, relating to the Offering, in the respective forms first used or made available for use to confirm sales of Securities. The term "Preliminary Prospectus" means any preliminary prospectus relating to the Offering or any preliminary prospectus supplement together with a prospectus relating to the Offering and, in the case of a Registered Offering that is an International Offering, the term "Preliminary Prospectus" shall mean, collectively, each preliminary prospectus or preliminary offering circular relating to the Offering or each preliminary prospectus supplement or preliminary offering circular supplement, together with a prospectus or offering circular, respectively, relating to the Offering. As used herein the terms "Registration Statement", "Prospectus" and "Preliminary Prospectus" shall include in each case the material, if any, incorporated by reference therein. The Manager will furnish to you, or make arrangements for you to obtain, copies of each Prospectus and Preliminary Prospectus (but excluding for this purpose, unless otherwise required pursuant to regulations under the 1933 Act, documents incorporated therein by reference) as soon as practicable after sufficient quantities thereof have been made available by the Issuer.
2.2. Unregistered Offerings. In the case of an Offering other than a Registered Offering, you understand that no registration statement has been filed with the Commission. The term "Offering Circular" means an offering circular or memorandum, if any, or any other written materials authorized by the Issuer to be used in connection with an Offering that is not a Registered Offering. The term "Preliminary Offering Circular" means any preliminary offering circular or memorandum, if any, or any other written preliminary materials authorized by the Issuer to be used in connection
with such an Offering. As used herein, the terms "Offering Circular" and "Preliminary Offering Circular" shall include the material, if any, incorporated by reference therein. We will either, as soon as practicable after the later of the date of the Invitation Wire or the date made available to us by the Issuer, furnish to you (or make available for your review in our office) a copy of any Preliminary Offering Circular or any proof or draft of the Offering Circular. In any event, in any Offering involving an Offering Circular, the Manager will furnish to you, or make arrangements for you to obtain, as soon as practicable after sufficient quantities thereof are made available by the Issuer, copies of the final Offering Circular, as amended or supplemented, if applicable (but excluding for this purpose documents incorporated therein by reference).
III. MANAGER'S AUTHORITY
3.1. Authority of Manager to Determine Form of Documents,
Terms of Offering, Etc. You authorize the Manager to act as lead manager of the
Offering of the Securities by the Underwriters (the "Underwriters' Securities")
or by the Issuer or Seller pursuant to delayed delivery contracts (the "Contract
Securities"), if any, contemplated by the Underwriting Agreement. You authorize
the Manager, on your behalf, (a) to determine the form of the Underwriting
Agreement, (b) to execute and deliver the Underwriting Agreement to the Issuer,
Guarantor or Seller, (c) to determine the form of any agreement or agreements
between or among the syndicates participating in the International Offering of
which the Offering is a part (each an "Intersyndicate Agreement"), and (d) to
execute and deliver any such Intersyndicate Agreement. You authorize the Manager
(i) to exercise any Over-allotment Option for the purchase any of or all the
Additional Securities for the accounts of the several Underwriters pursuant to
the Underwriting Agreement, (ii) to agree, on your behalf and on behalf of the
Co-Managers, to any addition to, change in or waiver of any provision of, or the
termination of, the Underwriting Agreement or any Intersyndicate Agreement
(other than an increase in the Purchase Price or in your Original Purchase
Obligation to purchase Securities, in either case from that contemplated by the
applicable AAU), (iii) to add or remove prospective Underwriters to or from the
syndicate, (iv) to exercise, in the Manager's discretion, all the authority
vested in the Manager in the Underwriting Agreement and (v) except as described
below in this Section 3.1, to take any other action as may seem advisable to the
Manager in respect of the Offering (including, without limitation, actions and
communications with the Commission, the National Association of Securities
Dealers, Inc. (the "NASD"), state blue sky or securities commissions, stock
exchanges and other regulatory bodies or organizations). If, in accordance with
the terms of the applicable AAU, the Offering of the Securities is at varying
prices based on prevailing market prices or prices related to prevailing market
prices or at negotiated prices, you authorize the Manager to determine, on your
behalf in the Manager's discretion, any Offering Price and the Fees and
Commissions applicable to the Offering from time to time. You authorize the
Manager on your behalf to arrange for any currency transactions (including
forward and hedging currency transactions) as the Manager deems necessary to
facilitate settlement of the purchase of the Securities, but you do not
authorize the Manager on your behalf to engage in any other forward or hedging
transactions in connection with the Offering unless such transactions are
specified in an applicable AAU or are otherwise consented to by you. You further
authorize the Manager, subject to the provisions of Section 1.2 hereof, (i) to
vary the offering terms of the Securities in effect at any time, including, if
applicable, the Offering Price and Fees and Commissions set forth in the
applicable AAU, (ii) to determine, on
your behalf, the Purchase Price and (iii) to increase or decrease the number, amount or percentage of Securities being offered. Notwithstanding the foregoing provisions of this Section 3.1, the Manager shall notify the Underwriters, prior to the signing of the Underwriting Agreement, of any provision in the Underwriting Agreement that could result in an increase in the amount or percentage of Firm Securities set forth opposite each Underwriter's name in the Underwriting Agreement by more than 25% (or such other percentage as shall have been specified in the applicable Invitation Wire or otherwise consented to by you) as a result of the failure or refusal of another Underwriter or Underwriters to perform its or their obligations thereunder.
3.2. Offering Date. The Offering is to be made as soon after the Underwriting Agreement is entered into by the Issuer, Guarantor or Seller and the Manager as in the Manager's judgment is advisable, on the terms and conditions set forth in the Prospectus or the Offering Circular, as the case may be, and the applicable AAU. You agree not to sell any Securities prior to the time the Manager releases such Securities for sale to purchasers. The date on which such Securities are released for sale is referred to herein as the "Offering Date".
3.3. Advertising; Supplemental Offering Material. Any public advertisement of the Offering shall be made by the Manager on behalf of the Underwriters on such date as the Manager shall determine. You agree not to advertise the Offering prior to the date of the Manager's advertisement thereof without the Manager's consent. If the offering is made in whole or in part in reliance on Rule 144A (or upon another exemption from registration), you agree not to engage in any general solicitation and to abide by any other restrictions in the AAU or the Underwriting Agreement in connection therewith relating to any advertising or publicity. Any advertisement you may make of the Offering after such date will be your own responsibility and at your own expense and risk. In addition to your agreement to comply with restrictions on the Offering pursuant to Sections 10.10 and 10.11 hereof, you also agree that you will not, in connection with the offer and sale of the Securities in the Offering, without the consent of the Manager, give to any prospective purchaser of the Securities or other person not in your employ any written information concerning the Offering, the Issuer, the Guarantor or the Seller, other than information contained in any Preliminary Prospectus, Prospectus, Preliminary Offering Circular or Offering Circular or in any computational materials ("Computational Materials") or other offering materials prepared by or with the consent of the Manager for use by the Underwriters in connection with the Offering and, in the case of a Registered Offering, filed with the Commission or the NASD, as applicable (the "Supplemental Offering Materials"). You further agree to cease distribution of any Computational Materials on the Offering Date.
3.4. Institutional and Retail Sales. You authorize the Manager to sell to institutions or retail purchasers such Securities purchased by you pursuant to the Underwriting Agreement as the Manager shall determine. The Selling Concession on any such sales shall be credited to the accounts of the Underwriters as the Manager shall determine.
3.5. Sales to Dealers. You authorize the Manager to sell to Dealers (as defined below) such Securities purchased by you pursuant to the Underwriting Agreement as the Manager shall determine. A "Dealer" shall be a person who is (a) a
broker or dealer (as defined in the By-Laws of the NASD) actually engaged in the
investment banking or securities business and (i) a member in good standing of
the NASD or (ii) a foreign bank, broker, dealer or other institution not
eligible for membership in the NASD that, in the case of either clause (a)(i) or
(a)(ii), makes the representations and agreements applicable to such
institutions contained in Section 10.6 hereof or (b) in the case of Offerings of
Securities that are exempt securities under Section 3(a)(12) of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and such other Securities as
from time to time may be sold by a "bank" (as defined in Section 3(a)(6) of the
1934 Act (a "Bank")), a Bank that is not a member of the NASD and that makes the
representations and agreements applicable to such institutions contained in
Section 10.6 hereof. If the price for any such sales by the Manager to Dealers
exceeds an amount equal to the Offering Price less the Selling Concession set
forth in the applicable AAU, the amount of such excess, if any, shall be
credited to the accounts of the Underwriters as the Manager shall determine.
3.6. Direct Sales. The Manager will advise you promptly, on the date of the Offering, as to the Securities purchased by you pursuant to the Underwriting Agreement that you shall retain for direct sale. At any time prior to the termination of the applicable AAU, any such Securities that are held by the Manager for sale but not sold, may, on your request and at the Manager's discretion, be released to you for direct sale, and Securities so released to you shall no longer be deemed held for sale by the Manager. You may allow, and Dealers may reallow, a discount on sales to Dealers in an amount not in excess of the Reallowance set forth in the applicable AAU. You may not purchase Securities from, or sell Securities to, any other Underwriter or Dealer at any discount or concession other than the Reallowance, except with the consent of the Manager.
3.7. Release of Unsold Securities. From time to time prior to the
termination of the applicable AAU, on the request of the Manager, you shall
advise the Manager of the amount of Securities remaining unsold which were
retained by or released to you for direct sale and of the amount of Securities
and Other Securities (as defined below) purchased for your account remaining
unsold which were delivered to you pursuant to Article V hereof or pursuant to
any Intersyndicate Agreement, and, on the request of the Manager, you shall
release to the Manager any such Securities and Other Securities remaining unsold
(i) for sale by the Manager to institutions, Dealers or retail purchasers, (ii)
for sale by the Issuer or Seller pursuant to delayed delivery contracts or (iii)
if, in the Manager's opinion, such Securities or Other Securities are needed to
make delivery against sales made pursuant to Article V hereof or any
Intersyndicate Agreement.
3.8. International Offerings. In the case of an International Offering, you authorize the Manager (i) to make representations on your behalf as set forth in any Intersyndicate Agreement or Underwriting Agreement and (ii) to purchase or sell for your account pursuant to the Intersyndicate Agreement (a) Securities, (b) any other securities of the same class and series, or any securities into which the Securities may be converted or for which the Securities may be exchanged or exercised and (c) any other securities designated in the applicable AAU or applicable Intersyndicate Agreement (the securities referred to in clauses (b) and (c) above being referred to collectively as the "Other Securities").
IV. DELAYED DELIVERY CONTRACTS
4.1. Arrangements for Sales. You agree that arrangements for sales of Contract Securities will be made only through the Manager acting either directly or through Dealers (including Underwriters acting as Dealers), and you authorize the Manager to act on your behalf in making such arrangements. The aggregate amount of Securities to be purchased by the several Underwriters shall be reduced by the respective amounts of Contract Securities attributed to such Underwriters as hereinafter provided. Subject to the provisions of Section 4.2, the aggregate amount of Contract Securities shall be attributed to the Underwriters as nearly as practicable in their respective Underwriting Percentages, except that, as determined by the Manager in its discretion, (i) Contract Securities directed and allocated by a purchaser to specific Underwriters shall be attributed to such Underwriters and (ii) Contract Securities for which arrangements have been made for sale through Dealers shall be attributed to each Underwriter approximately in the proportion that Securities of such Underwriter held by the Manager for sales to Dealers bear to all Securities so held. The fee with respect to Contract Securities payable to the Manager for the accounts of the Underwriters pursuant to the Underwriting Agreement shall be credited to the accounts of the respective Underwriters in proportion to the Contract Securities attributed to such Underwriters pursuant to the provisions of this Section 4.1, less, in the case of each Underwriter, the concession to Dealers on Contract Securities sold through Dealers and attributed to such Underwriter.
4.2. Excess Sales. If the amount of Contract Securities attributable to an Underwriter pursuant to Section 4.1 would exceed such Underwriter's Original Purchase Obligation reduced by the amount of Underwriters' Securities sold by or on behalf of such Underwriter, such excess shall not be attributed to such Underwriter, and such Underwriter shall be regarded as having acted only as a Dealer with respect to, and shall receive only the concession to Dealers on, such excess.
V. PURCHASE AND SALE OF SECURITIES; FACILITATION OF DISTRIBUTION
5.1. Purchase and Sale of Securities; Facilitation of Distribution. In order to facilitate the distribution and sale of the Securities, you authorize the Manager to buy and sell Securities and any Other Securities, in addition to Securities sold pursuant to Article III hereof, in the open market or otherwise (including, without limitation, pursuant to any Intersyndicate Agreement), for long or short account, on such terms as it shall deem advisable, and to over-allot in arranging sales. Such purchases and sales and over-allotments shall be made for the accounts of the several Underwriters as nearly as practicable in their respective Underwriting Percentages or, in the case of an International Offering, such purchases and sales shall be for such accounts as set forth in the applicable Intersyndicate Agreement. Any securities which may have been purchased by the Manager for stabilizing purposes in connection with the Offering prior to the execution of the applicable AAU shall be treated as having been purchased pursuant to this Section 5.1 for the accounts of the several Underwriters or, in the case of an International Offering, for such accounts as are set forth in the applicable Intersyndicate Agreement. Your net commitment pursuant to the foregoing authorization shall not exceed at the close of business on any day an amount equal to 20% of your Underwriting Percentage of the aggregate initial Offering Price of the Firm Securities, it being understood that, in calculating such net commitment, the initial Offering Price shall be used with respect to the Securities so purchased or sold and, in the case of all Other
Securities, shall be the purchase price thereof. Your net commitment for short account (i.e., "naked short") shall be calculated by assuming that all Securities that may be purchased upon exercise of any over-allotment option then exercisable are acquired (whether or not actually acquired) and, in the case of an International Offering, after giving effect to the purchase of any Securities or Other Securities that the Manager has agreed to purchase for your account pursuant to any applicable Intersyndicate Agreement. On demand you shall take up and pay for any Securities or Other Securities so purchased for your account and any Securities released to you pursuant to Section 3.7 hereof and you shall deliver to the Manager against payment any Securities or Other Securities so sold or over-allotted for your account or released to you. The Manager agrees to notify you if it engages in any stabilization transaction requiring reports to be filed pursuant to Rule 17a-2 under the 1934 Act and to notify you of the date of termination of stabilization. You agree not to stabilize or engage in any syndicate covering transaction (as defined in Rule 100 of Regulation M under the 1934 Act ("Regulation M")) in connection with the Offering without the prior consent of the Manager. You further agree to provide to Salomon Smith Barney any reports required of you pursuant to Rule 17a-2 not later than the date specified therein and you authorize Salomon Smith Barney to file on your behalf with the Commission any reports required by such Rule.
If the limitations of Rule 101 of Regulation M ("Rule 101") do not apply to you with respect to the Securities, Other Securities or other reference securities (as defined in Rule 100 of Regulation M) because they satisfy the exception for actively-traded securities in subsection (c)(1) of Rule 101 or the exception for Rule 144A securities in subsection (b)(10) of Rule 101, you agree that promptly upon notice from the Manager (or, if later, at the time stated in the notice) you will comply with Rule 101 as though such exception were not available but the other provisions of Rule 101 (as interpreted by the Commission and after giving effect to any applicable exemptions) did apply. If the securities in question are NASDAQ securities (as defined in Rule 100 of Regulation M) you may engage in passive market making in accordance with Rule 103 of Regulation M (except that the daily net purchase volume limitation will not apply and the maximum displayed bid size shall be 5,000 shares excluding transactions effected in the SOES system) unless the notice from the Manager also states that passive market making is not permitted.
5.2. Penalty With Respect to Securities Repurchased by the Manager. If pursuant to the provisions of Section 5.1 and prior to the termination of the Manager's authority to cover any short position incurred under the applicable AAU or such other date as the Manager shall specify in a Wire, either (A) the Manager purchases or contracts to purchase for the account of any Underwriter in the open market or otherwise any Securities which were retained by, or released to, you for direct sale or any Securities sold pursuant to Section 3.4 for which you received a portion of the Selling Concession set forth in the applicable AAU, or any Securities which may have been issued on transfer or in exchange for such Securities, and which Securities were therefore not effectively placed for investment or (B) if the Manager has advised you by Wire that trading in the Securities will be reported to the Manager pursuant to the "Initial Public Offering Tracking System" of The Depository Trust Company ("DTC") and the Manager determines, based on notices from DTC, that your customers sold an amount of Securities during any day that exceeds the amount previously notified to you by Wire, then you authorize the Manager either to charge your account with an amount equal to such portion of the Selling Concession set forth in the applicable AAU received
by you with respect to such Securities or, in the case of clause (B), such Securities as exceed the amount specified in such Wire or to require you to repurchase such Securities or, in the case of clause (B), such Securities as exceed the amount specified in such Wire, at a price equal to the total cost of such purchase, including transfer taxes, accrued interest, dividends and commissions, if any.
5.3. Compliance with Regulation M. You represent that, at all times since you were invited to participate in the Offering, you have complied with the provisions of Regulation M applicable to such Offering, in each case as interpreted by the Commission and after giving effect to any applicable exemptions. If you have been notified in a Wire that the Underwriters may conduct passive market making in compliance with Rule 103 of Regulation M in connection with the Offering, you represent that, at all times since your receipt of such Wire, you have complied with the provisions of such Rule applicable to such Offering, as interpreted by the Commission and after giving effect to any applicable exemptions.
5.4. Standby Underwritings. You authorize the Manager in its discretion, at any time on, or from time to time prior to, the expiration of the conversion right of convertible securities identified in the applicable AAU in the case of securities called for redemption, or the expiration of rights to acquire securities in the case of rights offerings, for which, in either case, standby underwriting arrangements have been made: (i) to purchase convertible securities or rights to acquire Securities for your account, in the open market or otherwise, on such terms as the Manager determines and to convert convertible securities or exercise rights so purchased; and (ii) to offer and sell the underlying common stock or depositary shares for your account, in the open market or otherwise, for long or short account (for purposes of such commitment, such common stock or depositary shares being considered the equivalent of convertible securities or rights), on such terms consistent with the terms of the Offering set forth in the Prospectus or Offering Circular as the Manager determines. On demand you shall take up and pay for any securities so purchased for your account or you shall deliver to the Manager against payment any securities so sold, as the case may be. During such period you may offer and sell the underlying common stock or depositary shares, but only at prices set by the Manager from time to time, and any such sales shall be subject to the Manager's right to sell to you the underlying common stock or depositary shares as above provided and to the Manager's right to reserve your Securities purchased, received or to be received upon conversion. You agree not to bid for, purchase, attempt to induce others to purchase, or sell, directly or indirectly, any convertible securities or rights or underlying common stock or depositary shares, provided, however, that no Underwriter shall be prohibited from (a) selling underlying common stock owned beneficially by such Underwriter on the day the convertible securities were first called for redemption, (b) converting convertible securities owned beneficially by such Underwriter on such date or selling underlying common stock issued upon conversion of convertible securities so owned, (c) exercising rights owned beneficially by such Underwriter on the record date for a rights offering or selling the underlying common stock or depositary shares issued upon exercise of rights so owned or (d) purchasing or selling convertible securities or rights or underlying common stock or depositary shares as a broker pursuant to unsolicited orders.
VI. PAYMENT AND SETTLEMENT
6.1. Payment and Settlement. You shall deliver to the Manager on the date and at the place and time specified in the applicable AAU (or on such later date and at such place and time as may be specified by the Manager in a subsequent Wire) the funds specified in the applicable AAU, payable to the order of Salomon Smith Barney Inc., for (i) an amount equal to the Offering Price plus (if not included in the Offering Price) accrued interest, amortization of original issue discount or dividends, if any, specified in the Prospectus or Offering Circular, less the applicable Selling Concession in respect of the Firm Securities to be purchased by you, (ii) an amount equal to the Offering Price plus (if not included in the Offering Price) accrued interest, amortization of original issue discount or dividends, if any, specified in the Prospectus or Offering Circular, less the applicable Selling Concession in respect of such of the Firm Securities to be purchased by you as shall have been retained by or released to you for direct sale as contemplated by Section 3.6 hereof or (iii) the amount set forth or indicated in the applicable AAU, as the Manager shall advise. You shall make similar payment as the Manager may direct for Additional Securities, if any, to be purchased by you on the date specified by the Manager for such payment. The Manager will make payment to the Issuer or Seller against delivery to the Manager for your account of the Securities to be purchased by you, and the Manager will deliver to you the Securities paid for by you which shall have been retained by or released to you for direct sale. If the Manager determines that transactions in the Securities are to be settled through the facilities of DTC or other clearinghouse facility, payment for and delivery of Securities purchased by you shall be made through such facilities, if you are a member, or, if you are not a member, settlement shall be made through your ordinary correspondent who is a member.
VII. EXPENSES
7.1. Management Fee. You authorize the Manager to charge your account as compensation for the Manager's and Co-Managers' services in connection with the Offering, including the purchase from the Issuer or Seller of the Securities, as the case may be, and the management of the Offering, the amount, if any, set forth as the management fee, global coordinators fee, praecipium or other similar fee in the applicable AAU. Such amount shall be divided among the Manager and any Co-Managers named in the applicable AAU as they may determine.
7.2. General Expenses. You authorize the Manager to charge your account with your Underwriting Percentage of all expenses of a general nature incurred by the Manager and Co-Managers under the applicable AAU in connection with the Offering, including the negotiation and preparation thereof, or in connection with the purchase, carrying, marketing and sale of any securities under the applicable AAU and any Intersyndicate Agreement, including, without limitation, legal fees and expenses, transfer taxes, costs associated with approval of the Offering by the NASD and the costs of currency transactions (including forward and hedging currency transactions) entered into to facilitate settlement of the purchase of Securities permitted under Section 3.1 hereof.
VIII. MANAGEMENT OF SECURITIES AND FUNDS
8.1. Advances; Loans; Pledges. You authorize the Manager to
advance the Manager's own funds for your account, charging current interest
rates, or to arrange loans for your account for the purpose of carrying out the
provisions of the applicable AAU and any Intersyndicate Agreement and in
connection therewith, to hold or pledge as security therefor all or any
securities which the Manager may be holding for your account under the
applicable AAU and any Intersyndicate Agreement, to execute and deliver any
notes or other instruments evidencing such advances or loans and to give all
instructions to the lenders with respect to any such loans and the proceeds
thereof. The obligations of the Underwriters under loans arranged on their
behalf shall be several in proportion to their respective Original Purchase
Obligations and not joint. Any lender is authorized to accept the Manager's
instructions as to the disposition of the proceeds of any such loans. In the
event of any such advance or loan, repayment thereof shall, in the discretion of
the Manager, be effected prior to making any remittance or delivery pursuant to
Section 8.2, 8.3 or 9.2 hereof.
8.2. Return of Amount Paid for Securities. Out of payment received by the Manager for Securities sold for your account which have been paid for by you, the Manager will remit to you promptly an amount equal to the price paid by you for such Securities.
8.3. Delivery and Redelivery of Securities for Carrying Purposes. The Manager may deliver to you from time to time prior to the termination of the applicable AAU pursuant to Section 9.1 hereof against payment, for carrying purposes only, any Securities or Other Securities purchased by you under the applicable AAU or any Intersyndicate Agreement which the Manager is holding for sale for your account but which are not sold and paid for. You shall redeliver to the Manager against payment any Securities or Other Securities delivered to you for carrying purposes at such times as the Manager may demand.
IX. TERMINATION; INDEMNIFICATION
9.1. Termination. Each AAU shall terminate at the close of business on the later of the date on which the Underwriters pay the Issuer or Seller for the Securities and 45 full days after the applicable Offering Date, unless sooner terminated by the Manager. The Manager may in its discretion by notice to you prior to the termination of such AAU alter any of the terms or conditions of the Offering to the extent permitted by Articles III or IV hereof, or terminate or suspend the effectiveness of Article V hereof, or any part thereof. No termination or suspension pursuant to this paragraph shall affect the Manager's authority under Section 3.1 hereof to take actions in respect of the Offering or under Article V hereof to cover any short position incurred under such AAU or in connection with covering any such short position to require you to repurchase Securities as specified in Section 5.2 hereof.
9.2. Delivery or Sale of Securities; Settlement of Accounts. Upon termination of each AAU or prior thereto at the Manager's discretion, the Manager shall deliver to you any Securities paid for by you pursuant to Section 6.1 hereof and held by the Manager for sale pursuant to Section 3.4 or 3.5 hereof but not sold and paid for and any Securities or Other Securities that are held by the Manager for your account pursuant to the provisions of Article V hereof or any Intersyndicate Agreement. Notwithstanding the foregoing, at the termination of such AAU, if the aggregate initial Offering Price of any such Securities and the aggregate purchase price of any Other
Securities so held and not sold and paid for does not exceed an amount equal to 20% of the aggregate initial Offering Price of the Securities, the Manager may, in its discretion, sell such Securities and Other Securities for the accounts of the several Underwriters, at such prices, on such terms, at such times and in such manner as it may determine. Within the period specified by applicable NASD Rules or, if no period is so specified, as soon as practicable after termination of such AAU, your account shall be settled and paid. The Manager may reserve from distribution such amount as the Manager deems advisable to cover possible additional expenses. The determination by the Manager of the amount so to be paid to or by you shall be final and conclusive. Any of your funds in the Manager's hands may be held with the Manager's general funds without accountability for interest
Notwithstanding any provision of this Master AAU other than Section
10.12, upon termination of each AAU or prior thereto at the Manager's
discretion, the Manager (i) may allocate to the accounts of the Underwriters the
expenses described in Section 7.2 hereof and any losses incurred upon the sale
of Securities or Other Securities pursuant to the applicable AAU or any
Intersyndicate Agreement (including any losses incurred upon the sale of
securities referred to in Section 5.4(ii) hereof), (ii) may deliver to the
Underwriters any unsold Securities or Other Securities purchased pursuant to
Section 5.1 hereof or any Intersyndicate Agreement and (iii) may deliver to the
Underwriters any unsold Securities purchased pursuant to the applicable
Underwriting Agreement, in each case in the Manager's discretion. The Manager
shall have full discretion to allocate expenses and Securities to the accounts
of any Underwriter as the Manager decides, except that (a) no Underwriter (other
than the Manager or a Co-Manager) shall bear more than its share of such
expenses, losses or Securities (such share shall not exceed such Underwriter's
Underwriting Percentage and shall be determined pro rata among all such
Underwriters based on their Underwriting Percentages), (b) no such Underwriter
shall receive Securities that, together with any Securities purchased by such
Underwriter pursuant to Section 6.1 (but excluding any Securities that such
Underwriter is required to repurchase pursuant to Section 5.2) exceed such
Underwriter's Original Purchase Obligation and (c) no Co-Manager shall bear more
than its share, as among the Manager and the other Co-Managers, of such
expenses, losses or Securities (such share to be determined pro rata among the
Manager and all Co-Managers based on (1) their relative Underwriting Percentages
as a percentage of the total combined Underwriting Percentages of the Manager
and all Co-Managers, or (2) if the Manager so determines, their relative
Offering Economics (as hereinafter defined) as a percentage of the combined
Offering Economics of the Manager and all Co-Managers together. The Manager's or
a Co-Manager's "Offering Economics" equals the sum of its Management Fee Share,
its Underwriting Fee Share and its Selling Concession Share (each as hereinafter
defined). The Manager's or a Co-Manager's "Management Fee Share" is the dollar
amount of its share, as agreed among the Manager and any Co-Managers, of the
amount payable by all Underwriters to some or all of the Manager and any
Co-Manager as a global coordinators' fee, praecipium, management fee or other
fee. The Manager's or a Co-Manager's "Underwriting Fee Share" is the dollar
amount of its Underwriting Percentage of the aggregate initial Offering Price of
the Firm Securities less the Purchase Price thereof, less the Selling Concession
thereon. The Manager's or a Co-Manager's "Selling Concession Share" is the
dollar amount of any Selling Concession credited to it on sales from the
institutional pot or on sales made for the account of any other Underwriter. If
any Securities or Other Securities returned to you pursuant to clause (ii) or
(iii) above were not paid for by you pursuant to Section 6.1 hereof, you shall
pay to the Manager an
amount per security equal to the amount set forth in Section 6.1(i), in the case of Securities returned to you pursuant to clause (iii) above, or the purchase price of such securities, in the case of Securities or Other Securities returned to you pursuant to clause (ii) above.
9.3. Post-Settlement Expenses. Notwithstanding any settlement on the
termination of the applicable AAU, you agree to pay any transfer taxes which may
be assessed and paid after such settlement on account of any sales or transfers
under such AAU or any Intersyndicate Agreement for your account and your
Underwriting Percentage of (i) all expenses incurred by the Manager in
investigating, preparing to defend or defending against any action, claim or
proceeding which is asserted or instituted by any party (including any
governmental or regulatory body) relating to (a) the Registration Statement, any
Preliminary Prospectus or Prospectus (or any amendment or supplement thereto),
any Preliminary Offering Circular or Offering Circular (or any amendment or
supplement thereto) or Supplemental Offering Materials, (b) the violation of any
applicable restrictions on the offer, sale, resale or purchase of Securities or
Other Securities imposed by United States Federal or state laws or foreign laws
and the rules and regulations of any regulatory body promulgated thereunder or
pursuant to the terms of such AAU, the Underwriting Agreement or any
Intersyndicate Agreement or (c) any claim that the Underwriters constitute a
partnership, an association or an unincorporated business or other separate
entity and (ii) any liability, including attorneys' fees, incurred by the
Manager in respect of any such action, claim or proceeding, whether such
liability shall be the result of a judgment or arbitrator's determination or as
a result of any settlement agreed to by the Manager, other than any such expense
or liability as to which the Manager actually receives indemnity pursuant to
Section 9.4, contribution pursuant to Section 9.5, indemnity or contribution
pursuant to the Underwriting Agreement or damages from an Underwriter for breach
of its representations, warranties, agreements, or covenants contained in the
applicable AAU. None of the foregoing provisions of this Section 9.3 shall
relieve any defaulting or breaching Underwriter from liability for its defaults
or breach.
9.4. Indemnification. You agree to indemnify and hold harmless each other Underwriter and each person, if any, who controls any such Underwriter within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act, to the extent and upon the terms which you agree to indemnify and hold harmless any of the Issuer, the Guarantor, the Seller, any person controlling the Issuer, the Guarantor, the Seller, its directors and, in the case of a Registered Offering, its officers who signed the Registration Statement and, in the case of an Offering other than a Registered Offering, its officers, in each case as set forth in the Underwriting Agreement. You further agree to indemnify and hold harmless any investment banking firm identified in a Wire as the qualified independent underwriter as defined in Rule 2720 of the NASD's Conduct Rules ("QIU") for an Offering and each person, if any, who controls such QIU within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act, from and against any and all losses, claims, damages and liabilities related to, arising out of or in connection with such investment banking firm's activities as QIU for the Offering. You agree with the other Underwriters to reimburse such QIU for all expenses, including fees and expenses of counsel as they are incurred, in connection with investigating, preparing for, or defending any action, claim or proceeding related to, arising out of, or in connection with such QIU's activities as a QIU for the Offering. Each Underwriter shall be responsible for its Underwriting Percentage of any amount due to such QIU on account of the foregoing indemnity. You agree that such QIU shall have no additional
liability to any Underwriter or otherwise as a result of its serving as QIU in connection with the Offering. You further agree that to the extent the indemnification provided to a QIU under this Section 9.4 is unavailable to such QIU or insufficient in respect of any losses, claims, damages or liabilities (and expenses relating thereto), whether as a matter of law or public policy or as a result of the default of any Underwriter in performing its obligations under this Section 9.4, you and each other Underwriter shall contribute to the amount paid or payable by such QIU as a result of such losses, claims, damages or liabilities (and expenses relating thereto) in proportion to your Underwriting Percentage.
9.5. Contribution. Notwithstanding any settlement on the termination of the applicable AAU, you agree to pay upon request of the Manager, as contribution, your Underwriting Percentage of any losses, claims, damages or liabilities, joint or several, paid or incurred by any Underwriter to any person other than an Underwriter, arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, any Preliminary Prospectus or Prospectus (or any amendment or supplement thereto), any Preliminary Offering Circular or Offering Circular (or any amendment or supplement thereto) or Supplemental Offering Materials or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading (other than an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with information furnished to the Company in writing by the Underwriter on whose behalf the request for contribution is being made expressly for use therein) and your Underwriting Percentage of any legal or other expenses reasonably incurred by the Underwriter (with the approval of the Manager) on whose behalf the request for contribution is being made in connection with investigating or defending any such loss, claim, damage or liability or any action in respect thereof; provided that no request shall be made on behalf of any Underwriter guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) from any Underwriter who was not guilty of such fraudulent misrepresentation. None of the foregoing provisions of this Section 9.5 shall relieve any defaulting or breaching Underwriter from liability for its defaults or breach.
9.6. Separate Counsel. If any claim is asserted or action or proceeding commenced pursuant to which the indemnity provided in Section 9.4 may apply, the Manager may take such action in connection therewith as it deems necessary or desirable, including retention of counsel for the Underwriters, and in its discretion separate counsel for any particular Underwriter or group of Underwriters, and the fees and disbursements of any counsel so retained shall be allocated among the several Underwriters as determined by the Manager. Any Underwriter may elect to retain at its own expense its own counsel and, on advice of such counsel but only with the consent of the Manager, may settle or consent to the settlement of any such claim, action or proceeding. The Manager may settle or consent to the settlement of any such claim, action or proceeding. Whenever the Manager receives notice of the assertion of any claim, action or proceeding to which the provisions of Section 9.4 would apply, it will give prompt notice thereof to each Underwriter, and whenever you receive notice of the assertion of any claim or commencement of any action or proceeding to which the provisions of Section 9.4 would apply, you will give prompt notice thereof to the Manager. The Manager also will furnish each Underwriter with periodic reports, at such times as it deems appropriate, as to the status of such claim, action or proceeding, and the action taken by it in connection therewith.
9.7. Survival of Agreements. Regardless of any termination of an AAU, your agreements contained in Article V and Sections 3.1, 9.3, 9.4, 9.5, 9.6 and 11.2 shall remain operative and in full force and effect regardless of (i) any termination of the Underwriting Agreement, (ii) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter or by or on behalf of the Issuer, the Guarantor, the Seller, its directors or officers or any person controlling the Issuer, the Guarantor or the Seller and (iii) acceptance of any payment for any Securities.
X. REPRESENTATIONS AND COVENANTS OF UNDERWRITERS
10.1. Knowledge of Offering. You understand that it is your responsibility to examine the Registration Statement, the Prospectus or the Offering Circular, as the case may be, relating to the Offering, any amendment or supplement thereto, any Preliminary Prospectus or Preliminary Offering Circular and the material, if any, incorporated by reference therein and any Supplemental Offering Materials and you will familiarize yourself with the terms of the Securities, any applicable Indenture and the other terms of the Offering thereof which are to be reflected in the Prospectus or the Offering Circular, as the case may be, and the applicable AAU and Underwriting Agreement. The Manager is authorized, with the advice of counsel for the Underwriters, to approve on your behalf any amendments or supplements to the Registration Statement and the Prospectus or the Offering Circular, as the case may be.
10.2. Distribution of Materials. You will keep an accurate record of the names and addresses of all persons to whom you give copies of the Registration Statement, the Prospectus, any Preliminary Prospectus (or any amendment or supplement thereto) or any Offering Circular or any Preliminary Offering Circular and, when furnished with any subsequent amendment to the Registration Statement, any subsequent Prospectus, any subsequent Offering Circular or any memorandum outlining changes in the Registration Statement or any Prospectus or Offering Circular, you will, upon request of the Manager, promptly forward copies thereof to such persons.
10.3. Accuracy of Underwriters' Information. You confirm that the information that you have given or are deemed to have given in response to the Underwriters' Questionnaire attached as Exhibit A hereto (and to any other questions addressed to you in the Invitation Wire or other Wires), which information has been furnished to the Issuer for use in the Registration Statement and the Prospectus or the Offering Circular, as the case may be, or has otherwise been relied upon in connection with the Offering, is complete and accurate. You shall notify the Manager immediately of any development before the termination of the applicable AAU which makes untrue or incomplete any information that you have given or are deemed to have given in response to the Underwriters' Questionnaire (or such other questions).
10.4. Name; Address. Unless you have promptly notified the Manager in writing otherwise, your name as it should appear in the Prospectus or the Offering Circular and any advertisement, if different, and your address are as set forth on the signature pages hereof.
10.5. Capital Requirements. You represent that your commitment to purchase the Securities will not result in a violation of the financial responsibility requirements of Rule 15c3-1 under the 1934 Act or of any similar provision of any
applicable rules of any securities exchange to which you are subject or, if you are a financial institution subject to regulation by the Board of Governors of the United States Federal Reserve System, the United States Comptroller of the Currency or the United States Federal Deposit Insurance Corporation, will not place you in violation of any applicable capital requirements or restrictions of such regulator or any other regulator to which you are subject.
10.6. Compliance with NASD Requirements. You represent that you are a
member in good standing of the NASD, a Bank that is not a member of the NASD or
a foreign bank or dealer not eligible for membership in the NASD. In making
sales of Securities, if you are such a member, you agree to comply with all
applicable interpretive material ("IM") and rules of the NASD, including,
without limitation, IM-2110-1 (the NASD's interpretation with respect to
free-riding and withholding) and Rule 2740 of the NASD's Conduct Rules, or, if
you are such a foreign bank or dealer, you agree to comply, as applicable, with
IM-2110-1 and Rules 2730, 2740 and 2750 of the NASD's Conduct Rules as though
you were such a member and Rule 2420 of the NASD's Conduct Rules as it applies
to a nonmember broker or dealer in a foreign country. If you are a Bank, you
agree, to the extent required by applicable law or the Conduct Rules of the
NASD, that you will not, in connection with the public offering of any
Securities that do not constitute "exempted securities" within the meaning of
Section 3(a)(12) of the 1934 Act or such other Securities as from time to time
may be sold by a Bank, purchase any Securities at a discount from the Offering
Price from any Underwriter or dealer or otherwise accept any Fees and
Commissions from any Underwriter or Dealer, and you agree to comply, as
applicable, with Rule 2420 of the NASD's Conduct Rules as though you were a
member.
10.7. Further State Notice. The Manager will file a Further State Notice with the Department of State of New York, if required.
10.8. Compliance with Rule 15c2-8. In the case of a Registered Offering and any other Offering to which the provisions of Rule 15c2-8 under the 1934 Act are made applicable pursuant to the AAU or otherwise, you agree to comply with such Rule in connection with the Offering. In the case of an Offering other than a Registered Offering, you agree to comply with applicable Federal and state laws and the applicable rules and regulations of any regulatory body promulgated thereunder governing the use and distribution of offering circulars by underwriters.
10.9. Discretionary Accounts. In the case of a Registered Offering of Securities issued by an Issuer that was not, immediately prior to the filing of the Registration Statement, subject to the requirements of Section 13(d) or 15(d) of the 1934 Act, you agree that you will not make sales to any account over which you exercise discretionary authority in connection with such sale except as otherwise permitted by the applicable AAU for such Offering.
10.10. Offering Restrictions. If you are a foreign bank or dealer and you are not registered as a broker-dealer under Section 15 of the 1934 Act, you agree that while you are acting as an Underwriter in respect of the Securities and in any event during the term of the applicable AAU, you will not directly or indirectly effect in, or with persons who are nationals or residents of, the United States, its territories or possessions any transactions (except for the purchases provided for in the Underwriting Agreement and transactions contemplated by Articles III and V hereof) in Securities or
any Other Securities.
It is understood that, except as specified in the applicable AAU, no action has been taken by the Manager, the Issuer, the Guarantor or the Seller to permit you to offer Securities in any jurisdiction other than the United States, in the case of a Registered Offering, where action would be required for such purpose.
10.11. Representations, Warranties and Agreements. You agree to make to each other Underwriter participating in an Offering the same representations, warranties and agreements, if any, made by the Underwriters to the Issuer, the Guarantor or the Seller in the applicable Underwriting Agreement or any Intersyndicate Agreement and you authorize the Manager to make such representations, warranties and agreements to the Issuer, the Guarantor or the Seller on your behalf.
10.12. Limitation on the Authority of the Manager to Purchase and Sell Securities for the Account of Certain Underwriters. Notwithstanding any provision of this AAU authorizing the Manager to purchase or sell any Securities or Other Securities (including arranging for the sale of Contract Securities) or over-allot in arranging sales of Securities for the accounts of the several Underwriters, the Manager may not, in connection with the Offering of any Securities, make any such purchases, sales and/or over-allotments for the account of any Underwriter that, not later than its acceptance of the Invitation Wire relating to such Offering, has advised the Manager that, due to its status as, or relationship to, a bank or bank holding company such purchases, sales and/or over-allotments are prohibited by applicable law. If any Underwriter so advises the Manager, the Manager may allocate any such purchases, sales and over-allotments (and the related expenses) which otherwise would have been allocated to your account based on your respective Underwriting Percentage to your account based on the ratio of your Original Purchase Obligation to the Original Purchase Obligations of all Underwriters other than the advising Underwriter or Underwriters or in such other manner as the Manager shall determine.
XI. DEFAULTING UNDERWRITERS
11.1. Effect of Termination. If the Underwriting Agreement is terminated as permitted by the terms thereof, your obligations hereunder with respect to the Offering of the Securities shall immediately terminate except (i) as set forth in Section 9.7, (ii) that you shall remain liable for your Underwriting Percentage (or such other percentage as may be specified pursuant to Section 9.2) of all expenses and for any purchases or sales which may have been made for your account pursuant to the provisions of Article V hereof or any Intersyndicate Agreement and (iii) that such termination shall not affect any obligations of any defaulting or breaching Underwriter.
11.2. Sharing of Liability. If any Underwriter shall default in its obligations (i) pursuant to Section 5.1, 5.2 or 5.4, (ii) to pay amounts charged to its account pursuant to Section 7.1, 7.2 or 8.1 or (iii) pursuant to Section 9.2, 9.3, 9.4, 9.5, 9.6 or 11.1, you will assume your proportionate share (determined on the basis of the respective Underwriting Percentages of the non-defaulting Underwriters) of such obligations, but no such assumption shall relieve any defaulting Underwriter from liability to the non-defaulting Underwriters, the Issuer, the Guarantor or the Seller for its default.
11.3. Arrangements for Purchases. The Manager is authorized to arrange for the purchase by others (including the Manager or any other Underwriter) of any Securities not purchased by any defaulting Underwriter in accordance with the terms of the applicable Underwriting Agreement or, if the applicable Underwriting Agreement does not provide arrangements for defaulting Underwriters, in the discretion of the Manager. If such arrangements are made, the respective amounts of Securities to be purchased by the remaining Underwriters and such other person or persons, if any, shall be taken as the basis for all rights and obligations hereunder, but this shall not relieve any defaulting Underwriter from liability for its default.
XII. MISCELLANEOUS
12.1. Obligations Several. Nothing contained in this Salomon Smith Barney Master AAU or any AAU constitutes you partners with the Manager or with the other Underwriters and the obligations of you and each of the other Underwriters are several and not joint. Each Underwriter elects to be excluded from the application of Subchapter K, Chapter 1, Subtitle A, of the United States Internal Revenue Code of 1986, as amended. Each Underwriter authorizes the Manager, on behalf of such Underwriter, to execute such evidence of such election as may be required by the United States Internal Revenue Service.
12.2. Liability of Manager. The Manager shall be under no liability to you for any act or omission except for obligations expressly assumed by the Manager in the applicable AAU.
12.3. Termination of Master Agreement Among Underwriters. This Salomon
Smith Barney Master AAU may be terminated by either party hereto upon five
business days' written notice to the other party; provided that with respect to
any Offering for which an AAU was sent prior to such notice, this Salomon Smith
Barney Master AAU as it applies to such Offering shall remain in full force and
effect and shall terminate with respect to such Offering in accordance with
Section 9.1 hereof.
12.4. Governing Law. This Salomon Smith Barney Master AAU and each AAU shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed in the State of New York.
12.5. Amendments. This Salomon Smith Barney Master AAU may be amended from time to time by consent of the parties hereto. Your consent shall be deemed to have been given to an amendment to this Salomon Smith Barney Master AAU, and such amendment shall be effective, five business days following written notice to you of such amendment if you do not notify Salomon Smith Barney in writing prior to the close of business on such fifth business day that you do not consent to such amendment. Upon effectiveness, the provisions of this Salomon Smith Barney Master AAU as so amended shall apply to each AAU thereafter entered into except as otherwise specifically provided in any such AAU.
12.6. Notices. Any notice to any Underwriter shall be deemed to have been duly given if mailed, sent by wire, telex, facsimile or electronic transmission or other written communication or delivered in person to such Underwriter at the address
which shall have been provided to Salomon Smith Barney as provided in Section 10.4 hereof. Any such notice shall take effect upon receipt thereof.
Please confirm your acceptance of this Salomon Smith Barney Master AAU by signing and returning to us the enclosed duplicate copy hereof.
Very truly yours,
Salomon Smith Barney Inc.
By:
Name:
Title:
CONFIRMED:_____________________1999
By:________________________________
Name:
Title:
(If person signing is not an officer or a partner,
please attach instrument of authorization)
Address:
Telephone:
Fax:
EXHIBIT A
June 1, 1999
SALOMON SMITH BARNEY INC.
UNDERWRITERS' QUESTIONNAIRE
In connection with each Offering covered by the Salomon Smith Barney Inc. Master Agreement Among Underwriters dated June 1, 1999, we confirm that except as set forth in a timely reply by us to the Invitation Wire:
(1) Neither we nor any of our directors, officers or partners have a material relationship (as "material" is defined in Regulation C under the 1933 Act) with the Issuer, the Guarantor or any Seller.
(2) (If the offer and sale of the Securities are to be registered under the 1933 Act pursuant to a Registration Statement on Form S-1 of Form F-1:) Neither we nor any "group" (as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of which we are a member is the beneficial owner (determined in accordance with Rule 13d-3 under the Exchange Act) of more than 5% of any class of voting securities of the Issuer or the Guarantor, nor do we have any knowledge that more than 5% of any class of voting securities of the Issuer or the Guarantor is held or to be held subject to any voting trust or other similar agreement.
(3) Other than as may be stated in the Salomon Smith Barney Master Agreement Among Underwriters dated June 1, 1999, the applicable AAU, the Intersyndicate Agreement or dealer agreement, if any, the Prospectus, the Registration Statement or the Offering Circular, we do not know and have no reason to believe that there is an intention to over-allot or that the price of any security may be stabilized to facilitate the offering of the Securities.
(4) Except as described in the Prospectus or Offering Circular, as the case may, be and the Invitation Wire, we do not know of any discounts or commissions to be allowed or paid to dealers, including all cash, securities, contracts or other consideration to be received by any dealer in connection with the sale of the securities.
(5) We have not prepared any report or memorandum for external use in connection with the Offering. (If there are any exceptions, (i) furnish four (4) copies of each report and memorandum to Salomon Smith Barney Inc., 388 Greenwich Street, New York, N.Y. 10013, Attention: Investment Banking Department/Transaction Structuring Group, (ii) identify each class of person who received such material and the number of copies distributed to each such class, and (iii) indicate when such distribution commenced and ceased.)
(6) (If the offer and sale of the Securities are to be registered under the 1933
Act pursuant to a Registration Statement on Form S-1 or Form F-1:) We have not within the past twelve months prepared or had prepared for us any engineering, management or similar report or memorandum relating to broad aspects of the business, operations or products of the Issuer or the Guarantor. (The immediately preceding sentence does not apply to reports solely comprised of recommendations to buy, sell or hold the Issuer's or the Guarantor's securities, unless such recommendations have changed within the past six months or to information already contained in documents filed with the Commission. If there are any exceptions, (i) furnish four (4) copies of each report and memorandum to Salomon Smith Barney Inc. 388 Greenwich Street, New York, N.Y. 10013, Attention: Investment Banking Department/Transaction Structuring Group, (ii) identify each class of persons who received such material and the number of copies distributed to each such class, and (iii) indicate when such distribution commenced and ceased.)
(7) We are not an "affiliate" of the Issuer or the Guarantor for purposes of Rule 2720 of the National Association of Securities Dealers, Inc.'s ("NASD") Conduct Rules. We understand that under Rule 2720 (except as provided in Rule 2720(b)(1)(C) thereof) two entities are "affiliates" of each other if one entity controls, is controlled by, or is under common control with, the second entity and that "control" is presumed to exist if one entity (or, in the case of an NASD member, the entity and all "persons associated with" it (as defined in the NASD By-Laws)) beneficially owns 10% or more of the second entity's outstanding voting securities or, if the second entity is a partnership, if the first entity has a partnership interest in 10% or more of the second entity's distributable profits or losses.
(8) (If the Securities are not investment grade debt securities or preferred stock, or equity securities for which there exists a "bona fide independent market" (as defined in Rule 2720(b)(3) of the NASD's Conduct Rules) or otherwise exempted under Rule 2720(b)(7)(D) of the NASD's Conduct Rules:) We do not have a "conflict of interest" with the Issuer or the Guarantor under Rule 2720 of the NASD's Conduct Rules. In that regard, we specifically confirm that we, our "parent" (as defined in Rule 2720), affiliates and "persons associated with" us (as defined in the NASD By-Laws), in the aggregate do not (i) beneficially own 10% or more of the Issuer's or the Guarantor's "common equity", "preferred equity", or "subordinated debt" (as each such term is defined in Rule 2720), or (ii) in the case of an Issuer or Guarantor which is a partnership, beneficially own a general, limited or special partnership interest in 10% or more of the Issuer's or Guarantor's distributable profits or losses.
(9) (If filing with the NASD is required:) Neither we nor any of our directors, officers, partners or "persons associated with" us (as defined in the NASD By-Laws) nor, to our knowledge, any "related person" (defined by the NASD to include counsel, financial consultants and advisors, finders, members of the selling or distribution group, any NASD member participating in the offering and any other persons associated with or related to and members of the immediate family of any of the foregoing) or any other broker-dealer, (a) within the last 12 months have purchased in private transactions, or intend before, at or within six months after the commencement of the public offering of the Securities to purchase in private transactions, any securities of the Issuer, the Guarantor or
any Issuer Related Party (as hereinafter defined), (b) within the last 12 months had any dealings with the Issuer, the Guarantor, any Seller or any subsidiary or controlling person thereof (other than relating to the proposed Underwriting Agreement) as to which documents or information are required to be filed with the NASD pursuant to its Corporate Financing Rule, or (c) during the 12 months immediately preceding the filing of the Registration Statement (or, if there is none, the Offering Circular), have entered into any arrangement which provided or provides for the receipt of any item of value (including, but not limited to, cash payments and expense reimbursements) and/or the transfer of any warrants, options or other securities from the Issuer, the Guarantor or any Issuer Related Party to us or any related person.
(10) (If filing with the NASD is required:) There is no association or
affiliation between us and (i) any officer or director of the Issuer,
the Guarantor or any Issuer Related Party, or (ii) any securityholder
of five percent or more (or, in the case of an initial public offering
of equity securities, any securityholder) of any class of securities of
the Issuer, the Guarantor or an Issuer Related Party; it being
understood that for purposes of paragraph (9) above and this paragraph
(10), the term "Issuer Related Party" includes any Seller, any
affiliate of the Issuer the Guarantor or a Seller and the officers or
general partners, directors, employees and securityholders thereof. (If
there are any exceptions, state the identity of the person with whom
the association or affiliation exists and, if relevant, the number of
equity securities or the face value of debt securities owned by such
person, the date such securities were acquired and the price paid for
such securities).
(11) (If the Securities are not issued by a real estate investment trust:) No portion of the net offering proceeds from the sale of the Securities will be paid to us or any of our affiliates or "persons associated with" us (as defined in the NASD By-Laws) or members of the immediate family of any such person.
(12) (If the Securities are debt securities and their offer and sale is to be registered under the 1933 Act:) We are not an affiliate (as defined in Rule 0-2 under the Trust Indenture Act of 1939) of the Trustee for the Securities or of its parent, if any. Neither the Trustee nor its parent, if any, nor any of their directors or executive officers is a "director, officer, partner, employee, appointee or representative" of ours (as those terms are defined in the Trust Indenture Act of 1939 or in the relevant instructions to Form T-1). We and our directors, partners, and executive officers, taken as a group, did not on the date specified in the Invitation Wire, and do not, own beneficially 1% or more of the shares of any class of voting securities of the Trustee or of its parent, if any. If we are a corporation, we do not have outstanding and have not assumed or guaranteed any securities issued otherwise than in our present corporate name.
(13) (If the Issuer is a public utility:) We are not a "holding company" or a "subsidiary company" or an "affiliate" of a "holding company" or of a "public-utility company", each as defined in the Public Utility Holding Company Act of 1935.
(14) If we are, or we are affiliated with, a U.S. or non-U.S. bank, we hereby represent that our participation in the offering of the Securities on the terms contemplated in the applicable AAU and the proposed Underwriting Agreement
does not contravene any U.S. or state banking law restricting the exercise of securities powers in the United States.
Capitalized terms used but not defined herein shall have the respective meanings given to them in the applicable AAU.
NUVEEN OPEN-END AND CLOSED-END FUNDS
DEFERRED COMPENSATION PLAN FOR
INDEPENDENT DIRECTORS AND TRUSTEES
The Board of each Participating Fund hereby establishes this Deferred Compensation Plan for Independent Directors and Trustees. The purpose of the Plan is to allow the independent directors and trustees of the Participating Funds to defer receipt of all, or a portion, of the compensation they earn for their service to the Participating Funds in lieu of receiving current payments of such compensation, and to treat any deferred amount as though an equivalent dollar amount had been invested in shares of one or more Eligible Funds. Each Board intends that the Plan shall be maintained at all times on an unfunded basis for federal income tax purposes under the Internal Revenue Code of 1986, as amended. The Plan is not covered by the Employee Retirement Income Security Act of 1974, as amended.
(a) "Administrator" shall mean Nuveen or such other person or persons as the Boards may from time to time designate, provided that no Eligible Participant may serve as Administrator.
(b) "Beneficiary" shall mean such person or persons designated pursuant to Section 4.4 hereof to receive benefits after the death of an Eligible Participant.
(c) "Board" shall mean the Board of Directors or the Board of Trustees of the respective Participating Funds.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, or any successor statute.
(e) "Compensation" shall mean the retainer and fees paid by Participating Funds to an Eligible Participant for a Deferral Period prior to reduction for Deferrals made under this Plan.
(f) "Deferral" shall mean the amount or amounts of an Eligible Participant's Compensation deferred under the provisions of Section 3 of this Plan.
(g) "Deferral Account" shall mean the account maintained to reflect an Eligible Participant's Deferrals made pursuant to Section 3 herein and any other credits or debits thereto.
(h) "Deferral Election" shall mean the Eligible Participant's election to defer his or her compensation under Plan Section 3.1(a).
(i) "Deferral Period" shall mean each calendar quarter during which an Eligible Participant makes, or is entitled to make, Deferrals under Section 3 hereof.
(j) "Eligible Fund" means an open-end fund managed by Nuveen and designated by the Boards as a fund that may be chosen by an Eligible Participant as a fund in which the Eligible Participant's Deferral Account may be deemed to be invested.
(k) "Eligible Participant" shall mean a member of a Board who is not an "interested person" of a Participating Fund or of Nuveen, as such term is defined under Section 2(a)(19) of the Investment Company Act of 1940, as amended ("1940 Act").
(l) "Hardship and Unforeseeable Emergency" shall mean a severe financial hardship to an Eligible Participant resulting from a sudden and unexpected illness or accident of the Eligible Participant or a dependent (within the meaning of Section 152(a) of the Code), of the Eligible Participant, loss of the Eligible Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances, arising from events beyond the Eligible Participant's control. Whether circumstances constitute a Hardship and Unforeseeable Emergency depends on the facts of each case, as determined by the Administrator, but in any case does not include a hardship that may be relieved:
(i) through reimbursement or compensation by insurance or otherwise;
(ii) by liquidation of the Eligible Participant's assets to the extent that liquidation itself would not cause such a severe financial hardship; or
(iii) by ceasing to defer receipt of any Compensation not yet earned.
The term "Hardship and Unforeseeable Emergency" shall have the same meaning as the term "unforeseeable emergency" as used in regulations issued under Section 457 of the Code, and shall be applied accordingly. The need to send an Eligible Participant's child to college and the desire to purchase a home shall not constitute a Hardship and Unforeseeable Emergency.
(n) "Net Asset Value" shall mean the per share value of an open-end fund, as determined as set forth in such fund's registration statement under the 1940 Act, governing instruments and otherwise in accordance with law.
(o) "Nuveen" shall mean The John Nuveen Company and its affiliates.
(p) "Participating Fund" shall mean an open-end or closed-end fund managed by Nuveen, whether existing at the time of adoption of the Plan or established at a later date, designated by its Board as a fund compensation from which may be deferred by an Eligible Participant. Participating Funds shall be listed on Exhibit A to the Plan, which shall be revised
from time to time by the Administrator, provided that failure to list a Participating Fund on Exhibit A shall not affect its status as a Participating Fund.
(q) "Plan" shall mean this Deferred Compensation Plan for Independent Directors and Trustees, as amended from time to time.
(r) "Separation from Service" shall mean the date on which an Eligible Participant ceases to be a member of a Board.
(s) "Valuation Date" shall mean the last business day of each calendar quarter and any other day upon which Nuveen makes a valuation of the Deferral Account.
(a) The date he cancels his election pursuant to Section 3.3(b);
(b) his Separation from Service; or
(c) the effective date of the termination of this Plan.
3.1 Deferral Elections.
(a) Subject to Section 3.1(d), an Eligible Participant participating in the Plan may elect to defer receipt of all, or a specified dollar amount or percentage of the Compensation (including fees for attending meetings) earned per quarter by such Eligible Participant for serving as a member of the Board of each Participating Fund or as a member of any committee (or subcommittee of such committee) of the Board of a Participating Fund of which such Eligible
Participant from time to time may be a member. Reimbursement of expenses of attending meetings of the Board, committees of the Board or subcommittees of such committees may not be deferred.
(b) Deferrals described in Section 3.1(a) above shall be withheld, based upon the percentage or dollar amount elected, from each payment of Compensation which the Eligible Participant would otherwise have been entitled but for his election in Section 3.1(a) below. If a dollar amount per quarter is elected, 100% of each payment of Compensation in each quarter will be deferred until such amount is reached.
(c) Each Participating Fund shall establish a book entry account ("Deferral Account") to which will be credited an amount equal to the Eligible Participant's Deferrals under this Plan. Any Compensation earned by an Eligible Participant which he has elected to defer pursuant to the Plan will be credited to such Eligible Participant's Deferral Account on the date such Compensation otherwise would have been payable to such Eligible Participant. The Deferral Account shall be debited to reflect any distributions from such Account. Such debits shall be allocated to the Deferral Account as of the date such distributions are made.
(d) Each amount that an Eligible Participant elects to defer shall be allocated among all Participating Funds for which the Eligible Participant serves as a director or trustee in the same proportion that the Eligible Participant's Compensation would have been allocated if it had not been deferred, and all subsequent earnings credited, and all distributions, losses and expenses charged, to the Eligible Participant's Deferral Account, shall be allocated among the Participating Funds in the same manner. The obligations of the Participating Funds to pay their respective allocated shares of an Eligible Participant's Deferral Account shall be several and not joint.
(a) Each Board shall from time to time designate one or more open-end funds managed by Nuveen as Eligible Funds. An Eligible Participant, on his deferral election form, shall have the right to select from the then-current list of Eligible Funds one or more, but not more than three, funds in which his Deferral Account shall be deemed invested as set forth in this Section 3 ("Designated Funds"). An Eligible Participant may designate an Eligible Fund even if he is not a member of the Board of that Eligible Fund. Except as provided below, amounts credited to an Eligible Participant's Deferral Account shall be treated as though such amounts had been invested and reinvested in shares of the Eligible Participant's Designated Funds, initially calculated as follows:
(i) the product of
(x) the amount of such Deferrals and
(y) the percentage of such Deferrals to be deemed invested in that Designated Fund, divided by
(ii) the Designated Fund's Net Asset Value per share as of the date such amount is so credited.
(b) As of the last day of each calendar year, by written election delivered to the Administrator not less than 10 business days prior to the end of such year, each Eligible Participant may direct that the Designated Funds in which his or her Deferral Account is deemed invested be changed. Any election to change such investment direction shall indicate the dollar amount or percentage of the balance in such Deferral Account (determined based on the then current Net Asset Value of each Designated Fund in which the Deferral Account is deemed invested immediately prior to giving effect to such investment change) to be invested in each such Designated Fund. The number of shares of each Designated Fund to be deemed held in the Eligible Participant's Deferral Account following such investment change shall be calculated as follows:
(i) the product of
(x) the balance in such Deferral Account and
(y) the percentage of such balance to be deemed invested in that Designated Fund divided by
(ii) the Designated Fund's Net Asset Value per share as of the last day of such calendar year.
(c) If a Designated Fund shall pay a stock dividend on, or split, combine, reclassify or substitute other securities by merger, consolidation or otherwise for its outstanding shares, the Eligible Participant's Deferral Account shall be adjusted as though shares of such Designated Fund were actually held by the Deferral Account in order to preserve rights substantially proportionate to the rights deemed held immediately prior to such event.
(d) On each payment date of dividends or capital gains distributions declared on shares of any Designated Fund in which an Eligible Participant's Deferral Account is deemed invested, the Deferral Account will be credited with book adjustments representing all dividends or capital gains distributions which would have been realized had such account been invested in shares of such Designated Fund and such dividend or capital gains distribution had been received and reinvested.
(e) The value of a Deferral Account on any Valuation Date shall be the sum of (i) the number of shares of each Designated Fund deemed to be held in the Deferral Account by the preceding paragraphs, multiplied by (ii) the Net Asset Value per share of such Designated Fund on the Valuation Date.
(f) On each date upon which a distribution of less than the entire balance is to be charged to an Eligible Participant's Deferral Account, the amount of such distribution shall, unless the Eligible Participant otherwise specifies in accordance with rules established by the Administrator, be allocated among all of the Designated Funds in which the Deferral Account is
deemed to be invested in proportion to the aggregate value of the number of deemed shares of each such Designated Fund, and the number of deemed shares of each such Designated Fund shall then be reduced by the portion of the distribution allocated to such Designated Fund divided by the Net Asset Value per share of such Designated Fund on the date on which the distribution is charged.
(g) Unless and until each Board otherwise determines, the Eligible Funds shall include only one or more open-end funds managed by Nuveen. Open-end funds that cease to be managed by Nuveen shall automatically cease to be Eligible Funds, unless one of the Boards otherwise determines with respect to Eligible Participants that are members of such Board. Either Board may at any time remove any open-end fund from the list of Eligible Funds, or may add any open-end fund (whether or not managed by Nuveen), for Eligible Participants who are members of that Board. If an Eligible Fund is removed from the list of Eligible Funds for any reason then no further deferrals shall be deemed invested in such Fund and, unless the Board otherwise determines, the Administrator shall give each Eligible Participant whose Deferral Account is deemed to be invested in such Eligible Fund a reasonable period to submit a new designation, and any Eligible Participant who fails to submit a new designation shall be subject to the provisions of Section 3.2(h)(iii) below.
(h) As of each Valuation Date, income, gain and loss equivalents
(determined as if the Deferral Account is invested in the manner set forth under
Section 3.2(a), above) attributable to the period following the next preceding
Valuation Date shall be credited to and/or deducted from the Eligible
Participant's Deferral Account. Except as provided below, the Eligible
Participant's Deferral Account shall receive a return in accordance with his
investment designations, provided such designations conform to the provisions of
this Section. If:
(i) the Eligible Participant does not furnish the Administrator with a written designation,
(ii) the written designation from the Eligible Participant is unclear, or
(iii) less than all of the Eligible Participant's Deferral Account is covered by such written designation,
then the Eligible Participant's Deferral Account shall receive no return until such time as the Eligible Participant shall provide the Administrator with instructions.
(a) An Eligible Participant shall elect to participate in this Plan and defer his Compensation by completing, signing and filing with the Administrator a Notice of Election to Defer Compensation (the "Notice") in the form attached to this Plan. The Notice shall include:
(i) the amount of Compensation to be deferred;
(ii) the time at which the distribution of such amount will commence, which may be:
(A) a specified date selected by the Participant not prior to the third anniversary of such election,
(B) the first day of the month, quarter or year following the Eligible Participant's Separation from Service, or
(C) the earlier of (A) or (B);
provided that the distribution of an Eligible Participant's Deferral Account shall in any event commence no later than the fifth anniversary of that Eligible Participant's Separation from Service.
(iii) the manner of distribution of such deferred compensation (i.e., in a lump sum or the number of annual or quarterly installments);
(iv) the Designated Fund or Designated Funds in which such deferrals are to be deemed invested and in what amounts or percentages; and
(v) any beneficiary designated pursuant to Section 4.4 of this Plan.
(b) All Deferral Elections shall remain in effect until the earliest of: (i) the date on which the Deferral Election is canceled or modified, (ii) the date of the Eligible Participant's Separation from Service, or (iii) the date on which the Eligible Participant begins to receive distributions from his or her Deferral Account. An Eligible Participant may modify the amount of his Deferral Election and/or the Designated Fund(s) specified in the Deferral Election, on a prospective basis by submitting an amended Notice to the Administrator. Such change will be effective as of the first day of the year following the date such revision is submitted to the Administrator. An Eligible Participant may cancel his Deferral Election on a prospective basis by submitting an amended Notice to the Administrator, which cancellation of the Deferral Election shall be effective for all Compensation for calendar quarters beginning or for meetings held after such notice is received, subject to any delay necessary for administrative processing. An Eligible Participant who cancels his Deferral Election may thereafter make a new Deferral Election as of the first day of any subsequent year pursuant to Section 3.3(a), but all new deferrals shall be credited to the same Deferral Account, and the time and manner of distribution of the Deferral Account, the manner in which the Deferral Election is deemed invested, and the identity of the Eligible Participant's Beneficiary, shall remain the same unless changed for the entire Deferral Account as otherwise provided herein.
Deferral Election has been cancelled, shall be filed with the Administrator no later than 10 business days prior to the last business day of the year preceding the year for which the modified or new Deferral Election is effective.
(a) lump sum; or
(b) annual or quarterly installments over a period of five (5) years, with each installment being equal to the balance in the Deferral Account immediately prior to payment of the installment divided by the number of installments remaining to be paid (including the installment the amount of which is being determined).
(c) If an Eligible Participant fails to designate the manner of distribution to apply to his Deferral Account, such Deferral Account shall be distributed in a lump sum on the first day of the month following the Eligible Participant's Separation from Service.
(d) An Eligible Participant may elect to change his distribution election with respect to his Deferral Account by filing an amended Notice with the Administrator not less than six months prior to the earlier of the date on which distribution was scheduled to begin under the original Notice or the date on which it is scheduled to begin under the amended Notice. The Eligible Participant's new distribution election shall be void and the Eligible Participant's original election shall be reinstated if the date on which distribution was originally scheduled to begin occurs (by reason of Separation from Service or otherwise) within six months after the date on which the changed distribution election was filed with the Administrator.
determine the extent, if any, to which such request is justified. Any such withdrawal shall be limited to an amount reasonably necessary to meet the Hardship and Unforeseeable Emergency, but not more than the amount of the Eligible Participant's Deferral Account.
(a) This Plan is unfunded. Neither an Eligible Participant nor any other person shall have any interest in any specific asset or assets of a Participating Fund by reason of any Deferral Account hereunder, nor any rights to receive distribution of his Deferral Account except and to the extent expressly provided hereunder. Except for money market funds complying with rule 2a-7 under the 1940 Act, a Participating Fund shall not be required to purchase, hold or dispose of any investments pursuant to this Plan. If in order to cover its obligations hereunder a Participating Fund purchases any investments, the same shall continue for all purposes to be a part of the general assets and property of that Participating Fund subject to the claims of its general creditors and no person other than the Participating Fund shall by virtue of the provisions of this Plan have any interest in such assets other than an interest as a general creditor of the Participating Fund.
(b) The rights of an Eligible Participant and the Beneficiaries to the amounts held in the Deferral Account are unsecured and such amounts shall be subject to the claims of the creditors of a Participating Fund. With respect to the payment of amounts held under the Deferral Account, the Eligible Participant and his Beneficiaries have the status of unsecured creditors of that Participating Fund. This Plan is executed on behalf of each Participating Fund by an officer of that Participating Fund as such and not individually. Any obligation of a Participating Fund hereunder shall be an unsecured obligation of that Participating Fund and not of any other person.
Account during such year. Such statements will be furnished no later than 60 days after the end of each calendar year.
(i) construe and interpret the Plan, and resolve any inconsistency or ambiguity with respect to any of its terms;
(ii) decide all questions of eligibility and determine the amount, manner and time of payment of any benefits hereunder;
(iii) prescribe rules and procedures to be followed by Eligible Participants or Beneficiaries in making any election or taking any action provided for herein, which rules and procedures may alter any provision of the Plan that is administrative or ministerial in nature without the necessity for an amendment;
(iv) allocate Deferral Accounts among the Eligible Funds;
(v) maintain all the necessary records for the administration of the
Plan;
(vi) delegate any of it duties or powers under the Plan to any other person acting under its supervision; and
(vii) do all other acts which the Administrator deems necessary or proper to accomplish and implement its responsibilities under the Plan.
Any rule or procedure adopted by the Administrator, or any decision, ruling or determination made by the Administrator, in good faith shall be final, binding and conclusive on all Participating Funds, Eligible Participants, Beneficiaries and all persons claiming through them. The authority of the Administrator may be exercised by such person as the Chief Executive Officer of the Administrator may designate or, in the absence of a specific designation, by those officers and employees of the Administrator whose normal duties include payment of compensation to independent directors and trustees.
IN WITNESS WHEREOF, each Participating Fund has caused this Plan to be executed by one of its duly authorized officers, this 30th day of October, 1998.
By: /s/ Alan G. Berkshire
---------------------
Name: Alan G. Berkshire
Title: Vice President
/s/ Karen L. Healy
-----------------------------------------
Witness
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EXPENSE REIMBURSEMENT AGREEMENT
AGREEMENT made this 1st day of August, 2002, by and between NUVEEN QUALITY PREFERRED INCOME FUND 2, a Massachusetts business trust (the "Fund"), and NUVEEN INSTITUTIONAL ADVISORY CORP., a Delaware corporation (the "Adviser").
WHEREAS, the Fund and the Adviser have separately entered into an Investment Management Agreement of even date herewith (the "Management Agreement"); and
WHEREAS, the Adviser in turn has entered into an Investment Sub-Advisory Agreement of even date herewith (the "Sub-Advisory Agreement") with Spectrum Asset Management, Inc. (the "Sub-Adviser");
NOW, THEREFORE, in consideration of the mutual covenants hereinafter contained, and in connection with the establishment and commencement of operations of the Fund, it is hereby agreed by and between the parties hereto as follows:
1. For the period from the commencement of the Fund's operations through September 30, 2002 and for the 12 month periods ending September 30 in each indicated year during the term of the Management Agreement (including any continuation done in accordance with Section 15(c) of the Investment Company Act of 1940), the Adviser agrees to reimburse expenses (including the management fee and other expenses) in the amounts determined by applying the following annual rates to the average daily net assets of the Fund:
Percentage Reimbursed (as a Percentage Reimbursed (as
Period Ending percentage of average daily net Period Ending a percentage of average
September 30 assets)(1) September 30 daily net assets)(1)
2002(2) .32%
2003 .32% 2008 .24%
2004 .32% 2009 .16%
2005 .32% 2010 .08%
2006 .32%
2007 .32%
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(1) Including net assets attributable to the Fund's Preferred Shares and the
principal amount of borrowings.
(2) From the commencement of operations.
The Fund understands that the Adviser and the Sub-Adviser have determined to effectively allocate the expense reimbursement obligation hereunder between themselves pursuant to a schedule set forth in the Sub-Advisory Agreement.
2. To effect the expense reimbursement provided for in this Agreement, the Fund may offset the appropriate amount of the reimbursement contemplated hereunder against the management fee payable under the Management Agreement.
3. This Agreement, and the Adviser's obligation to so reimburse expenses hereunder, shall terminate on the earlier of (a) September 30, 2010 or (b) termination of the Management Agreement.
4. Except as provided in paragraph 3, above, this Agreement may be terminated only by the vote of (a) the Board of Trustees of the Fund, including the vote of the members of the Board who are not "interested persons" within the meaning of the Investment Company Act of 1940, and (b) a majority of the outstanding voting securities of the Fund.
5. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule, or otherwise, the remainder shall not be thereby affected.
6. The Fund's Declaration of Trust is on file with the Secretary of the Commonwealth of Massachusetts. This Agreement is executed on behalf of the Fund by the Fund's officers as officers and not individually and the obligations imposed upon the Fund by this Agreement are not binding upon any of the Fund's Trustees, officers or shareholders individually but are binding only upon the assets and property of the Fund.
7. This Agreement shall be construed in accordance with applicable federal law and (except as to Section 6 hereof which shall be construed in accordance with the laws of Massachusetts) the laws of the State of Illinois.
IN WITNESS WHEREOF, the Fund and the Adviser have caused this Agreement to be executed on the day and year above written.
NUVEEN QUALITY PREFERRED INCOME FUND 2
by: /s/ Gifford R. Zimmerman
-----------------------------
Vice President
Attest: /s/ Virginia L. O'Neal
----------------------------
Assistant Secretary
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NUVEEN INSTITUTIONAL ADVISORY CORP.
by: /s/ William M. Fitzgerald
-----------------------------
Managing Director
Attest: /s/ Jessica R. Droeger
-----------------------------
Assistant Secretary
|
[LETTERHEAD OF BELL, BOYD & LLOYD LLC]
August 21, 2002
Nuveen Quality Preferred Income Fund 2
333 West Wacker Drive
Chicago, Illinois 60606
Ladies and Gentlemen:
Nuveen Quality Preferred Income Fund 2
We have acted as counsel for Nuveen Quality Preferred Income Fund 2 (the "Fund") in connection with the registration under the Securities Act of 1933 (the "Act") of certain of its common shares of beneficial interest (the "Shares") covered by registration statement no. 333-91678 on Form N-2, as it is proposed to be amended by pre-effective amendment no. 1 (as proposed to be amended, the "Registration Statement").
In this connection we have examined originals, or copies certified or otherwise identified to our satisfaction, of such documents, corporate and other records, certificates and other papers as we deemed it necessary to examine for the purpose of this opinion, including the agreement and declaration of trust and by-laws of the Fund, actions of the board of trustees of the Fund authorizing the issuance of shares of the Fund and the Registration Statement.
We assume that, upon sale of the Shares, the Fund will receive the authorized consideration therefor, which will at least equal the net asset value of the Shares.
Based upon the foregoing, we are of the opinion that when the Shares are issued and sold after the Registration Statement has been declared effective and the authorized consideration therefor is received by the Fund, they will be legally issued, fully paid and nonassessable by the Fund, except that, as set forth in the Registration Statement, shareholders of the Fund may under certain circumstances be held personally liable for obligations of the Fund.
In rendering the foregoing opinion, we have relied upon the opinion of Bingham McCutchen LLP expressed in their letter to us dated August 21, 2002.
We consent to the filing of this opinion as an exhibit to the Registration Statement. In giving this consent, we do not admit that we are in the category of persons whose consent is required under section 7 of the Act.
Very truly yours,
/s/ Bell, Boyd & Lloyd LLC |
[Letterhead of Bingham McCutchen LLP]
August 21, 2002
Bell, Boyd & Lloyd LLC
Three First National Plaza
Suite 3300
Chicago, Illinois 60602
Ladies and Gentlemen:
We have acted as special Massachusetts counsel to Nuveen Quality Preferred Income Fund 2, a Massachusetts business trust (the "Fund"), in connection with the Fund's Registration Statement on Form N-2 as such Registration Statement is proposed to be amended by Pre-Effective Amendment No. 1 to be filed with the Securities and Exchange Commission on or about August 21, 2002 (as proposed to be amended, the "Registration Statement"), with respect to certain of its Common Shares of Beneficial Interest, par value of $.01 per share (the "Shares"). You have requested that we deliver this opinion to you, as special counsel to the Fund, for use by you in connection with your opinion to the Fund with respect to the Shares.
In connection with the furnishing of this opinion, we have examined the following documents:
(a) a certificate of the Secretary of State of the Commonwealth of Massachusetts as to the existence of the Fund;
(b) a copy of the Fund's Declaration of Trust as filed with the Secretary of State of the Commonwealth of Massachusetts;
(c) a Certificate executed by Virginia L. O'Neal, an Assistant Secretary of the Fund, certifying as to, and attaching copies of, the Fund's Declaration of Trust and By-Laws, and certain resolutions adopted by the Trustee of the Fund; and
(d) a printer's proof in .pdf format received on August 21, 2002 of Pre-Effective Amendment No. 1.
In such examination, we have assumed the genuineness of all signatures, the
Bell, Boyd & Lloyd LLC
August 21, 2002
conformity to the originals of all of the documents reviewed by us as copies, the authenticity and completeness of all original documents reviewed by us in original or copy form and the legal competence of each individual executing any document. We have assumed that the Registration Statement, as filed with the Securities and Exchange Commission, will be in substantially the form of the printer's proof referred to in paragraph (d) above.
This opinion is based entirely on our review of the documents listed above and such investigation of law as we have deemed necessary or appropriate. We have made no other review or investigation of any kind whatsoever, and we have assumed, without independent inquiry, the accuracy of the information set forth in such documents. As to our opinion below relating to the due organization and existence of the Fund, our opinion relies entirely upon and is limited by the certificate referenced in paragraph (a) above.
This opinion is limited solely to the laws of the Commonwealth of Massachusetts as applied by courts located in such Commonwealth.
We understand that all of the foregoing assumptions and limitations are acceptable to you.
Based upon and subject to the foregoing, please be advised that it is our opinion that:
1. The Fund is duly organized and existing under the Fund's Declaration of Trust and the laws of the Commonwealth of Massachusetts as a voluntary association with transferable shares of beneficial interest commonly referred to as a "Massachusetts business trust."
2. The Shares, when issued and sold in accordance with the Fund's Declaration of Trust and By-Laws, will be legally issued, fully paid and non-assessable, except that, as indicated in the Registration Statement, shareholders of the Fund may under certain circumstances be held personally liable for its obligations.
Bell, Boyd & Lloyd LLC
August 21, 2002
We hereby consent to your reliance on this opinion in connection with your opinion to the Fund with respect to the Shares, to the reference to our name in the Registration Statement under the heading "Legal Opinions" and to the filing of this opinion as an exhibit to the Registration Statement.
Very truly yours,
/s/ BINGHAM MCCUTCHEN LLP |
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the Registration Statement (Form N-2) and related prospectus and statement of additional information of the Nuveen Quality Preferred Income Fund 2 filed with the Securities and Exchange Commission in the Pre-effective Amendment No. 1 to the Registration Statement under the Securities Act of 1933 (File No. 333-91678) and in this Amendment No. 1 to the Registration Statement under the Investment Company Act of 1940 (File No. 811-21137).
/s/ ERNST & YOUNG LLP
Chicago, Illinois
August 21, 2002
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NUVEEN MUTUAL FUNDS
NUVEEN EXCHANGE-TRADED FUNDS
NUVEEN DEFINED PORTFOLIOS
NUVEEN ADVISORY CORP.
NUVEEN INSTITUTIONAL ADVISORY CORP.
NUVEEN ASSET MANAGEMENT INC.
NUVEEN SENIOR LOAN ASSET MANAGEMENT INC.
NUVEEN INVESTMENTS
CODE OF ETHICS
AND
REPORTING REQUIREMENTS
In accordance with the rules and requirements of the Investment Company Act of 1940 and the Investment Advisers Act of 1940, Nuveen Investments, and each of its affiliated companies, has adopted this Code of Ethics and Reporting Requirements (the "Code") to guard against violations of the standards set forth in the above rules. In addition, the Code establishes guidelines for the conduct of persons who:
(1) may obtain material non-public information concerning securities held by or considered for purchase or sale by any series of Nuveen- sponsored registered managed funds (open-end and closed-end funds), Nuveen defined portfolios (unit investment trusts) and any managed accounts to which Nuveen Advisory Corp., Nuveen Asset Management Inc., Nuveen Institutional Advisory Corp., Nuveen Senior Loan Asset Management Inc. or Rittenhouse Financial Services, Inc. act as investment advisers; or
(2) may make any recommendation or participate in the determination of which recommendation shall be made concerning the purchase or sale of any securities by a Nuveen managed fund, defined portfolio or managed account. Persons subject to this Code are also subject to Nuveen's Policies and Procedures Designed to Prevent Insider Trading.
A. The Code establishes guidelines for Nuveen employees, officers, directors and members of their immediate families in the conduct of their personal investments and is designed to:
. forbid transactions that the Securities and Exchange Commission or other regulatory bodies would view as illegal, such as front-running;
. avoid situations where Nuveen employees, officers, directors or members of their immediate family, and any Nuveen managed fund, defined portfolio or managed account, had personally benefited, or appeared to benefit, at the expense of a managed fund, defined portfolio or managed account shareholder or client, or taken inappropriate advantage of their fiduciary positions; and
. prevent, as well as detect, the misuse of material, non-public information.
B. Employees, officers and directors should be aware that Nuveen's reputation could be adversely affected as the result of even a single transaction considered questionable in light of the fiduciary duties we owe to Nuveen's managed funds, defined portfolios and managed accounts. It bears emphasis that technical compliance with the Code's procedures will not automatically insulate from scrutiny transactions which show a pattern of abuse of the individual's fiduciary duties to a managed fund, defined portfolio or managed account. In addition, a violation of the general principles of the Code may subject an individual to sanctions.
II. Definitions
In addition, you are an Access Person if you are any of the following:
. A president, vice president or director of Nuveen Advisory Corp.,
Nuveen Institutional Advisory Corp., Nuveen Asset Management or Nuveen
Senior Loan Asset Management Inc.
. "Investment Personnel" or a "Portfolio Manager" as defined below.
(NOTE: A list of persons deemed to be Access Persons of the various entities subject to this Code is attached as Exhibit A)
1) Direct obligation of the Government of the United States or
of agencies of the U.S. Government that are backed by the
full faith and credit of the U.S. Government;
2) Bankers' acceptances, bank certificates of deposit,
commercial paper and high quality short-term debt
instruments, including repurchase agreements; and
3) Shares issued by open-end investment companies.
pecuniary interest means the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in the subject securities. (Rule 16a-1(a)(2) under the Securities Exchange Act of 1934)
The pecuniary interest standard looks beyond the record owner of securities. As a result, the definition of Beneficial Ownership is extremely broad and encompasses many situations that might not ordinarily be thought to confer a "pecuniary interest" in, or "ownership" of securities.
. your spouse or domestic partner;
. your child or other relative who shares your home or, although
not living in your home, is economically dependent upon you; or
. any other person if you obtain from such securities benefits
substantially similar to those of ownership.
Beneficial Ownership does not include:
- securities held in the portfolio of a registered investment company
solely by reason of an individual's ownership of shares or units of
such registered investment company;
- securities purchased via an automatic dividend reinvestment plan;
- securities purchased via a rights of accumulation plan;
- securities held by a pension or retirement plan holding securities
of an issuer whose employees generally are the beneficiaries of the
plan. However, your participation in a pension or retirement plan is
considered Beneficial Ownership of the portfolio securities if you
can withdraw and trade the securities without withdrawing from the
plan.
1. Any Covered Security which, within the most recent 15 days:
a) is or has been held by the managed fund, defined portfolio
or managed account; or
b) is being or has been considered by the managed fund,
defined portfolio or managed account; and
2. Any option to purchase or sell, and any security convertible into or exchangeable for, a Covered Security.
The trading prohibitions or restrictions listed in Section IV below of this Code shall not apply to the following transactions:
A. Nuveen open-end fund purchases or redemptions.
B. Purchases or redemptions of shares of investment companies from sponsors other than Nuveen.
C. Purchases or sales of direct obligations of the U.S. Government or Government agencies; bankers' acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements.
control over transactions in managed accounts they Beneficially Own unless they have certified otherwise in their Initial Holdings, Quarterly Transaction and Annual Holdings Reports.
E. Purchases or sales that are non-volitional on the part of either the individual involved or a managed fund or managed account client, for example, securities obtained through inheritance or gift.
F. Purchases which are part of an automatic dividend reinvestment plan or similar automatic periodic investment process or when issued pro rata to all holders of a class of securities, such as stock splits, stock dividends or the exercise of rights, warrants or tender offers. However, these transactions should be reported by Access Persons in their Quarterly Transaction and Annual Holdings reports once acknowledgement of the transaction is received.
G. Purchases or sales of equity securities issued by companies with an equity market capitalization of at least $1 billion, unless such securities appear on an applicable blackout list (Rittenhouse, Nuveen Senior Loan Asset Management, Defined Portfolios). However, these transactions should be reported by Access Persons in their Quarterly Transaction and Annual Holdings reports once acknowledgement of the transaction is received. Transactions in securities of The John Nuveen Company are NOT exempted transactions under this section.
NOTE: The fiduciary principles set forth in Section I apply to all of the above-described transactions.
IV. Prohibited or Restricted Purchases and Sales
1. Prohibition of purchases of IPOs. No employee may purchase any securities in an initial public offering (IPO) other than an offering of municipal securities or U.S. Government securities.
2. Pre-clearance of certain transactions. Unless previously pre-cleared in the manner described in Section VI below, no employee may purchase or sell the following securities for his or her own account or for any account in which he or she has any Beneficial Ownership:
(a) securities offered in a private placement; or
(b) securities of The John Nuveen Company.
In addition to the requirements set out in paragraph A above, Access Persons of the types specified in each paragraph are subject to the following additional requirements:
1. No Trades When A Managed Fund or Managed Account has Pending "Buy" or "Sell" Order.
No Portfolio Manager or Investment Personnel shall execute a securities transaction on a day during which a managed fund or managed account of a type identified on Exhibit A has a pending "buy" or "sell" order in that same security until that order is executed or withdrawn. No other Access Person shall execute a securities transaction on a day during which a managed fund or managed account has a pending "buy" or "sell" order in that same security until that order is executed or withdrawn, if that person knows, or reasonably should have known, an order is pending. The preceding two sentences do not apply to securities transactions involving a security held by a managed fund or managed account and invested and managed under a sub-advisory agreement unless the person has actual knowledge that the fund or account has a pending "buy" or "sell" order involving such security.
2. No Trades within Seven Days of Managed Fund or Managed Account Trades.
No Portfolio Manager or Investment Personnel of a managed fund or managed account may purchase or sell any security within seven calendar days before or after the managed fund or managed account of a type identified on Exhibit A for that individual trades or considers to purchase or sell such security. This prohibition does not apply to securities that are invested or managed under a sub-advisory agreement unless the person has actual knowledge that the fund or account has traded or is considering a trade involving such security.
3. No Trades in Securities on the Defined Portfolio Blackout List.
No Access Person for Defined Portfolios shall execute a securities transaction in any security contained on the blackout list for Defined Portfolios in effect from time to time. The blackout list for a portfolio will be issued approximately two weeks prior to the deposit date (or such later time the portfolio is set) and will remain in effect until seven days following the deposit date. A second
blackout list will be issued approximately two weeks prior to the termination date for a portfolio and will remain in effect until the close of business on the termination date.
4. Pre-clearance of Trades in Securities Identified as Eligible for Purchase.
Portfolio Managers and Investment Personnel of Nuveen managed funds and managed accounts must pre-clear, prior to purchase or sale, fixed-income and equity securities identified as eligible for purchase or sale for a fund or product for which they individually have some significant responsibility.
5. Profits on Purchases and Sales within 60 Days.
Portfolio Managers and Investment Personnel may not profit as a result of a purchase and sale, or sale and purchase, within a period of 60 calendar days, of the same (or equivalent) security, if such security is held by a managed fund or managed account for which they individually have some significant responsibility.
C. Section 16 Persons of Nuveen Exchange-Traded Funds
Those persons who, by reason of their position with a Nuveen-sponsored exchange-traded fund are subject to the provisions of Section 16 of the Securities Exchange Act of 1934, must pre-clear all trades in any exchange-traded fund for which they serve as a Section 16 officer or director.
D. Nuveen Senior Loan Asset Management Exchange-Traded Funds
Access persons of Nuveen Senior Loan Asset Management must pre-clear all trades in exchange-traded funds which are managed by Nuveen Senior Loan Asset Management.
E. Non-Interested Fund Directors
Nuveen employees should not accept any gift from any person or entity that does business with or on behalf of a managed fund, defined portfolio or managed account. For purposes of this prohibition, "gift" has the same meaning as that expressed in Rule 2830 of the National Association of Securities Dealers Conduct Rules. Therefore, a gift may not have a market value of more than $100. Employees are not prohibited from accepting non-cash compensation in the way of entertainment, including meals and tickets to cultural and sporting events within certain limits. Please refer to Nuveen's policies and procedures located on the Legal/Compliance website for more information concerning the receipt of cash and non-cash compensation.
Access Persons are prohibited from serving on boards of directors of publicly traded companies absent prior authorization from an attorney in the Legal Department based upon a determination that the board service would be consistent with the interests of defined portfolios, managed funds or managed accounts. Access Persons who receive authorization to serve as board members must be isolated through "Chinese Wall" procedures from those investment personnel making investment decisions regarding securities issued by the entity involved.
As noted in Section IV above, certain securities transactions require pre-clearance prior to purchase or sale, or prior to the placement or rescission of a self-executing order. The affected individual may obtain pre-clearance from the paralegal responsible for reviewing personal securities trading (currently, Ginny Johnson) or an attorney in the Legal Department. The
request for pre-clearance may be made orally or in writing. Requests for pre-clearance must include the following information:
. issue name;
. ticker symbol or CUSIP number;
. type of security (bond, stock, note, etc.);
. maximum expected dollar amount of proposed transaction;
. nature of the transaction (purchase, sale or self-executing order)
The paralegal or attorney reviewing the transaction will make note of the outcome in a written or electronic report. If authorization is granted, Legal will provide the individual with a written record in the form attached as Exhibit B. The affected individual will have three business days to execute an approved transaction at market, or to place or cancel a self-executing order. Failure to execute the approved transaction within three business days will require the person to re-submit their pre-clearance request as described above. The automatic execution of an order does not require additional pre-clearance.
Requests from employees for approval to purchase securities offered in a private placement must be submitted in writing to an attorney in the Legal Department prior to placing an order to purchase the securities. Unless specifically exempt under section III above, no such transaction may be effected without prior clearance. The attorney reviewing the transaction will take into account, among other factors, whether the investment opportunity should be reserved for a defined portfolio, managed fund or managed account and whether the opportunity is being offered to an individual by virtue of his or her position.
Employees and directors must pre-clear all market transactions in JNC stock with an attorney in the Legal Department. The following procedures also apply:
All employees must instruct their broker-dealer to send duplicate confirmations and copies of periodic statements (quarterly reports) of all securities transactions in their accounts, with the exception of those transactions exempt under Section III. A form of letter of instruction for broker-dealers to direct the duplicate confirmation is attached as Exhibit C, or may be obtained from the designated paralegal (currently, Ginny Johnson) in the Legal Department.
Please note that a "broker-dealer" includes both of the following:
A broker or dealer with whom a securities brokerage account is maintained in the employee's name; AND
A broker or dealer who maintains an account for a person whose trades an employee must report as a Beneficial Owner of the securities.
1. Initial Holdings Reports -
Each Access Person must provide an Initial Holdings Report to the Legal Department listing all securities Beneficially Owned by the Access Person no later than 10 days after he or she becomes an Access Person.
The Initial Holdings Report must include the following information:
. list of all securities accounts maintained with a broker,
dealer or bank;
. a list of all securities Beneficially Owned by the Access
Person with the exception of those exempt securities outlined
in Section III above;
. the number of shares held in each security; and
. the principal amount (dollar value of initial investment) of
each security Beneficially Owned.
A sample copy is attached as Exhibit D.
2. Quarterly Securities Transaction Reports -
Each Access Person is responsible for reporting to the Legal Department quarterly all securities purchased or sold in any account in which the Access Person has direct or indirect Beneficial Ownership. This quarterly reporting can be either in the form of broker, dealer or bank statements, or in the form of a Quarterly Securities Transaction Report, and must be received by the Legal Department within 10 days after the end of each calendar quarter. A form of Quarterly Transaction Report is sent to all Access Persons by the designated paralegal (currently, Ginny Johnson) in the Legal Department. If you are an Access Person and did not receive a Quarterly Transaction Report, it is your responsibility to obtain it from Legal. The Quarterly Transaction Report must contain the following information:
. the date of each transaction, the description and number of
shares, and the principal amount of each security involved;
. the nature of each transaction, that is, purchase, sale or any
other type of acquisition or disposition;
. the transaction price for each transaction; AND
. the name of the broker, dealer or bank through whom each
transaction was effected.
A sample copy is attached as Exhibit E.
3. Annual Holdings Reports -
In addition to the Initial Holdings Report and Quarterly Securities Transaction Reports, each Access Person is required to file an Annual Holdings Report with the Legal Department. Such reports must be filed within 30 days after December 31/st/.
The Annual Holdings Report must contain the following information:
. A list of all securities accounts maintained with a broker,
dealer or bank;
. a list of all securities Beneficially Owned by the Access
Person with the exception of those exempt securities described
in Section III above;
. the number of shares held in each security; and
. the principal amount (dollar value of initial investment) of
each security Beneficially Owned.
A sample copy is attached as Exhibit F.
Non-interested Directors of a Fund need only report a personal securities transaction if such Director, at the time of that transaction, knew that during the 15-day period immediately preceding or subsequent to the date of the transaction by the Director, such security was purchased or sold by a Fund or was being considered for purchase or sale by a Fund.
Non-interested Directors must report securities transactions meeting the requirements of the paragraph above within 10 days after the end of each calendar quarter. Such reports should be forwarded to the designated paralegal (currently, Ginny Johnson) in the Legal Department for review.
Nuveen employees may be subject to sanctions for violations of the specific provisions or the general principles provided by the Code. Violations will be reviewed and sanctions determined by the General Counsel and the Director of Compliance.
A. Sanctions which may be imposed include:
. formal warning;
. restriction of trading privileges;
. disgorgement of trading profits;
. fines; AND/OR
. suspension or termination of employment.
B. Sanction Factors:
The factors that may be considered when determining the appropriate sanctions include, but are not limited to:
. the harm to a Fund's or client's interest;
. the extent of unjust enrichment;
. the frequency of occurrence;
. the degree to which there is personal benefit from unique knowledge
. obtained through employment with a Fund, investment adviser or
underwriter;
. the degree of perception of a conflict of interest;
. evidence of fraud, violation of law, or reckless disregard of a
regulatory requirement; and/or
. the level of accurate, honest and timely cooperation from the
person subject to the Code.
As a condition of employment, all Access Persons will be asked to certify annually that they:
. have read and understood the Code;
. agree that they are legally bound by it;
. have complied and will comply with its requirements; and
. have reported all personal securities transactions required to be
disclosed.
A sample copy of the certification is attached as Exhibit G.
A. The Legal/Compliance Department shall review the reports, statements and confirms received and compare them with the pre-clearance authorization provided and report any trading or reporting violations to fund management.
B. Fund management, at least once a year, must provide the fund boards of directors with a written report that:
1) describes issues that arose during the previous year under the Code or procedures applicable to the Code, including, but not limited to, information about material Code or procedures violations and sanctions imposed in response to those material violations and
2) certifies to the fund boards of directors that the funds and their affiliated investment advisers and underwriters have adopted procedures reasonably necessary to prevent their employees from violating the Code.
C. This Code, a copy of employee and internal reports hereunder, and a list of all persons required to make reports hereunder shall be preserved with the records of the fund or investment adviser for the periods required by Rule 17j-1(f) of the Investment Company Act of 1940 or Rule 204-2 under the Investment Advisers Act of 1940.
May 2001
FUND ADVISER'S CODE OF ETHICS
OF
SPECTRUM ASSET MANAGEMENT, INC.
This Code of Ethics ("Code") is being adopted in compliance with the requirements of Sections 204A and 206 of the Investment Advisers Act of 1940 (the "Advisers Act") and Rule 204-2 thereunder and Section 17j of the Investment Company Act of 1940 (the "40 Act") and Rule 17j-1 thereunder, to effectuate the purposes and objectives of those provisions. Section 204A of the Advisers Act requires the establishment and enforcement of policies and procedures reasonably designed to prevent the misuse of material, nonpublic information by investment advisers. Rule 204-2 imposes recordkeeping requirements with respect to personal securities transactions of access persons (defined below). Section 206 of the Advisers Act ("Section 206") and Rule 17j-1 of the 40 Act ("Rule 17j-1") make it unlawful for certain persons, including Spectrum Asset Management, Inc. (the "Firm"):
(1) To employ a device, scheme or artifice to defraud any client or prospective client, or any portfolio of the Principal Investor's Fund (the "Fund") managed by the Firm;
(2) To engage in any transaction, practice or course of business which operates or would operate as a fraud or deceit upon any client or prospective client, or the Fund;
(3) Acting as principal for his own account, knowingly to sell any security to or purchase any security from a client, or acting as broker for a person other than such client, knowingly to effect any sale or purchase of any security for the account of such client, without disclosing to such client in writing before the completion of such transaction the capacity in which he is acting and obtaining the consent of the client to such transaction. The prohibitions of this paragraph (3) shall not apply to any transaction with a customer of a broker or dealer if such broker or dealer is not acting as an investment adviser in relation to such transaction;
(4) To engage in any act, practice, or course of business which is fraudulent, deceptive or manipulative; or
(5) To make to the Fund any untrue statement of a material fact or omit to state to the Fund a material fact necessary in order to make the statements made, in light of the circumstances in which they are made, not misleading.
This Code contains provisions reasonably necessary to prevent persons from engaging in acts in violation of the above standard and procedures reasonably necessary to prevent violations of the Code.
This Code of Ethics is adopted by the Board of Directors of the Firm. This
Code is based upon the principle that the directors and officers of the Firm,
and certain affiliated persons of the Firm, owe a fiduciary duty to, among
others, the client of the Firm and shareholders of the Fund to conduct their
affairs, including their personal securities transactions, in such manner to
avoid (i) serving their own personal interests ahead of clients or shareholders;
(ii) taking inappropriate advantage of their position with the Firm or the Fund;
and (iii) any actual or potential conflicts of
interest or any abuse of their position of trust and responsibility. This fiduciary duty includes the duty of the Compliance Officer of the Firm to report violations of this Code of Ethics to the Firm's Board of Directors and to the Fund's Compliance Officer.
The Firm forbids any officer, director or employee from trading, either personally or on behalf of others, including accounts managed by the Firm, on material nonpublic information or communicating material nonpublic information to others in violation of the law. This conduct is frequently referred to as "insider trading." The Firm's policy applies to every officer, director and employee and extends to activities within and outside their duties at the Firm. Any questions regarding the Firm's policy and procedures should be referred to the Firm's Compliance Officer.
The term "insider trading" is not defined in the federal securities laws, but generally is used to refer to the use of material nonpublic information to trade in securities (whether or not one is an "insider") or to communications of material nonpublic information to others.
While the law concerning insider trading is not static, it is generally understood that the law prohibits:
(1) trading by an insider, while in possession of material nonpublic information, or
(2) trading by a non-insider, while in possession of material nonpublic information, where the information either was disclosed to the non- insider in violation of an insider's duty to keep it confidential or was misappropriated, or was misappropriated, or
(3) communicating material nonpublic information to others.
The concept of "insider" is broad. It includes officers, directors and employees of a company. In addition, a person can be a "temporary insider" if he or she enters into a special confidential relationship in the conduct of a company's affairs and as a result is given access to information solely for the company's purposes. A temporary insider can include, among others, a company's attorneys, accountants, consultants, bank lending officers, and the employees of such organizations. In addition, the Firm may become a temporary insider of a company it advises or for which it performs other services. For that to occur, the company must expect the Firm to keep the disclosed nonpublic information confidential and the relationship must at least imply such a duty before the Firm will be considered an insider.
Trading on inside information is not a basis for liability unless the information is material. "Material information" generally is defined as information for which there is a substantial likelihood that a reasonable investor would consider it important in making his or her investment decisions, or information that is reasonably certain to have a substantial effect on the price of a company's securities. Information that officers, directors and employees should consider material includes, but is not limited to: dividend changes, earnings estimates, changes in previously released earnings estimates, significant merger or acquisition proposals or agreements, major litigation, liquidation problems, and extraordinary management developments.
Before trading for yourself or others in the securities of a company about which you may have potential inside information, ask yourself the following questions:
i. Is the information material? Is this information that an investor would consider important in making his or her investment decisions? Is this information that would substantially affect the market price of the securities if generally disclosed?
ii. Is the information nonpublic? To whom has this information been provided? Has the information been effectively communicated to the marketplace?
If, after consideration of the above, you believe that the information is material and nonpublic, or if you have questions as to whether the information is material and nonpublic, you should take the following steps.
i. Report the matter immediately to the Firm's Compliance Officer.
ii. Do not purchase or sell the securities on behalf of yourself or others.
iii. Do not communicate the information inside or outside the Firm, other than to the Firm's Compliance Officer.
iv. After the Firm's Compliance Officer has reviewed the issue, you will be instructed to continue the prohibitions against trading and communication, or you will be allowed to trade and communicate the information.
Information in your possession that you identify as material and nonpublic may not be communicated to anyone, including persons within the Firm, except as provided above. In addition, care should be taken so that such information is secure. For example, files containing material nonpublic information should be sealed; access to computer files containing material nonpublic information should be restricted.
The role of the Firm's Compliance Officer is critical to the implementation and maintenance of the Firm's policy and procedures against insider trading. The Firm's Supervisory Procedures can be divided into two classifications -- prevention of insider trading and detection of insider trading.
To prevent insider trading, the Firm will;
i. provide, on a regular basis, an educational program to familiarize officers, directors and employees with the Firm's policy and procedures, and
ii. when it has been determined that an officer, director or employee of the Firm has material nonpublic information,
1. implement measures to prevent dissemination of such information, and
2. if necessary, restrict officers, directors and employees from trading the securities.
To detect insider trading, the Firm's Compliance Officer will:
i. review the trading activity reports filed by each officer, director and employee, and
ii. review the trading activity of accounts managed by the Firm.
a. "Access person" means any director, officer, general partner or advisory person of the Firm.
b. "Advisory person" means (a) any employee of the Firm who, in connection with his regular functions or duties, normally makes, participates in, or obtains current information regarding the purchase or sale of a security by the Firm or the Fund, or whose functions relate to the making of any recommendations with respect to such purchases or sales; and (b) any natural person in a control relationship to the Firm who obtains information concerning recommendations made to the Firm or the Fund with regard to the purchase or sale of a security by the Firm or the Fund.
c. "Affiliated company" means a company with an affiliated person.
d. "Affiliate person" of another person means (a) any person directly
or indirectly owning, controlling, or holding with power to vote,
5 per centum or more of the outstanding voting securities or such
other person; (b) any person 5 per centum or more of whose
outstanding voting securities are directly or indirectly owned,
controlled or held with power to vote, by such other person; (c)
any person directly or indirectly controlling, controlled by, or
under common control with, such other person; (d) any officer,
director, partner, copartner, or employee of such other person;
(e) if such other person is an investment company, any investment
adviser thereof or any member of an advisor board thereof; and (f)
if such other person is an unincorporated investment company not
having a board of directors, the depositor thereof.
e. A security is "being considered for purchase or sale" or is "being purchased or sold" when a recommendation to purchase or sell the security has been made and communicated, which includes when the Firm or the Fund has a pending "buy" or "sell" order with respect to a security, and, with respect to the person making the recommendation, when such person seriously considers making such a recommendation. "Purchase or sale of a security" includes the writing of an option to purchase or sell a security.
f. "Beneficial ownership" shall be as defined in, and interpreted in the same manner as it would be in determining whether a person is subject to the provisions of Section 16 or the Securities Exchange Act of 1934 and the rules and regulations thereunder which, generally speaking, encompasses those situations where the beneficial owner has the right to enjoy some economic benefit from the ownership of the security. A person is normally regarded as the beneficial owner of securities held in the name of his or her spouse or minor children living in his or her household.
g. "Control" means the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of an official position with such company. Any person who owns beneficially, either directly or through one or more controlled companies, more than 25 per centum of the voting securities of a company shall be presumed to control such company. Any person who does not so own more than 25 per centum of the voting securities of any company shall be presumed not to control such company. A natural person shall be presumed not to be a controlled person.
h. "Investment Personnel" means (a) any portfolio manager of the Firm or the Fund as defined in (10) below; and (b) securities analysts, traders and other personnel who provide information and advice to the portfolio manager or who help execute the portfolio manager's decisions.
i. "Person" means any natural person or a company.
j. "Portfolio Manager" means an employee of the Firm entrusted with the direct responsibility and authority to make investment decisions.
k. "Security" means any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a "security," or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of; or warrant or right to subscribe to or purchase, any of the foregoing. Security shall not include securities issued by the government of the United States or by federal agencies and which are direct obligations of the United States, bankers' acceptances, bank certificates of deposit, commercial paper and shares of unaffiliated registered open-end investment companies (mutual funds).
A. Access persons
a. No access person shall engage in any act, practice or
course of conduct, which would violate the provisions of
Section 206 and Rule 17j-1.
b. No access person shall:
i. purchase or sell, directly or indirectly, any security in which he has or by reason of such transaction acquires, any direct or indirect beneficial ownership and which to his or her actual knowledge at the time of such purchase or sale:
1. is being considered for purchase or sale by the Firm or
the Fund, or
2. is being purchased or sold by any portfolio of the Firm or the Fund; or
ii. disclose to other persons the securities activities engaged in or contemplated for the various portfolios of the Firm or the Fund.
B. Investment Personnel
i. No investment personnel shall:
a. accept any gift or other thing of more than de minimis value from any person or entity that does business with or on behalf of the Firm or the Fund; for the purpose of this Code de minimis shall be considered to be the annual receipt of gifts from the same source valued at $250 or less per individual recipient, when the gifts are in relation to the conduct of the Firm's business;
b. acquire securities, other than fixed income securities, in an initial public offering, in order to preclude any possibility of such persons profiting from their positions with the Firm;
c. purchase any securities in a private placement, without prior approval of the Firm's Compliance Officer, or other officer designated by the Board of Directors. Any person authorized to purchase securities in a private placement shall disclose that investment when they play a part in any subsequent consideration by the Firm or Fund of an investment in the issuer. In such circumstances, the Firm's or the Fund's decision to purchase securities of the issuer shall be subject to independent review by investment personnel with no personal interest in the issuer.
d. profit in the purchase and sale, or sale and purchase, of the same (or equivalent) securities within sixty (60) calendar days. Trades made in violation of this prohibition should be unwound, if possible. Otherwise, any profits realized on such short-term trades shall be subject to disgorgement to the appropriate portfolio of the Firm.
Exceptions: The Firm's management, upon the advice of counsel, may allow exceptions to this policy on a case-by-case basis when the abusive practices that the policy is designed to prevent, such as front running or conflicts of interest, are not present and the equity of the situation strongly supports and exemption. An example is the involuntary sale of securities due to unforeseen corporate activity such as a merger. The ban on short-term trading profits is specifically designed to deter potential conflicts of interest and front-running transactions, which typically involve a quick trading pattern to capitalize on a short-lived market impact of a trade by one of the Firm's client portfolios. The Firm's management shall consider the policy reasons for the ban on short-term trades, as stated herein, in determining when an exception to the prohibition is permissible. The granting of an exception to this prohibition shall be permissible if the securities involved in the transaction are not (i) being considered for purchase or sale by the portfolio of
the Firm that serves as the basis of the individual's "investment personnel" status or (ii) being purchased or sold by the portfolio of the Firm that serves as the basis of the individual's "investment personnel" status and, are not economically related to such securities; exceptions granted under this provision are conditioned upon receipt by a duly authorized officer of the Firm of a report of the transaction and certification by the respective investment personnel that the transaction is in compliance with this Code of Ethics (see Exhibit D).
e. serve on the board of directors of any publicly traded company without prior authorization of the President or other duly authorized officer of the Firm or the Fund. Any such authorization shall be based upon a determination that the board service would be consistent with the interests of the Firm's clients and the Fund's shareholders. Authorization of board service shall be subject to the implementation by the Firm of "Chinese Wall" or other procedures to isolate such investment personnel from the investment personnel making decisions about trading in that company's securities.
C. Portfolio Managers
a. No portfolio manager shall:
i. buy or sell a security within seven (7) calendar days before and within seven (7) calendar days after any portfolio of the Firm trades in that security. Any trades made within the proscribed period shall be unwound, if possible. Otherwise, any profits realized on trades within the proscribed period shall be disgorged to the appropriate client portfolio(s).
The prohibitions of Sections B shall not apply to:
a. purchase or sales effected in any account over which the access person has no direct or indirect influence or control;
b. purchases or sales which are non-volitional on the part of either the access person or the Firm;
c. purchases which are part of an automatic dividend reinvestment plan;
d. purchases effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of its securities, to the extent such rights were acquired from such issuer, and sales of such rights to acquired;
e. purchases or sales of securities which are not eligible for purchase by the Firm or the Fund and which are not related economically to securities purchased, sold or held by the Firm or the Fund;
f. transactions which appear upon reasonable inquiry and investigation to present no reasonable likelihood of harm to the clients and which are otherwise in
accordance with this Code and Section 206 and Rule 17j-1; For example, such transactions would normally include purchases or sales of:
a. securities contained in the Standard and Poor's 100 Composite Stock Index;
b. within any three-consecutive month period, up to $25,000 principal amount of a fixed income security or 100 shares of an equity security (all trades within a three-consecutive month period shall be integrated to determine the availability of this exemption);
c. up to 1,000 shares of a security which is being considered for purchase or sale by a client portfolio or the Fund (but not then being purchased or sold) if the issuer has a market capitalization of over $1 billion, and if the proposed acquisition or disposition by the Firm is less than one percent of the class outstanding as shown by the most recent report or statement published by the issuer, or less than one percent of the average weekly reported volume of trading in such securities on all national securities exchanges and/or reported through the automated quotation system of a registered securities association, during the four calendar weeks prior to the individual's personal securities transaction; or
d. any amount of securities if the proposed acquisition or disposition by the Firm or the Fund is in the amount of 1,000 or less shares and the security listed on a national securities exchange or the national Association of Securities Dealers Automated Quotation System.
a. Pre-clearance
All access persons shall receive prior written approval from the Firm's Compliance Officer, or other officer designated by the Board of Directors before purchasing or selling securities.
Purchase or sales by access persons who are employees of Principal Investor's Fund are not subject to the pre-clearance procedures set forth herein, provided that such persons are required to pre-clear proposed transactions in securities pursuant to a Code of Ethics.
Purchases or sales of securities which are not eligible for purchase or sale by the Firm or any portfolio of the Firm that serves as the basis of the individual's "access persons" status shall be entitled to clearance automatically from the Firm's Compliance Officer. This provision shall not relieve any access person from compliance with pre-clearance procedures.
b. Disclosure of Personal Holdings
All investment personnel shall disclose to the Firm's Compliance Officer all personal securities holdings within ten (10) days of their appointment as an Access Person and thereafter on an annual basis as of December 31. This initial report shall be made on the form attached as Exhibit A and shall be delivered, upon request, to the Firm's Compliance Officer, and, upon request, the Fund's Compliance Officer.
c. Certification of Compliance with Code of Ethics
a. Every access person shall certify annually that:
i. they have read and understand the Code of Ethics and recognize that they are subject thereto;
ii. they have complied with the requirements of the Code of Ethics; and;
iii. they have reported all personal securities transactions required to be reported pursuant to the requirements of the Code of Ethics.
The annual report shall be made on the form attached as Exhibit B and delivered to the Compliance Officers of the Firm and the Fund.
d. Reporting Requirements
a. Every access person shall report to the Compliance Officers of
the Firm and the Fund the information described in, Subparagraph
(4)(b) of this Section with respect to transactions in any
security in which such person has, or by reason of such
transaction acquires, any direct or indirect beneficial ownership
in the security; provided, however, that an access person shall
not be required to make a report with respect to transactions
effected for any account over which such person does not have any
direct or indirect influence.
b. Reports required shall be made not later than 10 days after the end of the calendar quarter in which the transaction to which the report relates was effected.
Every access person shall be required to submit a report for all periods, including those periods in which no securities transactions were effected. A report shall be made on the form attached hereto as Exhibit C or on any other form containing the following information:
i. the date of the transaction, the title and the number of shares, and the principal amount of each security involved;
ii. the nature of the transactions (i.e., purchase, sale or any other type of acquisition or disposition);
iii. the price at which the transaction was effected; and
iv. the name of the broker, dealer or bank with or through whom the transaction was effected.
Duplicate copies of the broker confirmation of all personal transactions and copies of periodic statements for all securities accounts may be appended to Exhibit C to fulfill the reporting requirement.
c. Any such report may contain a statement that the report shall not be construed as an admission by the person making such report that he or she has any direct or indirect beneficial ownership in the security to which the report relates.
d. The Compliance Officer of the Firm shall notify each access person that he or she is subject to these reporting requirements, and shall deliver a copy of this Code of Ethics to each such person upon request.
e. Reports submitted to the Compliance Officers of the Firm/Fund pursuant to this Code of Ethics shall be confidential and shall be provided only to the officers and directors of the Firm/Fund, Firm/Fund counsel or regulatory authorities upon appropriate request.
e. Conflict of Interest
Every access person shall notify the Compliance Officers of the Firm and the Fund of any personal conflict of interest relationship which may involve the Firm's clients (including the Fund), such as the existence of any economic relationship between their transactions and securities held or to be acquired by any portfolio of the Firm. Such notification shall occur in the pre-clearance process.
a. The Firm's Compliance Officer shall promptly report to the Board of Directors and to the Fund's Compliance Officer all apparent violations of this Code of Ethics and the reporting requirements thereunder.
b. When the Firm's Compliance Officer finds that a transaction otherwise
reportable to the Board of Directors under Paragraph (1) of this
Section could not reasonably be found to have resulted in a fraud,
deceit or manipulative practice in violation of Section 206 or Rule
17j-1, he may, in his discretion, lodge a written memorandum of such
finding and the reasons therefore with the reports made pursuant to
this Code of Ethics, in lieu of reporting the transaction to the Board
of Directors.
c. The Board of Directors, or a Committee of Directors created by the Board of Directors for that purpose, shall consider reports made to the Board of Directors hereunder and shall determine whether or not this Code of Ethics has been violated and what sanctions, if any, should be imposed.
a. Annually, those individuals charged with the responsibility for carrying out this Code shall prepare a written report to the Boards of Directors of Principal Management and of the Funds that, at a minimum, will include:
(1) A certification that Spectrum Asset Management, Inc. has adopted procedures reasonably necessary to prevent Access Persons from violating the Code;
(2) Identification of material violations and sanctions imposed in response to those violations during the past year;
(3) A description of issues that arose during the previous year under the Code; and
(4) Recommendations, if any, as to changes in existing restrictions or procedures based on experience with this Code, evolving industry practices or developments in applicable laws or regulations.
The Fund's Compliance Officer will prepare a similar report for the Fund's Board of Directors.
Upon discovering a violation of this Code, the Board of Directors may impose such sanctions as they deem appropriate, including, among other things, a letter of censure or suspension or termination of the employment of the violator.
This Code of Ethics, a list of all persons required to make reports hereunder from time to time, as shall be updated by the Firm's Compliance Officer, a copy of each report made by an access person hereunder, each memorandum made by the Firm's Compliance Officer hereunder and a record of any violation hereof and any action taken as a result of such violation, shall be maintained by the Firm.
Date: _______________________ , 2001.
(Exhibit A)
SPECTRUM ASSET MANAGEMENT, INC.
CODE OF ETHICS
INITIAL REPORT OF INVESTMENT PERSONNEL
To the Compliance Officer of Spectrum Asset Management, Inc. (the "Firm") on behalf of ss Inc. (the "Fund"):
a. I hereby acknowledge receipt of a copy of the Code of Ethics for the Firm.
b. I have read and understand the Code and recognize that I am subject thereto in the capacity of "Investment Personnel."
c. Except as noted below, I hereby certify that I have no knowledge of the existence of any personal conflict of interest relationship which may involve the Firm or the Fund, such as any economic relationship between my transactions and securities held or to be acquired by the Firm or any of its portfolios, including the Fund.
d. As of the date below, I had a direct or indirect beneficial ownership in the following securities:
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Type of Interest
Name of Securities Number of Shares (Direct or Indirect)
-------------------------- ------------------------- ---------------------------
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NOTE: Do not report transactions in U.S. Government securities, bankers' acceptances, bank certificates of deposit, commercial paper and unaffiliated registered open-end investment companies (mutual fund).
Date: __________________________ Signature: ________________________________
(First date of investment
personnel status) Print Name: ______________________________
Title: ____________________________________
|
Employers Name: Spectrum Asset Management, Inc.
Date: _________________________ Signature: ______________________________ Firm's Compliance Officer
(Exhibit B)
SPECTRUM ASSET MANAGEMENT, INC.
CODE OF ETHICS
ANNUAL REPORT OF ACCESS PERSONS
To the Compliance Officer of Spectrum Asset Management, Inc. (the "Firm") and The Principal Investor's Fund. (the "Fund"):
a. I have read and understand the Code and recognize that I am subject thereto in the capacity of an "Access Person."
b. I hereby certify that, during the year ended December 31, 200__, I have complied with the requirements of the Code and I have reported all securities transactions required to be reported pursuant to the Code.
c. I hereby certify that I have not disclosed pending "buy" or "sell" orders for a portfolio of the Firm or the Fund to any employees of any other Principal Investor's Fund affiliate, except where the disclosure occurred subsequent to the execution or withdrawal of an order.
d. Except as noted below, I hereby certify that I have no knowledge of the existence of any personal conflict of interest relationship which may involve the Firm or Fund, such as any economic relationship between my transactions and securities held or to be acquired by the Firm or any of its portfolios, including the Fund.
e. Only access persons who are also investment personnel complete this item. As of December 31, 200__, I had a direct or indirect beneficial ownership in the following securities:
--------------------------------------------------------------------------------
Name of Securities Number of Shares Type of Interest
(Direct or Indirect)
-------------------------- ------------------------ ----------------------------
-------------------------- ------------------------ ----------------------------
-------------------------- ------------------------ ----------------------------
-------------------------- ------------------------ ----------------------------
-------------------------- ------------------------ ----------------------------
-------------------------- ------------------------ ----------------------------
-------------------------- ------------------------ ----------------------------
-------------------------- ------------------------ ----------------------------
-------------------------- ------------------------ ----------------------------
-------------------------- ------------------------ ----------------------------
-------------------------- ------------------------ ----------------------------
-------------------------- ------------------------ ----------------------------
---------------------------------------- ---------------------------------------
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Note: Do not report transactions in U.S. Government securities, bankers' acceptances, bank certificates of deposit, commercial paper and unaffiliated registered open-end investment companies (mutual fund).
Date: ____________________ Signature: __________________________________
Print Name: _________________________________
Title: ______________________________________
|
Employer's Name: Spectrum Asset Management, Inc.
Date: _____________________ Signature: __________________________________ Firm's Compliance Officer
(Exhibit C)
SPECTRUM ASSET MANAGEMENT, INC.
ACCESS PERSONS
Securities Transactions Report For the Calendar Quarter Ended: ___________
To the Compliance Officer of Spectrum Asset Manager, Inc. (the "Firm") (with a copy to the Compliance Officer of Principal Investor's Fund, Inc. (the "Fund"):
During the quarter referred to above, the following transactions were effected in securities of which I had, or by reason of such transaction acquired, direct or indirect beneficial ownership, and which are required to be reported pursuant to the Code of Ethics adopted by the Firm.
---------------------------------------------------------------------------------------------------------------------
Nature of Broker/Dealer
Dollar Transaction or Bank
Date of Number of Amt. of (Purchase, Through Whom
Security Transaction Shares Transaction Sale, Other) Other Effected
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This report (i) excludes transactions with respect to which I had no direct or indirect influence or control, (ii) excludes other transactions not required to be reported, and (iii) is not an admission that I have or had any direct or indirect beneficial ownership in the securities listed above.
Except as noted on the reverse side of this report, I hereby certify that I have no knowledge of the existence of any personal conflict of interest relationship which may involve the Firm and the Fund, such as the existence of any economic relationship between my transactions and securities held or to be acquired by Firm clients or any related portfolios, including the Fund.
Note: Do not report transactions in U.S. Government securities, bankers' acceptances, bank certificates of deposit, commercial paper and unaffiliated registered open-end investment companies (mutual funds).
Date: _________________________ Signature: ______________________________
Print Name: _____________________________
Title: ___________________________________
|
Employer's Name: Spectrum Asset Management, Inc.
Date: _________________________ Signature: _______________________________
Firm's Compliance Officer
|
(Exhibit D)
SPECTRUM ASSET MANAGEMENT, INC.
INVESTMENT PERSONNEL
Securities Transactions Report Relating to Short-Term Trading
(See Section Code of Ethics)
For the Sixty-Day Period from __________ to __________ :
To the Compliance Officer of Spectrum Asset Management, Inc. (the "Firm") on behalf of Principal Investor's Fund, Inc. ("the Fund").
During the 60 calendar day period referred to above, the following purchases and sales, or sales and purchases, of the same (or equivalent) securities were effected or are proposed to be effected in securities of which I have, or by reason of such transaction acquired, direct or indirect beneficial ownership.
---------------------------------------------------------------------------------------------------------------------
Nature of Broker/Dealer
Dollar Transaction Price (or or Bank
Date of No. of Amount of (Purchase, Proposed Through Whom
Security Transaction Shares Transaction Sale, Other) Price) Effected
----------------- ---------------- ------------ --------------- ----------------- -------------- ---------------------
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This report (i) excludes transactions with respect to which I have or had no direct or indirect influence or control, (ii) excludes other transactions not required to be reported, and (iii) is not an admission that I have or had any direct or indirect beneficial ownership in the securities listed above.
With respect to the (1) portfolio of the Firm that serves as the basis for my "investment personnel" status with the Firm (the "Portfolio"); and (2) transactions in the securities set forth in the table above, I hereby certify that:
(a) I have no knowledge of the existence of any personal conflict of interest relationship which may involve the Portfolio, such as frontrunning transactions or the existence of any economic relationship between my transaction and securities held or to be acquired by the Portfolio:
(b) such securities, including securities that are economically
related to such securities, involved in the transaction are not
(i) being considered for purchase or sale by Firm Clients,
including the Fund, or (ii) being purchased or sold by Firm
clients; and
(c) are in compliance with the Code of Ethics of the Firm.
Date: __________________________ Signature: _____________________________
Print Name: ____________________________
Title: __________________________________
|
Employer's Name: Spectrum Asset Management, Inc.
In accordance with the provisions of the Code of Ethics of the Firm, the transaction proposed to be effected as set forth in this Report is:
Authorized ___
Unauthorized ___
Date: __________________________ Signature: ______________________________ Compliance Officer
(Exhibit E)
SPECTRUM ASSET MANAGEMENT, INC.
ACCESS PERSONS
Personal Securities Transactions Pre-clearance Form
(See Code of Ethics)
To the Compliance Officer of Spectrum Asset Management, Inc. (the "Firm"):
I hereby request pre-clearance of the following proposed transactions:
---------------------------------------------------------------------------------------------------------------------
Nature of Broker/Dealer
Transaction Or Bank Authorized
Dollar (Purchase, Price (or Through
No. of Amount of Sale, Proposed Whom Yes No
Security Shares Transaction Other) Price) Effected
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Signature: _________________________ Date: ___________________________
Print Name: _______________________
Employer: Spectrum Asset Management, Inc.
Signature: __________________________ Date: ___________________________
Firm's Compliance Officer
|
NUVEEN QUALITY PREFERRED INCOME FUND 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of the
above-referenced organizations, hereby constitutes and appoints JESSICA R.
DROEGER, LARRY W. MARTIN, GIFFORD R. ZIMMERMAN and ERIC F. FESS, and each of
them (with full power to each of them to act alone) his true and lawful
attorney-in-fact and agent, for him on his behalf and in Registration Statements
on Form N-2 under the Securities Act of l933 and the Investment Company Act of
l940, including any amendment or amendments thereto, with all exhibits, and any
and all other documents required to be filed with any regulatory authority,
federal or state, relating to the registration thereof, or the issuance of
shares thereof, without limitation, granting unto said attorneys, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same as fully to all intents and purposes as he might or could do
if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned trustee of the above-referenced organizations has hereunto set his hand this 25th day of June, 2002.
/s/ Timothy R. Schwertfeger ------------------------------- Timothy R. Schwertfeger |
STATE OF ILLINOIS )
----------------
)SS
COUNTY OF COOK )
--------------
|
On this 25th day of June, 2002, personally appeared before me, a Notary Public in and for said County and State, the person named above who is known to me to be the person whose name and signature is affixed to the foregoing Power of Attorney and who acknowledged the same to be his voluntary act and deed for the intent and purposes therein set forth.
"OFFICIAL SEAL"
Virginia L. Corcoran /s/Virginia L. Corcoran Notary Public, State of Illinois ----------------------- My Commission Expires: 10/27/05 Notary Public |
NUVEEN QUALITY PREFERRED INCOME FUND 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of the
above-referenced organizations, hereby constitutes and appoints TIMOTHY R.
SCHWERTFEGER, JESSICA R. DROEGER, LARRY W. MARTIN, GIFFORD R. ZIMMERMAN and ERIC
F. FESS, and each of them (with full power to each of them to act alone) his
true and lawful attorney-in-fact and agent, for him on his behalf and in his
name, place and stead, in any and all capacities, to sign and file one or more
Registration Statements on Form N-2 under the Securities Act of l933 and the
Investment Company Act of l940, including any amendment or amendments thereto,
with all exhibits, and any and all other documents required to be filed with any
regulatory authority, federal or state, relating to the registration thereof, or
the issuance of shares thereof, without limitation, granting unto said
attorneys, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises
in order to effectuate the same as fully to all intents and purposes as he might
or could do if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned trustee of the above-referenced organizations has hereunto set his hand this 31st day of July, 2002.
/s/ James E. Bacon --------------------------------- James E. Bacon |
STATE OF ILLINOIS )
----------------
)SS
COUNTY OF COOK )
--------------
|
On this 31st day of July, 2002, personally appeared before me, a Notary Public in and for said County and State, the person named above who is known to me to be the person whose name and signature is affixed to the foregoing Power of Attorney and who acknowledged the same to be his voluntary act and deed for the intent and purposes therein set forth.
"OFFICIAL SEAL"
Virginia L. Corcoran /s/ Virginia L. Corcoran Notary Public, State of Illinois --------------------------------- My Commission Expires: 10/27/05 Notary Public |
NUVEEN QUALITY PREFERRED INCOME FUND 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of the
above-referenced organizations, hereby constitutes and appoints TIMOTHY R.
SCHWERTFEGER, JESSICA R. DROEGER, LARRY W. MARTIN, GIFFORD R. ZIMMERMAN and ERIC
F. FESS, and each of them (with full power to each of them to act alone) his
true and lawful attorney-in-fact and agent, for him on his behalf and in his
name, place and stead, in any and all capacities, to sign and file one or more
Registration Statements on Form N-2 under the Securities Act of l933 and the
Investment Company Act of l940, including any amendment or amendments thereto,
with all exhibits, and any and all other documents required to be filed with any
regulatory authority, federal or state, relating to the registration thereof, or
the issuance of shares thereof, without limitation, granting unto said
attorneys, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises
in order to effectuate the same as fully to all intents and purposes as he might
or could do if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned trustee of the above-referenced organizations has hereunto set his hand this 31st day of July, 2002.
/s/ William E. Bennett --------------------- William E. Bennett |
STATE OF ILLINOIS )
---------------
)SS
COUNTY OF COOK )
--------------
|
On this 31st day of July, 2002, personally appeared before me, a Notary Public in and for said County and State, the person named above who is known to me to be the person whose name and signature is affixed to the foregoing Power of Attorney and who acknowledged the same to be his voluntary act and deed for the intent and purposes therein set forth.
"OFFICIAL SEAL"
Virginia L. Corcoran /s/ Virginia L. Corcoran Notary Public, State of Illinois ----------------------- My Commission Expires: 10/27/05 Notary Public |
NUVEEN QUALITY PREFERRED INCOME FUND 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of the
above-referenced organizations, hereby constitutes and appoints TIMOTHY R.
SCHWERTFEGER, JESSICA R. DROEGER, LARRY W. MARTIN, GIFFORD R. ZIMMERMAN and ERIC
F. FESS, and each of them (with full power to each of them to act alone) his
true and lawful attorney-in-fact and agent, for him on his behalf and in his
name, place and stead, in any and all capacities, to sign and file one or more
Registration Statements on Form N-2 under the Securities Act of l933 and the
Investment Company Act of l940, including any amendment or amendments thereto,
with all exhibits, and any and all other documents required to be filed with any
regulatory authority, federal or state, relating to the registration thereof, or
the issuance of shares thereof, without limitation, granting unto said
attorneys, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises
in order to effectuate the same as fully to all intents and purposes as he might
or could do if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned trustee of the above-referenced organizations has hereunto set his hand this 31st day of July, 2002.
/s/ Jack B. Evans ----------------- Jack B. Evans |
STATE OF ILLINOIS )
----------------
)SS
COUNTY OF COOK )
--------------
|
On this 31st day of July, 2002, personally appeared before me, a Notary Public in and for said County and State, the person named above who is known to me to be the person whose name and signature is affixed to the foregoing Power of Attorney and who acknowledged the same to be his voluntary act and deed for the intent and purposes therein set forth.
"OFFICIAL SEAL"
Virginia L. Corcoran /s/ Virginia L. Corcoran Notary Public, State of Illinois ----------------------- My Commission Expires: 10/27/05 Notary Public |
NUVEEN QUALITY PREFERRED INCOME FUND 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of the
above-referenced organizations, hereby constitutes and appoints TIMOTHY R.
SCHWERTFEGER, JESSICA R. DROEGER, LARRY W. MARTIN, GIFFORD R. ZIMMERMAN and ERIC
F. FESS, and each of them (with full power to each of them to act alone) his
true and lawful attorney-in-fact and agent, for him on his behalf and in his
name, place and stead, in any and all capacities, to sign and file one or more
Registration Statements on Form N-2 under the Securities Act of l933 and the
Investment Company Act of l940, including any amendment or amendments thereto,
with all exhibits, and any and all other documents required to be filed with any
regulatory authority, federal or state, relating to the registration thereof, or
the issuance of shares thereof, without limitation, granting unto said
attorneys, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises
in order to effectuate the same as fully to all intents and purposes as he might
or could do if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned trustee of the above-referenced organizations has hereunto set his hand this 31st day of July, 2002.
/s/ William L. Kissick ----------------------------------- William L. Kissick |
STATE OF ILLINOIS )
----------------
)SS
COUNTY OF COOK )
--------------
|
On this 31st day of July, 2002, personally appeared before me, a Notary Public in and for said County and State, the person named above who is known to me to be the person whose name and signature is affixed to the foregoing Power of Attorney and who acknowledged the same to be his voluntary act and deed for the intent and purposes therein set forth.
"OFFICIAL SEAL"
Virginia L. Corcoran /s/ Virginia L. Corcoran Notary Public, State of Illinois ----------------------------------- My Commission Expires: 10/27/05 Notary Public |
NUVEEN QUALITY PREFERRED INCOME FUND 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of the
above-referenced organizations, hereby constitutes and appoints TIMOTHY R.
SCHWERTFEGER, JESSICA R. DROEGER, LARRY W. MARTIN, GIFFORD R. ZIMMERMAN and ERIC
F. FESS, and each of them (with full power to each of them to act alone) his
true and lawful attorney-in-fact and agent, for him on his behalf and in his
name, place and stead, in any and all capacities, to sign and file one or more
Registration Statements on Form N-2 under the Securities Act of l933 and the
Investment Company Act of l940, including any amendment or amendments thereto,
with all exhibits, and any and all other documents required to be filed with any
regulatory authority, federal or state, relating to the registration thereof, or
the issuance of shares thereof, without limitation, granting unto said
attorneys, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises
in order to effectuate the same as fully to all intents and purposes as he might
or could do if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned trustee of the above-referenced organizations has hereunto set his hand this 31st day of July, 2002.
/s/ Thomas E. Leafstrand ----------------------------------- Thomas E. Leafstrand |
STATE OF ILLINOIS )
------------------
)SS
COUNTY OF COOK )
--------------
|
On this 31st day of July, 2002, personally appeared before me, a Notary Public in and for said County and State, the person named above who is known to me to be the person whose name and signature is affixed to the foregoing Power of Attorney and who acknowledged the same to be his voluntary act and deed for the intent and purposes therein set forth.
"OFFICIAL SEAL"
Virginia L. Corcoran /s/ Virginia L. Corcoran Notary Public, State of Illinois ----------------------------------- My Commission Expires: 10/27/05 Notary Public |
NUVEEN QUALITY PREFERRED INCOME FUND 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of the
above-referenced organizations, hereby constitutes and appoints TIMOTHY R.
SCHWERTFEGER, JESSICA R. DROEGER, LARRY W. MARTIN, GIFFORD R. ZIMMERMAN and ERIC
F. FESS, and each of them (with full power to each of them to act alone) her
true and lawful attorney-in-fact and agent, for her on her behalf and in her
name, place and stead, in any and all capacities, to sign and file one or more
Registration Statements on Form N-2 under the Securities Act of l933 and the
Investment Company Act of l940, including any amendment or amendments thereto,
with all exhibits, and any and all other documents required to be filed with any
regulatory authority, federal or state, relating to the registration thereof, or
the issuance of shares thereof, without limitation, granting unto said
attorneys, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises
in order to effectuate the same as fully to all intents and purposes as he might
or could do if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned trustee of the above-referenced organizations has hereunto set her hand this 1st day of August, 2002.
/s/ Sheila W. Wellington ----------------------------------- Sheila W. Wellington |
STATE OF ILLINOIS )
----------------
)SS
COUNTY OF COOK )
--------------
|
On this 1st day of August, 2002, personally appeared before me, a Notary Public in and for said County and State, the person named above who is known to me to be the person whose name and signature is affixed to the foregoing Power of Attorney and who acknowledged the same to be his voluntary act and deed for the intent and purposes therein set forth.
"OFFICIAL SEAL"
Virginia L. Corcoran /s/ Virginia L. Corcoran Notary Public, State of Illinois ----------------------- My Commission Expires: 10/27/05 |