U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [2]
Post-Effective Amendment No. [ ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 2
F&C/CLAYMORE PREFERRED SECURITIES INCOME FUND INCORPORATED
(Exact Name of Registrant as Specified in Charter)
301 E. Colorado Boulevard
Pasadena, California 91101
Address of Principal Executive Offices (Number, Street, City, State and Zip
Code)
(626) 795-7300
Registrant's Telephone Number, including Area Code
Robert M. Ettinger
301 E. Colorado Boulevard
Suite 720
Pasadena, CA 91101
Name and Address (Number, Street, City, State and Zip Code) of Agent for Service
WITH COPIES TO:
Rose F. DiMartino, Esq.
Willkie Farr & Gallagher
787 Seventh Avenue
New York, New York 10019
(212) 728-8000
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 will be 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):
/ / when declared effective pursuant to Section 8(c) of the Securities Act of 1933.
If appropriate, check the following box:
/ /This post-effective amendment designates a new effective date for a previous filed registrations statement.
/ /This Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act and the Securities Act registration statement number of the earlier effective registration statement for the same offering is ____.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES BEING AMOUNT BEING OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED UNIT PRICE (1) REGISTRATION FEE
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Common Stock, $0.01 par value per share 48,300,000 Shares $25.00 $1,207,500,000 $111,090* -------------------------------------------------------------------------------------------------------------------- |
(1) Estimated solely for purposes of calculating the registration fee.
* Of which $5,520 was previously transmitted prior to filing the initial registration statement on Form N-2.
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 THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE.
THE UNDERSIGNED REGISTRANT HEREBY UNDERTAKES THAT: (1) FOR PURPOSES OF
DETERMINING ANY LIABILITY UNDER THE SECURITIES ACT OF 1933, THE INFORMATION
OMITTED FROM THE FORM OF PROSPECTUS FILES AS PART OF THE REGISTRATION STATEMENT
IN RELIANCE UPON THE PROSPECTUS FILED BY THE REGISTRANT PURSUANT TO RULE
424(b)(1) OR (4) OR 497(h) UNDER THE SECURITIES ACT SHALL BE DEEMED TO BE PART
OF THIS REGISTRATION STATEMENT AS OF THE TIME IT WAS DECLARED EFFECTIVE; (2) 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 SUCH SECURITIES AT THAT TIME SHALL BE DEEMED TO BE THE INITIAL
BONA FIDE OFFERING THEREOF.
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
PRELIMINARY PROSPECTUS DATED JANUARY 28, 2003
PROSPECTUS
[F&C LOGO] [CLAYMORE LOGO]
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INVESTMENT OBJECTIVE. F&C/Claymore Preferred Securities Income Fund Incorporated (the "Fund") is a newly organized, closed-end, diversified management investment company.
The Fund's investment objective is high current income for holders of its Common Stock consistent with preservation of capital. At least 80% of the Fund's total assets will be invested in a diversified portfolio of preferred securities. Under current market conditions, the Fund expects that its portfolio of preferred securities will consist principally of "hybrid" or taxable preferreds. At least 80% of the Fund's preferred securities will be investment grade quality at the time of purchase. Up to 20% of the Fund's total assets may be invested in securities rated below investment grade (which securities must be rated at least either Ba3 or BB-), provided the issuer has investment grade senior debt outstanding. The Fund's investment adviser intends to pursue strategies that include, among other things, hedging, which are generally intended to result in the Fund's income increasing in response to significant increases in interest rates while being relatively resistant to the impact of significant declines in interest rates.
NO PRIOR HISTORY. Prior to this offering, there has been no public market for the Common Stock. The Common Stock has been accepted for listing on the New York Stock Exchange, subject to notice of issuance, under the trading symbol of "FFC." Shares of closed-end funds frequently trade at a discount from their net asset value and initial offering prices. The risks associated with this characteristic of closed-end investment companies may be greater for investors expecting to sell shares of a closed-end investment company soon after the completion of an initial public offering of the company's shares.
PER SHARE TOTAL
--------- -----
Public offering price....................................... $25.00 $
Sales load(1)............................................... $1.125 $
Estimated offering expenses(2).............................. $.05 $
Proceeds to the Fund........................................ $23.825 $
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(1) For a description of other compensation paid to Merrill Lynch, see "Underwriting."
(2) In addition to the sales load, the Fund will pay offering expenses, which are estimated to total $1,750,000 and which will reduce the "Proceeds to the Fund" (above). The Fund's investment adviser has agreed to pay all organizational expenses of the Fund. The investment adviser has also agreed to pay those offering costs of the Fund (other than the sales load) that exceed $0.05 per share of Common Stock.
The underwriters may also purchase up to an additional shares of Common Stock at the public offering price, less the sales load, within 45 days of the date of this prospectus to cover over-allotments.
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.
The shares of Common Stock will be ready for delivery on or about January 31, 2003.
MERRILL LYNCH & CO. RAYMOND JAMES
A.G. EDWARDS & SONS, INC. LEGG MASON WOOD WALKER RBC CAPITAL MARKETS
INCORPORATED
WACHOVIA SECURITIES WELLS FARGO SECURITIES, LLC ADVEST, INC.
BB&T CAPITAL MARKETS ROBERT W. BAIRD & CO. FAHNESTOCK & CO. INC.
FERRIS, BAKER WATTS J.J.B. HILLIARD, W.L. LYONS, INC. HUNTLEIGH SECURITIES CORPORATION
INCORPORATED
JANNEY MONTGOMERY SCOTT LLC MCDONALD INVESTMENTS INC. MORGAN KEEGAN & COMPANY, INC.
RYAN BECK & CO. WEDBUSH MORGAN SECURITIES INC.
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The date of this prospectus is January , 2003.
INVESTMENT ADVISER. Flaherty & Crumrine Incorporated acts as investment
adviser to the Fund. The Fund's address is 301 E. Colorado Boulevard,
Suite 720, Pasadena, California 91101, and the Fund's telephone number is
(626) 795-7300.
LEVERAGE. Within three months after the completion of the offering of Common Stock described in this prospectus, the Fund intends, subject to then favorable market conditions, to offer shares of auction rate preferred stock representing up to approximately 36% of the Fund's capital immediately following the issuance of such shares. The issuance of these shares, which would be senior to the Common Stock, will result in the financial leveraging of the Common Stock. Whether to offer shares of auction rate preferred stock and, if offered, the terms of such shares and the timing and other terms of their offering will be determined by the Fund's Board of Directors. The Fund anticipates that shares of auction rate preferred stock will pay dividends based on short-term rates, and that the net return on the Fund's portfolio, including the proceeds of the preferred stock offering, will exceed the dividend rate on such shares. Through leveraging, the Fund will seek to obtain a higher return for holders of Common Stock than if the Fund did not use leverage. Leverage is a speculative technique and investors should note that there are special risks and costs associated with the leveraging of the Common Stock. There can be no assurance that a leveraging strategy will be successful during any period in which it is employed. See "Special Leverage Considerations" and "Description of Capital Stock."
You should read this prospectus, which contains important information about the Fund, before deciding whether to invest in the Common Stock, and retain it for future reference. You may request a free copy of any additional information that the Fund has filed with the Securities and Exchange Commission, by calling 800-345-7999 or by writing to the Fund, or obtain the information from the Securities and Exchange Commission's web site (http://www.sec.gov).
The Fund's Common Stock does not represent a deposit or obligation of, and is not guaranteed or endorsed by, any bank or other insured depository institution, and is not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.
TABLE OF CONTENTS
PAGE
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Prospectus Summary................................ 4
Summary of Fund Expenses.......................... 16
The Fund.......................................... 17
Use of Proceeds................................... 17
Investment Objective and Policies................. 17
Risk Factors and Special Considerations........... 39
Special Leverage Considerations................... 43
Investment Restrictions........................... 46
Management of the Fund............................ 48
Portfolio Transactions............................ 55
Dividends and Distributions....................... 56
Net Asset Value................................... 57
Description of Capital Stock...................... 57
Taxation.......................................... 61
Repurchase of Common Stock and Tender Offers;
Conversion to Open-End Fund..................... 66
Certain Provisions of the Articles of
Incorporation................................... 68
Custodian, Transfer Agent, Dividend-Paying Agent
and Registrar................................... 69
Underwriting...................................... 70
Performance Related and Comparative Information... 72
Legal Matters..................................... 73
Reports to Shareholders........................... 73
Experts........................................... 73
Report of Independent Accountants................. 74
F&C/Claymore Preferred Securities Income Fund
Incorporated Statement of Assets and
Liabilities..................................... 75
APPENDIX A........................................ A-1
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. THE FUND HAS NOT, AND THE UNDERWRITERS HAVE NOT, AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT INFORMATION OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. THE FUND IS NOT, AND THE UNDERWRITERS ARE NOT, MAKING AN OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME THAT THE INFORMATION IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS. THE FUND'S BUSINESS, FINANCIAL CONDITION AND PROSPECTS MAY HAVE CHANGED SINCE THAT DATE.
Until February 22, 2003 (25 days after the date of this prospectus), all dealers that buy, sell or trade the Common Stock, 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 SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS. IT MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE RISK FACTORS, TO UNDERSTAND THE OFFERING OF THE SHARES OF COMMON STOCK FULLY. THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS AND APPENDIX A HERETO.
THE FUND............ F&C/Claymore Preferred Securities Income Fund Incorporated
is a newly organized, diversified, closed-end management
investment company. See "The Fund."
THE OFFERING........ The Fund is offering shares of Common Stock
through a group of underwriters led by Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch").
You must purchase at least 100 shares of Common Stock. The
underwriters have been granted an option to purchase up to
additional shares of Common Stock to cover
over-allotments. The initial public offering price is
$25.00 per share. The Fund's investment adviser has agreed
to pay all organizational expenses of the Fund. The
investment adviser has also agreed to pay those offering
costs (other than the sales load) that exceed $0.05 per
share of Common Stock. See "Underwriting."
LISTING AND The Fund's Common Stock has been approved for listing on
SYMBOL............ the New York Stock Exchange upon notice of issuance under
the symbol "FFC."
INVESTMENT OBJECTIVE
AND POLICIES...... OBJECTIVE. The Fund's investment objective is high current
income for holders of its Common Stock consistent with
preservation of capital. The Fund's investment adviser
intends to pursue strategies that it expects generally to
result in the Fund's income increasing in response to
significant increases in interest rates while being
relatively resistant to the impact of significant declines
in interest rates. This strategy involves hedging
strategies and is described more fully below.
In seeking its objective, the Fund normally will invest at
least 80% of its total assets in a diversified portfolio
of preferred securities, some or all of which are expected
to be hedged. Under current market conditions, the Fund
expects that its portfolio of preferred securities will
consist principally of "hybrid" or taxable preferreds. The
Fund may also invest up to 20% of its total assets in debt
securities and up to 15% of its total assets in common
stocks. The portions of the Fund's assets invested in
various types of preferred, debt or equity may vary from
time to time depending on market conditions. The portion
of securities that the Fund will hedge, as well as the
types of hedge positions utilized, may also vary
significantly from time to time.
CREDIT QUALITY. At least 80% of the preferred securities
that the Fund will acquire will be rated investment grade
(at least "Baa3" by Moody's Investors Services, Inc.
("Moody's") or "BBB-" by
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Standard & Poor's Corporation ("S&P") at the time of
investment or will be preferred securities of issuers of
investment grade senior debt, which securities are rated,
at the time of investment, at least either "Ba3" by
Moody's or "BB-" by S&P. In addition, the Fund may invest
in unrated issues that the Fund's investment adviser deems
to be comparable in quality to rated issues in which the
Fund is authorized to invest.
The Fund will limit to 20% of its total assets its
holdings of securities rated below investment grade (which
securities must be rated at least either "Ba3" by Moody's
or "BB-" by S&P) at the time of purchase or judged to be
comparable in quality at the time of purchase; however,
any such securities must be issued by an issuer having a
class of senior debt rated investment grade outstanding.
PROTECTIVE HEDGING STRATEGIES. The Fund currently
anticipates hedging some or all of the general interest
rate exposure inherent in its holdings of preferred and
debt securities. The response of the Fund's income to
changes in interest rates will be impacted by the
effectiveness of its hedging strategies. Under current
market conditions, this hedging would be accomplished
principally by one or more of the following strategies:
(1) purchasing put options (called a "long position in a
put option") on Treasury Bond and/ or Treasury Note
futures contracts, (2) entering into futures contracts to
sell Treasury Bonds and/or Treasury Notes (called a "short
position in a futures contract"), (3) entering into
interest rate swap agreements as a "fixed rate payer",
and/or (4) purchasing options to enter into interest rate
swap agreements as a "fixed rate payer" (called a "pay
fixed swaption").
The hedging positions that the Fund currently expects to
hold normally appreciate in value when interest rates rise
significantly, reflecting either the expected rise in
yields of Treasury securities or interest rate swap
yields, as applicable, and the associated decline in the
prices of underlying Treasury securities or decreased net
market value of an obligation to pay a fixed income stream
in a higher interest rate environment.
The response of the Fund's income to changes in interest
rates will be impacted by the effectiveness of its hedging
strategies. There are economic costs of hedging reflected
in the pricing of futures, interest rate swaps, options
and swaptions contracts which can be significant,
particularly when long-term interest rates are
substantially above short-term interest rates, as is the
case at present. For a more detailed discussion of futures
transactions, interest rate swaps, and related options,
and the risks associated with investing in those
instruments, See "Investment Objective and
Policies--Investment Techniques--Futures Contracts and
Options on Futures Contracts" and "Interest Rate Swaps and
Options Thereon" ("Swaptions").
PREFERRED SECURITIES. Preferred securities include
"hybrid" or taxable preferred securities and traditional
preferred/preference
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stock whose dividends qualify for the inter-corporate
dividends received deduction ("DRD") that meet certain
criteria (as described below). Under current market
conditions, the Fund expects that its portfolio of
preferred securities will consist principally of "hybrid"
or taxable preferreds. For this reason, most of the Fund's
distributions will generally not qualify for the DRD. The
preferred securities in which the Fund invests consist
principally of fixed rate and adjustable rate, some or all
of which are expected to be hedged. See "Investment
Objective and Policies--Portfolio Investments--Adjustable
Rate Securities." Preferred securities include securities
that are commonly known as MIPs, QUIPS, TOPrS, TrUPS,
QUIBS, QUIDS, CorTS, PINES, Trust Preferred Securities or
capital securities. See "Investment Objective and
Policies--Portfolio Investments."
INDUSTRY DIVERSIFICATION. Under normal market conditions,
- The Fund intends to invest 25% or more of its total
assets in securities of companies in the utilities
industry.
- The Fund intends to invest 25% or more of its total
assets in securities of companies in the banking
industry.
The Fund's holdings of securities of companies in any
industry other than the utilities industry or the banking
industry will at all times be less than 25% of the Fund's
total assets. Consistent with the limitations described
above, the proportion of the Fund's assets invested in the
utilities, banking and other industries may vary from time
to time, depending on market conditions.
CONVERTIBLE SECURITIES AND COMMON STOCK. Certain
traditional and hybrid preferred securities are
convertible into the common stock of the associated
issuer. To the extent that such preferred securities,
because of their terms and market conditions, trade in
close relationship to the underlying common stock of the
issuer, they will be subject to the limit of 15% of total
assets, under normal market conditions, that also applies
to common stocks. Otherwise, such convertible preferred
securities will be treated by the Fund in the same manner
as non-convertible preferred securities.
See "Investment Objective and Policies" and Appendix A to
this prospectus.
INVESTMENT ADVISER
AND SERVICING
AGENT............. Flaherty & Crumrine Incorporated (the "Adviser"), a
registered investment adviser, acts as the Fund's
investment adviser. The Adviser has been active in the
management of portfolios of preferred securities,
including related hedging activities, since 1983. The
Adviser had aggregate assets under management, as of
December 31, 2002 (excluding the net assets of the Fund),
equal to approximately $896 million.
Claymore Securities, Inc. (the "Servicing Agent"), a
registered broker-dealer, acts as shareholder servicing
agent to the Fund. Claymore specializes in the creation,
development and distribution of investment solutions for
advisors and their valued clients.
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The Fund pays the Adviser a monthly fee for its advisory
services equal to an annual rate of 0.525% on the first
$200 million of the Fund's average weekly total managed
assets, which is reduced to 0.45% on the next $300 million
of the Fund's average weekly total managed assets and
0.40% on the Fund's average weekly total managed assets
above $500 million.
The Fund pays the Servicing Agent a monthly fee for its
servicing functions equal to an annual rate of 0.025% on
the first $200 million of the Fund's average weekly total
managed assets, 0.10% on the next $300 million of the
Fund's average weekly total managed assets and 0.15% on
the Fund's average weekly total managed assets above $500
million. Total managed assets means the total assets of
the Fund (including any assets attributable to any Fund
Preferred Shares (as defined below) that may be outstand-
ing or otherwise attributable to the use of leverage)
minus the sum of accrued liabilities (other than debt
representing financial leverage). For purposes of
determining total managed assets, the liquidation
preference of the Fund Preferred Shares is not treated as
a liability. See "Management of the Fund--Investment
Adviser."
ADMINISTRATOR....... PFPC, Inc., a member of the PNC Financial Services
Group, Inc., serves as the Fund's administrator (the
"Administrator"). The Administrator calculates the net
asset value of the Fund's shares of Common Stock and
generally assists in all aspects of the Fund's
administration and operation. As compensation for the
Administrator's services, the Fund pays the Administrator
a monthly fee at an annual rate of 0.10% of the first
$200 million of the Fund's average weekly total managed
assets, declining thereafter at higher asset levels. The
Administrator also serves as the Fund's Common Stock
servicing agent (transfer agent), dividend-paying agent
and registrar and, as compensation for the Administrator's
services as such, the Fund pays the Administrator a
monthly fee at an annual rate of 0.02% on the first
$150 million of the Fund's average weekly net assets
attributable to the Common Stock, declining thereafter at
higher asset levels, plus certain out-of-pocket expenses.
PROPOSED OFFERING OF
SHARES OF AUCTION
RATE PREFERRED
STOCK............. Subject to market conditions and the Fund's receipt of
"Aaa" and "AAA" credit ratings on the Fund Preferred
Shares (as defined below), within three months after the
completion of this offering, the Fund intends, subject to
then favorable market conditions, to offer shares of
auction rate preferred stock in one or more series ("Fund
Preferred Shares") representing up to approximately 36% of
the Fund's capital after their issuance. The issuance of
Fund Preferred Shares will leverage common shareholders'
investment in the shares of Common Stock.
The fees and expenses incident to the offering and
issuance of Fund Preferred Shares will be recorded as a
reduction of capital
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of the Fund attributable to the Common Stock. See "The
Fund" and "Special Leverage Considerations."
LEVERAGE The Fund anticipates that, while the Fund will pay
CONSIDERATIONS.... dividends on its Fund Preferred Shares based on
shorter-term rates, the net return on the Fund's
portfolio, including the proceeds of the Fund Preferred
Shares offering, will exceed the dividend rate on the Fund
Preferred Shares, although no assurance can be given that
the issuance of Fund Preferred Shares will result in a
higher net return to Common Stock shareholders. So long as
the Fund is able to invest the proceeds of the Fund
Preferred Share offering in securities that provide a
higher net return than a rate of return based on the then
current dividends paid on the Fund Preferred Shares
outstanding after taking into account the expenses of the
Fund Preferred Shares offering and the Fund's operating
expenses, the effect of leverage will be to cause the
Common Stock shareholders to realize a higher current rate
of return than if the Fund were not leveraged. If the
current dividend rate on the Fund Preferred Shares
outstanding were to approach the net return on the Fund's
investment portfolio after expenses, however, the benefit
of leverage to the Common Stock shareholders would be
reduced. Moreover, if the current dividend rate on the
Fund Preferred Shares outstanding 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 the Common Stock shareholders. See "Description of
Capital Stock--Preferred Stock."
RATING AGENCY
GUIDELINES AND
ASSET COVERAGE
REQUIREMENTS...... In connection with the anticipated issuance of Fund
Preferred Shares, the Fund's investments will be subject
to certain investment guidelines and certain minimum asset
and dividend coverage and liquidity requirements
established by the rating agencies rating the Fund
Preferred Shares. Provided that the Fund complies with
these guidelines, it is expected that the Fund Preferred
Shares will be rated "Aaa" and "AAA", as applicable, by at
least two rating agencies. In addition, in order to pay
dividends on the Common Stock, the Fund will be required
by the 1940 Act, to meet minimum asset coverage
requirements. See "Investment Objective and
Policies--Rating Agency Guidelines and Asset Coverage
Requirements."
DIVIDENDS AND
DISTRIBUTIONS..... Prior to the issuance of Fund Preferred Shares, the Fund
expects to distribute through the year, primarily in the
form of regular monthly dividends, substantially all (on
an annual basis) of its net investment income (that is,
income other than net realized long-term and short-term
capital gains) and its net realized short-term capital
gains, if any. Dividends to Common Stock shareholders are
expected to be declared approximately 45 days, and paid
approximately 60 to 90 days, after the completion of the
offering of shares of Common Stock. If the Fund Preferred
Shares are issued, the Internal Revenue Service requires
the Fund to allocate particular types of income received
by it for any taxable year between
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shares of Common Stock and the Fund Preferred Shares out-
standing in proportion to the total amount of
distributions paid to each such class of shares for such
taxable year. Realized long term capital gains, if any,
are expected to be distributed annually. Investors should
note that the Fund is not expected to generate significant
income that qualifies for the intercorporate dividends
received deduction. Certain tax proposals currently under
preliminary discussion by federal government officials
would eliminate the taxation of dividends paid by
corporations out of previously taxed corporate income.
However, it is uncertain if, and in what form, this
proposal will ultimately be adopted. As proposed, it would
be possible for the Fund to distribute tax-free to
shareholders certain dividends paid on certain stocks in
its portfolio. Under current market conditions and current
tax law, the Fund intends to invest principally in
"hybrid" or taxable preferred securities, the payments on
which do not appear to be excludable from taxable income
under the current proposals. If tax law changes in a way
that affords tax benefits to traditional preferred
securities, the Fund would take those tax benefits into
account when determining whether to invest in different
types of preferred securities. As a result, the Fund might
hold a smaller portion of its assets in hybrid preferreds
and a larger portion in traditional preferreds than
currently contemplated. See "Taxation."
DIVIDEND
REINVESTMENT AND
CASH PURCHASE
PLAN.............. Under the Fund's Dividend Reinvestment and Cash Purchase
Plan, a Common Stock shareholder whose shares are
registered in his or her own name will have all dividends
or distributions with respect to his or her shares of
Common Stock reinvested automatically in additional shares
of the Fund's Common Stock, unless the shareholder elects
to receive distributions in cash.
In addition, a Common Stock shareholder whose shares are
held in the name of a broker/dealer or nominee will have
all distributions reinvested automatically by the
broker/dealer or nominee in additional shares of Common
Stock under the plan unless the shareholder elects to
receive distributions in cash. A Common Stock shareholder
whose shares are held in the name of a broker/ dealer or
nominee should contact his or her respective broker/
dealer or nominee for details. See "Description of Capital
Stock--Dividend Reinvestment and Cash Purchase Plan" and
"Taxation."
RISK FACTORS AND
SPECIAL
CONSIDERATIONS.... Risk is inherent in all investing. Investing in any
investment company security involves risk, including the
risk that you may receive little or no return on your
investment or even that you may lose part or all of your
investment. Therefore, before investing you should
consider carefully the following risks that you assume
when you invest in shares of the Fund's Common Stock:
INTEREST RATE RISK. Changes in the level of interest rates
are expected to affect the value of the Fund's portfolio
holdings of fixed rate securities and, under certain
circumstances, its holdings
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of adjustable rate securities. Subject to certain
limitations described herein, the Fund currently
anticipates hedging, from time to time, some or all of its
holdings of fixed rate and adjustable rate securities, for
the purposes of (1) protecting against declines in value
attributable to significant increases in interest rates in
general and (2) providing increased income in the event of
significant increases in interest rates while maintaining
the Fund's relative resistance to a reduction in income in
the event of significant declines in interest rates. There
can be no guarantee that such hedging strategies will be
successful. Significant changes in the interest rate
environment, as well as other factors, may cause the
Fund's holdings of preferred and debt securities to be
redeemed by the issuers, thereby reducing the Fund's
holdings of higher income-paying securities at a time when
the Fund may be unable to acquire other securities paying
comparable income rates with the redemption proceeds. In
addition to fluctuations due to changes in interest rates,
the value of the Fund's holdings of preferred and debt
securities, and as a result the Fund's net asset value,
may also be affected by other market and credit factors,
as well as by actual or anticipated changes in tax laws.
See "Investment Objective and Policies--Risk Factors and
Special Considerations."
HEDGING STRATEGY RISK. Certain of the investment
techniques that the Fund may employ for hedging or, under
certain circumstances, to increase income will expose the
Fund to risks. In addition to the hedging techniques
described elsewhere, i.e., positions in Treasury Bond or
Treasury Note futures contracts, use of options on these
positions, positions in interest rate swaps, and options
thereon ("swaptions"), these investment techniques may
include entering into interest rate and stock index
futures contracts and options on interest rate and stock
index futures contracts, purchasing and selling put and
call options on securities and stock indices, purchasing
and selling securities on a when-issued or delayed
delivery basis, entering into repurchase agreements, lend-
ing portfolio securities and making short sales of
securities "against the box." The Fund intends to comply
with regulations of the Securities and Exchange Commission
involving "covering" or segregating assets in connection
with the Fund's use of options and futures contracts. See
"Investment Objective and Policies--Investment
Techniques."
CREDIT RISK. Credit risk is the risk that an issuer of a
preferred or debt security will become unable to meet its
obligation to make dividend, interest and principal
payments. In general, lower rated preferred or debt
securities carry a greater degree of credit risk. If
rating agencies lower their ratings of preferred or debt
securities in the Fund's portfolio, the value of those
obligations could decline, which could jeopardize the
rating agencies' ratings of Fund Preferred Shares. In
addition, the underlying revenue source for a preferred or
debt security may be insufficient to pay principal or
interest in a timely manner. Because the primary source of
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income for the Fund is the dividend, interest and principal payments on the preferred or debt securities in which it invests, any default by an issuer of a preferred or debt security could have a negative impact on the Fund's ability to pay dividends on Common Stock. Even if the issuer does not actually default, adverse changes in the issuer's financial condition may negatively affect its credit rating or presumed creditworthiness. These developments would adversely affect the market value of the issuer's obligations. LEVERAGE RISK. The Fund's use of leverage through the issuance of Preferred Shares creates an opportunity for increased Common Stock net income, but also creates special risks for Common Stockholders. There is no assurance that the Fund's leveraging strategy will be successful. Risks affecting the Fund's net asset value will be magnified if and when the Fund issues Fund Pre- ferred Shares. If the Fund's current net investment income and capital gains are not sufficient to meet dividend requirements on outstanding Fund Preferred Shares, the Fund may need to liquidate certain of its investments, thereby possibly reducing the net asset value attributable to the Common Stock. In addition, failure to meet required asset coverage requirements for Fund Preferred Shares to satisfy certain guidelines established by the rating agen- cies may result in mandatory partial or full redemptions of Fund Preferred Shares, which would reduce or eliminate the Fund's leverage and could also adversely affect distributions to holders of the Common Stock. Such redemptions may also cause the Fund to incur additional transaction costs, including costs associated with the sale of portfolio securities. Leverage creates two major types of risks for Common Stockholders: - The likelihood of greater volatility of net asset value and market price of Common Stock because changes in the value of the Fund's portfolio are borne entirely by the Common Stockholders; and - The possibility either that Common Stock income will fall if the dividend rate on the Fund Preferred Shares or the interest rate on any borrowings rises, or that Common Stock income will fluctuate because the dividend rate on the Fund Preferred Shares or the interest rate on any borrowings varies. When the Fund is utilizing leverage, the fees paid to the Adviser and its affiliates for investment advisory services will be higher than if the Fund did not utilize leverage because the fees paid will be calculated based on the Fund's managed assets (which include the liquidation preference on any Fund Preferred Shares and the principal amount of any borrowings used for leverage). As a result, the Adviser has a financial incentive for the Fund to issue Fund Preferred Shares or to otherwise incur leverage, which may create a conflict of interest. See "Special Leverage Considerations" and "Description of Capital Stock." INDUSTRY CONCENTRATION RISK. The Fund concentrates its investments in the utilities and banking industries. As a result, the Fund's |
investments may be subject to greater risk and market fluctuation than a fund that had securities representing a broader range of investment alternatives. See "Investment Objective and Policies--Concentration." PREFERRED SECURITIES RISK. Investment in preferred securities carries certain risks including; - Deferral Risk--Typically preferred securities contain provisions that allow an issuer, at its discretion, to defer distributions for up to 20 consecutive quarters. If the Fund owns a preferred security that is deferring its distributions, the Fund may be required to report income for tax purposes while it is not receiving any income. - Redemption Risk--Preferred securities typically contain provisions that allow for redemption in the event of tax or security law changes in addition to call features at the option of the issuer. In the event of a redemption, the Fund may not be able to reinvest the proceeds at comparable rates of return. - Limited Voting Rights--Preferred securities typically do not provide any voting rights. - Subordination--Preferred securities are subordinated to bonds and other debt instruments in a company's capital structure in terms of priority to corporate income and liquidation payments, and therefore will be subject to greater credit risk than those debt instruments. - Liquidity--Preferred securities may be substantially less liquid than many other securities, such as common stocks or U.S. government securities. NO OPERATING HISTORY. The Fund is a newly organized, closed-end investment company with no previous operating history. MARKET DISCOUNT RISK. As with any stock, the price of the Fund's shares will fluctuate with market conditions and other factors. Shares of closed-end investment companies frequently trade at discounts from net asset value, especially shortly after the completion of the initial public offering. This characteristic of shares of a closed-end fund is a risk separate and distinct from the risk that the fund's net asset value may decrease. The Fund cannot predict whether the Common Stock will trade at, above or below net asset value. The risk of purchasing shares of closed-end funds that may trade at a discount is more pronounced for investors who wish to sell their shares in a relatively short period of time after the initial public offering. The Common Stock is designed for long-term investors and should not be treated as a trading vehicle. For those investors, realization of gain or loss on their investment is likely to be more dependent upon the existence of a premium or discount than upon portfolio performance. Net asset value will be reduced immediately following the initial offering by a sales load and organizational and selling expenses paid by the Fund and immediately following any offering of Fund Preferred Shares by |
the costs of that offering paid by the Fund. See
"Investment Objective and Policies--Risk Factors and
Special Considerations."
MANAGEMENT RISK. The Fund is subject to management risk
because it is an actively managed portfolio. The adviser
will apply investment techniques and risk analyses in
making investment decisions for the Fund, but there can be
no guarantee that these will produce the desired results.
LOWER-RATED SECURITIES RISK. The Fund may invest up to 20%
of its total assets in its holdings of securities rated
below investment grade at the time of purchase or judged
to be comparable in quality at the time of purchase. Lower
rated preferred stock or debt securities, or equivalent
unrated securities, which are commonly known as "junk
bonds," generally involve greater volatility or price and
risk of loss of income and principal, and may be more
susceptible to real or perceived adverse economic and com-
petitive industry conditions than higher grade securities.
It is reasonable to expect that any adverse economic
conditions could disrupt the market for lower-rated
securities, have an adverse impact on the value of those
securities, and adversely affect the ability of the
issuers of those securities to repay principal, dividends
and interest on those securities.
A POTENTIAL PARTICIPANT IN THE OFFERING SENT UNAUTHORIZED
E-MAILS TO CERTAIN OF ITS CLIENTS AND POTENTIAL INVESTORS.
Two employees of Bear Stearns & Co. Inc. ("Bear Stearns")
distributed unauthorized
e-mails to over 500 potential investors. Neither the Fund,
the Adviser nor any member of the underwriting syndicate
group nor any of their officers, directors or employees
authorized, encouraged or were involved in any way in the
preparation or distribution of those e-mails and each
specifically disclaims any responsibility for the
distribution of those e-mails. The distribution of the
e-mails to investors may have constituted an offer by Bear
Stearns that did not meet the requirements of the
Securities Act of 1933. If the unauthorized e-mails did
constitute a violation of the Securities Act of 1933,
those recipients, if any, of the
e-mails that purchase shares of Common Stock might sue the
Fund for damages, the amount of which cannot be
determined. Once Bear Stearns became aware of the mistaken
distribution, it contacted the addressees and notified
them that the e-mail they received and the information in
the e-mail should be disregarded and that only the
preliminary prospectus and the investor guide authorized
by the Fund could be relied upon in considering an
investment in the Fund. Bear Stearns is not an underwriter
of shares of Common Stock nor a dealer authorized by the
Underwriters to sell shares of Common Stock nor will it
offer or sell any shares of Common Stock in the offering.
The e-mails distributed by the Bear Stearns employees
contained certain information regarding the Fund and the
Adviser that is not contained in this prospectus,
including an estimated initial dividend yield range,
anticipated details of a model portfolio of the Fund and
incorrect information about the rating of the Adviser by a
fund rating organization. YOU SHOULD NOT CONSIDER OR
|
RELY UPON ANY OF THE INFORMATION SET FORTH IN THOSE
E-MAILS, AND YOU SHOULD NOT MAKE AN INVESTMENT DECISION
WITHOUT CAREFULLY CONSIDERING THE RISKS AND OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS.
CONVERSION RISK. Under the Fund's Bylaws, if at any time
after the third year following the offering made hereby,
shares of the Common Stock publicly trade for a
substantial period of time at a significant discount from
the Fund's then current net asset value per share, the
Board of Directors of the Fund is obligated to consider
taking various actions designed to reduce or eliminate the
discount, including recommending to shareholders amend-
ments to the Fund's Articles of Incorporation (together
with any amendments or supplements thereto, including any
articles supplementary, the "Articles" or "Articles of
Incorporation") to convert the Fund to an open-end
investment company, which would result in the redemption
of Fund Preferred Shares then outstanding and the
potential subsequent sale of Fund assets during
unfavorable market conditions. In addition, the Board may
consider taking actions designed to eliminate the discount
whenever it deems it to be appropriate. See "Repurchase of
Common Stock and Tender Offers; Conversion to Open-End
Fund."
ANTI-TAKEOVER PROVISIONS. The Fund's Articles of
Incorporation and Bylaws include provisions that could
have the effect of inhibiting the Fund's possible
conversion to open-end status and limiting the ability of
other entities or persons to acquire control of the Fund's
Board of Directors. In certain circumstances, these
provisions might also inhibit the ability of shareholders
to sell their shares at a premium over prevailing market
prices. See "Certain Provisions of the Articles of
Incorporation."
MARKET DISRUPTION. As a result of the terrorist attacks on
the World Trade Center and the Pentagon on September 11,
2001, some of the U.S. securities markets were closed for
a four-day period. These terrorist attacks and related
events have led to increased short-term market volatility
and may have long-term effects on U.S. and world economies
and markets. A similar disruption of the financial markets
could impact interest rates, auctions, secondary trading,
ratings, credit risk, inflation and other factors relating
to the Common Stock.
INFLATION RISK. Inflation risk is the risk that the value
of assets or income from the Fund's investments will be
worth less in the future as inflation decreases the value
of payments at future dates.
TAX RISK. Future changes in tax law or regulation could
adversely affect the Fund and its portfolio holdings,
including their valuation, which could negatively impact
the Fund's shareholders and distributions they receive
from the Fund. Tax changes can be given retroactive
effect.
STOCK PURCHASES AND
TENDERS........... The Fund's Board of Directors currently contemplates that
the Fund, at least once each year, may consider
repurchasing shares of Common Stock in the open market or
in private transactions, or tendering for shares, in an
attempt to reduce or eliminate a market value discount
from net asset value, if one should occur.
|
Upon the issuance of Fund Preferred Shares, the Fund's
ability to repurchase shares of, or tender for, its Common
Stock may be limited by the asset coverage requirements of
the 1940 Act and by asset coverage and other requirements
imposed by Moody's as a condition to rating the Fund
Preferred Shares. No assurance can be given that the Board
of Directors will decide to undertake share repurchases or
tenders or, if undertaken, that repurchases and/or tender
offers will result in the Fund's Common Stock trading at a
price that is close to, equal to or above net asset value.
The Fund may borrow to finance repurchases and/or tender
offers. See "Repurchase of Common Stock and Tenders
Offers; Conversion to Open-End Fund."
CUSTODIAN, TRANSFER
AGENT AND
DIVIDEND-PAYING
AGENT AND
REGISTRAR......... PFPC Trust Company serves as the Fund's custodian.
PFPC, Inc. serves as the Fund's transfer agent,
dividend-paying agent and registrar for the Common Stock.
See "Custodian, Transfer Agent and Dividend-Paying Agent
and Registrar."
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SUMMARY OF FUND EXPENSES
The following table assumes the issuance of Fund Preferred Shares in an amount equal to 36% of the Fund's capital (after issuance), assumes that the Fund issues approximately 35,000,000 shares of Common Stock and shows Fund expenses as a percentage of net assets attributable to shares of Common Stock. Footnote 3 to the table also shows Fund expenses as a percentage of net assets attributable to shares of Common Stock, but assumes that no Fund Preferred Shares are issued or outstanding (such as will be the case prior to the Fund's expected issuance of Fund Preferred Shares).
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering
price)........................................ 4.50%
Offering Expenses Borne by the Fund (as a
percentage of offering price)(1).............. 0.20%
Dividend Reinvestment Plan Fees................. None(2)
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PERCENTAGE OF NET
ASSETS ATTRIBUTABLE
TO COMMON STOCK
(ASSUMING THE
ISSUANCE OF FUND
PREFERRED SHARES)(3)
----------------------------
ANNUAL EXPENSES
Investment Advisory Fees........................ 0.67%(4)
Other Expenses.................................. 0.56%(5)
Total Annual Fund Operating Expenses............ 1.23%(1)
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(1) The Adviser has agreed to pay all the Fund's organizational expenses. The
Adviser has also agreed to pay those offering costs of the Fund (other than
the sales load) that exceed $0.05 per share of Common Stock (0.20% of the
offering price). The offering costs to be paid by the Fund are not included
in the expenses shown in the table. Offering costs borne by Common
Stockholders will result in a reduction of capital of the Fund attributa-
ble to the Common Stock.
(2) You will pay brokerage charges if you direct the plan agent to sell your
Common Shares held in a dividend reinvestment account.
(3) The table presented below in this footnote estimates what the Fund's annual
expenses would be stated as percentages of the Fund's net assets
attributable to Common Stock but, unlike the table above, assumes that no
Fund Preferred Shares are issued or outstanding. This will be the case, for
instance, prior to the Fund's expected issuance of Fund Preferred Shares.
In accordance with these assumptions, the Fund's expenses would be
estimated to be as follows:
PERCENTAGE OF NET ASSETS
ATTRIBUTABLE TO COMMON
STOCK (ASSUMING NO FUND
PREFERRED SHARES ARE ISSUED
OR OUTSTANDING)
---------------------------
ANNUAL EXPENSES
Investment Advisory Fees........................ 0.45%(4)
Other Expenses.................................. 0.27%
Total Annual Fund Operating Expenses............ 0.72%(1)
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(4) Does not include the amounts paid to the Servicing Agent for its
shareholder servicing activities, which are included in "Other Expenses."
(5) If the Fund offers Fund Preferred Shares, costs of that offering, estimated
to be approximately 1.16% of the total dollar amount of the Fund Preferred
Shares offering (including the sales load paid to the underwriters for the
Fund Preferred Shares offering), will be borne immediately by Common
Stockholders and result in a reduction of the net asset value of the Common
Stock. Assuming the issuance of Fund Preferred Shares in an amount equal to
36% of the Fund's capital (after their issuance) these offering costs are
estimated to be approximately $5,409,580 or $0.15 per share of Common Stock
(0.62% of the offering price). These offering costs are not included among
the expenses shown in this table.
EXAMPLE
The purpose of the following table is to help a holder of Common Stock understand the fees and expenses that such holder would bear directly or indirectly. The expenses shown in the table are based on estimated amounts for the Fund's first year of operations, unless otherwise indicated, and assume that the Fund issues approximately 35,000,000 shares of Common Stock. If the Fund issues fewer shares of Common Stock, all other things being equal, these expenses would increase. See "Management of the Fund."
As required by relevant Securities and Exchange Commission regulations, the
following example illustrates the expenses (including the sales load of $45,
estimated offering expenses of this offering of $2.00 and the estimated offering
costs of issuing Fund Preferred Shares, assuming the Fund issues Fund Preferred
Shares representing 36% of the Fund's capital (after their issuance), of $6.18)
that you would pay on a $1,000 investment in shares of Common Stock, assuming
(1) total annual expenses of 1.23% of net assets attributable to shares of
Common Stock and (2) a 5% annual return(1):
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Total Expenses Incurred....... $65 $90 $118 $195
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(1) THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES. ACTUAL EXPENSES MAY BE HIGHER OR LOWER. The example assumes that the estimated "Other Expenses" set forth in the Annual Expenses table are accurate and that all dividends and distributions are reinvested at 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.
THE FUND
The Fund is a newly organized, closed-end, diversified management investment
company registered under the Investment Company Act of 1940, as amended, and the
rules and regulations thereunder (the "1940 Act"). The Fund, which was
incorporated under the laws of the State of Maryland on May 23, 2002, is
registered under the 1940 Act and has its principal office at 301 E. Colorado
Boulevard, Suite 720, Pasadena, California 91101. The Fund's telephone number is
(626) 795-7300.
USE OF PROCEEDS
The net proceeds of the offering of shares of Common Stock will be approximately $ ($ if the underwriters exercise the over-allotment option in full) after payment of the sales load and organizational and offering costs (other than the sales load) that do not exceed $0.05 per share of Common Stock. The net proceeds of the offering will be invested in accordance with the Fund's investment objective and policies (as stated below) as soon as practicable after completion of the offering. The Fund currently anticipates being able to do so within three months after the completion of the offering. Pending investment of the net proceeds in accordance with the Fund's investment objectives and policies, the Fund will invest in money market securities or money market mutual funds. Investors should expect, therefore, that before the Fund has fully invested the proceeds of the offering in accordance with its investment objective and policies, the Fund's yield would be somewhat lower, but that its net asset value would be subject to less fluctuation, than would be the case at such time as the Fund is fully invested.
INVESTMENT OBJECTIVE AND POLICIES
GENERAL
The Fund's investment objective is high current income for holders of its Common Stock consistent with preservation of capital. The Fund's investment objective may not be changed without the
approval of the holders of at least 80% of the Fund's outstanding voting securities (as defined below under "Investment Restrictions"), voting as a single class, and at least 80% of the Fund's outstanding Fund Preferred Shares (as defined below under "Investment Restrictions"), voting as a separate class. See "Description of Capital Stock--Preferred Stock--Voting Rights" for additional information with respect to the voting rights of holders of Fund Preferred Shares. No assurance can be given that the Fund's investment objective will be achieved.
The Fund pursues its investment objective by investing in a diversified portfolio primarily consisting of preferred securities. In seeking its objective, the Fund will normally invest at least 80% of its total assets in a diversified portfolio of preferred securities. Under current market conditions, the Fund expects that its portfolio of preferred securities will consist principally of "hybrid" or taxable preferreds.
In selecting individual securities for investment, the Adviser considers, among other things, current yield, price variability and the underlying fundamental characteristics of the issuer, with particular emphasis on debt and dividend coverage and the potential for the timely payment of dividends and interest. It is expected that the Fund's assets will be invested primarily in fixed rate and adjustable rate preferred securities. The Fund has no current intention of investing in inverse floating rate securities. The Fund may invest in other types of preferred securities--such as auction rate preferred stocks and convertible preferred stocks--as well as debt and common equity securities in appropriate circumstances. The Adviser currently anticipates using various protective hedging techniques, including (1) entering into futures contracts and options on futures contracts and (2) entering into interest rate swap positions and options thereon ("swaptions"), from time to time for the purpose of hedging some or all of its preferred securities and debt holdings. There is no limit on the portion of the Fund's assets that can be hedged, subject to compliance with applicable laws and regulations, as well as restrictions imposed in connection with the rating of the Fund Preferred Shares. The Fund may invest up to 5% of its total assets in each of options on securities and options on stock indices, up to 10% of its total assets in each of initial margin deposits on futures contracts and premiums paid for options thereon, and up to 5% of its total assets for time premiums paid for swaptions. However, under current market conditions, it is expected that up to an aggregate of 15% of the Fund's total assets could be invested in options on securities and stock indices, initial margin deposits and option premiums paid in connection with futures transactions, and initial margin deposits and options premiums paid in connection with interest rate swaps and swaptions. (See "Investment Techniques--Futures Contracts and Options on Futures Contracts" for a discussion of the limitations and risks associated with investments in futures contracts and options on futures contracts. See also "Investment Techniques--Interest Rate Swaps and Options Thereon ("Swaptions")" for a discussion of the limitations and risks associated with positions in interest rate swaps and options thereon.) The portion of the Fund's assets not invested in preferred securities and hedging instruments may be invested in, among other securities, money market instruments, money market mutual funds, corporate debt securities, asset-backed securities, and securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities ("Government Securities"), which, depending on market conditions, may at times have a higher or lower yield than preferred securities in which the Fund invests. Under normal conditions, the Fund's investments in such debt securities is limited to 20% of its total assets. Under normal conditions, the Fund may also invest up to 15% of its total assets in common stocks or convertible securities which trade in close relationship to their underlying associated common stocks.
PORTFOLIO STRATEGIES
The Adviser believes that the pursuit of the strategies described below will result in a high level of current income to the Fund's Common Stock consistent with preservation of capital. Furthermore, that income is expected by the Adviser to increase in response to significant increases in interest rates while being relatively resistant to the impact of significant declines in interest rates due to (1) the composition of fixed rate and adjustable rate securities owned, (2) the maintenance of certain hedging positions
against some or all of the Fund's holdings of preferred and debt securities, from time to time, and (3) the intended leveraging of the Fund through the issuance of Fund Preferred Shares.
Coupon rates on fixed rate preferred and debt securities held by the Fund,
as their name implies, would be fixed regardless of the direction of interest
rates. In addition, the market prices of such securities would tend to
(1) decline as interest rates rose and (2) rise as interest rates fell.
Adjustable rate securities pay income that generally rises as interest rates
rise and falls as interest rates decline, often subject to minimum income floors
and maximum income ceilings (often called "collars"). All other things being
equal, adjustable rate preferreds will tend to have somewhat less price
variability than would fixed rate securities of comparable maturity.
Nevertheless, changing interest rate conditions may still affect adjustable rate
preferred stocks' principal value, which may expose the Fund to risk of loss.
See "Investment Objective and Policies--Risk Factors and Special
Considerations--Fluctuation in Share Price."
The Fund normally anticipates hedging some or all of the interest rate exposure inherent in its holdings of these different types of preferred and debt securities. Under current market conditions, this hedging would be accomplished principally by one or more of the following strategies: (1) purchasing put options (called a "long position in a put option") on Treasury Bond and/or Treasury Note futures contracts, (2) entering into futures contracts to sell Treasury Bonds and/or Treasury Notes (called a "short position in a futures contract"), (3) entering into interest rate swap agreements as a "fixed rate payer", and/or (4) purchasing options to enter into interest rate swap agreements as a "fixed rate payer" (called a "pay fixed swaption").
The hedging positions that the Fund currently expects to hold normally appreciate in value when interest rates rise significantly, reflecting either the expected rise in yields of Treasury securities or interest rate swap yields, as applicable, and the associated decline in the prices of underlying Treasury securities or decreased net market value of an obligation to pay a fixed income stream in a higher interest rate environment.
Conversely, such hedging positions would normally depreciate in value when interest rates fall significantly. A short position in a Treasury Bond or Treasury Note futures contract should reflect directly changes in the price of that futures contract, i.e., benefiting from price declines and being adversely affected by price increases. Further, the value of a long position in a put option on a Treasury Bond or Treasury Note futures contract should rise and fall in inverse relationship to the market price of that futures contract, but the magnitude of the change in value would to a large extent depend upon whether and the extent to which the exercise price of the put option was below ("out-of-the-money") or above ("in-the-money") the price of the futures contract.
Similarly, a "pay-fixed" position in an interest rate swap should directly reflect changes in the level of interest rate swap yields. Also, the value of an option to pay fixed rate in an interest rate swap, i.e., a pay-fixed swaption, will rise or fall in direct relationship to a pay-fixed interest rate swap's value, but the magnitude of the value change would, to a large extent, depend on whether and the extent to which the exercise yield of the pay-fixed swaption was above ("out-of the-money") or below ("in-the-money") the existing level of interest rate swap yields. A more specific explanation of options and swaptions follows.
Should the Fund purchase an out-of-the-money put option on a Treasury Bond or Treasury Note futures contract as part of its hedging strategies, that put option would be expected to have value at its expiration date only if the price of the underlying futures contract declined below the exercise price of the put option. Accordingly, interest rates could generally increase moderately, and a decline in value of the Fund's preferred and debt holdings could result without the Fund receiving any offsetting benefit from its holdings of such put options. The Fund would achieve a gain on a long position in an out-of-
the-money put option on a Treasury Bond or Treasury Note futures contract at the time of its expiration only if interest rates were to increase significantly so as to result in a decline in the price of the underlying futures contract sufficient to cause the value of such put option at expiration to exceed the premiums paid by the Fund to acquire it (plus transaction costs).
Should the Fund acquire an in-the-money put option on a Treasury Bond or Treasury Note futures contract as part of its hedging strategies and should interest rates generally increase subsequently, the value of that put option at the time of its expiration would normally reflect favorably any decline in the market price of the underlying futures contract. However, the premium paid to acquire such in-the-money put option would have reflected the exercise value already present in the option at the time of purchase, and therefore, the premium would normally be higher than that paid for an out-of-the-money put option. Furthermore, the value of an in-the-money put option would be adversely impacted directly by an increase in the price of the underlying Treasury Bond or Treasury Note futures contract which could result from a decline in interest rates. The Fund currently intends to hedge using put options on Treasury Bonds or Treasury Note futures contracts that are, at the time of purchase, out-of-the-money.
An interest rate swap is an agreement between two parties where one party agrees to pay a contractually stated fixed income stream, usually denoted as a fixed percentage of an underlying "notional" amount, in exchange for receiving a variable income stream, usually based on LIBOR, and denoted as a percentage of the underlying notional amount. From the perspective of a fixed rate PAYER, if interest rates rise, the payer will expect a rising level of income since the payer is a receiver of floating rate income. This would cause the value of the swap contract to rise in value, from the payer's perspective, because the discounted present value of its obligatory payment stream is diminished at higher interest rates, all at the same time it is receiving higher income. Alternatively, if interest rates fall, the reverse occurs and the payer simultaneously faces the prospects of both a diminished floating rate income stream and a higher discounted present value of his fixed rate payment obligation. For purposes of completing the analysis, these value changes all work in reverse from the perspective of a fixed rate RECEIVER.
The use of pay fixed swaptions is, in many key respects, analogous to the treatment of put options on futures contracts of Treasury securities. If the Fund should buy an option to pay fixed in an interest rate swap at an exercise yield above current market levels, such pay fixed swaption is deemed out-of- the-money. Conversely, if the Fund should buy a pay fixed swaption with an exercise yield below the current market level of interest rate swap yields, such pay fixed swaption is considered in-the-money.
Should the Fund purchase an out-of-the-money pay fixed swaption as part of its hedging strategies, that pay fixed swaption would be expected to have value at its expiration date only if the then prevailing level of interest rate swap yields was in excess of the exercise yield specified in the pay fixed swaption. Accordingly, interest rates could generally increase moderately, and a decline in value of the Fund's preferred and debt holdings could result without the Fund receiving any offsetting benefit from its holdings of such pay fixed swaptions. The Fund would achieve a gain on its holding of an out-of-the-money pay fixed swaption at the time of its expiration only if interest rates were to increase significantly so as to result in a rise in value from the perspective of a fixed rate payer sufficient to exceed the premiums paid by the Fund to acquire the pay fixed swaption (plus transaction costs).
Should the Fund acquire an in-the-money pay fixed swaption as part of its hedging strategies and should interest rates generally increase subsequently, the value of that pay fixed swaption at the time of its expiration would normally reflect favorably any rise in value of the underlying interest rate swap from the perspective of a fixed rate payer. However, the premium paid to acquire such in-the-money pay fixed swaption would have reflected the exercise value already present in the option at the time of purchase, and therefore, the premium would normally be higher than that paid for an at-the-money or out-of-the-money pay fixed swaption. Furthermore, the value of an in-the-money pay fixed swaption
would be adversely impacted directly by a decrease in the yield of the underlying interest rate swap contract, which could result from a general decline in the level of interest rates.
In any event, the maximum loss that might be incurred on a long position in either a put option on a Treasury futures contract or a pay-fixed swaption would be limited to the premium paid for the purchase of such option or swaption (plus transaction costs).
The response of the Fund's income to changes in interest rates will be
impacted by the effectiveness of its hedging strategies. In order for the Fund's
income from its holdings of fixed rate securities to increase as interest rates
rise, the Fund must achieve gains on its hedging positions. These gains can be
used to acquire additional shares of preferred or debt securities, which in turn
would generate additional dividend or interest income. In the case of generally
rising interest rates, the gains potentially achievable by the Fund from hedge
instruments will be reduced by the premiums paid for the purchase of options and
swaptions and to the extent that such options and swaptions held are out-of-
the-money when purchased. In order for the Fund's income to be relatively
resistant to significant declines in interest rates, the Fund must have limited
exposure to the magnitude of losses on hedge instruments which would occasion
the sale of some of its holdings of securities in order to cover such hedging
losses and related costs. The Fund's exposure to losses on hedge instruments in
the event of generally declining interest rates will be greater to the degree it
holds (a) short positions in futures contracts, pay fixed interest rate swaps,
and long positions in-the-money put options or swaptions rather than
(b) out-of-the-money put options or swaptions.
There are economic costs of hedging reflected in the pricing of futures, swaps, options, and swaption contracts which can be significant, particularly when long-term interest rates are substantially above short-term interest rates, as is the case at present. The desirability of moderating these hedging costs will be a factor in the Adviser's choice of hedging strategies, although costs will not be the exclusive consideration in selecting hedge instruments. Although appreciation is not a focus of the Fund, the Fund may select individual investments based upon their potential for appreciation without regard to the effect on current income, in an attempt to mitigate the impact on the Fund's assets of the expected normal cost of hedging.
The Fund's use of hedging instruments and the availability of gains for investment in additional shares of preferred and debt securities may be limited by the restrictions and distribution requirements imposed on the Fund under certain regulations of the Commodity Futures Trading Commission ("CFTC") and in connection with its qualification as a regulated investment company under the Internal Revenue Code of 1986, as amended (the "Code"). See "Investment Techniques" below and "Taxation." The Adviser does not believe that these restrictions and requirements will materially adversely affect the management of the Fund or the ability of the Fund to achieve its investment objective.
There may be an imperfect correlation between changes in the value of the Fund's portfolio holdings and hedging positions entered into by the Fund, which may prevent the Fund from achieving the intended hedge or expose the Fund to risk of loss. In addition, the Fund's success in using hedge instruments is subject to the Adviser's ability to predict correctly changes in the relationships of such hedge instruments to the Fund's portfolio holdings, and there can be no assurance that the Adviser's judgment in this respect will be accurate. Consequently, the use of hedging transactions might result in a poorer overall performance for the Fund, whether or not adjusted for risk, than if the Fund had not hedged its portfolio holdings.
The Fund Preferred Shares which the Fund expects to issue will have dividend rates established by auctions which will typically be held at regular seven day or other short intervals. This auction process is designed to result in a high degree of principal stability for holders of the Fund Preferred Shares. The dividend rates set pursuant to such auction process are expected to be influenced by short-term
interest rates generally, so that the dividend rate on the Fund Preferred Shares outstanding is expected to increase as short-term interest rates rise and to decline as short-term interest rates fall.
In the event of an equal rise in long-term and short-term interest rates from current levels, the additional income anticipated to be received from the investment of gains on appreciated hedging positions (assuming a significant rise in interest rates) when coupled with the net impact of increasing income from adjustable rate securities would tend to more than offset the expected increased dividend rate payable on the Fund Preferred Shares outstanding. Thus, net income to the Common Stock is expected to rise in response to significant increases in interest rates as described herein.
In the event of equal declines in long-term and short-term interest rates from current levels, losses on hedge positions would be expected to result, possibly requiring the sale of some of the Fund's securities holdings and decreasing the Fund's investment income, although such hedging losses would be limited to the amount of the premiums paid (plus transaction costs) to the extent that the Fund hedged with long positions in put options or swaptions as described above. Furthermore, the existence of income floors on adjustable rate securities would mitigate the downward pressure on Fund income, to the degree the Fund has holdings of such securities. In addition, lower interest rates would be expected to result in a lower dividend rate on the Fund Preferred Shares outstanding, which would increase net investment income available to Common Stock.
However, in declining interest rate environments, issuers may call for redemption those preferred and debt securities which have coupon rates above prevailing rates. This would reduce the Fund's income since preferred and debt securities paying comparable yields would not be available to be purchased with the redemption proceeds. The combined impact of the limitation of hedge losses through the use of options hedges, lower collars on adjustable rate securities and the decline in the cost of the Fund Preferred Shares outstanding, in the opinion of the Adviser, should contribute to the net income to the Fund's Common Stock being relatively resistant to equal declines in long-term and short-term interest rates, subject to the adverse impact of redemptions of the Fund's higher yielding preferred and debt securities in the event of substantial declines in interest rates.
If short-term interest rates were to rise while long-term rates remained unchanged, the cost of the Fund's outstanding Fund Preferred Shares would be expected to rise while coupon rates on the Fund's holdings of fixed rate and adjustable rate securities would remain unchanged (with certain exceptions in the case of adjustable rate securities whose income would rise if short term rates were to exceed long term rates by a sufficiently wide margin). See "Investment Objective and Policies--Portfolio Investments--Adjustable Rate Preferred Stock."
However, such a hypothesized change in the relationship between short-term and long-term rates also would be expected to reduce the cost of hedging preferred and debt securities, regardless of whether such hedges were in futures contracts, interest rate swaps, long positions in put options, or holdings of pay fixed swaptions. The combined impact of the foregoing factors on the Fund's net income would depend in large measure on the relative size of the Fund's holdings of hedged preferred and debt securities and the hedging instruments utilized.
In the opposite case, namely, a decline in short-term rates with long-term rates remaining unchanged, the income from fixed rate and, for the most part, adjustable rate securities would be unaffected. Under certain circumstances, the income from adjustable rate securities may be adversely affected. The cost of the Fund's outstanding Fund Preferred Shares would be expected to fall. On balance, these various movements would contribute to a higher net return to the Fund. However, in this interest rate environment, there would be an expected increase in the cost of hedging preferred and debt securities. The combined impact of the foregoing factors on the Fund, as under the scenario
described in the preceding paragraph, would depend in large measure on the relative size of the Fund's holdings of different types of securities and the hedge instruments utilized.
The portions of the Fund's assets invested in various types of preferred and debt securities may vary from time to time. The portion of the Fund's securities that will be hedged and the types of hedge positions held may also vary significantly from time to time. There can be no assurance that the Fund will seek to hedge its entire portfolio of preferred and debt securities or that, if such hedging strategies were undertaken, they would be successful (1) in protecting against declines in value attributable to rising interest rates in general, and/or (2) in providing increased income in the event of significant increases in interest rates while maintaining the Fund's relative resistance to declines in income in the event of significant declines in interest rates.
PORTFOLIO INVESTMENTS
Under normal market conditions, the Fund will invest at least 80% of its total assets in preferred securities. Preferred securities include "hybrid" or taxable preferred securities and traditional preferred/ preference stock whose dividends qualify for the inter-corporate dividends received deduction ("DRD") that meet certain criteria (as described below). Under current market conditions, the Fund expects that its portfolio of preferred securities will consist principally of "hybrid" or taxable preferreds. For this reason, the Fund's distributions will generally not qualify for the DRD. Certain tax proposals currently under preliminary discussion by federal government officials would eliminate the taxation of dividends paid by corporations to individuals out of previously taxed corporate income. However, it is uncertain if and in what form this proposal will ultimately be adopted. As proposed, it would be possible for the Fund to distribute tax-free to individual shareholders certain dividends paid on preferred stocks in its portfolio. Under current market conditions and current tax law, the Fund intends to invest principally in "hybrid" or taxable preferred securities, the payments on which do not appear to be excludable from an individual's taxable income under the current proposals. If tax law changes in a way that affords tax benefits to traditional preferred securities, the Fund would take those tax benefits into account when determining whether to invest in different types of preferred securities. As a result, the Fund might hold a smaller portion of its assets in hybrid preferreds and a larger portion in traditional preferreds than currently contemplated.
The Fund will invest in hybrid, or fully taxable, preferred securities that
meet the following criteria: (1) the issuer has the ability to defer payments
for a minimum period of 18 months without triggering an event of default and
(2) the security is a junior and fully subordinated liability of an issuer or
the beneficiary of a guarantee that represents a junior and fully subordinated
liability of the guarantor. Hybrid securities that do not meet these criteria
will be considered debt securities.
"Hybrid" or taxable preferred securities are not eligible for the DRD and are not legally considered equity of an issuer. They 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, hybrids typically permit an issuer to defer the payment of income for 18 months or more without triggering an event of default. Generally, the deferral period is five years. 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 hybrids have not been made), these issues are often treated as close substitutes to traditional preferred securities, both by issuers and investors. Hybrid securities are also treated in a similar fashion to traditional preferred/preference stocks 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. As is also true of preferred/preference stock, hybrids 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. Hybrid securities have been marketed under a variety of names, including, but not limited to MIPS, QUIPS, TOPrS, TrUPS, QUIBS, QUIDS, CorTS, PINES, Trust Preferred Securities and capital securities. As with traditional preferred/preference stocks, hybrid or taxable preferreds may be convertible into underlying common stock of the issuer or associated grantor.
Perpetual preferred/preference stocks are issued with no mandatory retirement provisions, but typically are callable after a period of time at the option of the issuer. No redemption can occur if full cumulative dividends have not been paid, although issuers may be able to engage in open-market repurchases without regard to any cumulative dividends payable. Sinking fund preferred/preference stocks provide for the redemption of a portion of the issue on a regularly scheduled basis with, in most cases, the entire issue being retired at a future date.
Hybrid preferreds are typically issued with a final maturity date, although, in certain instances the 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 consequences 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.
Preferred/preference stock is, with common stock, one of the two major types of equity securities. Generally, preferred/preference stock receives dividends prior to distributions on common stock and usually has a priority of claim over common stockholders if the issuer of the stock is liquidated. The income paid by an issuer to holders of its preferred/preference and common stocks is typically eligible for the DRD. Unlike common stock, preferred stock does not usually have voting rights; preferred/ preference stock, in some instances, is convertible into common stock.
Preferred/preference securities have certain characteristics of both debt and common equity securities. They are debt-like to the extent that their promised income is contractually fixed. They are common equity-like since they do not have rights to precipitate bankruptcy filings or collection activities in the event of missed payments. Furthermore, they 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.
In order to be payable, dividends on preferred/preference stock must be declared by the issuer's board of directors. In addition, distributions on hybrid securities are also subject to deferral and are thus not automatically payable. Income payments on the 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, of course, no assurance that dividends or distributions on the preferred securities in which the Fund invests will be declared or otherwise made payable. The Fund may acquire non-cumulative preferred securities subject to the restrictions on quality adopted by the Fund, although the Adviser would consider, among other things, their non-cumulative nature in making any decision to purchase or sell such securities.
Shares of preferred securities have a liquidation value that generally equals the original purchase price at the date of issuance. The market values of preferred securities may be affected by favorable and unfavorable changes impacting companies in the utilities and banking industries, which are prominent issuers of preferred securities (See "Investment Objective and Policies--Concentration" below), and by actual and anticipated changes in tax laws, such as changes in corporate income tax rates and in the DRD.
Because the claim on an issuer's earnings represented by preferred/preference stocks and hybrid securities may become onerous when interest rates fall below the rate payable on the stock or for other reasons, the issuer may redeem the securities. Thus, in declining interest rate environments in particular, the Fund's holdings of higher coupon-paying preferred/preference and hybrid securities may be reduced and the Fund would be unable to acquire securities paying comparable coupons with the redemption proceeds.
From time to time, preferred securities issues have been, and may in the future be, offered having features other than those described below that are typical for fixed rate, adjustable rate or auction rate preferred securities. The Fund reserves the right to invest in these securities if the Adviser believes that doing so would be consistent with the Fund's investment objective 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. The Adviser believes that the unavailability of such innovative securities would not adversely affect the Fund's ability to achieve its investment objective.
CREDIT QUALITY. At least 80% of the Preferred securities that the Fund will acquire will be rated investment grade (at least "Baa3" by Moody's or "BBB-" by S&P) at the time of investment or will be securities of issuers whose senior debt is rated investment grade by Moody's or S&P at the time of investment. In addition, the Fund may acquire unrated issues that the Adviser deems to be comparable in quality to rated issues in which the Fund is authorized to invest. The Fund will limit to 20% of its total assets the portion of its portfolio invested in preferred and debt securities rated below investment grade (which securities must be rated at least "Ba3" by Moody's or "BB-" by S&P at the time of purchase) or judged to be comparable in quality at the time of purchase; however, any such securities must be issued by an issuer having a class of senior debt rated investment grade outstanding. Securities rated "Baa" by Moody's or "BBB" by S&P, although investment grade, are considered to have speculative characteristics, and securities rated "Ba" or "BB" are believed to have speculative elements and a greater vulnerability to default than higher-rated securities. Moody's and S&P may modify certain letter ratings of securities with the addition of a plus or a minus sign or other modifier in order to show relative standing within the rating category.
References to a particular letter rating in this prospectus may or may not be to the rating with or without regard to any specific modifiers as the context requires.
The ratings of Moody's and S&P represent their opinions as to the quality of the securities that they undertake to rate; the ratings are relative and subjective and are not absolute standards of quality. The Adviser's judgment as to credit quality of a security, thus, may differ from that suggested by the ratings published by a rating service. A description of ratings by Moody's and S&P relevant to the Fund's investments is included in Appendix A to this prospectus. The policies of the Fund described above as to ratings of portfolio investments apply only at the time of the purchase of a security, and the Fund is not required to dispose of a security in the event Moody's or S&P downgrades its assessment of the credit characteristics of the security's issuer, although standards for rating the Fund Preferred Shares imposed by Moody's may result in the Fund's disposing of securities that are downgraded.
TRADITIONAL FIXED RATE PREFERRED STOCK. Traditional fixed rate preferred stocks have fixed dividend rates for the life of the issue and typically pay dividends that qualify for the DRD. They can be perpetual with no maturity date or subject to mandatory redemptions such as through a sinking fund. The category of fixed rate preferred stocks also includes a variety of innovative securities as well as certain convertible preferred securities. Certain fixed rate preferred stocks have features intended to provide some degree of price stability. These features may include an auction mechanism at some specified future date. The auction feature is normally intended to enhance the probability that a
preferred stock shareholder will be able to dispose of his holdings close to a pre-specified price, typically equal to par or stated value. Other price stability mechanisms include convertibility into an amount of common equity of the same issuer at some specified future date, typically in amounts not greater than par value of the underlying preferred stocks. Another common form of fixed rate preferred stock is the traditional convertible preferred stock, which permits the holder to convert into a specified number of shares at the holder's option at any time prior to some specified date. Innovative preferred stock and traditional convertible preferred stock are often less liquid than the conventional fixed rate preferred stock. The Fund's ability to achieve its investment objective is not dependent on the availability of such innovative or convertible preferred stocks.
ADJUSTABLE RATE PREFERRED STOCK. Unlike traditional fixed rate preferred stocks, adjustable rate preferred stocks are preferred stocks that have a dividend rate that adjusts periodically to reflect changes in the general level of interest rates. (Like traditional fixed rate preferred stocks, these issues typically pay dividends that qualify for the DRD.) The adjustable dividend rate feature is intended to make the market value of these securities less sensitive to changes in interest rates than similar securities with fixed dividend rates. Nonetheless, adjustable rate preferred stocks have fluctuated in market value and are expected to do so in the future.
The dividend rate on an adjustable rate preferred stock is determined typically each quarter by applying an adjustment formula established at the time of issuance of the stock. Although adjustment formulas vary among issues, they typically involve a fixed relationship either to (1) rates on specific classes of debt securities issued by the U.S. Treasury or (2) LIBOR, with limits (known as "collars") on the minimum and maximum dividend rates that may be paid. As the maximum dividend rate is approached, any further increase in interest rates may adversely affect the market value of the stock. Conversely, as the minimum dividend rate is approached, any further decrease in interest rates may positively affect the market value of the stock. The adjustment formula is fixed at the time of issuance of the adjustable rate preferred stock and cannot be changed without the approval of the holders thereof.
The market values of outstanding issues of adjustable rate preferred stock may fluctuate in response to changing market conditions. In the event that market participants in a particular issue demand a different dividend yield than the adjustment formula produces, the market price will change to produce the desired yield. The dividend yield demanded by market participants may vary with changing perceptions of credit quality and the relative levels of short-term and long-term interest rates, as well as other factors.
Most of the issues of adjustable rate preferred stocks currently outstanding are perpetual.
HYBRID PREFERRED SECURITIES. Hybrid, or taxable preferreds, are a comparatively new asset class, having first been introduced late in 1993. Income paid on these securities is not eligible for the DRD, but does constitute deductible interest expense for issuers thereof. The universe of hybrid issuers consists overwhelmingly of fixed coupon rate issues with final stated maturity dates. However, certain issues have adjustable coupon rates, which reset quarterly in a manner similar to adjustable rate preferred stocks described above. The hybrid preferred securities universe 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 ten years of call protection (at premium prices) from the date of their original issuance.
COMMON STOCK. The Fund may invest up to 15% of its total assets in common stock. Common stock is defined as shares of a corporation that entitle the holder to a pro rata share of the profits of the corporation, if any, without preference over any other shareholder or class of shareholders, including holders of the corporation's preferred stock and other senior equity. Common stock usually carries with it the right to vote and frequently an exclusive right to do so. Holders of common stock also have the right to participate in the assets of the corporation after all other claims are paid. In selecting common stocks for investment, the Fund expects generally to focus more on the security's dividend-paying capacity than on its potential for appreciation.
Certain traditional and hybrid preferred securities are convertible into the common stock of the associated issuer. To the extent that such preferred securities, because of their terms and market conditions, trade in close relationship to the underlying common stock of the issuer, they will be subject to the limit of 15% of total assets, under normal market conditions, that applies to common stocks.
AUCTION RATE PREFERRED STOCK. Auction rate preferred stocks pay dividends that adjust based on periodic auctions. Auction rate preferred stocks are similar to short-term corporate money market instruments in that an auction rate preferred stockholder has the opportunity to sell the preferred stock at par in an auction, normally conducted at 49-day or other short intervals, through which buyers set the dividend rate in a bidding process for the next period. The dividend rate set in the auction depends upon market conditions and the credit quality of the particular issuer. The typical auction rate preferred stock's dividend is limited to a specified maximum percentage of the Federal Reserve's Commercial Paper Index as of the auction date. Further, the terms of auction rate preferred stocks generally provide that the shares are redeemable by the issuer at certain times.
The failures of several auctions since late 1990 have significantly decreased the financial market's perception that the auction process can be depended upon to guarantee that the price of such preferred stocks will approximate par or stated value, particularly among lower rated issues.
MONEY MARKET INSTRUMENTS. Under normal conditions, the Fund may hold up to 15% of its total assets in cash or money market instruments or, subject to the limitation on investments in investment companies, in money market mutual funds holding such types of investments. The Fund intends to invest in money market instruments or money market funds to meet its general working capital needs including, but not limited to, the need for collateral in connection with certain investment techniques (see "Investment Objective and Policies--Investment Techniques" below), to hold as a reserve pending the payment of dividends to investors and to meet the liquidity requirements of rating agencies that rate the Fund Preferred Shares, and to facilitate the payment of expenses and settlement of trades. As noted above, pending investment of the net proceeds of this offering in accordance with the Fund's investment objective and policies, the Fund may invest without limitation in money market instruments. In addition, when the Adviser believes that economic circumstances warrant a temporary defensive posture, the Fund may invest in short-term money market instruments without regard to the normal 15% limitation. To the extent the Fund invests in short-term money market instruments, it may not be pursuing its investment objective of high current income.
Money market instruments that the Fund may acquire will be securities rated
in the highest short-term rating category by Moody's or S&P or the equivalent
from another major rating service, securities of issuers that have received such
ratings with respect to other short-term debt or comparable unrated securities.
Money market instruments in which the Fund typically expects to invest include:
Government Securities; bank obligations (including certificates of deposit, time
deposits and bankers' acceptances of U.S. or foreign banks); commercial paper
rated P-1 by Moody's or A-1 by S&P; and repurchase agreements. Money market
funds in which the Fund may invest, are expected to be rated "Aaa" by one or
more rating agencies.
As indicated above, the Fund may invest normally up to 15% of its total assets in money market instruments but, under certain circumstances, may invest without limit in money market instruments. Subject to these limits, the Fund may invest up to 25% of its total assets in U.S. dollar-denominated money market obligations of foreign banks or foreign branches of U.S. banks but will do so only if the Adviser determines that the obligation presents minimal credit risks. These obligations entail risks that are different from those of investments in obligations of U.S. banks. These risks include foreign economic and political developments, foreign governmental restrictions that may adversely affect payment of principal and interest on the obligations, foreign exchange controls and foreign withholding or other taxes on income. Foreign branches of U.S. banks are not necessarily subject to the same or similar regulatory requirements that apply to the domestic operations of U.S. banks, such as mandatory reserve requirements, loan limitations and accounting, auditing and financial record-keeping requirements. In addition, less information may be publicly available about a foreign branch of a U.S. bank than about a U.S. bank.
The Fund may enter into repurchase agreement transactions with certain member banks of the Federal Reserve System or with certain dealers listed on the Federal Reserve Bank of New York's list of reporting dealers. A repurchase agreement is a contract under which the buyer of a security simultaneously commits to resell the security to the seller at an agreed-upon price on an agreed-upon date. Under the terms of a typical repurchase agreement, the Fund would acquire an underlying obligation for a relatively short period (usually not more than seven days) subject to an obligation of the seller to repurchase, and the Fund to resell, the obligation at an agreed-upon price and time, thereby determining the yield during the Fund's holding period. This arrangement results in a fixed rate of return that is not subject to market fluctuations during the Fund's holding period. Under each repurchase agreement, the selling institution will be required to maintain the value of the securities subject to the repurchase agreement at not less than their repurchase price. Repurchase agreements could involve certain risks in the event of default or insolvency of the seller, including possible delays or restrictions on the Fund's ability to dispose of the underlying securities. In evaluating these potential risks, the Adviser, on an ongoing basis, monitors (1) with the assistance of the Administrator, the value of the collateral underlying each repurchase agreement of the Fund to ensure that the value is at least equal to the total amount of the repurchase obligation, including interest, and (2) the creditworthiness of the banks and dealers with which the Fund enters into repurchase agreements.
GOVERNMENT SECURITIES. Government Securities in which the Fund may invest include direct obligations of the United States and obligations issued by U.S. Government agencies and instrumentalities. Included among direct obligations of the United States are Treasury Bills, Treasury Notes and Treasury Bonds, which differ principally in terms of their maturities. Included among the securities issued by U.S. Government agencies and instrumentalities are: securities that are supported by the full faith and credit of the United States (such as Government National Mortgage Association certificates), securities that are supported by the right of the issuer to borrow from the U.S. Treasury (such as securities of Federal Home Loan Banks), and securities that are supported by the credit of the instrumentality (such as Federal National Mortgage Association and Federal Home Loan Mortgage Corporation bonds).
ZERO COUPON SECURITIES. The Fund may invest up to 10% of its total assets in zero coupon securities issued by the U.S. Government, its agencies or instrumentalities as well as custodial receipts or certificates underwritten by securities dealers or banks that evidence ownership of future interest payments, principal payments or both on certain Government Securities. Zero coupon securities pay no cash income to their holders until they mature and are issued at substantial discounts from their value at maturity. When held to maturity, their entire return comes from the difference between their purchase price and their maturity value. Because interest on zero coupon securities is not paid on a current basis, the values of securities of this type are subject to greater fluctuations than are the values of securities that distribute income regularly and may be more speculative than such securities. Accordingly, the values of these securities may be highly volatile as interest rates rise or fall. In addition, the
Fund's investments in zero coupon securities will result in special tax consequences. Although zero coupon securities 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.
Custodial receipts evidencing specific coupon or principal payments have the same general attributes as zero coupon Government Securities but are not considered to be Government Securities. Although typically under the terms of a custodial receipt the Fund is authorized to assert its rights directly against the issuer of the underlying obligation, the Fund may be required to assert through the custodian bank such rights as may exist against the underlying issuer. Thus, in the event the underlying issuer fails to pay principal and/or interest when due, the Fund may be subject to delays, expenses and risks that are greater than those that would have been involved if the Fund had purchased a direct obligation of the issuer. In addition, in the event that the trust or custodial account in which the underlying security has been deposited is determined to be an association taxable as a corporation, instead of a non-taxable entity, the yield on the underlying security would be reduced in respect of any taxes paid.
RESTRICTED SECURITIES (DIRECT PLACEMENTS). The Fund may invest up to 20% of its total assets in securities purchased in direct placements. Securities obtained by means of direct placement typically are less liquid than securities traded on the open market because of statutory or contractual restrictions on resale and thus are often referred to as restricted securities. Such securities are therefore unlike securities traded in the open market, which can be sold immediately if the market is adequate. This lack of liquidity creates special risks for the Fund. However, the Fund could sell such securities if a substantial market of qualified institutional buyers develops pursuant to Rule 144A under the Securities Act of 1933, as amended, in privately negotiated transactions with a limited number of purchasers or in public offerings registered under such Act.
Direct placements of securities have frequently resulted in higher yields to purchasers and more restrictive covenants to issuers, which may provide greater protection for the purchaser than comparable registered securities. As it has avoided the expense and delay involved in a public offering of its securities, an issuer is often willing to offer the purchaser more attractive features in its securities issued in direct placements. Also, adverse conditions in the public securities markets may at certain times preclude a public offering of an issuer's securities.
Because it is not possible to predict with assurance how the market for restricted securities pursuant to Rule 144A will develop, the Fund will carefully monitor the Fund's investments in such securities with particular regard to valuation, liquidity and availability of information.
INVESTMENT COMPANY SECURITIES. The Fund may invest up to 10% of its total assets in securities of registered investment companies. The Fund will not acquire securities of any one investment company if, immediately thereafter, the Fund would own in the aggregate (1) more than 3% of such issuer's total outstanding voting securities or (2) securities issued by such issuer having an aggregate value in excess of 5% of the Fund's total assets. To the extent that investment advisory and brokerage expenses of an investment company are reflected in the price of its shares held in the Fund's portfolio, there will be a duplication of such expenses.
CONCENTRATION
The Fund intends to concentrate its investments in utility companies and companies in the banking industry so that, under normal market conditions, at least 25% of the Fund's total assets will be invested in securities issued by utilities and an additional 25% or more of its total assets will be invested in securities issued by companies in the banking industry. If adverse economic conditions prevail in either or both of these industries at some future date, the Fund, for defensive purposes,
temporarily may invest less than 25% of its total assets in the affected industry or industries. This concentration policy is a fundamental policy of the Fund and cannot be changed without approval by the vote of a majority of the Fund's outstanding voting securities, voting as a single class, and a majority of the Fund's outstanding Fund Preferred Shares, voting as a separate class, as described under "Investment Restrictions" below.
Consistent with the limitations set forth in the preceding paragraph, the portion of the Fund's assets invested in each of the utilities, banking and other industries will vary from time to time. The concentration of the Fund's assets in the utilities and banking industries is a source of potential risk, although the Fund intends to diversify its investments broadly among issuers in order to reduce risk and will be subject to diversification requirements and other investment limitations imposed by rating agencies in connection with the rating of the Fund Preferred Shares intended to be issued by the Fund. See "Investment Objective and Policies--Rating Agency Guidelines and Asset Coverage Requirements."
UTILITY SECURITIES. The utilities industry generally includes companies engaged in the generation, transmission or distribution of electric energy, gas, or water, or, in certain instances, the providing of telephone and telecommunications services. Certain segments of the industry and individual companies within such segments may not perform as well as the industry as a whole. Many utility companies historically have been subject to risks of increases in fuel and other operating costs, high interest costs on borrowings needed for capital improvement programs and costs associated with compliance with and changes in environmental and other governmental regulations. In particular, regulatory changes with respect to nuclear and conventionally fueled power generating and transmission facilities could increase costs or impair the ability of the utility companies to operate and utilize such facilities, thus reducing the utility companies' earnings or resulting in losses. Rates of return on investment of certain utility companies are subject to review by government regulators. There can be no assurance that changes in regulatory policies or accounting standards will not negatively affect utility companies' earnings or dividends. Costs incurred by utilities, such as fuel and purchased power costs, often are subject to immediate market action resulting from such things as political or military forces operating in geographic regions where oil production is concentrated or global or regional weather conditions, such as droughts, while the rates of return of utility companies generally are subject to review and limitation by state public utility commissions, which results ordinarily in a lag or an absence of correlation between costs and return. It is also possible that costs may not be offset by return. Utilities have, in recent years, been affected by increased competition, which could adversely affect the profitability or viability of such utilities. Electric utilities may also be subject to increasing economic pressures due to deregulation of generation, transmission and other aspects of their business.
BANK HOLDING COMPANY AND BANK STOCKS. Investment in the Fund involves consideration of various regulatory and economic factors affecting bank holding companies and their subsidiary banks.
For many years federal and state banking laws and regulations have limited the ability of bank holding companies and banks to compete geographically and have restricted sharply the activities in which they may engage. From time to time, changes in law and regulation have been proposed to permit greater diversification of the financial products of bank holding companies and banks, but often such legislation has bogged down or, if it has been enacted, often it has been limited in the scope of change it has facilitated. In 1994 the Congress enacted legislation that enhanced the ability of bank holding companies and banks to expand by acquisition or branching across state lines. Their ability to engage in nonbanking activities, however, remained very limited.
In late 1999 the Congress enacted the Gramm-Leach-Bliley Act, a piece of financial regulation reform legislation that altered the landscape of bank holding company and bank regulation. The Act repealed provisions of the Glass-Steagall Act that since 1933 had severely limited the underwriting of
securities by affiliates of banks and it repealed provisions of the Bank Holding Company Act that had severely limited the insurance activities of bank holding companies. The Gramm-Leach-Bliley Act created a new scheme or regulation for FINANCIAL HOLDING COMPANIES--these are bank holding companies with high capital levels, good compliance and management records and good records under the Community Reinvestment Act that have elected to become financial holding companies. Such companies enjoy several prerogatives versus bank holding companies that have not made this election. First, they are allowed to engage in a broad range of financial activities, including securities and insurance activities, not merely activities that are closely related to banking. Second, they are not subject to any Glass-Steagall-based limitations on their securities underwriting and dealing activities. Third, they are permitted to invest in nonfinancial companies and to control investment funds that invest in such companies. Fourth, they do not require prior Federal Reserve approval to engage in new activities or to acquire non-banking companies. A large number of local and regional bank holding companies have elected to become financial holding companies.
Federal law and regulations require commercial banks and bank holding companies to maintain minimum levels of capital and liquidity and to establish loan loss reserves. A bank's failure to maintain specified capital ratios may trigger dividend restrictions, suspensions on payments on subordinated debt, and limitations on growth. Bank regulators have broad authority in these instances and can ultimately impose sanctions, including conservatorship or receivership, on such non-complying banks even when these banks continue to be solvent, thereby possibly resulting in the elimination of stockholders' equity. Unless a bank holding company has subsidiaries other than banks that generate substantial revenues, the holding company's cash flow and ability to declare dividends may be impaired severely by restrictions on the ability of its bank subsidiaries to declare dividends.
Fiscal and monetary policies of the government and general economic and political conditions can affect the availability and cost of funds to banks, loan demand and asset quality and thereby impact the earnings and financial condition of banking institutions. Downturns in a regional or local economy or in the general business cycle or depressed conditions in an industry, for example, may adversely affect the quality or volume of a bank's loan portfolio, particularly if the portfolio is concentrated in the affected region or industry. From time to time, general economic conditions have adversely affected financial institutions' energy, agricultural, commercial real estate, less-developed country, venture capital, technology, telecommunications, and highly-leveraged loan portfolios. The impact of a deteriorating economy or industry upon institutions depends, in part, on the size of the institutions, the extent to which they are involved in the type of lending or market affected, the duration of the softening in the affected area and the managerial and capital resources of the institutions. In addition, changes in accounting rules applicable to loans and investment securities also may adversely impact the financial condition of banking institutions.
INVESTMENT TECHNIQUES
For hedging purposes or, under certain circumstances, to increase its
income, the Fund may employ, among others, the investment techniques described
below, although its ability to engage in any of these strategies may be limited
by restrictions imposed on the Fund's operations in connection with obtaining
and maintaining (i) a rating for the Fund Preferred Shares outstanding and
(ii) its qualification as a regulated investment company under the Code.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund may enter into interest rate and stock index futures contracts and may purchase and sell put and call options on such futures contracts. The Fund will enter into such transactions for hedging and other appropriate risk-management purposes or to increase return, in accordance with the rules and regulations of the CFTC and the Commission.
An interest rate futures contract is a standardized contract for the future delivery of a specified security (such as 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. A stock index futures contract is an agreement to take or make delivery of an amount of cash equal to the difference between the value of the index at the beginning and at the end of the contract period. 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 5% of the Fund's net asset value, 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 "Taxation."
Under regulations of the CFTC currently in effect, which may change from time to time, with respect to futures contracts to purchase securities or stock indices, call options on futures contracts purchased by the Fund and put options on futures contracts written 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 as well as put and call options on futures written by it must be collateralized with cash or certain liquid assets held in a segregated account or "covered" in a manner similar to that described below for covered options on securities (see "Investment Objective and Policies--Investment Techniques--Options on Securities" below) 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 and write put and call options on interest rate futures contracts and stock index futures contracts in order to hedge all or a portion of its investments and may enter into closing purchase transactions with respect to options written by the Fund in order to terminate existing positions. There is no guarantee that such closing transactions can be effected at any particular time or at all. In addition, 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 an interest rate futures contract or stock index 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 stock index futures contract or interest rate 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, in the case of a
call, or is less than, in the case of a put, 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.
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. Further, the Fund's use of futures contracts and options on futures contracts to reduce risk involves costs and will be subject to the Adviser's ability to predict correctly changes in interest rate relationships or other factors. No assurance can be given that the Adviser's judgment in this respect will be correct.
INTEREST RATE SWAPS AND OPTIONS THEREON ("SWAPTIONS"). The Fund may enter into interest rate swap agreements and may purchase and sell put and call options on such swap agreements, commonly referred to as swaptions. The Fund will enter into such transactions for hedging some or all of its interest rate exposure in its holdings of preferred securities. Interest rate swap agreements and swaptions are highly specialized investments and are not traded on or regulated by any securities exchange or regulated by the CFTC or the Commission.
An interest rate swap is an agreement between two parties where one party agrees to pay a contractually stated fixed income stream, usually denoted as a fixed percentage of an underlying "notional" amount, in exchange for receiving a variable income stream, usually based on LIBOR, and denoted as a percentage of the underlying notional amount. From the perspective of a fixed rate PAYER, if interest rates rise, the payer will expect a rising level of income since the payer is a receiver of floating rate income. This would cause the value of the swap contract to rise in value, from the payer's perspective, because the discounted present value of its obligatory payment stream is diminished at higher interest rates, all at the same time it is receiving higher income. Alternatively, if interest rates fall, the reverse occurs and it simultaneously faces the prospects of both a diminished floating rate income stream and a higher discounted present value of his fixed rate payment obligation. For purposes of completing the analysis, these value changes all work in reverse from the perspective of a fixed rate receiver.
A swaption is an agreement between two parties where one party purchases the right from the other party to enter into an interest rate swap at a specified date and for a specified "fixed rate" yield (or "exercise" yield). In a pay-fixed swaption, the holder of the swaption has the right to enter into an interest rate swap as a payer of fixed rate and receiver of variable rate, while the writer of the swaption has the obligation to enter into the other side of the interest rate swap. In a received-fixed swaption, the holder of the swaption has the right to enter into an interest rate swap as a receiver of fixed rate and a payer of variable rate, while the writer of the swaption has the obligation to enter into the opposite side of the interest rate swap.
A pay fixed swaption is analogous to a put option on Treasury securities in that it rises in value as interest rate swap yields rise. A receive fixed swaption is analogous to a call option on Treasury
securities in that it rises in value as interest rate swap yields decline. As with other options on securities, indices, or futures contracts, the price of any swaption will reflect both an intrinsic value component, which may be zero, and a time premium component. The intrinsic value component represents what the value of the swaption would be if it were immediately exercisable into the underlying interest rate swap. The intrinsic value component measures the degree to which an option is in-the-money, if at all. The time premium represents the difference between the actual price of the swaption and the intrinsic value.
It is customary market practice for swaptions to be "cash settled" rather than an actual position in an interest rate swap being established at the time of swaption expiration. For reasons set forth more fully below, the Fund's Adviser expects to enter strictly into cash settled swaptions, i.e., where the exercise value of the swaption is determined by reference to the market for interest rate swaps then prevailing.
The pricing and valuation terms of interest rate swap agreements and swaptions are not standardized and there is no clearinghouse whereby a party to the agreement can enter into an offsetting position to close out a contract. Interest rate swaps and swaptions must thus be regarded as inherently illiquid. Interest rate swap agreements are usually (1) between an institutional investor and a broker/ dealer firm or bank or (2) between institutional investors. In addition, substantially all swaps are entered into subject to the standards set forth by the International Swaps & Derivatives Association ("ISDA"). ISDA represents participants in the privately negotiated derivatives industry. It helps formulate the investment industry's position on regulatory and legislative issues, develops international contractual standards, and offers arbitration on disputes concerning market practice.
Under the rating agency guidelines imposed in connection with the intended issuance of Fund Preferred Shares, it is expected that the Fund will be authorized to enter into swaptions but not authorized to enter into interest rate swap agreements. Certain rating agency guidelines may be changed from time to time and it is expected that those relating to interest rate swaps would be able to be revised by the Fund's Board, without shareholder vote of the Common Stock or the Fund Preferred Shares, so long as the relevant rating agency(ies) has given written notice that such revisions would not adversely affect the rating of the Fund Preferred Shares then in effect.
The Board of Directors has currently limited the Fund's use of interest rate swaps and swaptions as follows: (1) swaps and swaptions must be U.S. dollar denominated and used for hedging purposes only; (2) no more than 5% of the Fund's total assets, at the time of purchase, may be invested in time premiums paid for swaptions; (3) swaps and swaptions must conform to the standards of the ISDA Master Agreement; and (4) the counterparty must be a bank or broker/dealer firm regulated under the laws of the United States of America that is (a) on a list approved by the Fund's Board, (b) with capital of at least $100 million, and (c) which is rated investment grade by both Moody's and S&P. These criteria can be modified by the Board at any time in its discretion.
The Fund's Adviser expects that the Fund will be subject to the initial and subsequent mark-to-market collateral requirements that are standard among ISDA participants. These requirements help insure that the party who is a net obligor at current market value has pledged for safekeeping, to the counterparty, sufficient collateral to cover any losses should the obligor become incapable, for whatever reason, of fulfilling its commitments under the swap or swaption agreements. This is analogous, in many respects, to the collateral requirements in place on regular futures and options exchanges. As long as the Fund is a purchaser of swaptions, which is expected to be the only possibility under rating agency guidelines applicable to the Fund Preferred Shares the Fund intends to issue, the Fund would not have to pledge collateral. However, it would have to monitor the market value of the swaptions held and insure that they are properly collateralized.
The Fund has instituted procedures for valuing any swaps or swaptions positions to which it is party. Swaps or swaptions will be valued by the counterparty to the swap or swaption in question. Such valuation will then be compared with the valuation provided by a broker/dealer or bank that is not a party to the swap or swaption. In the event of material discrepancies, the Fund has procedures in place for valuing the swap or swaption, subject to the direction of the Fund's Board, which include reference to (1) third-party information services, such as Bloomberg, and (2) comparison with the Adviser's valuation models.
The use of interest rate swaps and swaptions, as the foregoing discussion suggests, are subject to risks and complexities beyond what might be encountered in standardized, exchange traded options and futures contracts. Such risks include operational risks, valuation risks, credit risks, and/or counterparty risk (i.e., the risk that the counterparty cannot or will not perform its obligations under the agreement). In addition, at the time the interest rate swap or swaption 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 Fund.
While the Fund may utilize interest rate swaps and swaptions for hedging purposes, their use might result in 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 or pledge a portion of its underlying portfolio of securities in order to meet daily mark-to-market collateralization requirements at a time when it might be disadvantageous to do so. There may be an imperfect correlation between the Fund's portfolio holdings and swaps or swaptions entered into by the Fund, which may prevent the Fund from achieving the intended hedge or expose the Fund to risk of loss. Further, the Fund's use of swaps and swaptions to reduce risk involves costs and will be subject to the Adviser's ability to predict correctly changes in interest rate relationships or other factors. No assurance can be given that the Adviser's judgment in this respect will be correct.
OPTIONS ON SECURITIES. In order to hedge against adverse market shifts, the Fund may utilize up to 5% of its total assets to purchase put and call options on securities. In addition, the Fund may seek to increase its income or may hedge a portion of its portfolio investments through writing (i.e., selling) covered put and call options. A put option embodies the right of its purchaser to compel the writer of the option to purchase from the option holder an underlying security or its equivalent at a specified price at any time during the option period. In contrast, a call option gives the purchaser the right to buy the underlying security or its equivalent covered by the option or its equivalent from the writer of the option at the stated exercise price. Under interpretations of the Commission currently in effect, which may change from time to time, a "covered" call option means that so long as the Fund is obligated as the writer of the option, it will own (1) the underlying instruments subject to the option, (2) instruments convertible or exchangeable into the instruments subject to the option or (3) a call option on the relevant instruments with an exercise price no higher than the exercise price on the call option written.
Similarly, the Commission currently requires that, to support its obligation to purchase the underlying instruments if a put option written by the Fund is exercised, the Fund either (a) deposit with its custodian in a segregated account liquid securities having a value at least equal to the exercise price of the underlying securities, (b) continue to own an equivalent number of puts of the same "series" (that is, puts on the same underlying security having the same exercise prices and expiration dates as those written by the Fund), or an equivalent number of puts of the same "class" (that is, puts on the same underlying security) with exercise prices greater than those it has written (or, if the exercise prices of the puts it holds are less than the exercise prices of those it has written, it will deposit the difference with its custodian in a segregated account) or (c) sell short the securities underlying the put option at the same or a higher price than the exercise price on the put option written.
The Fund will receive a premium when it writes put and call options, which increases the Fund's return on the underlying security in the event the option expires unexercised or is closed out at a profit. By writing a call, the Fund will limit its opportunity to profit from an increase in the market value of the underlying security above the exercise price of the option for as long as the Fund's obligation as the writer of the option continues. Upon the exercise of a put option written by the Fund, the Fund may suffer an economic loss equal to the difference between the price at which the Fund is required to purchase the underlying security and its market value at the time of the option exercise, less the premium received for writing the option. Upon the exercise of a call option written by the Fund, the Fund may suffer an economic loss equal to an amount not less than the excess of the security's market value at the time of the option exercise over the Fund's acquisition cost of the security, less the sum of the premium received for writing the option and the difference, if any, between the call price paid to the Fund and the Fund's acquisition cost of the security. Thus, in some periods the Fund might receive less total return and in other periods greater total return from its hedged positions than it would have received from its underlying securities unhedged.
The Fund may purchase and write options on securities that are listed on national securities exchanges or are traded over the counter, although it expects, under normal circumstances, to effect such transactions on national securities exchanges.
As a holder of a put option, the Fund will have the right to sell the securities underlying the option and as the holder of a call option, the Fund will have the right to purchase the securities underlying the option, in each case at their exercise price at any time prior to the option's expiration date. The Fund may choose to exercise the options it holds, permit them to expire or terminate them prior to their expiration by entering into closing sale transactions. In entering into a closing sale transaction, the Fund would sell an option of the same series as the one it has purchased. The ability of the Fund to enter into a closing sale transaction with respect to options purchased and to enter into a closing purchase transaction with respect to options sold depends on the existence of a liquid secondary market. There can be no assurance that a closing purchase or sale transaction can be effected when the Fund so desires. The Fund's ability to terminate option positions established in the over-the-counter market may be more limited than in the case of exchange-traded options and may also involve the risk that securities dealers participating in such transactions would fail to meet their obligations to the Fund.
In purchasing a put option, the Fund will seek to benefit from a decline in the market price of the underlying security, while in purchasing a call option, the Fund will seek to benefit from an increase in the market price of the underlying security. If an option purchased is not sold or exercised when it has remaining value, or if the market price of the underlying security remains equal to or greater than the exercise price, in the case of a put, or remains equal to or below the exercise price, in the case of a call, during the life of the option, the option will expire worthless. For the purchase of an option to be profitable, the market price of the underlying security must decline sufficiently below the exercise price, in the case of a put, and must increase sufficiently above the exercise price, in the case of a call, to cover the premium and transaction costs. Because option premiums paid by the Fund are small in relation to the market value of the instruments underlying the options, buying options can result in large amounts of leverage. The leverage offered by trading in options could cause the Fund's net asset value to be subject to more frequent and wider fluctuation than would be the case if the Fund did not invest in options.
OPTIONS ON STOCK INDICES. The Fund may utilize up to 5% of its total assets to purchase put and call options on domestic stock indices to hedge against risks of market-wide price movements affecting its assets. In addition, the Fund may write covered put and call options on stock indices. A stock index measures the movement of a certain group of stocks by assigning relative values to the common stocks
included in the index. Options on stock indices are similar to options on securities. Because no underlying security can be delivered, however, the option represents the holder's right to obtain from the writer, in cash, a fixed multiple of the amount by which the exercise price exceeds (in the case of a put) or is less than (in the case of a call) the closing value of the underlying index on the exercise date. The advisability of using stock index options to hedge against the risk of market-wide movements will depend on the extent of diversification of the Fund's investments and the sensitivity of its investments to factors influencing the underlying index. The effectiveness of purchasing or writing stock index options as a hedging technique will depend upon the extent to which price movements in the Fund's securities, investments correlate with price movements in the stock index selected. In addition, successful use by the Fund of options on stock indices will be subject to the ability of the Adviser to predict correctly changes in the relationship of the underlying index to the Fund's portfolio holdings. No assurance can be given that the Adviser's judgment in this respect will be correct.
When the Fund writes an option on a stock index, it will establish a segregated account with its custodian in which the Fund will deposit liquid securities in an amount equal to the market value of the option, and will maintain the account while the option is open.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. New issues of preferred and debt securities may be offered on a when-issued or delayed delivery basis, which means that delivery and payment for the security normally take place within 45 days after the date of the commitment to purchase. The payment obligation and the dividends that will be received on the security are fixed at the time the buyer enters into the commitment. The Fund will make commitments to purchase securities on a when-issued or delayed delivery basis only with the intention of acquiring the securities, but may sell these securities before the settlement date if the Adviser deems it advisable. No additional when-issued or delayed delivery commitments will be made if more than 20% of the Fund's total assets would be so committed. Securities purchased on a when-issued or delayed delivery basis may be subject to changes in value based upon the public's perception of the creditworthiness of the issuer and changes, real or anticipated, in the level of interest rates. Securities purchased or sold on a when-issued or delayed delivery basis may expose the Fund to risk because they may experience these fluctuations prior to their actual delivery. The Fund will not accrue income with respect to a debt security it has purchased on a when-issued or delayed delivery basis prior to its stated delivery date but will accrue income on a delayed delivery security it has sold. Purchasing or selling securities on a when-issued or delayed delivery basis can involve the additional risk that the yield available in the market when the delivery takes place actually may be higher than that obtained in the transaction itself. A segregated account of the Fund consisting of liquid securities equal at all times to the amount of the Fund's when-issued and delayed delivery purchase commitments will be established and maintained with the Fund's custodian. Placing securities rather than cash in the segregated account may have a leveraging effect on the Fund's net asset value per share; that is, to the extent that the Fund remains substantially fully invested in securities at the same time that it has committed to purchase securities on a when-issued or delayed delivery basis, greater fluctuations in its net asset value per share may occur than if it has set aside cash to satisfy its purchase commitments.
LENDING PORTFOLIO SECURITIES. The Fund is authorized to lend securities it holds to brokers, dealers and other financial organizations, although it has no current intention of doing so. Loans of the Fund's securities, if and when made, may not exceed 33-1/3% of the Fund's assets taken at value. The Fund's loans of securities will be collateralized by cash, letters of credit or Government Securities that will be maintained at all times in a segregated account with the Fund's custodian in an amount at least equal to the current market value of the loaned securities. From time to time, the Fund may pay a part of the interest earned from the investment of collateral received for securities loaned to the borrower and/ or a third party that is unaffiliated with the Fund and that is acting as a "finder."
By lending its portfolio securities, the Fund can increase its income by
continuing to receive interest on the loaned securities, by investing the cash
collateral in short-term instruments or by obtaining yield in the form of
interest paid by the borrower when Government Securities are used as collateral.
The risk in lending portfolio securities, as with other extensions of credit,
consists of the possible delay in recovery of the securities or the possible
loss of rights in the collateral should the borrower fail financially. The Fund
will adhere to the following conditions whenever it lends its securities:
(1) the Fund must receive at least 100% cash collateral or equivalent securities
from the borrower, which will be maintained by daily marking-to-market; (2) the
borrower must increase the collateral whenever the market value of the
securities loaned rises above the level of the collateral; (3) the Fund must be
able to terminate the loan at any time; (4) the Fund must receive reasonable
interest on the loan, as well as any dividends, interest or other distributions
on the loaned securities, and any increase in market value; (5) the Fund may pay
only reasonable custodian fees in connection with the loan; and (6) voting
rights on the loaned securities may pass to the borrower, except that, if a
material, event adversely affecting the investment in the loaned securities
occurs, the Fund's Board of Directors must terminate the loan and regain the
Fund's right to vote the securities.
SHORT SALES AGAINST THE BOX. The Fund may make short sales of securities in order to reduce market exposure and/or to increase its income if, at all times when a short position is open, the Fund owns an equal or greater amount of such securities or owns preferred securities, debt or warrants convertible or exchangeable into an equal or greater number of the shares of common stock sold short. Short sales of this kind are referred to as short sales of securities "against the box." The broker-dealer that executes a short sale generally invests the cash proceeds of the sale until they are paid to the Fund. Arrangements may be made with the broker-dealer to obtain a portion of the interest earned by the broker on the investment of short sale proceeds. The Fund will segregate the securities against which short sales against the box have been made in a special account with its custodian. Not more than 10% of the Fund's total assets (taken at current value) may be held as collateral for such sales at any one time.
RATING AGENCY GUIDELINES AND ASSET COVERAGE REQUIREMENTS
In connection with the anticipated issuance of Fund Preferred Shares, the Fund's investments will be subject to certain investment guidelines (the "Rating Agency Guidelines") established by the rating agencies rating the Fund Preferred Shares at all times when the Fund Preferred Shares are outstanding. Provided that the Fund complies with the Rating Agency Guidelines, it is expected that the Fund Preferred Shares will be rated "Aaa" and "AAA" by the rating agencies, but no assurance can be given that such a rating can be obtained. Moody's and S&P each receives fees in connection with issuances of ratings.
It is anticipated that the Rating Agency Guidelines will require the Fund to meet, as of certain specified dates, an "Eligible Asset Coverage Amount" requirement. To meet the Eligible Asset Coverage Amount requirement, the Fund must maintain a certain percentage of its assets in specific types of investments ("Eligible Assets") with an aggregate value (determined using procedures specified by the rating agencies) sufficient to cover the aggregate liquidation preference of the outstanding Fund Preferred Shares plus accumulated dividends to the redemption date or the liquidation date and certain projected dividends. In addition, in order to pay dividends on the Common Stock, the 1940 Act requires the Fund to meet minimum asset coverage requirements (the "1940 Act Asset Coverage Requirement"). The 1940 Act Asset Coverage Requirement will be met if the value of the Fund's total assets, less all liabilities and indebtedness of the Fund, is equal to at least 200% of the aggregate liquidation preference of the outstanding Fund Preferred Shares. Compliance with the Rating Agency Guidelines would impose restrictions on the securities in which the Fund would invest and, in certain circumstances, meeting the Eligible Asset Coverage Amount requirement and 1940 Act Asset Coverage
Requirement would require the Fund to redeem or purchase shares of its Fund Preferred Shares outstanding.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Risk is inherent in all investing. Investing in any investment company security involves risk, including the risk that you may receive little or no return on your investment or even that you may lose part or all of your investment. Therefore, before investing you should consider carefully the following risks that you assume when you invest in shares of the Fund's Common Stock.
INTEREST RATE RISK. Changes in the level of interest rates are expected to
affect the value of the Fund's portfolio holdings of fixed rate securities and,
under certain circumstances, its holdings of adjustable rate securities and
positions in hedging instruments, and the market price of the Common Stock.
Subject to certain limitations described herein, the Fund currently anticipates
hedging, from time to time, some or all of its holdings of fixed rate and
adjustable rate securities, for the purposes of (1) protecting against declines
in value attributable to significant increases in interest rates in general and
(2) providing increased income in the event of significant increases in interest
rates while maintaining the Fund's relative resistance to a reduction in income
in the event of significant declines in interest rates. There can be no
guarantee that such hedging strategies will be successful. In addition to
fluctuations due to changes in interest rates, the value of the Fund's holdings
of preferred and debt securities and common stocks, and as a result, the Fund's
net asset value, may also be affected by other market and credit factors, as
well as by actual or anticipated changes in tax laws, such as corporate income
tax rates and the DRD. Further, the exercise of call provisions on preferred or
debt securities by their issuers due to generally falling interest rates or
otherwise, could result in the Fund not realizing the benefits of (i) price
appreciation in the securities above the call prices and/or (ii) stable income
in the event of declining yields for preferred and debt securities. In addition,
there can be no assurance that there will be sufficient liquidity of preferred
securities to enable the Fund to buy or sell preferred securities at prices that
the Adviser believes to be suitable.
HEDGING STRATEGY RISK. Certain of the investment techniques that the Fund may employ for hedging or, under certain circumstances, to increase income will expose the Fund to risks. In addition to the hedging techniques described elsewhere, i.e., positions in Treasury Bond or Treasury Note futures contracts, use of options on these positions, positions in interest rate swaps, and options thereon ("swaptions"), these investment techniques may include entering into interest rate and stock index futures contracts and options on interest rate and stock index futures contracts, purchasing and selling put and call options on securities and stock indices, purchasing and selling securities on a when-issued or delayed delivery basis, entering into repurchase agreements, lending portfolio securities and making short sales of securities "against the box." The Fund intends to company with regulations of the Commission involving "covering" or segregating assets in connection with the Fund's use of options and futures contracts.
ILLIQUIDITY. Preferred securities, which will constitute the principal portion of the Fund's assets, may be substantially less liquid than many other securities such as common stocks or Government Securities. At any particular time, a preferred security may not be actively traded in the secondary market, even though it may be listed on the New York Stock Exchange or other securities exchange. Many preferred securities currently outstanding are listed on the New York Stock Exchange, although secondary market transactions in preferred securities are frequently effected in the over-the-counter market, even in those preferred securities that are listed. The prices of illiquid securities may be more volatile than more actively traded securities and the absence of a liquid secondary market may adversely affect the ability of the Fund to buy or sell its preferred securities holdings at the times and prices desired and the ability of the Fund to determine its net asset value.
LEVERAGE RISK. The Fund's use of leverage through the issuance of Preferred Shares creates an opportunity for increased Common Stock net income, but also creates special risks for Common Stockholders. There is no assurance that the Fund's leveraging strategy will be successful. Risks affecting the Fund's net asset value will be magnified if and when the Fund issues Fund Preferred Shares. If the Fund's current net investment income and capital gains are not sufficient to meet dividend requirements on outstanding Fund Preferred Shares, the Fund may need to liquidate certain of its investments, thereby possibly reducing the net asset value attributable to the Common Stock. In addition, failure to meet required asset coverage requirements for Fund Preferred Shares or to satisfy certain guidelines established by the rating agencies may result in mandatory partial or full redemption of Fund Preferred Shares, which would reduce or eliminate the Fund's leverage and could also adversely affect distributions to holders of Common Stock. Such redemptions may also cause the Fund to incur additional transaction costs, including costs associated with the sale of portfolio securities. Leverage creates two major types of risks for Common Stockholders:
- The likelihood of greater volatility of net asset value and market price of Common Stock because changes in the value of the Fund's portfolio are borne entirely by the Common Stockholders; and
- The possibility either that Common Stock income will fall if the dividend rate on the Fund Preferred Shares or the interest rate on any borrowings rises, or that Common Stock income will fluctuate because the dividend rate on the Fund Preferred Shares or the interest rate on any borrowings varies.
When the Fund is utilizing leverage, the fees paid to the Adviser and its affiliates for investment advisory services will be higher than if the Fund did not utilize leverage because the fees paid will be calculated based on the Fund's managed assets (which include the liquidation preference on any Fund Preferred Shares and the principal amount of any borrowings used for leverage). As a result, the Adviser has a financial incentive for the Fund to issue Fund Preferred Shares or to otherwise incur leverage, which may create a conflict of interest. See "Special Leverage Considerations" and "Description of Capital Stock."
INDUSTRY CONCENTRATION RISK. The Fund concentrates its investments in the utilities and banking industries. As a result, the Fund's investments may be subject to greater risk and market fluctuation than a fund that had securities representing a broader range of investment alternatives. See "Investment Objective and Policies--Concentration."
INCOME INELIGIBLE FOR DRD. Investors should note that the Fund is not expected to generate significant income that qualifies for the DRD. Certain tax proposals currently under preliminary discussion by federal government officials would eliminate the taxation of dividends paid by corporations out of previously taxed corporate income. However, it is uncertain if, and in what form, this proposal will ultimately be adopted. As proposed, it would be possible for the Fund to distribute tax-free to shareholders certain dividends paid on certain stocks in its portfolio. Under current market conditions and current tax law, the Fund intends to invest principally in "hybrid" or taxable preferred securities, the payments on which do not appear to be excludable from taxable income under the current proposals. If tax law changes in a way that affords tax benefits to traditional preferred securities, the Fund would take those tax benefits into account when determining whether to invest in different types of preferred securities. As a result, the Fund might hold a smaller portion of its assets in hybrid preferreds and a larger portion in traditional preferreds than currently contemplated. See "Taxation."
PREFERRED SECURITIES RISK. Investment in preferred securities carries certain risks including:
- Deferral Risk--Typically preferred securities contain provisions that allow an issuer, at its discretion, to defer distributions for up to 20 consecutive quarters. If the Fund owns a preferred security that is deferring its distributions, the Fund may be required to report income for tax purposes while it is not receiving any income.
- Redemption Risk--Preferred securities typically contain provisions that allow for redemption in the event of tax or security law changes in addition to call features at the option of the issuer. In the event of a redemption, the Fund may not be able to reinvest the proceeds at comparable rates of return.
- Limited Voting Rights--Preferred securities typically do not provide any voting rights.
- Subordination--Preferred securities are subordinated to bonds and other debt instruments in a company's capital structure in terms of priority to corporate income and liquidation payments, and therefore will be subject to greater credit risk than those debt instruments.
- Liquidity--Preferred securities may be substantially less liquid than many other securities, such as common stocks or U.S. government securities.
UNRATED SECURITIES. The Fund may invest in unrated securities that the Adviser determines to be of comparable quality to the rated securities in which the Fund may invest. Dealers may not maintain daily markets in unrated securities and retail secondary markets for many of them may not exist. As a result, the Fund's ability to sell these securities when the Adviser deems it to be appropriate may be diminished.
LOWER-QUALITY PREFERRED AND DEBT SECURITIES. The Fund is permitted to invest up to 20% of its total assets in preferred and debt securities rated at the time of purchase below either "Baa3" by Moody's or "BBB-" by S&P or deemed to be of comparable quality at the time of purchase, but at least equal to either "Ba3" or "BB-" by such rating agencies, respectively. Preferred and debt securities rated "Ba" by Moody's are judged to have speculative elements; their future cannot be considered as well assured and earnings and asset protection may be very moderate. Preferred and debt securities rated "BB" by S&P are regarded as having predominantly speculative characteristics and, while such obligations have less near-term vulnerability to default than other speculative issues, they face major ongoing uncertainties or exposure to adverse business, financial or economic conditions, which could lead to inadequate capacity to meet timely payments. See Appendix A to this prospectus for a general description of Moody's and S&P's ratings of preferred and debt securities.
The Fund may have difficulty disposing of certain preferred and debt securities because the trading market for such lower-quality securities may be thinner than the market for preferred and debt securities generally. To the extent a secondary trading market for lower-quality preferred and debt securities does exist, it generally is not as liquid as the secondary market for higher-rated securities. The lack of a liquid secondary market, as well as adverse publicity and investor perception with respect to these securities, may have an adverse impact on market price and the Fund's ability to dispose of particular issues in response to a specific economic event such as a deterioration in the creditworthiness of the issuer. The lack of a liquid secondary market for certain securities also may make it more difficult for the Fund to obtain accurate market quotations for purposes of valuing the Fund's portfolio and calculating its net asset value. The market behavior of preferred and debt securities in lower rating categories is often more volatile than that of higher quality securities.
LOWER-RATED SECURITIES RISK. The Fund may invest up to 20% of its total assets in its holdings of securities rated below investment grade at the time of purchase or judged to be comparable in quality at the time of purchase. Lower-rated preferred stock or debt securities, or equivalent unrated securities, which are commonly known as "junk bonds," generally involve greater volatility of price and risk of loss
of income and principal, and may be more susceptible to real or perceived adverse economic and competitive industry conditions than higher grade securities. It is reasonable to expect that any adverse economic conditions could disrupt the market for lower-rated securities, have an adverse impact on the value of those securities, and adversely affect the ability of the issuers of those securities to repay principal, dividends and interest on those securities.
A POTENTIAL PARTICIPANT IN THE OFFERING SENT UNAUTHORIZED E-MAILS TO CERTAIN OF ITS CLIENTS AND POTENTIAL INVESTORS. Two employees of Bear Stearns & Co. Inc. ("Bear Stearns") distributed unauthorized e-mails to over 500 potential investors. Neither the Fund, the Adviser nor any member of the underwriting syndicate group nor any of their officers, directors or employees authorized, encouraged or were involved in any way in the preparation or distribution of those e-mails and each specifically disclaims any responsibility for the distribution of those e-mails. The distribution of the e-mails to investors may have constituted an offer by Bear Stearns that did not meet the requirements of the Securities Act of 1933. If the unauthorized e-mails did constitute a violation of the Securities Act of 1933, those recipients, if any, of the e-mails that purchase shares of Common Stock might sue the Fund for damages, the amount of which cannot be determined. Once Bear Stearns became aware of the mistaken distribution, it contacted the addressees and notified them that the e-mail they received and the information in the e-mail should be disregarded and that only the preliminary prospectus and the investor guide authorized by the Fund could be relied upon in considering an investment in the Fund. Bear Stearns is not an underwriter of shares of Common Stock nor a dealer authorized by the Underwriters to sell shares of Common Stock nor will it offer or sell any shares of Common Stock in the offering.
The e-mails distributed by the Bear Stearns employees contained certain information regarding the Fund and the Adviser that is not contained in this prospectus, including an estimated initial dividend yield range, anticipated details of a model portfolio of the Fund and incorrect information about the rating of the Adviser by a fund rating organization. YOU SHOULD NOT CONSIDER OR RELY UPON ANY OF THE INFORMATION SET FORTH IN THOSE E-MAILS, AND YOU SHOULD NOT MAKE AN INVESTMENT DECISION WITHOUT CAREFULLY CONSIDERING THE RISKS AND OTHER INFORMATION CONTAINED IN THIS PROSPECTUS.
ANTI-TAKEOVER PROVISIONS. The Fund's Articles of Incorporation and Bylaws include provisions that could have the effect of inhibiting the Fund's possible conversion to open-end status and limiting the ability of other entities or persons to acquire control of the Fund's Board of Directors. In certain circumstances, these provisions might also inhibit the ability of shareholders to sell their shares at a premium over prevailing market prices. See "Certain Provisions of the Articles of Incorporation."
MARKET DISRUPTION. As a result of the terrorist attacks on the World Trade Center and the Pentagon on September 11, 2001, some of the U.S. securities markets were closed for a four-day period. These terrorist attacks and related events have led to increased short-term market volatility and may have long-term effects on U.S. and world economies and markets. A similar disruption of the financial markets could impact interest rates, auctions, secondary trading, ratings, credit risk, inflation and other factors relating to the Common Stock.
CONVERSION RISK. Under the Fund's Bylaws, if at any time after the third year following the offering made hereby, shares of the Common Stock publicly trade for a substantial period of time at a significant discount from the Fund's then current net asset value per share, the Board of Directors of the Fund is obligated to consider taking various actions designed to reduce or eliminate the discount, including recommending to shareholders amendments to the Fund's Articles of Incorporation to convert the Fund to an open-end investment company, which would result in the redemption of Fund Preferred Shares then outstanding and the potential subsequent sale of Fund assets during unfavorable market conditions. In addition, the Board may consider taking actions designed to eliminate the discount whenever it deems it to be appropriate.
NO PRIOR HISTORY. The Fund is a newly organized, closed-end investment company with no previous operating history.
MARKET DISCOUNT RISK. As with any stock, the price of the Fund's shares will fluctuate with market conditions and other factors. Shares of closed-end investment companies frequently trade at a discount from net asset value, especially shortly after the completion of the initial public offering. The Common Stock is designed for long-term investors and should not be treated as a trading vehicle. This characteristic of shares of a closed-end fund is a risk separate and distinct from the risk that the fund's net asset value will decrease. The Fund cannot predict whether the Common Stock will trade at, above or below net asset value. The risk of purchasing shares of a closed-end fund that might trade at a discount is more pronounced for investors who wish to sell their shares in a relatively short period of time after the initial public offering. For those investors, realization of gain or loss on their investment is likely to be more dependent upon the existence of a premium or discount than upon portfolio performance and the possible advantages associated with the leveraging of the Common Stock. Net asset value will be reduced immediately following the initial offering by a sales load and organizational and selling expenses paid by the Fund and immediately following any offering of Fund Preferred Shares by the costs of that offering paid by the Fund. The Common Stock is not redeemable.
TAX RISK. Future changes in tax law or regulation could adversely affect the Fund and its portfolio holdings, including their valuation, which could negatively impact the Fund's shareholders and distributions they receive from the Fund. Tax changes can be given retroactive effect.
SPECIAL LEVERAGE CONSIDERATIONS
EFFECTS OF LEVERAGE
Subject to market conditions and the Fund's receipt of an "Aaa" and "AAA" credit ratings by rating agencies on the Fund Preferred Shares, within three months after the completion of the offering of the Common Stock the Fund intends to offer Fund Preferred Shares representing up to approximately 36% of the Fund's capital immediately after their issuance. The issuance of Fund Preferred Shares is intended to occur as soon as practicable after the proceeds of this offering are invested. No assurance can be given that Fund Preferred Shares representing that percentage of the Fund's capital will in fact be issued and, if issued, will remain outstanding for any specific period of time. The issuance of Fund Preferred Shares would result in the financial leveraging of the Common Stock.
Although the terms of the Fund Preferred Shares and the timing and other terms of its offering will be determined by the Fund's Board of Directors, the Fund anticipates that, while the Fund will pay dividends on the Fund Preferred Shares outstanding that typically reflect shorter-term rates (which would generally be redetermined at relatively short intervals), the net return on the Fund's portfolio, including proceeds of the Fund Preferred Shares offering, will for the applicable comparison period exceed the dividends paid on the Fund Preferred Shares. So long as the Fund, during the applicable comparison period, is able to invest the proceeds of the Fund Preferred Shares offering in securities that provide, on average, a higher net return than the rate of return based on the then current dividends paid on the Fund Preferred Shares outstanding after taking into account the expenses of the Fund Preferred Shares offering and the Fund's operating expenses, the effect of leverage will be to cause Common Stock shareholders to realize a higher current rate of return than if the Fund were not leveraged. The leverage would also have the effect of increasing the net asset value of the Common Stock to a greater extent than if the Fund were not leveraged in the event the net asset value per share of the Fund's investment portfolio increased.
Based on current and historical relationships between short-term, intermediate-term and long-term yields, during the relatively short period after the Fund Preferred Shares have been issued but before
the proceeds of that offering have been fully invested in accordance with the Fund's investment objective and policies, the Fund will probably not be able to earn a sufficiently high return on its investments to permit leverage to be of benefit to Common Stock shareholders. However, before authorizing the issuance of the Fund Preferred Shares, the Board of Directors of the Fund will consider the length of time expected to be necessary to invest the proceeds of the Fund Preferred Shares offering in an effort to maximize the benefits of leverage to Common Stockholders.
Utilization of leverage is a speculative investment technique and involves certain risks to the holders of Common Stock. These include the possibility of higher volatility of the net asset value of the Common Stock and potentially more volatility in the market value of the Common Stock. 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 Stock to realize a 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 Stock 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 holders of Common Stock than if the Fund were not so leveraged.
Any increases in the Fund's assets, whether attributable to net capital appreciation, the reinvestment of dividends or the issuance of additional shares pursuant to the Fund's Dividend Reinvestment and Cash Purchase Plan, will result in a decrease in the percentage of the Fund's capitalization represented by Fund Preferred Shares outstanding, thereby reducing the effects of leverage. Since any decline in the net asset value of the Fund's investments would be borne entirely by holders of Common Stock, the effect of leverage in a declining market would result in a greater decrease in net asset value to holders of Common Stock than if the Fund were not leveraged, which would likely be reflected in a greater decline in the market price for shares of Common Stock. In an extreme case, if the Fund's current investment income were not sufficient to meet dividend requirements on the Fund Preferred Shares outstanding, the Fund may be required to liquidate certain of its investments and use the proceeds to meet such requirements, thereby possibly reducing the net asset value attributable to the Common Stock. For that reason, no assurance can be given that the issuance of Fund Preferred Shares will result in a higher return to Common Stock shareholders.
A flattening of the yield curve would reduce the current advantage of longer-term interest rates over the short-term interest rates and could affect the Fund adversely. In such a case, the cost to the Fund of the dividends paid on the Fund Preferred Shares outstanding, which would generally reflect shorter-term interest rates, could rise relative to the Fund's dividend income. Under the typical adjustment formula, the dividend rates on adjustable rate preferred stocks would reflect only the change in longer-term Treasury Bond yields as the current yield curve flattened, which could impact negatively the prices of such adjustable rate preferred stocks as well. Should the yield curve become inverted, resulting in the discount yield on 3-month Treasury Bills exceeding the yields on 10- and 20-year Treasury securities, the dividend rates of adjustable rate preferred stocks would then generally be determined by the yields on such shorter-term Treasury Bills for as long as this inverted yield curve continued to exist. In the case of fixed rate preferred stocks, a flattening or inversion of the yield curve would not affect the Fund's dividend income but could negatively impact the value of such stocks.
Under the 1940 Act, the Fund is not permitted to issue preferred shares unless immediately after the issuance the value of the Fund's total assets 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 total assets less liabilities other than borrowing). In addition, the Fund is not permitted to declare any cash dividend or other distribution on its Common Stock unless, at the time of such declaration, the value of the Fund's total assets less liabilities other than borrowing is at least 200% of such liquidation value. If
Fund Preferred Shares are issued, the Fund intends, to the extent possible, to purchase or redeem Fund Preferred Shares from time to time to the extent necessary in order to maintain coverage of any Fund Preferred Shares of at least 200%. If the Fund has Fund Preferred Shares outstanding, two of the Fund's Directors will be elected by the holders of Fund Preferred Shares, voting separately as a class. The remaining Directors of the Fund will be elected by holders of Common Stock and Fund Preferred Shares voting together as a single class. In the event the Fund failed to pay dividends on Fund Preferred Shares for two years, Fund Preferred Shareholders would be entitled to elect a majority of the Directors 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 Stock.
The Fund may be subject to certain restrictions imposed by guidelines of one or more rating agencies which may issue ratings for Fund Preferred Shares. 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 guidelines will impede the Adviser from managing the Fund's portfolio in accordance with the Fund's investment objective and policies. In addition to other considerations, to the extent that the Fund believes that the covenants and guidelines required by a rating agency or another rating agency would impede its ability to meet its investment objective, or if the Fund is unable to obtain the ratings from rating agencies on the Fund Preferred Shares (expected to be "Aaa" or "AAA"), the Fund will not issue the Fund Preferred Shares.
Assuming that the Fund Preferred Shares will represent approximately 36% of the Fund's capital and pay dividends at an annual average rate of 3%, the income generated by the Fund's portfolio (net of estimated expenses) must exceed 1.18% in order to cover such dividend payments and other expenses specifically related to the Fund Preferred Shares. Of course, these numbers are merely estimates, used for illustration. Actual Fund Preferred Share dividend 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 Commission. It is designed to illustrate the effect of leverage on Common Stock 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 Fund Preferred Shares representing approximately 36% of the Fund's total capital and the Fund's currently projected annual Fund Preferred Share dividend rate of 3%.
Assumed Portfolio Total Return (Net of Expenses).............. (10)% (5)% 0% 5% 10% Common Stock Total Return................. (17.31)% (9.50)% (1.69)% 6.13% 13.94% |
Common Stock total return is composed of two elements--the Common Stock dividends paid by the Fund (the amount of which is largely determined by the net investment income of the Fund after paying dividends on Fund Preferred Shares) and gains or losses on the value of the securities the Fund owns. As required by Commission rules, the table assumes that the Fund is more likely to suffer capital losses than to enjoy capital appreciation.
During the time in which the Fund is utilizing leverage, the fees paid to the Adviser and the Servicing Agent for services will be higher than if the Fund did not utilize leverage because the fees paid will be calculated based on the Fund's managed assets. Only the Fund's holders of Common Stock bear the cost of the Fund's fees and expenses.
The Fund may also borrow money as a temporary measure for extraordinary or emergency purposes, including the payment of dividends and the settlement of securities transactions which otherwise might require untimely dispositions of Fund securities.
Until the Fund Preferred Shares are issued, the Common Stock will not be leveraged, and the special leverage considerations described above will not apply.
MANAGEMENT OF INVESTMENT PORTFOLIO AND CAPITAL STRUCTURE
In the event of an increase in short-term rates or other changed market conditions to a point at which the Fund's leverage could adversely affect Common Stock shareholders as noted above, or in anticipation of those changes, the Fund may attempt to reduce the degree to which it is leveraged by partially or fully redeeming or otherwise purchasing Fund Preferred Shares. If market conditions subsequently warranted "releveraging" of the Fund's capital structure, the Fund might sell previously unissued shares of preferred stock or shares of preferred stock that the Fund previously issued but later repurchased.
Under the 1940 Act, the Fund is not permitted to issue shares of preferred stock unless immediately after their issuance the net asset value of the Fund's portfolio is at least 200% of the liquidation value of the outstanding preferred stock (expected to equal the original purchase price per share plus any accumulated and unpaid dividends). In addition, the Fund is not permitted to declare any cash dividend or other distribution on the Common Stock unless, at the time of the declaration, the net asset value of the Fund's portfolio (determined after deducting the amount of the dividend or distribution) is at least 200% of the liquidation value of the preferred stock outstanding. Under the Fund's proposed capital structure, assuming the sale of Fund Preferred Shares representing approximately 36% of the Fund's capital immediately following the issuance of those shares of stock, the net asset value of the Fund's portfolio is expected to be approximately 278% of the liquidation value of the Fund Preferred Shares. If the Fund's assets declined to a point where the Fund no longer met the 200% asset coverage test (which would represent a 28% decline in the value of the Fund's assets from the initial asset coverage of 278%), the Fund would be restricted from making distributions to Common Stock shareholders until the 200% asset coverage requirement was again met. To the extent possible, the Fund intends to purchase or partially or fully redeem Fund Preferred Shares from time to time to maintain coverage of Fund Preferred Shares of at least 200%. As a result, holders of Fund Preferred Shares may be required to liquidate their shares before they otherwise would have and at times that they may deem to be disadvantageous.
INVESTMENT RESTRICTIONS
The Fund has adopted certain fundamental investment restrictions that may not be changed without the prior approval of the holders of a majority of the Fund's outstanding voting securities, voting as a single class, and approval of the holders of a majority of the Fund's outstanding shares of preferred stock, voting as a separate class. A "majority of the Fund's outstanding voting securities" for this purpose means the lesser of (1) 67% or more of the shares of Common Stock and shares of preferred stock present at a meeting of shareholders, voting as a single class, if the holders of more than 50% of such shares are present or represented by proxy at the meeting, or (2) more than 50% of the outstanding shares of Common Stock and outstanding shares of preferred stock voting as a single class. A majority of the Fund's outstanding shares of preferred stock for this purpose is determined in a similar manner, by applying the percentages in the previous sentence to outstanding shares of preferred stock. For purposes of the restrictions listed below, all percentage limitations apply immediately after a purchase or initial investment, and any subsequent change in any applicable percentage resulting from
market fluctuations does not require elimination of any security from the Fund's portfolio. Under its fundamental restrictions, the Fund may not:
(1) Purchase securities (other than Government Securities) of any issuer if as a result of the purchase more than 5% of the value of the Fund's total assets would be invested in the securities of that issuer, except that up to 25% of the value of the Fund's total assets may be invested without regard to this 5% limitation.
(2) Purchase more than 10% of the voting securities of any one issuer, except that (i) this limitation is not applicable to the Fund's investments in Government Securities and (ii) up to 25% of the value of the Fund's total assets may be invested without regard to this 10% limitation.
(3) Issue senior securities (including borrowing money for other than temporary or emergency purposes) except in conformity with the limits set forth in the 1940 Act.
(4) Sell securities short or purchase securities on margin, except for such short-term credits as are necessary for the clearance of transactions, but the Fund may make margin deposits in connection with transactions in options on securities, futures and options on futures, and may make short sales of securities "against the box."
(5) Underwrite any issue of securities, except to the extent that the sale of portfolio securities may be deemed to be an underwriting.
(6) Purchase, hold or deal in real estate or oil and gas interests, except that the Fund may invest 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 in real estate 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.
(7) Invest in commodities, except that the Fund may enter into futures contracts, including interest rate and stock index futures, and may purchase options and write covered options on futures contracts and securities, as described in this prospectus.
(8) Lend any funds or other assets, except through purchasing debt securities, lending portfolio securities and entering into repurchase agreements consistent with the Fund's investment objective.
(9) Invest more than 25% of its total assets in the securities of issuers in any single industry other than each of the utilities and banking industries, except that this limitation will not be applicable to the purchase of Government Securities.
(10) Make any investments for the purpose of exercising control or management of any company.
Except for the investment restrictions set forth above, the Fund's investment objective and the Fund's policy of concentrating in the utilities and banking industries, the other policies and percentage limitations referred to in this prospectus are not fundamental policies of the Fund and, unless provided to the contrary in the Fund's Articles of Incorporation (together with any amendments or supplements thereto, including any articles supplementary, the "Articles" or "Articles of Incorporation"), may be changed by the Fund's Board of Directors without shareholder approval. In addition, (1) the Fund's investment objective, (2) the Fund's status as a diversified investment company (the requirements for which are embodied in investment restrictions nos. 1 and 2 above) and (3) the Fund's policy of not making any investments for the purpose of exercising control or management of any company (see investment restriction no. 10 above) may not be changed except through an amendment to the Fund's
charter. Any such amendment would require the vote of 80% of the votes of the Fund's Common Stock and Preferred Stock entitled to be cast by stockholders, voting as a single class, and of at least 80% of the votes of the Fund's Preferred Stock entitled to be cast by stockholders, voting as a separate class. The Fund's policy of investing at least 80% of its total assets in preferred securities is non-fundamental and may be changed by the Board of Directors without shareholder approval, to become effective on at least 60 days' written notice to shareholders prior to any such change.
The Fund intends to apply for ratings for the Fund Preferred Shares the Fund intends to issue. In order to obtain and maintain these ratings the Fund will be required to comply with investment quality, diversification and other guidelines established by the rating agencies that will be more restrictive in many respects than the restrictions set forth above. See "Investment Objective and Policies--Rating Agency Guidelines and Asset Coverage Requirements." The Fund does not anticipate that such guidelines would have a material adverse effect on the Common Stock shareholders or the Fund's ability to achieve its investment objective.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The business and affairs of the Fund are managed under the direction of the Fund's Board of Directors. Information pertaining to the Directors and officers of the Fund is set forth below.
TERM OF OFFICE PRINCIPAL
POSITIONS(S) AND LENGTH OF OCCUPATION(S)
NAME, ADDRESS, AND AGE HELD WITH FUND TIME SERVED DURING PAST FIVE YEARS
---------------------- ------------------------- ------------------------- -------------------------
NON-INTERESTED
DIRECTORS:
MARTIN BRODY Director Since inception Retired.
c/o HMK Associates
30 Columbia Turnpike
Floral Park, NJ 07932
Age: 81
DAVID GALE Director Since inception President and CEO of
Delta Dividend Delta Dividend
Group, Inc. Group, Inc.
301 Pine Street (investments).
San Francisco, CA 94104
Age: 53
MORGAN GUST Director Since inception From March 2002,
Giant Industries, Inc. President, Giant
23733 N. Scottsdale Road Industries, Inc.
Scottsdale, AZ 85255 (petroleum refining and
Age: 55 marketing); and, for more
than five years prior
thereto, Executive Vice
President, and various
other Vice President
positions at Giant
Industries, Inc.
ROBERT F. WULF Director Since inception Since March 1984,
3560 Deerfield Drive Financial Consultant;
South Trustee, University of
Salem, OR 97302 Oregon Foundation;
Age: 65 Trustee, San Francisco
Theological Seminary.
NUMBER OF
FUNDS
IN FUND
COMPLEX
OVERSEEN BY OTHER DIRECTORSHIPS HELD
NAME, ADDRESS, AND AGE DIRECTOR BY DIRECTOR
---------------------- ------------------------- -------------------------
NON-INTERESTED
DIRECTORS:
MARTIN BRODY 3 Director, Jacklyn Inc.
c/o HMK Associates (luggage and accessories)
30 Columbia Turnpike
Floral Park, NJ 07932
Age: 81
DAVID GALE 3 --
Delta Dividend
Group, Inc.
301 Pine Street
San Francisco, CA 94104
Age: 53
MORGAN GUST 3 --
Giant Industries, Inc.
23733 N. Scottsdale Road
Scottsdale, AZ 85255
Age: 55
ROBERT F. WULF 3 --
3560 Deerfield Drive
South
Salem, OR 97302
Age: 65
|
TERM OF OFFICE PRINCIPAL
POSITIONS(S) AND LENGTH OF OCCUPATION(S)
NAME, ADDRESS, AND AGE HELD WITH FUND TIME SERVED DURING PAST FIVE YEARS
---------------------- ------------------------- ------------------------- -------------------------
INTERESTED
DIRECTORS:
DONALD F. CRUMRINE+ Director, Chairman of the Since inception Chairman of the Board,
301 E. Colorado Boulevard Board and Chief Executive since December 1996, and
Suite 720 Officer previously held other
Pasadena, CA 91101 officerships of
Age: 55 Flaherty & Crumrine;
Director of Flaherty &
Crumrine.
NICHOLAS DALMASO+ Director, Vice President Since inception Chief Operations Officer
210 N. Hale Street and Assistant Secretary and General Counsel of
Wheaton, IL 60187 Claymore Securities, Inc.
Age: 37 since November, 2001.
Associate General Counsel
of Nuveen Investments
from July 1999 to
November, 2001. Prior to
that, Associate General
Counsel of Van Kampen
Investments.
OFFICERS
ROBERT M. ETTINGER President Since inception President of Flaherty &
301 E. Colorado Boulevard Crumrine since
Suite 720 October 2002, and
Pasadena, CA 91101 previously held other
Age: 44 officerships of
Flaherty & Crumrine;
Director of Flaherty &
Crumrine.
PETER C. STIMES Vice President, Chief Since inception Vice President of
301 E. Colorado Boulevard Financial Officer, Chief Flaherty & Crumrine.
Suite 720 Accounting Officer,
Pasadena, CA 91101 Treasurer and Assistant
Age: 47 Secretary
R. ERIC CHADWICK Vice President, Secretary Since Inception Vice President of
301 E. Colorado Boulevard and Assistant Treasurer Flaherty & Crumrine since
Suite 720 August 2001, and
Pasadena, CA 91101 previously (since January
Age: 27 1999), portfolio manager
of Flaherty & Crumrine.
Prior to that, worked as
portfolio manager of Koch
Industries, Inc.
NUMBER OF
FUNDS
IN FUND
COMPLEX
OVERSEEN BY OTHER DIRECTORSHIPS HELD
NAME, ADDRESS, AND AGE DIRECTOR BY DIRECTOR
---------------------- ------------------------- -------------------------
INTERESTED
DIRECTORS:
DONALD F. CRUMRINE+ 3 --
301 E. Colorado Boulevard
Suite 720
Pasadena, CA 91101
Age: 55
NICHOLAS DALMASO+
210 N. Hale Street
Wheaton, IL 60187
Age: 37
OFFICERS
ROBERT M. ETTINGER -- --
301 E. Colorado Boulevard
Suite 720
Pasadena, CA 91101
Age: 44
PETER C. STIMES -- --
301 E. Colorado Boulevard
Suite 720
Pasadena, CA 91101
Age: 47
R. ERIC CHADWICK -- --
301 E. Colorado Boulevard
Suite 720
Pasadena, CA 91101
Age: 27
|
+ "Interested person" of the Fund as defined in the 1940 Act. Messrs. Crumrine and Dalmaso are each considered an "interested person" because of their affiliation with the Adviser and Servicing Agent, respectively.
Each Director who is not a director, officer or employee of the Adviser or the Servicing Agent or any of their affiliates receives a fee of $9,000 per annum plus $500 for each in-person meeting of the Board of Directors or any committee and $100 for each such meeting conducted by telephone conference call. In addition, all Directors are reimbursed for travel and out-of-pocket expenses associated with attending Board of Directors or committee meetings.
Commencing with the first annual meeting of shareholders, the Board of Directors will be divided into three classes having terms of one, two and three years, respectively. At the annual meeting of shareholders in each year thereafter, the term of one class will expire and Directors will be elected to serve in that class for terms of three years. It is anticipated that, under the Fund's Articles of Incorporation and the 1940 Act, holders of Fund Preferred Shares (when issued), voting as a single class, will elect two Directors and holders of the Common Stock and the Fund Preferred Shares (when issued), voting as a single class, will elect the remaining Directors, subject to the provisions of the 1940 Act and the Fund's Articles, which will permit the holders of Fund Preferred Shares to elect the minimum number of additional Directors that when combined with the two Directors elected by the holders of Fund Preferred Shares would give the holders of Fund Preferred Shares a majority of the Directors when dividends are in arrears for two full years. Messrs. Gust and Dalmaso are expected to represent the holders of Fund Preferred Shares, and the remaining Directors are subject to election by holders of the Common Stock and the Fund Preferred Shares (when issued), voting as a single class. Directors elected by holders of Common Stock and Fund Preferred Shares will be apportioned among the classes of Directors. The Fund's Articles of Incorporation limit the liability of Directors and officers of the Fund to the Fund or its shareholders for damages, and require that the Fund indemnify its Directors and officers against liabilities and expenses incurred by reason of their services to the Fund, to the fullest extent permitted by Maryland law. These provisions do not apply to liabilities or expenses incurred as a result of any Director's or officer's willful misfeasance, bad faith, gross negligence or reckless disregard of his duties. The Fund, at its expense, provides liability insurance for the benefit of its Directors and officers.
Overall responsibility for management and supervision of the Fund rests with the Fund's Board of Directors. The Directors approve all significant agreements between the Fund and the persons or companies that furnish services to the Fund, including agreements with its investment adviser, servicing agent, administrator, custodian and transfer agent. The day-to-day operations of the Fund are delegated to the Adviser.
The Audit Committee is comprised of all of the independent directors of the Fund (Messrs. Brody, Gale, Gust and Wulf). The role of the Fund's Audit Committee is to assist the Board of Directors in its oversight of the Fund's financial reporting process. The Audit Committee operates pursuant to a Charter that was approved by the Board of Directors of the Fund on December 16, 2002. As set forth in the Charter, management is responsible for the preparation, presentation and integrity of the Fund's financial statements, and for the procedures designed to ensure compliance with accounting standards and applicable laws and regulations. The independent accountants are responsible for planning and carrying out audits of the Fund's financial statements and expressing an opinion as to their conformity with accounting principles generally accepted in the United States of America.
The Fund's Nominating Committee is comprised of all of the independent directors of the Fund. The Nominating Committee is responsible for considering candidates for election to the Board of Directors in the event a position is vacated or created. The Nominating Committee will consider recommendations by shareholders if a vacancy were to exist. Any such recommendations should be forwarded to the Secretary of the Fund.
OWNERSHIP OF SECURITIES
Set forth in the table below is the dollar range of equity securities owned by the Directors as of the date of this prospectus in the Fund and the aggregate dollar range of equity securities in the three registered investment companies in the Preferred Funds family.
AGGREGATE DOLLAR RANGE OF
EQUITY SECURITIES IN ALL
REGISTERED INVESTMENT
COMPANIES OVERSEEN BY
DOLLAR RANGE OF EQUITY DIRECTOR IN FAMILY OF
NAME OF DIRECTOR SECURITIES IN THE FUND*(1) INVESTMENT COMPANIES*(1)(2)
---------------- -------------------------- ---------------------------
INTERESTED DIRECTORS
Donald F. Crumrine E(3) E
Nicholas Dalmaso A A
INDEPENDENT DIRECTORS
Martin Brody A B
David Gale A C
Morgan Gust A C
Robert F. Wulf A C
|
* Key to Dollar Ranges:
A. None
B. $1--$10,000
C. $10,000--$50,000
D. $50,000--$100,000
E. Over $100,000
(1) This information for the other two Preferred Funds has been furnished by
each Director as of December 31, 2002. "Beneficial ownership" is determined
in accordance with Rule 16a-1(a)(2) of the Securities Exchange Act of 1934.
(2) Less than 1%.
(3) Mr. Crumrine may be deemed to beneficially own Fund shares held by the
Adviser as a result of his ownership of shares of the Adviser.
COMPENSATION
The following table sets forth certain information regarding the estimated compensation of the Fund's Directors for the fiscal year ended November 30, 2002. Directors and executive officers of the Fund do not receive pension or retirement benefits from the Fund.
COMPENSATION TABLE
TOTAL COMPENSATION
FROM FUND AND FUND
AGGREGATE COMPENSATION FROM COMPLEX PAID TO FUND
NAME OF PERSON AND POSITION THE FUND DIRECTORS*
--------------------------- --------------------------- --------------------
Donald F. Crumrine
Director and Chairman of the Board $0 $0
Nicholas Dalmaso
Director, Vice President and Assistant
Secretary $0 $0
Martin Brody
Director $0 $26,500
David Gale
Director $0 $27,100
Morgan Gust
Director $0 $27,300
Robert F. Wulf
Director $0 $27,400
|
* Represents the total estimated compensation to be paid to such persons for the fiscal year ended November 30, 2002 by those funds which are considered part of the same "fund complex" because they have a common investment adviser.
INVESTMENT ADVISER
Flaherty & Crumrine Incorporated serves as the Fund's investment adviser pursuant to an advisory agreement between the Fund and the Adviser (the "Advisory Agreement"). The Adviser, which was organized in 1983 and has offices at 301 E. Colorado Boulevard, Pasadena, California 91101, specializes in the management of portfolios of preferred securities, including related hedging activities, for institutional investors and had aggregate assets under management, as of December 31, 2002 (which do not include the net assets of the Fund) of approximately $896 million. The Adviser is registered as an investment adviser under the Investment Advisers Act of 1940, as amended, and also serves as an investment adviser to Preferred Income Fund Incorporated and Preferred Income Opportunity Fund Incorporated, closed-end investment companies investing primarily in preferred securities, which as of December 31, 2002 had approximately $403 million in aggregate total assets. In managing the day-to- day operations of the Fund, the Adviser relies on the expertise of its team of money management professionals, consisting of Messrs. Crumrine, Ettinger, Stimes and Chadwick, whose backgrounds are described above. Mr. Robert T. Flaherty, a founder of the Adviser, along with Messrs. Crumrine and Ettinger may each be deemed to control the Adviser by virtue of their ownership of the Adviser.
Subject to the supervision and direction of the Fund's Board of Directors,
the Adviser manages the Fund's portfolio in accordance with the Fund's
investment objective and policies, places orders to purchase and sell securities
and employs professional portfolio managers and securities analysts who provide
research services to the Fund. For its services, the Adviser is paid a fee
computed and paid monthly equal to an annual rate of 0.525% on the first $200
million of the Fund's average weekly total managed assets, which is reduced to
0.45% on the next $300 million of the Fund's average weekly total managed assets
and 0.40% on the Fund's average weekly total managed assets above $500 million.
(FOR PURPOSES OF CALCULATING SUCH FEE, THE FUND'S TOTAL MANAGED ASSETS MEANS THE
TOTAL ASSETS OF THE FUND (INCLUDING ANY ASSETS ATTRIBUTABLE TO ANY FUND
PREFERRED SHARES THAT MAY BE OUTSTANDING OR OTHERWISE
ATTRIBUTABLE TO THE USE OF LEVERAGE) MINUS THE SUM OF ACCRUED LIABILITIES (OTHER THAN DEBT, IF ANY, REPRESENTING FINANCIAL LEVERAGE). FOR PURPOSES OF DETERMINING TOTAL MANAGED ASSETS, THE LIQUIDATION PREFERENCE OF THE FUND PREFERRED SHARES IS NOT TREATED AS A LIABILITY.)
The Advisory Agreement provides that the Adviser shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Fund in connection with the matters to which the Advisory Agreement relates, except liability resulting from willful misfeasance, bad faith or gross negligence on the Adviser's part in the performance of its duties or from reckless disregard of its obligations and duties under the Advisory Agreement ("disabling conduct"). The Advisory Agreement also provides that the Fund will indemnify the Adviser for any loss, claim, damage, liability or expense not resulting from disabling conduct on the part of the Adviser.
CODE OF ETHICS
The Fund and the Adviser have each adopted a written Code of Ethics (the "Code of Ethics"), which permits personnel covered by the Code of Ethics ("Covered Persons") to invest in securities, including securities that may be purchased or held by the Fund. The Code of Ethics also contains provisions designed to address the conflicts of interest that could arise from personal trading by advisory personnel, including: (1) all Covered Persons must report their personal securities transactions at the end of each quarter; (2) with certain limited exceptions, all Covered Persons must obtain preclearance before executing any personal securities transactions; (3) Covered Persons may not execute personal trades in a security if there are any pending orders in that security by the Fund; and (4) certain Covered Persons may not invest in initial public offerings without prior approval.
The Board reviews the administration of the Code of Ethics at least annually and may impose sanctions for violations of the Code of Ethics.
SERVICING AGENT
Claymore Securities, Inc. (the "Servicing Agent") serves as the Fund's Servicing Agent. In this capacity, it acts as shareholder servicing agent to the Fund. Pursuant to a shareholder servicing agreement (the "Servicing Agreement"), the Servicing Agent's duties include developing and maintaining a website for the Fund; assisting in the review of materials made available to shareholders to assure compliance with applicable laws, rules and regulations; assisting in the dissemination of the Fund's net asset value, market price and discount; maintaining ongoing contact with brokers whose clients hold or may have an interest in acquiring Fund shares; replying to information requests from shareholders or prospective investors; and aiding in secondary market support for the Fund through regular written and oral communications with the Fund's New York Stock Exchange specialist and the closed-end fund analyst community. As compensation for its services, the Fund pays the Servicing Agent a fee computed and paid monthly at the annual rate of 0.025% on the first $200 million of the Fund's average weekly total managed assets, 0.10% on the next $300 million of the Fund's average weekly total managed assets and 0.15% on the Fund's average weekly total managed assets above $500 million. Total managed assets are computed in the same manner as described above for the Adviser's fee. Claymore Securities, Inc. specializes in the creation, development and distribution of investment solutions for advisors and their valued clients. The Servicing Agent is registered with the SEC as a broker-dealer.
ADMINISTRATOR AND TRANSFER AGENT
PFPC, Inc. (the "Administrator") serves as the Fund's administrator. In its capacity as such, the Administrator calculates the net asset value of the Common Stock and generally assists in all aspects of the administration and operation of the Fund. Pursuant to an administration agreement between the
Fund and the Administrator (the "Administration Agreement"), as compensation for the Administrator's services the Fund pays the Administrator a monthly fee at an annual rate of 0.10% on the first $200 million of the Fund's average weekly total managed assets, 0.04% on the next $300 million of the Fund's average weekly total managed assets and 0.03% on the Fund's average weekly total managed assets above $500 million. (For purposes of calculating such fee, the Fund's total managed assets means the total assets of the Fund (including any assets attributable to any Fund Preferred Shares that may be outstanding or otherwise attributable to the use of leverage) minus the sum of accrued liabilities (other than debt representing financial leverage). For purposes of determining total managed assets, the liquidation preference of the Fund Preferred Shares is not treated as a liability.) The Administrator also serves as the Fund's Common Stock servicing agent (transfer agent), dividend-paying agent and registrar. As compensation for the Administrator's services as such, the Fund pays the Administrator a fee computed and paid monthly at an annual rate of 0.02% on the first $150 million of the Fund's average weekly net assets attributable to the Common Stock, 0.01% on the next $350 million of the Fund's average weekly net assets attributable to the Common Stock and 0.005% on the Fund's average weekly net assets attributable to the Common Stock above $500 million (which for purposes of calculating such fee, will be deemed to be the average weekly value of the Fund's total assets minus the sum of the Fund's liabilities (which liabilities include the aggregate liquidation preference of the Fund's outstanding Fund Preferred Shares) and accumulated dividends, if any, on the Fund Preferred Shares), plus certain out-of-pocket expenses.
DURATION AND TERMINATION; NON-EXCLUSIVE SERVICES
The Advisory Agreement is effective on the date the Fund's registration
statement is declared effective by the SEC and will, unless earlier terminated
as described below, remain in effect for two years and from year to year
thereafter if approved annually (1) by the Board of Directors of the Fund or by
the holders of a majority of the Fund's outstanding voting securities and
(2) by a majority of the Directors who are not parties to the Advisory Agreement
or "interested persons" (as defined in the 1940 Act) of any such party. The
Advisory Agreement terminates on its assignment by any party and may be
terminated without penalty on 60 days' written notice at the option of any party
or by vote of the shareholders of the Fund. Each of the Administration Agreement
and the Servicing Agreement is effective on the date the Fund's registration
statement is declared effective and will terminate unless approved annually by
the Board of Directors of the Fund. Each of the Administration Agreement and the
Servicing Agreement is terminable upon 30 days' notice by the Fund and 60 day's
notice by the other party to the agreement.
The services of the Adviser, the Administrator and the Servicing Agent are not deemed to be exclusive, and nothing in the relevant service agreements prevents either of them or their affiliates from providing similar services to other investment companies and other clients (whether or not their investment objectives and policies are similar to those of the Fund) or from engaging in other activities.
ESTIMATED EXPENSES
The Adviser, the Administrator and the Servicing Agent are each obligated to pay expenses associated with providing the services contemplated by the agreements to which they are parties, including compensation of and office space for their respective officers and employees connected with investment and economic research, trading and investment management and administration of the Fund. The Adviser and the Servicing Agent are each obligated to pay the fees of any Director of the Fund who is affiliated with it, except that the Fund will bear travel expenses or an appropriate portion thereof of directors, officers or employees of the Adviser and the Servicing Agent to the extent such expenses relate to attendance at meetings of the Fund's Board of Directors or any committee thereof. The Fund pays all other expenses incurred in the operation of the Fund including, among other things, advisory, servicing and administration fees, expenses for legal and independent accountants' services, costs of
printing proxies, stock certificates and shareholder reports, charges of the custodian and transfer and dividend-paying agent and registrar, expenses in connection with the Dividend Reinvestment and Cash Purchase Plan, Commission fees, fees and expenses of unaffiliated Directors, membership fees in trade associations, fidelity bond coverage for the Fund's officers and employees, Directors' and officers' errors and omissions and liability insurance coverage, interest, brokerage costs and stock exchange fees, taxes, stock exchange listing fees and expenses, expenses of qualifying the Fund's shares for sale in various states, expenses in connection with auctions of Fund Preferred Shares outstanding, litigation and other extraordinary or non-recurring expenses, and other expenses properly payable by the Fund. The fees and expenses incident to the offering and issuance of Common Stock and the Fund Preferred Shares issued by the Fund (which include certain marketing expenses of the underwriters, the Servicing Agent and the Adviser) will be recorded as a reduction of capital of the Fund attributable to the Common Stock.
On the basis of the anticipated size of the Fund immediately following the offering, assuming no exercise of the over-allotment option, the Adviser estimates that the Fund's annual operating expenses will be approximately $6,023,564 without taking expenses incident to the initial offering of the Fund Preferred Shares into account. No assurance can be given, in light of the Fund's investment objective and policies, however, that actual annual operating expenses will not be substantially more or less than this estimate and, in fact, the Fund's annual expenses in the year in which the Fund offers its Fund Preferred Shares can be expected to be substantially higher than the estimate.
Costs incurred in connection with the organization of the Fund, estimated at $24,113, will be borne by the Adviser. Offering expenses relating to the Fund's Common Stock (other than the sales load), estimated at $1,750,000, that do not exceed $0.05 per share of Common Stock will be payable upon completion of the Common Stock offering and will be charged to capital upon the commencement of investment operations of the Fund. Offering expenses with regard to the Fund Preferred Shares will be payable upon the completion of the offering of the Fund Preferred Shares and will be charged to capital attributable to Common Stock at such time.
PORTFOLIO TRANSACTIONS
GENERAL
The Fund's portfolio securities ordinarily are purchased from and sold to parties acting as either principal or agent. In general, preferred stocks are traded on a net basis with dealers acting as principal for their own account. While there is no stated commission on such transactions, the price usually includes compensation for the risk and costs incurred by the dealer. When a party acts as agent, a stated commission cost will be incurred. The Adviser will consider the commission cost in determining the effective price of the security. Orders are placed directly with a principal market maker unless a better price can be obtained by using a broker. Newly issued securities are purchased directly from the issuer or the underwriter. The prices paid to underwriters of newly issued securities usually include a concession paid by the issuer to the underwriter.
Transactions on behalf of the Fund are allocated by the Adviser in its best judgment to various dealers, which may include Merrill Lynch and other members of the syndicate that participate in the underwriting of the Common Stock. The primary consideration is prompt and effective execution of orders at the most favorable price. Subject to that primary consideration, dealers may be selected for research, statistical or other services to enable the Adviser to supplement its own research and analysis with the views and information of other securities firms. Research and investment services are those which brokerage houses customarily provide to institutional investors and include research reports on particular issues and industries.
Brokerage and research services furnished by brokers and dealers through which the Fund effects securities transactions may be used by the Adviser in advising other accounts and, conversely, brokerage and research services furnished to the Adviser by brokers and dealers in connection with other accounts advised by the Adviser may be used by the Adviser in advising the Fund. Although it is not possible to place a dollar value on these services, it is the Adviser's view that the receipt and study of such services should not reduce the overall costs of its research services.
Investment decisions for the Fund are made independently from those of other accounts advised by the Adviser. If such other accounts are prepared to invest in, or desire to dispose of, securities at the same time as the Fund, however, available investments or opportunities for sales will be allocated equitably to each entity. In some cases, this procedure may adversely affect the size of the position obtained for or disposed of by the Fund or the price paid or received by the Fund.
The Fund's Board of Directors periodically reviews the commissions paid by the Fund to determine if the commissions paid over representative periods of time were reasonable in relation to the benefits inuring to the Fund.
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 objective. The Fund cannot accurately predict its securities portfolio turnover rate, but anticipates that its annual turnover rate will not exceed 50% under normal market conditions. Portfolio turnover rate is calculated by dividing the lesser of the Fund's annual sales or purchases of portfolio securities by the monthly average value of securities in the portfolio during the year, excluding any portfolio security (including hedging instruments), the maturity of which at the time of acquisition is one year or less. Higher portfolio turnover rates could result in corresponding increases in brokerage commissions. The Fund will not consider turnover rate a limiting factor in making investment decisions consistent with its investment objective and policies.
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy, which may be changed by the Fund's Board of Directors, will be to distribute throughout the year, primarily in the form of regular monthly dividends, substantially all (on an annual basis) of its net investment income (that is, income other than net realized long-term and short-term capital gains) and its net realized short-term capital gains, if any, to the holders of the Common Stock. Dividends to Common Stock shareholders are expected to be declared approximately 45 days, and paid approximately 60-90 days, after the completion of the offering of shares of Common Stock. Expenses of the Fund are accrued each day. The Fund will determine whether to distribute annually its net realized long-term capital gains, if any, to Common Stock shareholders and holders of Fund Preferred Shares outstanding. For a discussion of the consequences of this determination to shareholders, see "Taxation--Taxation of the Fund and its Investments."
After the issuance of Fund Preferred Shares, the dividends and capital gain distributions to Common Stock shareholders will consist of the Fund's net investment income and net realized short-term capital gains, if any, and, to the extent distributed by the Fund, net realized long-term capital gains, remaining after the payment of accumulated dividends on the Fund Preferred Shares outstanding. While any Fund Preferred Shares are outstanding, the Fund may not declare or pay any cash dividend or other distribution on the Common Stock unless at the time of the declaration (1) all accumulated dividends on the Fund Preferred Shares outstanding have been paid and (2) the Fund's net asset value (determined after deducting the amount of that dividend or other distribution on the Common Stock) is at least 200% of the liquidation value of the outstanding Fund Preferred Shares (expected to equal
the original purchase price per share plus any accumulated and unpaid dividends thereon). This limitation on the Fund's ability to make distributions on the Common Stock could, under certain circumstances, impair the Fund's ability to maintain its qualification for Federal income tax purposes as a regulated investment company or to avoid the imposition of a 4% excise tax on certain undistributed income. See "Taxation."
If for any full taxable year, the Fund's total payments to its shareholders attributable to the taxable year exceed net investment income and net realized capital gains due to its intent to make regular monthly dividend payments, the excess payments generally will be treated as a tax-free return of capital (up to the amount of the shareholder's tax basis in his or her shares). The amount treated as a tax-free return of capital will reduce a shareholder's adjusted basis in his or her shares. Pursuant to the requirements of the 1940 Act and other applicable laws, a notice will accompany any distribution paid from sources other than net investment income. In the event that the Fund pays to its shareholders amounts in excess of its net investment income and net realized capital gains, such payments may have the effect of decreasing the Fund's total assets, which may increase the Fund's expense ratio. The Fund's Board of Directors intends to monitor the amount of dividends paid in order to seek to avoid such excess payments.
NET ASSET VALUE
The net asset value of the Fund's Common Stock is determined as of the close
of trading on the New York Stock Exchange, currently 4:00 p.m., New York time,
on the last day on which the New York Stock Exchange is open for trading of each
week and month and at such other times as the Board shall determine. It is
determined by dividing the value of the Fund's net assets attributable to common
shares by the number of shares of Common Stock outstanding. The value of the
Fund's net assets attributable to common shares is deemed to equal the value of
the Fund's total assets less (i) the Fund's liabilities, (ii) the aggregate
liquidation value of the outstanding Fund Preferred Shares and
(iii) accumulated and unpaid dividends on the outstanding Fund Preferred Shares.
Securities listed on a national securities exchange are valued on the basis
of the last sale on such exchange on the day of valuation, except as described
hereafter. In the absence of sales of listed securities and with respect to
(a) securities for which the most recent sale prices are not deemed to represent
fair market value and (b) unlisted securities (other than money market
instruments), securities are valued at the mean between the closing bid and
asked prices when quoted prices for investments are readily available.
Investments in over-the-counter derivative instruments, such as interest rate
swaps and options thereon ("swaptions") are valued at the prices obtained from
the broker/dealer or bank that is the counterparty to such instrument, subject
to comparison of such valuation with a valuation obtained from a broker/dealer
or bank that is not a counterparty to the particular derivative instrument.
Investments for which market quotations are not readily available or for which
management determines that the prices are not reflective of current market
conditions are valued at fair value as determined in good faith by or under the
direction of the Board of Directors, including reference to valuations of other
securities which are comparable in quality, maturity and type. Investments in
money market instruments, which mature in 60 days or less, are valued at
amortized cost. Investments in money market funds are valued at their net asset
value.
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Fund is authorized to issue up to 250,000,000 shares of capital stock, of which 240,000,000 are classified as Common Stock, par value $.01 per share. The Board of Directors is authorized to amend the Articles to increase or decrease the aggregate number of shares of stock of the Fund or the
number of shares of stock of any class or series that the Fund has authority to issue. All shares of Common Stock have equal non-cumulative voting rights and equal rights with respect to dividends and distribution of assets upon liquidation. Shares of Common Stock are fully paid and non-assessable when issued and have no preemptive, conversion or exchange rights. So long as any Fund Preferred Shares are outstanding, the Fund is not permitted to declare dividends or make any distributions with respect to or purchase its Common Stock unless, at the time of such declaration, distribution or purchase, as applicable (and after giving effect thereto), all accumulated dividends on Fund Preferred Shares outstanding have been paid, and unless asset coverage (as defined in the 1940 Act) with respect to the Fund Preferred Shares would be at least 200% after giving effect to the dividend, distribution or purchase. See "Description of Capital Stock--Preferred Stock" below.
PREFERRED STOCK
The Fund's Articles of Incorporation authorize the issuance of up to 10,000,000 shares of preferred stock having a par value of $.01 per share in one or more series, with rights as determined by the Board of Directors, without the approval of the Common Stock shareholders. Common Stock shareholders have no preemptive right to purchase any shares of preferred stock that might be issued by the Fund.
LIMITED ISSUANCE OF FUND PREFERRED SHARES. Under the 1940 Act, the Fund
could issue Fund Preferred Shares with an aggregate liquidation value of up to
one-half of the value of the Fund's total assets less liabilities other than
borrowings, measured immediately after issuance of the Fund Preferred 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 Stock
unless the liquidation value of the Fund Preferred Shares is less than one-half
of the value of the Fund's total assets less liabilities other than borrowings
(determined after deducting the amount of such dividend or distribution)
immediately after the distribution. If the Fund sells all the Common Stock and
Fund Preferred Shares discussed in this prospectus, the liquidation value of the
Fund Preferred Shares is expected to be approximately 36% of the value of the
Fund's total assets less liabilities other than borrowings. The Fund intends to
purchase or redeem Fund Preferred Shares, if necessary, to keep that fraction
below one-half.
DISTRIBUTION PREFERENCE. The Fund Preferred Shares will have complete priority over the Common Stock.
LIQUIDATION PREFERENCE. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Fund, holders of Fund Preferred 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 Stock. After payment of the full amount of the liquidating distribution to which they are entitled, the holders of Fund Preferred Shares outstanding will not be entitled to any further participation in any distribution of assets by the Fund. A consolidation, merger or statutory share exchange of the Fund with or into any other corporation or corporations or a sale of all or substantially all of the assets of the Fund will not be deemed to be a liquidation, dissolution or winding up of the Fund for the purposes of determining liquidation rights.
VOTING RIGHTS. Fund Preferred Shares are required to be voting shares and to have equal voting rights with Common Stock. Except as otherwise indicated in this prospectus and except as otherwise required by applicable law, holders of Fund Preferred shares will vote together with holders of Common Stock as a single class.
Holders of Fund Preferred Shares, voting as a separate class, will be entitled to elect two of the Fund's Directors. The remaining Directors will be elected by holders of Common Stock and holders of Fund Preferred Shares, voting together as a single class. In the unlikely event that two full years of accrued dividends are unpaid on the Fund Preferred Shares, the holders of all outstanding Fund Preferred Shares, voting as a separate class, will be entitled to elect a majority of the Fund's Directors until all dividends in arrears have been paid or declared and set apart for payment.
A majority of the votes entitled to be cast by the holders of Fund Preferred Shares outstanding, voting as a separate class, will be required to amend the Fund's Articles of Incorporation so as to affect adversely any contract right of the Fund Preferred Shares set forth in the Fund's Articles of Incorporation in any material respect or issue any shares of preferred stock ranking prior to or on a parity with the Fund Preferred Shares as to dividends or upon liquidation (other than previously authorized shares, including shares purchased or redeemed by the Fund). Unless a higher percentage is provided for under "Certain Provisions of the Articles of Incorporation," the affirmative vote of a majority of the votes entitled to be cast by holders of Fund Preferred Shares outstanding, voting as a separate class, will be required to approve any plan of reorganization adversely affecting the shares or any action requiring a vote of security holders under Section 13 (a) of the 1940 Act including, among other things, changes in the Fund's investment objective or changes in certain restrictions described above under "Investment Objective and Policies" and "Investment Restrictions." The class vote of holders of Fund Preferred Shares outstanding described above will in each case be in addition to a separate vote of the requisite percentage of the votes entitled to be cast by holders of shares of Common Stock and outstanding Fund Preferred Shares, voting as a single class, necessary to authorize the action in question. The voting provisions with respect to Fund Preferred Shares described in this prospectus will not apply if at, or prior to, the time at which the act with respect to which the vote would otherwise be required is effected, all outstanding Fund Preferred Shares have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemptions.
REDEMPTION, PURCHASE AND SALE OF FUND PREFERRED SHARES. The terms of the Fund Preferred Shares may provide than they are redeemable at certain times, in whole or in part, at the original purchase price per share plus accumulated dividends. The terms may also state that the Fund may tender for or purchase Fund Preferred Shares and resell any shares so tendered. Any redemption of purchase of Fund Preferred Shares by the Fund will reduce the leverage applicable to Common Stock, while any resale of shares by the Fund will increase such leverage. See "Use of Leverage."
The discussion above describes the Board of Directors' present intention with respect to a possible offering of Fund Preferred Shares. If the Board of Directors determines to authorize such an offering, the terms of the Fund Preferred Shares may be the same as, or different from, the terms described above, subject to applicable law and the Fund's Articles of Incorporation. The Board of Directors, without the approval of the Common Stock shareholders, may authorize an offering of preferred stock or may determine not to authorize such an offering.
PRINCIPAL SHAREHOLDER
As of the date of this prospectus, the Adviser was the record and beneficial owner of all of the outstanding shares of Common Stock and thus was deemed in "control" of the Fund as "control" is defined in the 1940 Act. These shares were issued in respect of the Adviser's contribution of the Fund's initial capital. The Adviser has undertaken that these shares were purchased for investment purposes only and that they will be sold only pursuant to a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), or an applicable exemption from the registration requirements of the Securities Act.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Under the Fund's Dividend Reinvestment and Cash Purchase Plan (the "Plan"), a shareholder whose shares of Common Stock are registered in his or her own name will have all distributions reinvested automatically by the Administrator as agent under the Plan in additional shares of Common Stock, unless the shareholder elects to receive distributions in cash.
Distributions with respect to shares registered in the name of a broker-dealer or other nominee (that is, in "street name") will also be reinvested automatically by the broker or nominee in additional shares under the Plan, unless the shareholder elects to receive distributions in cash (but only in the latter case if the service is provided by the broker or nominee). A shareholder who holds shares of Common Stock registered in the name of a broker or other nominee may not be able to transfer the shares to another broker or nominee and continue to participate in the Plan. Investors who own shares of Common Stock registered in street name should consult their broker or nominee for details regarding reinvestment.
The number of shares of Common Stock distributed to participants in the Plan in lieu of a cash dividend is determined in the following manner. Whenever the market price per share of the Fund's Common Stock is equal to or exceeds the net asset value per share on the valuation date, participants in the Plan will be issued new shares valued at the higher of net asset value or 95% of the then-current market value. Otherwise, the Administrator will buy shares of the Common Stock in the open market, on the New York Stock Exchange or elsewhere, on or shortly after the payment date of the dividend or distribution and continuing until the ex-dividend date of the Fund's next distribution to holders of the Common Stock or until it has expended for such purchases all of the cash that would otherwise be payable to the participants. The number of purchased shares of Common Stock that will then be credited to the participants' accounts will be based on the average per share purchase price of the shares so purchased, including brokerage commissions. If the Administrator commences purchases in the open market and the then-current market price of the shares (plus any estimated brokerage commissions) subsequently exceeds their net asset value most recently determined before the completion of the purchases, the Administrator will attempt to terminate purchases in the open market and cause the Fund to issue the remaining dividend or distribution in shares. In this case, the number of shares received by the participant will be based on the weighted average of prices paid for shares purchased in the open market and the price at which the Fund issues the remaining shares. These remaining shares will be issued by the Fund at the higher of net asset value or 95% of the then-current market value.
Plan participants are not subject to any charge for reinvesting dividends or capital gains distributions. Each Plan participant will, however, bear a proportionate share of brokerage commissions incurred with respect to the Administrator's open market purchases in connection with the reinvestment of dividends or capital gains distributions.
The automatic reinvestment of dividends and capital gains distributions will not relieve Plan participants of any income tax that may be payable on the dividends or capital gains distributions. A participant in the Plan will be treated for Federal income tax purposes as having received, on the dividend payment date, a dividend or distribution in an amount equal to the cash that the participant could have received instead of shares.
In addition to acquiring shares of Common Stock through the reinvestment of cash dividends and distributions, a shareholder may invest any further amounts from $100 to $3,000 semi-annually at the then-current market price in shares purchased through the Plan. Such semi-annual investments are subject to any brokerage commission charges incurred.
A shareholder whose Common Stock is registered in his or her own name and
who participates in the Plan may terminate participation in the Plan at any time
by notifying the Administrator in writing, by completing the form on the back of
the Plan account statement and forwarding it to the Administrator or by calling
the Administrator directly. A termination will be effective immediately if
notice is received by the Administrator not less than 10 days before any
dividend or distribution record date. Otherwise, the termination will be
effective, and only with respect to any subsequent dividends or distributions,
on the first day after the dividend or distribution has been credited to the
participant's account in additional shares of the Fund. Upon termination and
according to a participant's instructions, the Administrator will either
(a) issue certificates for the whole shares credited to shareholder's Plan
account and a check representing any fractional shares or (b) sell the shares in
the market. Shareholders who hold common stock registered in the name of a
broker or other nominee should consult their broker or nominee to terminate
participation.
The Plan is described in more detail in the Fund's Plan brochure. Information concerning the Plan may be obtained from the Administrator at 1-800-331-1710.
TAXATION
The following general discussion summarizes certain U.S. Federal income tax considerations affecting the Fund and its shareholders. This discussion does not address state, local, or non-U.S. taxes. It is intended to be only a summary and is not intended as a substitute for careful tax planning by prospective shareholders. Prospective shareholders should therefore consult their own tax advisors prior to purchasing shares of Common Stock.
This discussion only deals with persons who will hold Common Stock as a capital asset within the meaning of Section 1221 of the Code. It does not address the U.S. Federal income tax consequences that may be relevant to a particular holder subject to special treatment under certain U.S. Federal income tax laws (for example, nonresident aliens, foreign corporations and persons subject to the alternative minimum tax provisions of the Code). Also, this discussion is not intended to be applicable to all categories of investors, some of which, such as dealers in securities of foreign currency, banks, trusts, insurance companies, tax-exempt organizations (employment, charitable or other), pension plans, persons that have a functional currency other than the U.S. dollar and investors in pass-through entities, may be subject to special rules.
This discussion is based on the Code, the final, temporary and proposed Treasury regulations promulgated thereunder, administrative pronouncements and judicial decisions, all as in effect on the date hereof and all of which are subject to change, possibly with retroactive effect. We have not requested, and will not request, a ruling from the U.S. Internal Revenue Service, or the "IRS," with respect to any of the U.S. Federal income tax consequences described below. There can be no assurance that the IRS will not disagree with or challenge any of the conclusions set fort herein.
TAXATION OF THE FUND AND ITS INVESTMENTS
The Fund intends to qualify each year as a "regulated investment company" under Subchapter M of the Code. To so qualify, the Fund must, among other things: (1) derive at least 90% of its gross income in each taxable year from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock, securities or foreign currencies, or certain other income (including, but not limited to, gains from options, futures and forward contracts) derived with respect to the Fund's business of investing in such stock, securities or foreign currencies and (2) diversify its holdings so that, at the end of each quarter of the Fund's taxable year (a) at least 50% of the market value of the Fund's total assets is represented by cash and cash items, Government Securities, securities of other regulated investment companies and other securities, with such other securities limited, with
respect to any one issuer, to an amount no 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 (b) not more than 25% of the market value of the Fund's total assets is invested in the securities (other than Government Securities or securities of other regulated investment companies) of any one issuer or of any two or more issuers that the Fund controls and which are determined to be in the same or similar trades or businesses or related trades or businesses. In order to meet these requirements, the Fund may be restricted in the utilization of certain of the investment techniques described under "Investment Objective and Policies--Investment Techniques."
As a regulated investment company, the Fund will not be subject to Federal income tax on its net investment income (I.E., income other than its net realized long-term and short-term capital gains) and its net realized long-term and short-term capital gains, if any, that it distributes to its shareholders, provided that an amount equal to at least 90% of its investment company taxable income (I.E., at least 90% of its taxable income minus the excess, if any, of its net realized long-term capital gains over its net realized short-term capital losses (including any capital loss carryovers) plus or minus certain other adjustments as specified in Section 852 of the Code but without regard to the dividends paid deduction specified therein) for the taxable year is so distributed, but will be subject to tax at regular corporate rates on any income or gains that it does not distribute. Further, the Fund will be subject to a Federal corporate income tax with respect to such distributed amounts in any year that it fails to qualify as a regulated investment company or fails to meet this distribution requirement. Any dividend declared by the Fund in October, November or December of any calendar year and payable to shareholders of record on a specified date in such a month shall be deemed to have been received by each such shareholder on December 31 of such calendar year and to have been paid by the Fund not later than such December 31, provided that such dividend is actually paid by the Fund to such shareholders during January of the following calendar year.
The Fund intends to distribute annually to its shareholders substantially
all of its investment company taxable income. The Fund also currently intends to
distribute any of its net realized long-term capital gains in excess of net
realized short-term capital losses (including any capital loss carryovers).
However, the Board of Directors of the Fund may in the future determine to
instead retain any such excess for investment. If the Fund retains for
investment an amount in excess of its net long-term capital gains less its net
short-term capital losses and capital loss carryovers, it will be subject to a
Federal corporate income tax (currently at a rate of 35%) on the amount
retained. In that event, the Fund expects to designate such retained amounts as
undistributed capital gains in a written notice to its shareholders each of whom
(a) will be required to include in income for Federal income tax purposes, as
long-term capital gains, its proportionate share of the undistributed amount,
(b) will be entitled to credit its proportionate share of the 35% tax paid by
the Fund on the undistributed amount against its own Federal income tax
liabilities, if any, and to claim refunds to the extent its credits exceed its
liabilities, and (c) will be entitled to increase its tax basis, for Federal
income tax purposes, in its shares by an amount equal to 65% of the amount of
undistributed capital gains included in its income.
The Code imposes a 4% nondeductible excise tax on the Fund to the extent the Fund does not distribute by the end of any calendar year at least 98% of the sum of its net investment income for that year, the net amount of its capital gains (both long-term and short-term) for the one-year period ending, as a general rule, on October 31 of that year and certain undistributed amounts from previous years. For this purpose, however, any income or gain retained by the Fund that is subject to corporate income tax will be considered to have been distributed by year-end.
If, at any time when Fund Preferred Shares are outstanding, the Fund does not meet the 1940 Act Asset Coverage Requirement or the Eligible Asset Coverage Amount Requirement, the Fund will be required to suspend dividends and distributions to holders of Common Stock until such coverage is restored. See "Description of Capital Stock." A suspension of dividends and distributions might prevent
the Fund from (1) satisfying the 90% distribution requirement described above, thereby causing the Fund to fail to qualify to be taxed as a regulated investment company or (2) making sufficient distributions to avoid the 4% excise tax described above. Upon any failure to meet the Eligible Asset Coverage Amount Requirement or the 1940 Act Asset Coverage Requirement, the Fund will be required to redeem Fund Preferred Shares in order to maintain or restore the requisite asset coverage and avoid the adverse consequences to the Fund and its shareholders of failing to qualify to be taxed as a regulated investment company. There can be no assurance, however, that any such redemption would achieve such objectives.
If, in any taxable year, the Fund fails to qualify as a regulated investment company under the Code, it would be taxed in the same manner as an ordinary corporation and distributions to its shareholders would not be deductible by the Fund in computing its taxable income. In addition, in the event of a failure to qualify, the Fund's distributions, to the extent derived from the Fund's current or accumulated earnings and profits, would constitute dividends (eligible for the DRD), even though those distributions might otherwise (at least in part) have been treated in the shareholders' hands as long-term capital gains. If the Fund fails to qualify as a regulated investment company in any year, it must pay out its earnings and profits accumulated in that year in order to qualify again as a regulated investment company. In addition, if the Fund failed to qualify as a regulated investment company for a period greater than two taxable years, the Fund may be required to recognize any net built-in gains with respect to certain of its assets (the excess of the aggregate gains, including items of income, over aggregate losses that would have been realized if it had been liquidated) in order to qualify as a regulated investment company in a subsequent year.
If the Fund is the holder of record of any stock on the record date for any dividends payable with respect to such stock, such dividends are included in the Fund's gross income not as of the date received but as of the later of (a) the date such stock became ex-dividend with respect to such dividends (I.E., the date on which a buyer of stock would not be entitled to receive the declared, but unpaid, dividends) or (b) the date the Fund acquired such stock. Accordingly, in order to satisfy its income distribution requirements, the Fund may be required to pay dividends based on anticipated earnings, and shareholders may receive dividends in an earlier year than would otherwise be the case.
The Fund's transactions 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 intends to monitor its transactions, make the appropriate tax elections and 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 to be taxed as a regulated investment company.
TAXATION OF THE FUND'S SHAREHOLDERS
GENERAL. The Fund currently intends to distribute substantially all of its net investment income and substantially all of its net realized long-term and short-term capital gains for each of its taxable years. Generally, dividends paid by the Fund derived from its net investment income (other than income designated as qualifying for the DRD) are taxable to shareholders as ordinary income. In addition, any distributions designated as being made from the Fund's net realized long-term capital
gains are taxable to shareholders as long-term capital gains, regardless of the holding period of such shareholders of the Fund's shares.
Distributions will be treated in the manner described above regardless of whether such distributions are paid in cash or in additional shares of the Fund. A shareholder whose distributions are reinvested in shares will be treated as having received a dividend equal to the fair market value of the new shares issued to the shareholder or the amount of cash allocated to the shareholder for the purchase of shares on its behalf.
A holder of shares of Common Stock that (1) is taxed as a corporation for Federal income tax purposes, (2) meets the applicable holding period and taxable income requirements of Section 246 of the Code, (3) is not subject to the "debt-financed portfolio stock" rules of Section 246A of the Code with respect to such holder's investment in shares of Common Stock, and (4) otherwise is entitled to the DRD under Section 243 of the Code, will be entitled to claim a deduction in an amount equal to 70% of the dividends received on shares of Common Stock which are designated by the Fund as qualifying for the DRD. The Fund expects its portfolio to consist primarily of "hybrid" or taxable preferreds. For this reason, most of the Fund's distributions will generally not qualify for the DRD.
DISTRIBUTIONS IN EXCESS OF EARNINGS AND PROFITS. If, for any taxable year of the Fund, the amount of distributions paid for such year exceeds its net investment income and net realized long-term and short-term gains for such year, the amount of such excess distribution will be treated as ordinary income up to the amount of the Fund's current and accumulated earnings and profits as calculated for Federal income tax purposes and any remaining excess distribution thereafter will, as a general rule, first be treated as a non-taxable return of capital to the extent of (and in reduction of) the shareholder's tax basis in its shares and, after such basis has been reduced to zero, will constitute a capital gain to the shareholder (assuming that the shares of Common Stock are held as a capital asset). This reduction of basis would operate to increase the shareholder's capital gain (or decrease its capital loss) upon a sale, exchange or other disposition of its shares. Under current Federal income tax principles, current earnings and profits are allocated first to shares of preferred stock and any remaining current earnings and profits (after all distributions are taken into account on the preferred stock) are allocated to common stock. Thus, the Fund anticipates that it will allocate its current earnings and profits to distributions on the Fund Preferred Shares prior to an allocation of such earnings and profits to the Common Stock unless required to do otherwise by applicable law. Since the Fund anticipates that it will distribute substantially all of its net investment income and net realized long-term and short-term capital gains in each of its taxable years, the Fund does not expect to have significant amounts of accumulated earnings and profits.
If the Fund does not have any accumulated earnings and profits and makes, by the end of its taxable year, an amount of Common Stock distributions on the Common Stock which exceeds the amount of its current earnings and profits, then each Common Stock dividend paid for that taxable year would be treated, in the same proportion, in part as a dividend of taxable income and in part as a non-taxable return of capital.
Dividends and distribution on the Fund's shares are generally subject to federal income tax as described herein, even though such dividends and distributions may economically represent a return of a particular shareholder's investment. Such distributions are likely to occur in respect of shares purchased at a time when the Fund's net asset value reflects gains that are either unrealized or realized but not distributed. Such realized gains may be required to be distributed even when the Fund's net asset value also reflects unrealized losses. Distributions are taxable to a shareholder even if they are paid from income or gains earned by the Fund prior to the shareholder's investment (and thus included in the price paid by the shareholders).
The IRS currently requires that a regulated investment company that has two or more classes of stock allocate to each such class proportionate amounts of each type of its income (such as ordinary income and capital gains) based upon the percentage of total dividends paid out of earnings or profits to each class for the tax year. Accordingly, the Fund intends each year to allocate capital gain dividends between its Common Shares and Fund Preferred Shares in proportion to the total dividends paid out of earnings or profits to each class with respect to such tax year. Dividends qualifying and not qualifying for the dividends received deduction will similarly be allocated between and among these classes.
TENDER OFFERS TO PURCHASE SHARES. Under current law, a holder of Common Stock which tenders, in response to a tender offer by the Fund, all shares of the Fund owned by such holder (as well as any shares considered owned by such shareholder under attribution rules contained in the Code) will realize a taxable gain or loss depending upon the amount realized and such shareholder's basis in its shares. Such gain or loss will be treated as capital gain or loss if the shares are held as capital assets in the shareholder's hands and will be long-term or short-term depending upon the shareholder's holding period for the shares. If a holder of Common Stock shares tenders, in response to a tender offer by the Fund, less than all shares owned by and attributed to such holder (or if the Fund purchases only some of the shares tendered by such holder), the proceeds received may be treated as a taxable dividend, return of capital or capital gain depending on the Fund's earnings and profits and the shareholder's basis in the tendered shares.
SALE OR EXCHANGE OF SHARES. Upon the sale or exchange of shares of the Fund which a shareholder holds as a capital asset, such shareholder may realize a capital gain or loss which will be long-term or short-term, depending upon the shareholder's holding period for 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.
However, all or a portion of any loss realized upon a taxable disposition of Fund shares will be disallowed to the extent the shares disposed of are replace (including through reinvestment of dividends) within a period of 60 days beginning 30 days before and ending 30 days after the disposition. In such a case, the basis of the newly purchased shares acquired will be adjusted to reflect the disallowed loss. Any loss realized by a shareholder on a taxable 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 (or amounts treated as undistributed capital gains) with respect to such shares.
BACKUP WITHHOLDING. If a shareholder fails to furnish a correct taxpayer identification number, fails to report fully dividend or interest income, or fails to certify that it has provided a correct taxpayer identification number and that it is not subject to backup withholding, then the shareholder may be subject to a "backup withholding" tax at a 30% rate (for 2002 and 2003) with respect to (1) taxable dividends and capital gain distributions and (2) the proceeds of any sales or repurchases of Fund shares. An individual's taxpayer identification number is his social security number. The backup withholding tax is not an additional tax and may be credited against a taxpayer's Federal income tax liability. Corporate shareholders and certain other shareholders are or may be exempt from backup withholding.
STATEMENTS AND NOTICES. Each shareholder will receive an annual statement as to the Federal income tax status of its dividends and distributions from the Fund for the prior calendar year. Furthermore, shareholders may also receive, if appropriate, various written notices after the close of the Fund's taxable year regarding the Federal income tax status of certain dividends and distributions that were paid (or that are treated as having been paid) by the Fund to its shareholders during the preceding year.
OTHER TAXES. Dividends and distributions also may be subject to additional state and local taxes depending on each shareholder's particular situation.
The Bush Administration has announced a proposal to eliminate the federal income tax on dividends of income previously taxed at the corporate level. In addition, under the proposal, shareholders may be provided with basis adjustments to reflect income taxed at the corporate level which is not distributed. Basis adjustments may not be allocated to shares which are preferred and limited as to dividends. Under the proposal, a regulated investment company such as the Fund may be permitted to pass through to its shareholders the excludable dividends and basis adjustments. It is anticipated that excludable dividends and basis adjustments will be treated similar to tax exempt interest under many of the rules applicable to regulated investment companies. Under the proposal, excludable dividends will not be a tax preference for alternative minimum tax purposes. At this time, however, some of the details of the proposal have not been specified. In addition, it is uncertain if, and in what form, the proposal will ultimately be adopted. Accordingly, it is not possible to evaluate how this proposal might affect the tax discussion above.
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN TAX CONSEQUENCES AFFECTING THE FUND AND ITS SHAREHOLDERS. SHAREHOLDERS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE FUND.
REPURCHASE OF COMMON STOCK AND TENDER OFFERS;
CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its shareholders do not have the right to cause the Fund to redeem their shares. Instead, the Fund's shares of Common Stock will trade in the open market at a price that is 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. Shares of closed-end investment companies frequently trade at a discount from net asset value, or in some cases trade at a premium. Some closed-end companies have taken certain actions, including the repurchase of common stock in the market at market prices and the making of one or more tender offers for common stock at prices close to net asset value, in an effort to reduce or mitigate any such discount. Others have converted to an open-end investment company, the shares of which are redeemable at net asset value.
If at any time after the third year following the offering made hereby, shares of the Common Stock publicly trade for a substantial period of time at a significant discount from the Fund's then current net asset value per share, the Board of Directors will consider, at its next regularly scheduled meeting and regularly thereafter (not less frequently than annually) as long as such discount persists, taking various actions designed to reduce or eliminate the discount, including recommending to shareholders amendments of the Fund's Articles of Incorporation to convert the Fund to an open-end investment company. The Board may not choose to adopt any actions with respect to the Fund's discount. Accordingly, the Fund cannot assure you that the Board will decide to take any particular action, or, if taken, that share repurchases or tender offers will cause the Fund's shares to trade at a price equal to their net asset value.
As noted above, so long as any Fund Preferred Shares are outstanding, the Fund may not purchase, redeem or otherwise acquire any shares of its Common Stock unless (1) all accumulated dividends on Fund Preferred Shares have been declared and paid and (2) at the time of the purchase, redemption or acquisition, the net asset value of the Fund's portfolio (determined after deducting the acquisition price of the Common Stock) is at least 200% of the liquidation value of the then-outstanding Fund Preferred Shares (expected to equal the original purchase price per share plus any accumulated and unpaid dividends thereon).
If the Fund converted to an open-end company, it would be required to redeem all Fund Preferred Shares then outstanding (requiring that it liquidate a portion of its investment portfolio), and the Fund's Common Stock 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.
Before deciding whether to take any action if the shares of Common Stock 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, market considerations and the effect of certain tax considerations, including maintenance of the Fund's tax status as a regulated investment company. Based on these considerations, even if the Fund's shares should trade at a discount, the Board may determine that, in the interest of the Fund and its shareholders, no action should be taken.
Conversion of the Fund to an open-end investment company would require an amendment of the Articles. Under the Articles, such an amendment would require the affirmative vote of at least 80% of the Board of Directors and at least 80% of the votes entitled to be cast by holders of shares of Common Stock of the Fund. In addition, as long as shares of Preferred Stock (including Fund Preferred Shares) remain outstanding, the amendment would need to be approved by the affirmative vote of at least 80% of the votes entitled to be cast by any Preferred Stock (including Fund Preferred Shares) outstanding, voting as a separate class. If an amendment providing for the conversion of the Fund to an open-end investment company has been previously approved by a vote of 80% of the Continuing Directors (as defined below), only a majority of the votes entitled to be cast by holders of shares of Common Stock and Fund Preferred Shares outstanding, voting together as a single class, would be required to approve the conversion. "Continuing Director" means any member of the Board of Directors of the Fund who (a) is not an Interested Party or an affiliate or associate of an Interested Party and has been a member of the Board of Directors for a period of at least 12 months (or since the Fund's commencement of operations, if that is less than 12 months); or (b) is a successor of a Continuing Director who is not an Interested Party or an affiliate or an associate of an Interested Party and is recommended to succeed a Continuing Director by a majority of the Continuing Directors then on the Board of Directors; or (c) is elected to the Board of Directors to be a Continuing Director by a majority of the Continuing Directors then on the Board of Directors and who is not an Interested Party or an affiliate or associate of an Interested Party. "Interested Party" means any person, other than the Fund's investment adviser or any of its affiliates, which enters into, or proposes to enter into, a business combination with the Fund or which individually or together with any other persons beneficially owns or is deemed to own, directly or indirectly, more than 5% of any class of the Fund's securities.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
ANTI-TAKEOVER PROVISIONS
The Fund's Articles of Incorporation include provisions that could have the effect of limiting the ability of other entities or persons to acquire control of the Fund or to change the composition of its Board of Directors and could have the effect of depriving shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control of the Fund. Commencing with the first annual meeting of shareholders, the Board of Directors will be divided into three classes. At the annual meeting of shareholders in each year thereafter, the term of one class expires and each Director elected to the class will hold office for a term of three years. This provision could delay for up to two years the replacement of a majority of the Board of Directors. The Articles provide that the maximum number of Directors that may constitute the Fund's entire Board is 12. A Director may be removed from office only with cause, and then only by vote of at least 80% of the votes entitled to be cast by holders of Common Stock with respect to Directors elected by them and at least 80% of the votes entitled to be cast by holders of outstanding Preferred Stock with respect to the Directors elected by them. The maximum number of Directors may be increased only by an amendment to the Articles approved by 80% of the votes entitled to be cast by holders of Common Stock and any outstanding Preferred Stock, each voting as a separate class, unless approved by 80% of the Continuing Directors, in which case the approval of a majority of the votes entitled to be cast by holders of Common Stock and any outstanding Preferred Stock, each voting as a separate class, will be required unless otherwise required by the Articles or unless otherwise required by law.
The Articles require the favorable vote of at least 80% of the entire Board of Directors and of at least 80% of the votes entitled to be cast by holders of Common Stock and, as long as shares of Preferred Stock remain outstanding, Preferred Stock, each voting as a separate class, to authorize the conversion of the Fund from a closed-end to an open-end investment company as defined in the 1940 Act (except under certain circumstances described above in "Repurchase of Common Stock and Tender Offers; Conversion to Open-End Fund"). The Articles of Incorporation also require the favorable vote of at least 80% of the Directors and at least 80% of the votes entitled to be cast by holders of Common Stock and any outstanding Preferred Stock, each voting as a separate class, to approve, adopt or authorize the following:
(i) merger, consolidation or share exchange of the Fund with or into any other person;
(ii) issuance or transfer by the Fund (in one or a series of transactions in any 12 month period) of any securities of the Fund to any other person or entity for cash, securities or other property (or combination thereof) having an aggregate fair market value of $1,000,000 or more excluding sales of securities of the Fund in connection with a public offering or private placement, issuances of securities of the Fund pursuant to a dividend reinvestment and cash purchase plan adopted by the Fund and issuances of securities of the Fund upon the exercise of any stock subscription rights distributed by the Fund;
(iii) sale, lease, exchange, mortgage, pledge, transfer or other disposition by the Fund (in one or a series of transactions in any 12 month period) to or with any person of any assets of the Fund having an aggregate fair market value of $1,000,000 or more except for portfolio transactions effected by the Fund in the ordinary course of its business (transactions within clauses (i) and (ii) and this clause (iii) each being known individually as a "Business Combination");
(iv) any proposal as to the voluntary liquidation or dissolution of the Fund or any amendment to the Fund's Articles of Incorporation to terminate its existence; and
(v) any shareholder proposal as to specific investment decisions made or to be made with respect to the Fund's assets.
However, separate 80% votes of the holders of shares of Common Stock and any outstanding Preferred Stock will not be required with respect to the transactions described in (i) through (iv) above (A) if they are approved by a vote of at least 80% of the Continuing Directors, in which case (x) the affirmative vote of a majority of the votes entitled to be cast by all stockholders (including by holders of Common Stock and Preferred Stock), voting together as a single class, shall be required to approve such action if it is an action under (i) or (iv) above or an action under (iii) with respect to a matter as to which a stockholder vote is required under Maryland law, and (y) no shareholder vote is required to approve an action under (ii) above or any other under (iii) above as to which a stockholder vote is not required under Maryland law. In addition, separate 80% votes of the holders of shares of Common Stock and any outstanding Preferred Stock will not be required in the case of a Business Combination, if certain conditions regarding the consideration paid by the person entering into, or proposing to enter into, a Business Combination with the Fund and various other requirements are satisfied, in which case the affirmative vote of a majority of the votes entitled to be cast by all shareholders shall be required to approve such action if any shareholders' approval is required by law. The Fund's Bylaws contain provisions the effect of which is to prevent matters, including nominations of Directors, from being considered at shareholders' meetings where the Fund has not received sufficient prior notice of the matters.
The Board of Directors has determined that the voting requirements described above, which are greater than the minimum requirements under Maryland law or the 1940 Act, are in the best interests of shareholders generally. Reference should be made to the Articles and Bylaws of the Fund on file with the Commission for the full text of these provisions.
CUSTODIAN, TRANSFER AGENT, DIVIDEND-PAYING AGENT AND REGISTRAR
PFPC Trust Company, an indirect wholly owned subsidiary of PNC Financial Services Group, located at 8800 Tinicum Boulevard, Suite 200, 3rd Floor, Philadelphia, PA 19153, acts as custodian of the Fund's investments. The Administrator located at 4400 Computer Drive, Westborough, MA 01581, serves as the transfer agent, dividend-paying agent and registrar for the Fund's Common Stock. The Administrator also serves as agent in connection with the Dividend Reinvestment and Cash Purchase Plan for the Common Stock.
UNDERWRITING
Subject to the terms and conditions of a purchase agreement dated January 28, 2003, each underwriter named below has severally agreed to purchase, and the Fund has agreed to sell to such underwriter, the respective number of shares of Common Stock set forth opposite the name of such underwriter.
NUMBER OF SHARES
UNDERWRITER OF COMMON STOCK
----------- ----------------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................
Raymond James & Associates, Inc...................
A.G. Edwards & Sons, Inc..........................
Legg Mason Wood Walker, Incorporated..............
RBC Dain Rauscher Inc.............................
Wachovia Securities, Inc..........................
Wells Fargo Securities, LLC.......................
Advest, Inc.......................................
BB&T Capital Markets, a division of Scott &
Stringfellow, Inc...............................
Robert W. Baird & Co. Incorporated................
Fahnestock & Co. Inc..............................
Ferris, Baker Watts, Incorporated.................
J.J.B. Hilliard, W.L. Lyons, Inc..................
Huntleigh Securities Corporation..................
Janney Montgomery Scott LLC.......................
McDonald Investments Inc., a KeyCorp Company......
Morgan Keegan & Company, Inc......................
Ryan Beck & Co....................................
Wedbush Morgan Securities Inc.....................
-------
Total..................................
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The purchase agreement provides that the obligations of the underwriters to purchase the shares of Common Stock included in this offering are subject to the approval of certain legal matters by counsel and to certain other conditions. The underwriters are obligated to purchase all the shares of Common Stock sold under the purchase agreement if any of the shares of Common Stock are purchased. In the purchase agreement, the Fund and the Adviser have agreed to indemnify the underwriters against certain liabilities, including certain liabilities arising under the Securities Act of 1933, or to contribute to payments the underwriters may be required to make for any of those liabilities.
The underwriters propose to initially offer some of the shares of Common Stock directly to the public at the public offering price set forth on the cover page of this prospectus and some of the shares of Common Stock to certain dealers at the public offering price less a concession not in excess of $ per share. The sales load the Fund will pay of $1.125 per share is equal to 4.5% of the initial offering price. The underwriters may allow, and the dealers may reallow, a discount not in excess of $ per share to other dealers. After the initial public offering, the public offering price, concession and discount may be changed.
The following table shows the public offering price, sales load, estimated offering expenses and proceeds to the Fund. The information assumes either no exercise or full exercise by the underwriters of their over-allotment option.
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
Public offering price.............. $25.00 $ $
Sales load......................... $1.125 $ $
Estimated offering expenses........ $0.05 $ $
Proceeds to the Fund............... $23.825 $ $
|
The expenses of the offering are estimated at $1,750,000 and are payable by the Fund. The Fund has agreed to pay the underwriters $0.0083 per share of Common Stock as a partial reimbursement of expenses incurred in connection with the offering. The Adviser has agreed to pay all organizational expenses of the Fund. The Adviser has also agreed to pay those offering costs of the Fund (other than the sales load, but including the partial reimbursement of expenses described in the second preceding sentence) that exceed $0.05 per share of Common Stock.
The Fund has granted the underwriters an option to purchase up to additional shares of Common Stock at the public offering price, less the sales load, within 45 days from the date of this prospectus solely to cover any over-allotments. If the underwriters exercise this option, each will be obligated, subject to conditions contained in the purchase agreement, to purchase a number of additional shares proportionate to that underwriter's initial amount reflected in the above table.
Until the distribution of the shares of Common Stock is complete, Securities and Exchange Commission rules may limit underwriters and selling group members from bidding for and purchasing shares of Common Stock. However, the representatives may engage in transactions that stabilize the price of shares of Common Stock, such as bids or purchases to peg, fix or maintain that price.
If the underwriters create a short position in shares of Common Stock in connection with the offering, i.e., if they sell more shares of Common Stock than are listed on the cover of this prospectus, the representatives may reduce that short position by purchasing shares of Common Stock in the open market. The representatives may also elect to reduce any short position by exercising all or part of the over-allotment option described above. The underwriters also may impose a penalty bid, whereby selling concessions allowed to syndicate members or other broker-dealers in respect of shares of Common Stock sold in this offering for their account may be reclaimed by the syndicate if such shares of Common Stock are repurchased by the syndicate in stabilizing or covering transactions. Purchases of shares of Common Stock to stabilize the price or to reduce a short position may cause the price of the Common Stock to be higher than it might be in the absence of such purchases.
Neither the Fund nor any of the underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the shares of Common Stock. In addition, neither the Fund nor any of the underwriters makes any representation that the representatives will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.
The Fund has agreed not to offer or sell any additional shares of Common Stock for a period of 180 days after the date of the purchase agreement without the prior written consent of the underwriters, except for the sale of the Common Stock to the underwriters pursuant to the purchase agreement and certain transactions relating to the Fund's Dividend Reinvestment Plan.
The Fund anticipates that the underwriters may from time to time act as brokers or dealers in executing the Fund's portfolio transactions after they have ceased to be underwriters. The underwriters
are active underwriters of, and dealers in, securities, and therefore can be expected to engage in portfolio transactions with the Fund.
One or more of the underwriters of shares of Common Stock may also act as an underwriter of the Fund Preferred Shares.
The Adviser (and not the Fund) has also agreed to pay a fee to Merrill Lynch quarterly at the annual rate of 0.10% of the Fund's average daily managed assets (including assets attributable to any Fund Preferred Shares that may be outstanding) during the continuance of the Investment Advisory Agreement. The maximum amount of this fee will not exceed 4.5% of the aggregate initial offering price of the Common Stock offered hereby; provided, that in determining when the maximum amount has been paid the value of each of the quarterly payments shall be discounted at the annual rate of 10% to the closing date of this offering. Merrill Lynch has agreed to provide certain after-market services to the Adviser designed to maintain the visibility of the Fund on an ongoing basis and to provide relevant information, studies or reports regarding the Fund and the closed-end investment company industry.
The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated is 4 World Financial Center, New York, New York 10080.
PERFORMANCE RELATED AND COMPARATIVE INFORMATION
From time to time in its advertising and sales literature, the Fund may include historical correlations of the market in preferred stocks, as measured by the Merrill Lynch Preferred Stock Hybrid Securities Index, with the investment-grade bond market, as measured by the Lehman Brothers Aggregate Bond Index, the non-investment grade bond market, as measured by the Lehman Brothers High Yield Index, and the equity market, as measured by the S&P 500 Index, with such correlations calculated by the Adviser. The Merrill Lynch Preferred Stock Hybrid Securities Index is an unmanaged index consisting of investment-grade exchange-traded preferred stocks with outstanding market values of at least $50 million and with maturities of at least one year that are covered by Merrill Lynch Fixed Income Research. The Lehman Brothers Aggregate Bond Index is an unmanaged index consisting of 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 at least $150 million. The Lehman Brothers High Yield Index is an unmanaged index covering the universe of fixed-rate non-investment-grade debt with maturities of at least one year and outstanding par values of at least $150 million and includes the debt of both U.S. and non-U.S. corporations. The S&P 500 is a capitalization-weighted index of 500 widely-held stocks designed to measure the performance of the broad domestic economy. Such correlations will be included to demonstrate the movement of the preferred stock market in relation to the equity and debt markets. There have been numerous instances in the past when, for brief intervals of time, the various sectors of the preferred security asset class have moved independently of one another, eventually moving back together. The Adviser believes it is well positioned to possibly take advantage of short-term inefficiencies in the preferred securities market in an attempt to enhance investment performance.
The Fund's advertising and sales literature may also include a discussion of the anticipated ratings breakdown of the various components of the Fund's portfolio under various market conditions.
ABOUT FLAHERTY & CRUMRINE INCORPORATED
The Adviser was formed in 1983 with the express intention of managing portfolios of preferred securities for institutional investors and has over 12 years of experience in managing leveraged and
hedged preferred securities funds. The Adviser serves as an investment adviser to two existing registered investment companies investing in preferred securities that each have at least ten years of performance. Through its experience in the preferred securities markets, the Adviser has developed and over time utilized a methodology designed to implement the portfolio and interest rate management strategies necessary in seeking to obtain high sustainable income, although there can be no guarantee that such strategies will be successful under any particular market conditions. The Fund's focus on research goes beyond reliance on rating agencies as each member of the Adviser's management team holds the Chartered Financial Analyst-Registered Trademark- designation, and the firm devotes substantial resources to evaluating the creditworthiness of each portfolio investment.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed on for the Fund by Willkie Farr & Gallagher, New York, New York. Certain legal matters will be passed on for the Underwriters by Clifford Chance US LLP, New York, New York. Counsel for the Fund and the Underwriters may rely, as to certain matters of Maryland law, on Venable, Baetjer and Howard, LLP, Baltimore, Maryland.
REPORTS TO SHAREHOLDERS
The Fund sends unaudited semiannual and audited annual reports to the holders of its securities, including a list of investments held.
EXPERTS
The financial statement of the Fund included in this prospectus has been so included in reliance upon the report of KPMG LLP, independent auditors, as experts in auditing and accounting. The address of KPMG LLP is 99 High Street, Boston, MA 02110-2371.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of F&C/Claymore Preferred Securities Income Fund Incorporated:
We have audited the accompanying statement of assets and liabilities of F&C/Claymore Preferred Securities Income Fund Incorporated as of January 21, 2003. This statement of assets and liabilities is the responsibility of the Fund's management. Our responsibility is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statement of assets and liabilities is free of material misstatement. An audit of a statement of assets and liabilities includes examining, on a test basis, evidence supporting the amounts and disclosures in that statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above presents fairly, in all material respects, the financial position of F&C/Claymore Preferred Securities Income Fund Incorporated as of January 21, 2003, in conformity with accounting principles generally accepted in the United States of America.
KPMG LLP
Boston, Massachusetts
January 23, 2003
F&C/CLAYMORE PREFERRED SECURITIES INCOME FUND INCORPORATED
STATEMENT OF ASSETS AND LIABILITIES
JANUARY 21, 2003
ASSETS:
Cash $ 100,017
Deferred offering costs 1,750,000
------------
Total Assets $ 1,850,017
------------
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LIABILITIES:
Payable for offering costs $ 1,750,000
------------
NET ASSETS $ 100,017
============
Shares outstanding 4,198
------------
Net asset value ($100,017/4,198 shares
outstanding) $ 23.83
------------
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENT.
F&C/CLAYMORE PREFERRED SECURITIES INCOME FUND INCORPORATED
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
JANUARY 21, 2003
NOTE 1 -- ORGANIZATION
F&C/Claymore Preferred Securities Income Fund Incorporated ("the Fund") was incorporated as a Maryland corporation on May 23, 2002, and has had no operations to date other than matters relating to its organization and registration as a diversified, closed-end management investment company under the Investment Company Act of 1940, as amended, and the sale and issuance of 4,198 shares of its Common Stock to Flaherty & Crumrine Incorporated ("F&C"), the Fund's investment adviser.
The Fund's investment objective is to provide its common shareholders with high current income consistent with preservation of capital. The Fund's investment adviser intends to achieve its objective by pursuing strategies that include, among other things, hedging, which are generally intended to result in the Fund's income increasing in response to significant increases in interest rates while being relatively resistant to the impact of significant declines in interest rates.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements is in conformity with accounting principles generally accepted in the United States of America and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
(A)VALUATION OF CASH: Cash is valued at cost, which approximates market value.
(B)ORGANIZATION EXPENSES AND OFFERING COSTS: Organization expenses relating to organizing the Fund have been paid by F&C. Offering costs are estimated to be approximately $1,750,000.
F&C has also agreed to pay offering costs (excluding sales charges) that exceed $0.05 per share. Offering costs up to $0.05 per share and sales charges will be borne by the Fund and its shareholders and will be accounted for as a reduction to paid in capital. Based on an estimated expected offering of 35,000,000 shares, all of the offering costs will be borne by the Fund.
(C)FEDERAL TAXES: The Fund intends to qualify for treatment as a regulated investment company under the Internal Revenue Code of 1986, as amended, and distribute all its taxable income. In addition, by distributing in each calendar year substantially all its net investment income, capital gains and certain other amounts, if any, the Fund will not be subject to Federal excise tax. Therefore, no Federal income or excise tax provision will be required.
NOTE 3 -- INVESTMENT ADVISER AND OTHER AFFILIATED TRANSACTIONS
F&C (the "Adviser") serves as investment adviser. The Adviser is a registered investment adviser under the Investment Advisers Act of 1940. As compensation for the Adviser's services, the Fund will pay the Adviser a monthly management fee, at an annual rate, of 0.525% of the first $200 million of the Fund's average weekly total managed assets, 0.45% of the next $300 million of the Fund's average weekly total managed assets and 0.40% of the Fund's average weekly total managed assets above $500 million.
Claymore Securities, Inc. (the "Servicing Agent") serves as the Fund's servicing agent. In this capacity, it acts as shareholder servicing agent to the Fund. As compensation for its services, the Fund pays the Servicing Agent a fee computed and paid monthly at the annual rate of 0.025% of the first $200 million of the Fund's average weekly total managed assets, 0.10% of the next $300 million of the Fund's average weekly total managed assets and 0.15% of the Fund's average weekly total managed assets above $500 million.
NOTE 4 -- SERVICE PROVIDERS
PFPC, Inc. ("PFPC") serves as the Fund's administrator. As administrator, PFPC provides the fund with certain administrative and accounting services. As compensation, the Fund pays the administrator a monthly fee at an annual rate of 0.10% of the first $200 million of the Fund's average weekly total managed assets, 0.04% of the next $300 million of the Fund's average weekly total managed assets and 0.03% of the Fund's average weekly total managed assets above $500 million. PFPC also serves as the Fund's transfer agent, dividend-paying agent and registrar for the Fund's shares. PFPC Trust Company acts as the Fund's custodian.
NOTE 5 -- FUND SHARES
There are 250,000,000 shares of capital stock authorized of which 240,000,000 are classified as common stock, par value $0.01 per share. At January 21, 2003, there were 4,198 shares issued and outstanding.
APPENDIX A
A description of Moody's and S&P's ratings follows below:
MOODY'S
PREFERRED STOCK RATINGS
"Aaa"--Preferred stocks which are rated "Aaa" are judged to be of best quality. This rating indicates good asset protection and the least risk of dividend impairment within the universe of preferred stocks.
"Aa"--preferred stocks which are rated "Aa" are judged to be of high quality by all standards. This rating indicates that there is reasonable assurance that earnings and asset protection will remain relatively well maintained in the foreseeable future.
"A"--Preferred stocks which are rated "A" possess many favorable investment attributes and are to be considered as upper-medium grade. While risks are judged to be somewhat greater than in the "Aaa" and "Aa" classifications, earnings and asset protection are, nevertheless, expected to be maintained at adequate levels.
"Baa"--Preferred stocks which are rated "Baa" are considered as medium-grade obligations (they are neither highly protected nor poorly secured). Earnings and asset protection appear adequate at present but may be questionable over any great length of time.
"Ba"--Preferred stocks 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 securities in this class.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating classification above in its preferred stock rating system. The modifier 1 indicates that the security 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.
COMMERCIAL PAPER RATINGS
The rating Prime-1 (P-l) is the highest commercial paper rating assigned by Moody's. Issuers (or related supporting institutions) rated P-1 have a superior ability for repayment of senior short-term debt obligations, and will normally be evidenced by leading market positions in well-established industries, high rates of return on funds employed, conservative capitalization structure with moderate reliance on debt and ample asset protection, broad margins in earnings coverage of fixed financial charges and high internal cash generation, and well-established access to a range of financial markets and assured sources of alternate liquidity.
S & P
PREFERRED STOCK RATINGS
AAA--This is the highest rating that may be assigned to a preferred stock issue and indicates an extremely strong capacity to pay the preferred stock obligations.
AA--A preferred stock issue rated AA also qualifies as a high-quality fixed income security. The capacity to pay preferred stock obligations is very strong, although not as overwhelming as for issues rated AAA.
A--An issue rated A is backed by a sound capacity to pay the preferred stock obligations, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions.
BBB--An issue rated BBB is regarded as backed by an adequate capacity to pay the preferred stock obligations. Although it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to make payments for preferred stock in this category than for issues in the A category.
BB--An issue rated BB is regarded, on balance, as predominantly speculative with respect to the issuer's capacity to repay preferred stock obligations, but has less near-term vulnerability to default than other speculative issues. While such issues will likely have some quality and protective characteristics, these are outweighed by major ongoing uncertainties or risk exposure to adverse business, financial or economic conditions, which could lead to inadequate capacity to meet timely payments.
To provide more detailed indications of preferred stock quality, the ratings
of AA, A, BBB and BB may be modified by the addition of a plus (+) or a minus
(-) sign to show the relative standing within the major rating categories.
COMMERCIAL PAPER RATINGS
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.
A--Issues assigned this highest rating are regarded as having the greatest capacity for timely payment. Issues in this category are delineated with the numbers 1, 2 and 3 to indicate the relative degree of safety.
This designation indicates that the degree of safety regarding timely payment is either overwhelming or very strong. Those issues determined to possess overwhelming safety characteristics are denoted with a plus sign (+) designation.
SHARES
F&C/CLAYMORE PREFERRED SECURITIES INCOME FUND INCORPORATED
MERRILL LYNCH & CO.
RAYMOND JAMES
A.G. EDWARDS & SONS, INC.
LEGG MASON WOOD WALKER
INCORPORATED
RBC CAPITAL MARKETS
WACHOVIA SECURITIES
WELLS FARGO SECURITIES, LLC
ADVEST, INC.
BB&T CAPITAL MARKETS
ROBERT W. BAIRD & CO.
FAHNESTOCK & CO. INC.
FERRIS, BAKER WATTS
INCORPORATED
J.J.B. HILLIARD, W.L. LYONS, INC.
HUNTLEIGH SECURITIES CORPORATION
JANNEY MONTGOMERY SCOTT LLC
MCDONALD INVESTMENTS INC.
MORGAN KEEGAN & COMPANY, INC.
RYAN BECK & CO.
WEDBUSH MORGAN SECURITIES
JANUARY , 2003
PART C - OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
1. Financial Statements
Financial Statements included in Part A of this Registration Statement:
Statement of Assets and Liabilities.
Financial Statements included in Part B of this Registration Statement:
None.
2. Exhibits
(a) (1) Articles of Incorporation. (**)
(2) Amended and Restated Articles of Incorporation. (*)
(b)(1) By-Laws. (*)
(b)(2) Amendment to By-laws. (*)
(c) Not applicable.
(d) Specimen certificate for Common Stock, par value $.01 per share.
(*)
(e) Not applicable.
(f) Not applicable.
(g) Form of Investment Advisory Agreement between the Fund and Flaherty & Crumrine Incorporated ("F&C"). (*)
(h) Form of Purchase Agreement with Merrill Lynch & Co. (*)
(i) Not applicable.
(j) (1) Form of Custodian Services Agreement between the Fund and PFPC Trust Company. (*)
(2) Form of Transfer Agency and Registrar Agreement between the Fund and PFPC, Inc. (*)
(3) Form of Administration Agreement between the Fund and PFPC, Inc. (*)
(4) Form of Services Agreement between the Fund and Claymore Securities, Inc. ("Claymore"). (*)
(k) Additional Compensation Agreement between F&C and Merrill Lynch.(*)
(l) (1) Opinion and consent of Willkie Farr & Gallagher. (*)
(2) Opinion and consent of Venable, Baetjer and Howard, LLP. (*)
1048174.4
(m) Not applicable.
(n) (1) Consent of KPMG, LLP. (*)
(2) Power of Attorney (***)
(o) Not applicable.
(p) Not applicable.
(q) (1) Code of Ethics of the Fund. (*)
(2) Code of Ethics of F&C. (*)
(3) Code of Ethics of Claymore. (*)
(*) Filed herewith.
(**) Previously filed as an exhibit to the Fund's Registration Statement on Form N-2 under the Securities Act of 1933, as amended (1933 Act File No. 333-91282) and the Investment Company Act of 1940, as amended (1940 Act File No. 811-21129) filed with the Securities and Exchange Commission on June 26, 2002.
(***) Previously filed with pre-effective amendment No. 1 to the Fund's Registration Statement on Form N-2 (1933 Act File No. 333-91282; 1940 Act File No. 811-21129) filed with the Securities and Exchange Commission on December 23, 2002.
ITEM 25. MARKETING ARRANGEMENTS
Reference is made to the Form of Underwriting Agreement filed as Exhibit (h) hereto.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Securities and Exchange Commission Fees $ 111,090
Printing and Engraving Expenses 470,000
Legal Fees 185,000
Accounting Expenses 10,000
Miscellaneous Expenses 973,910
Total $1,750,000
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ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
None.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
The Fund has not yet commenced operations.
ITEM 29. INDEMNIFICATION
1048174.4
Section 2-418 of the General Corporation Law of the State of Maryland and Article VIII of the Registrant's Articles of Incorporation provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, 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 as against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Registrant is fulfilling the requirement of this Item 30 to provide a list of the officers and directors of its investment adviser, together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by that entity or those of its officers and directors during the past two years, by incorporating by reference the information contained in the Form ADV filed with the SEC pursuant to the Investment Advisers Act of 1940 by F&C (SEC File No. 801-19384) and Claymore (SEC File No. 801-54810).
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
F&C/Claymore Preferred Securities Income Fund Incorporated
c/o Flaherty & Crumrine Incorporated
301 E. Colorado Blvd. - Suite 720
Pasadena, CA 91101
(Registrant's Articles of Incorporation and By Laws)
Flaherty & Crumrine Incorporated
301 E. Colorado Blvd. - Suite 720
Pasadena, CA 91101
(with respect to its services as Adviser)
Claymore Securities, Inc.
210 N. Hale Street
Wheaton, IL 60187
(with respect to its services as Servicing Agent)
PFPC, Inc.
(with respect to its services as Administrator)
101 Federal Street
Boston, MA 02110
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
1048174.4
1. Registrant undertakes to suspend offering its shares until it amends its prospectus if (1) subsequent to the effective date of its registration statement, the net asset value per share declines more than 10 percent from its net asset value per share as of the effective date of this registration statement, or (2) the net asset value per share increases to an amount greater than its net proceeds as stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. Registrant hereby 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 this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by Registrant pursuant to 497(h) under the Act 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 such 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 or receipt of a written request 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 the City of Pasadena, State of California, on the 28th day of January, 2003.
F&C/CLAYMORE PREFERRED SECURITIES INCOME
FUND INCORPORATED
By: /s/ Donald F. Crumrine
----------------------
Donald F. Crumrine
Chief Executive Officer
|
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/ Donald F. Crumrine Chief Executive Officer Director and January 28, 2003
---------------------- Chairman of the Board
Donald F. Crumrine
/s/ Peter C. Stimes Chief Financial Officer January 28, 2003
----------------------
Peter C. Stimes
/s/ Martin Brody* Director January 28, 2003
----------------
Martin Brody
/s/ Nicholas Dalmaso* Director January 28, 2003
--------------------
Nicholas Dalmaso
/s/ David Gale* Director January 28, 2003
--------------
David Gale
/s/ Morgan Gust* Director January 28, 2003
---------------
Morgan Gust
/s/ Robert F. Wulf* Director January 28, 2003
------------------
Robert F. Wulf
*By: /s/ Donald F. Crumrine
----------------------
Donald F. Crumrine as Attorney-in-Fact
|
1048174.4
EXHIBIT INDEX
Exhibit (a)(2) Amended and Restated Articles of Incorporation
Exhibit (b)(1) By-Laws
Exhibit (b)(2) Amendment to By-Laws
Exhibit (d) Specimen certificate for Common Stock, par value $.01 per
share
Exhibit (g) Form of Investment Advisory Agreement between the Fund and
Flaherty & Crumrine Incorporated
Exhibit (h) Form of Purchase Agreement with Merrill Lynch & Co.
Exhibit (j)(1) Form of Custodian Services Agreement between the Fund and
PFPC Trust Company
Exhibit (j)(2) Form of Transfer Agency and Registrar Agreement between
the Fund and PFPC Inc.
Exhibit (j)(3) Form of Administration Agreement between the Fund and PFPC
Inc.
Exhibit (j)(4) Form of Services Agreement between the Fund and Claymore
Securities, Inc.
Exhibit (k) Additional Compensation Agreement between F&C and Merrill
Lynch
Exhibit (l)(1) Opinion and consent of Willkie Farr & Gallagher
Exhibit (l)(2) Opinion and consent of Venable, Baetjer and Howard, LLP
Exhibit (n)(1) Consent of KPMG, LLP
Exhibit (q)(1) Code of Ethics of the Fund
Exhibit (q)(2) Code of Ethics of F&C
Exhibit (q)(3) Code of Ethics of Claymore
|
EXHIBIT a(2)
ARTICLES OF AMENDMENT AND RESTATEMENT
OF
C/F&C PREFERRED SECURITIES INCOME FUND I, INC.
C/F&C Preferred Securities Income Fund I, Inc., a Maryland corporation (the "Corporation"), hereby certifies to the State Department of Assessments and Taxation that:
A. C/F&C Preferred Securities Income Fund I, Inc., a Maryland corporation, desires to amend and restate its charter as currently in effect and as hereinafter amended. The charter of the Corporation is hereby amended and restated by striking out in their entirety Articles I through IX of the Articles of Incorporation and substituting in lieu thereof the following:
ARTICLE I
THE UNDERSIGNED, Mary C. Carty, whose post office address is c/o Willkie Farr & Gallagher, 787 Seventh Avenue, New York, New York 10019, being at least eighteen years of age, does hereby act as an incorporator and form a corporation under and by virtue of the Maryland General Corporation Law.
ARTICLE II
NAME
The name of the Corporation is F&C/CLAYMORE PREFERRED
SECURITIES INCOME FUND INCORPORATED (the "Corporation").
ARTICLE III
PURPOSES AND POWERS
The Corporation is formed for the following purposes:
(1) To conduct and carry on the business of a closed-end investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act").
(2) To hold, invest and reinvest its assets in securities and other investments or to hold part or all of its assets in cash.
(3) To issue and sell shares of its capital stock in such amounts and on such terms and conditions and for such purposes and for such amount or kind of consideration as may now or hereinafter be permitted by law.
(4) To pursue the investment objective of high current income for holders of its Common Stock consistent with preservation of capital.
(5) To do any and all additional acts and to exercise any and all additional powers or rights as may be necessary, incidental, appropriate or desirable for the accomplishment of all or any of the foregoing purposes.
The Corporation shall be authorized to exercise and enjoy all
of the powers, rights and privileges granted to, or conferred upon, corporations
by the Maryland General Corporation Law now or hereinafter in force, and the
enumeration of the foregoing shall not be deemed to exclude any powers, rights
or privileges so granted or conferred; provided, that the Corporation may not
(i) purchase securities (other than securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities ("Government Securities")) of any
issuer if as a result of the purchase more than 5% of the value of the
Corporation's total assets would be invested in the securities of the issuer,
except that up to 25% of the value of the Corporation's total assets may be
invested without regard to this 5% limitation; (ii) purchase more than 10% of
the voting securities of any one issuer, except that (X) this limitation is not
applicable to the Corporation's investment in Government Securities and (Y) up
to 25% of the value of the Corporation's total assets may be invested without
regard to this 10% limitation; and (iii) make any investments for the purpose of
exercising control or management of any company.
ARTICLE IV
PRINCIPAL OFFICE AND RESIDENT AGENT
The post office address of the principal office of the Corporation is 300 East Lombard Street, Baltimore, Maryland 21202. The name of the resident agent of the Corporation in the State of Maryland is The Corporation Trust Incorporated. The post office address of the resident agent is 300 East Lombard Street, Baltimore, Maryland 21202.
ARTICLE V
CAPITAL STOCK
(1) The total number of shares of capital stock that the Corporation shall have authority to issue is two hundred fifty million (250,000,000) shares, of which 240,000,000 shares are classified as Common Stock, par value one cent ($.01) per share, and 10,000,000 shares are classified as Preferred Stock, par value one cent ($.01) per share. The aggregate par value of all shares of all classes that the Corporation is authorized to issue is $2,500,000.
(2) The Board of Directors is authorized to determine the designation of and to set the terms of the Preferred Stock, including the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms and conditions of redemption prior to issuance. The Preferred Stock may be issued in series.
(3) The Board of Directors is authorized, from time to time, to fix the price or the minimum price of the consideration or minimum consideration for, and to issue, the shares of stock of the Corporation.
(4) The Corporation may issue fractional shares. Any fractional share shall carry proportionately the rights of a whole share including, without limitation, the right to vote and the right to receive dividends. A fractional share shall not, however, carry the right to receive a certificate evidencing it.
(5) All persons who shall acquire stock in the Corporation shall acquire the same subject to the provisions of the Charter and the Bylaws of the Corporation, as from time to time amended.
(6) No holder of stock of the Corporation by virtue of being such a holder shall have any preemptive or preferential right to purchase or subscribe for any shares of the Corporation's capital stock or any other security that the Corporation may issue or sell other than a right that the Board of Directors in its discretion may determine to grant.
(7) The Board of Directors shall have authority by resolution to classify and reclassify any authorized but unissued shares of capital stock from time to time by setting or changing in any one or more respects the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption of the capital stock.
(8) Notwithstanding any provision of law requiring any action to be taken or authorized by the affirmative vote of the holders of a greater proportion of the votes of all classes or of any class of stock of the Corporation, such action shall be effective and valid if taken or authorized by the affirmative vote of a majority of the total number of votes entitled to be cast thereon, except as otherwise provided in the charter.
(9) The Board of Directors, with the approval of a majority of the entire Board of Directors, and without any action by the stockholders of the Corporation, may amend the charter from time to time to increase or decrease the aggregate number of shares of stock of the Corporation or the number of shares of stock of any class or series that the Corporation has authority to issue.
(10) No holder of stock of the Corporation shall be entitled to exercise the rights of an objecting stockholder under Title 3, Subtitle 2 of the Maryland General Corporation Law or any successor provision thereto.
(11) The presence in person or by proxy of the holders of shares of stock of the Corporation entitled to cast a majority of the votes entitled to be cast (without regard to class) shall constitute a quorum at any meeting of the stockholders, except with respect to any such matter that, under applicable statutes or regulatory requirements, requires approval by a separate vote of one or more classes of stock, in which case the presence in person or by proxy of the holders of shares entitled to cast a majority of the votes entitled to be cast by each such class on such a matter shall constitute a quorum.
ARTICLE VI
BOARD OF DIRECTORS
(1) The number of directors constituting the Board of Directors shall be as specified in the Bylaws or determined by the Board of Directors pursuant to the Bylaws, except that the number of Directors shall in no event be less than the minimum number required under Maryland General Corporation Law or greater than twelve (12). The name of the director who shall act until the first annual meeting of shareholders or until his successors are duly chosen and qualified is:
Donald F. Crumrine
(2) Beginning with the first annual meeting of stockholders held after the initial public offering of the shares of the Corporation (the "initial annual meeting"), the Board of Directors shall be divided into three classes: Class I, Class II and Class III. The terms of office of the classes of Directors elected at the initial annual meeting shall expire at the times of the annual meetings of the stockholders as follows: Class I on the next annual meeting, Class II on the second next annual meeting and Class III on the third next annual meeting, or thereafter in each case when their respective successors are elected and qualified. At each subsequent annual election, the Directors chosen to succeed those whose terms are expiring shall be identified as being of the same class as the Directors whom they succeed, and shall be elected for a term expiring at the time of the third succeeding annual meeting of stockholders, or thereafter in each case when their respective successors are elected and qualified. Subject to the following paragraph, the number of directorships shall be apportioned among the classes so as to maintain the classes as nearly equal in number as possible, but in no case shall a decrease in the number of directors shorten the term of any incumbent director.
If the Corporation issues Preferred Stock entitling the holders to elect additional Directors in specified circumstances, and the election of such additional Directors would cause the number of Directors to exceed 12, then the terms of office of a number of Directors elected by the other stockholders (excluding any Directors which the holders of the Preferred Stock are entitled to elect in all events) shall terminate at the time of the meeting of the holders of the Preferred Stock called to elect the additional Directors such that the sum of the number of remaining Directors and the number of additional Directors to be elected by the holders of the Preferred Stock does not exceed 12. The Directors whose term shall expire will be determined in inverse order of their initial election to the Board of Directors. The additional Directors will be apportioned among the classes of Directors so that the number of Directors in each class will be as nearly equal as possible.
(3) A director may be removed only with cause, and then only by action of the stockholders taken by the holders of at least eighty percent (80%) of the votes entitled to be cast for election of the Director's successor.
(4) In furtherance, and not in limitation, of the powers conferred by the laws of the State of Maryland, the Board of Directors is expressly authorized:
(i) To have the exclusive right to make, alter or repeal the Bylaws of the Corporation, except as otherwise required by the 1940 Act.
(ii) From time to time to determine whether and to what extent and at what times and places and under what conditions and regulations the books and accounts of the Corporation, or any of them other than the stock ledger, shall be open to the inspection of the stockholders. No stockholder shall have any right to inspect any account or book or document of the Corporation, except as conferred by law or authorized by resolution of the Board of Directors.
(iii) Without the assent or vote of the stockholders, to authorize the issuance from time to time of shares of the stock of any class of the Corporation, whether now or hereafter authorized, and securities convertible into shares of stock of the Corporation of any class or classes, whether now or hereafter authorized, for such consideration as the Board of Directors may deem advisable.
(iv) Without the assent or vote of the stockholders, to authorize and issue obligations of the Corporation, secured and unsecured, as the Board of Directors may determine, and to authorize and cause to be executed mortgages and liens upon the real or personal property of the Corporation.
(v) In addition to the powers and authorities granted herein and by statute expressly conferred upon it, the Board of Directors is authorized to exercise all powers and do all acts that may be exercised or done by the Corporation pursuant to the provisions of the laws of the State of Maryland, these Articles of Incorporation and the Bylaws of the Corporation.
(5) Any determination made in good faith and in accordance with these Articles of Incorporation by or pursuant to the direction of the Board of Directors, with respect to the amount of assets, obligations or liabilities of the Corporation, as to the amount of net income of the Corporation from dividends and interest for any period or amounts at any time legally available for the payment of dividends, as to the amount of any reserves or charges set up and the propriety thereof, as to the time of or purpose for creating reserves or as to the use, alteration or cancellation of any reserves or charges (whether or not any obligation or liability for which the reserves or charges have been created has been paid or discharged or is then or thereafter required to be paid or discharged), as to the value of any security owned by the Corporation, as to the determination of the net asset value of shares of any class of the Corporation's capital stock, or as to any other matters relating to the issuance, sale or other acquisition or disposition of securities or shares of capital stock of the Corporation, and any reasonable determination made in good faith by the Board of Directors whether any transaction constitutes a purchase of securities on "margin," a sale of securities "short," or an underwriting or the sale of, or a participation in any underwriting or selling group in connection with the public distribution of, any securities, shall be final and conclusive, and shall be binding upon the Corporation and all holders of its capital stock, past, present and future, and shares of the capital stock of the Corporation are issued and sold on the condition and understanding, evidenced by the purchase of shares of capital stock or acceptance of share certificates, that any and all such determinations shall be finding as aforesaid. No provision of these Articles of Incorporation of the Corporation shall be effective to (i) require a waiver of compliance with any provision of the Securities Act
of 1933, as amended, or the Investment Company Act of 1940, as amended, or of any valid rule, regulation or order of the Securities and Exchange Commission under those Acts or (ii) protect or purport to protect any Director or officer of the Corporation against any liability to the Corporation or its security holders 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.
ARTICLE VII
CERTAIN TRANSACTIONS
(1) Except as otherwise provided in this Article VII, at least eighty percent (80%) of the votes of the Corporation's Common Stock and Preferred Stock entitled to be cast by stockholders, each voting as a separate class, in addition to the affirmative vote of at least eighty percent (80%) of the Board of Directors, shall be necessary to effect any of the following actions:
(i) Any amendment to these Articles to make the
Corporation's Common Stock a "redeemable security" or to convert the corporation
from a "closed-end company" to an "open-end company" (as such terms are defined
in the Investment Company Act of 1940, as amended) or any amendment to paragraph
(1) of Article III, unless the Continuing Directors (as hereinafter defined) of
the Corporation, by a vote of at least eighty percent (80%) of such Directors,
approve such amendment in which case the affirmative vote of a majority of the
votes entitled to be cast by stockholders shall be required to approve such
actions unless otherwise provided in the charter;
(ii) Any stockholder proposal as to specific investment decisions made or to be made with respect to the Corporation's assets;
(iii) Any proposal as to the voluntary liquidation or dissolution of the Corporation or any amendment to these Articles of Incorporation to terminate the existence of the Corporation, unless the Continuing Directors of the Corporation, by a vote of at least eighty percent (80%) of such Directors, approve such proposal in which case the affirmative vote of a majority of the votes entitled to be cast by stockholders shall be required to approve such actions unless otherwise provided in the charter; or
(iv) Any Business Combination (as hereinafter defined) unless either the condition in clause (A) below is satisfied, or all of the conditions in clauses (B), (C), (D), (E) and (F) below are satisfied, in which case paragraph (3) below shall apply:
(A) The Business Combination shall have been approved by a vote of at least eighty percent (80%) of the Continuing Directors.
(B) The aggregate amount of cash and the Fair Market Value (as hereinafter defined), as of the date of the consummation of the Business Combination, of consideration other than cash to be received per share by holders of any class of outstanding Voting Stock (as hereinafter defined) in such Business Combination shall be at least equal to the higher of the following:
(x) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by an Interested Party (as hereinafter defined) for any shares of such Voting Stock acquired by it (aa) within the two-year period immediately prior to the first public announcement of the proposal of the Business Combination (the "Announcement Date"), or (bb)(i) in the Threshold Transaction (as hereinafter defined), or (ii) in any period between the Threshold Transaction and the consummation of the Business Combination, whichever is higher; and
(y) the net asset value per share of such Voting Stock on the Announcement Date or on the date of the Threshold Transaction, whichever is higher.
(C) The consideration to be received by holders of the particular class of outstanding Voting Stock shall be in cash or in the same form as the Interested Party has previously paid for shares of any class of Voting Stock. If the Interested Party has paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration for such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock previously acquired by it.
(D) After the occurrence of the Threshold Transaction, and prior to the consummation of such Business Combination, such Interested Party shall not have become the beneficial owner of any additional shares of Voting Stock except by virtue of the Threshold Transaction.
(E) After the occurrence of the Threshold Transaction, such Interested Party shall not have received the benefit, directly or indirectly (except proportionately as a shareholder of the Corporation), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise.
(F) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, as amended, and the rules and regulations thereunder (or any subsequent provisions replacing such Acts, rules or regulations) shall be prepared and mailed by the Interested Party, at such Interested Party's expense, to the shareholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Acts or subsequent provisions).
(2) For the purposes of this Article:
(i) "Business Combination" shall mean any of the transactions described or referred to in any one or more of the following subparagraphs:
(A) any merger, consolidation or share exchange of the Corporation with or into any other person;
(B) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions in any 12 month period) to or with any other person of any assets of the Corporation having an aggregate Fair Market Value of $1,000,000 or more except for portfolio transactions of the Corporation effected in the ordinary course of the Corporation's business;
(C) the issuance or transfer by the Corporation (in
one transaction or a series of transactions in any 12 month period) of any
securities of the Corporation to any other person in exchange for cash,
securities or other property (or a combination thereof) having an aggregate Fair
Market Value of $1,000,000 or more excluding (x) sales of any securities of the
Corporation in connection with a public offering or private placement thereof,
(y) issuances of any securities of the Corporation pursuant to a dividend
reinvestment and/or cash purchase plan adopted by the Corporation and (z)
issuances of any securities of the Corporation upon the exercise of any stock
subscription rights distributed by the Corporation;
(ii) "Continuing Director" means any member of the Board of Directors of the Corporation who (A) is not an Interested Party or an Affiliate or an Associate (as these terms are defined below) of an Interested Party and has been a member of the Board of Directors for a period of at least 12 months (or since the Corporation's commencement of operations, if that period is less than 12 months), or (B) is a successor of a Continuing Director who is not an Interested Party or an Affiliate or an Associate of an Interested Party and is recommended to succeed a Continuing Director by a majority of the Continuing Directors then on the Board of Directors; or (C) is elected to the Board of Directors to be a Continuing Director by a majority of the Continuing Directors then on the Board of Directors and who is not an Interested Party or an Affiliate or Associate of an Interested Party.
(iii) "Interested Party" shall mean any person, other than
an investment company advised by the Corporation's initial investment manager
(or the successor to that manager through reorganization, merger, acquisition or
otherwise of the manager or its successor) or any of its (or the successor's)
Affiliates, which enters, or proposes to enter, into a Business Combination with
the Corporation or which individually or together with any other persons
beneficially owns or is deemed to own, directly or indirectly, more than 5
percent of any class of the Corporation's securities (within the meaning of
Section 13(d) of the Securities Exchange Act of 1934 and the rules and
regulations thereunder (the "Exchange Act")).
(iv) "Person" shall mean an individual, a corporation, a trust or a partnership.
(v) "Voting Stock" shall mean capital stock of the Corporation entitled to vote generally in the election of directors.
(vi) A person shall be a "beneficial owner" of any Voting Stock:
(A) which such person or any of its Affiliates or Associates (as hereinafter defined) beneficially owns, directly or indirectly; or
(B) which such person or any of its Affiliates or Associates has the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options; or
(C) which is beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Voting Stock.
(vii) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the Exchange Act; provided that the term "Affiliate" shall also include any person who, at or prior to the time of election to the Board of Directors, had expressed support in writing of any proposals of an Interested Party for which shareholder approval would be required (for purposes of consideration of these proposals only).
(viii) "Fair Market Value" means:
(A) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the relevant date of a share of such stock on the New York Stock Exchange, or if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing sale price (if such stock is a National Market System security) or the highest closing bid quotation (if such stock is not a National Market System security) with respect to a share of such stock during the 30-day period preceding the relevant date on the National Association of Securities Dealers, Inc. Automated Quotation System (NASDAQ) or any system then in use, or if no such quotations are available, the fair market value on the relevant date of the share of such stock as determined by at least eighty percent (80%) of the Continuing Directors in good faith, and
(B) in the case of property other than cash or stock, the fair market value of such property on the relevant date as determined by at least eighty percent (80%) of the Continuing Directors in good faith.
(ix) "Threshold Transaction" means the transaction by or as a result of which an Interested Party first becomes the beneficial owner of Voting Stock.
(x) In the event of any Business Combination in which the Corporation survives, the phrase "consideration other than cash to be received" as used in subparagraph (1)(iv)(B) above shall include the shares of Common Stock and/or the shares of any other class of outstanding Voting Stock retained by the holders of such shares.
(xi) Continuing Directors of the Corporation shall have
the power and duty to determine, on the basis of information known to them after
reasonable inquiry, all facts necessary to determine (a) the number of shares of
Voting Stock beneficially owned by any person, (b) whether a person is an
Affiliate or Associate of another, (c) whether the requirements of subparagraph
(1)(iv) above have been met with respect to any Business Combination, and (d)
whether the assets which are the subject of any Business Combination have, or
the consideration
to be received for the issuance or transfer of securities by the Corporation in any Business Combination has, an aggregate Fair Market Value of $1,000,000 or more.
(3) If any Business Combination described in subparagraph
(2)(i)(A) or (B) (if the transfer or other disposition is one with respect to
which a stockholder vote is required under Maryland law) is approved by a vote
of eighty percent (80%) of the Continuing Directors or all of the conditions in
subparagraph (1)(iv)(B), (C), (D), (E) and (F) are satisfied, a majority of the
votes entitled to be cast by stockholders shall be required to approve such
transaction. If any other Business Combination is approved by a vote of eighty
percent (80%) of the Continuing Directors or all of the conditions in
subparagraph (1)(iv)(B), (C), (D), (E) and (F) are satisfied, no stockholder
vote shall be required to approve such transaction unless otherwise required by
law.
ARTICLE VIII
LIMITATIONS ON LIABILITY; INDEMNIFICATION
(1) To the fullest extent that limitations on the liability of directors and officers are permitted by the Maryland General Corporation Law, no director or officer of the Corporation shall have any liability to the Corporation or its stockholders for damages. This limitation on liability applies to events occurring at the time a person serves as a director or officer of the Corporation whether or not such person is a director or officer at the time of any proceeding in which liability is asserted.
(2) Any person who was or is a party or is threatened to be made a party in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is a current or former director or officer of the Corporation, or is or was serving while a director or officer of the Corporation at the request of the Corporation as a director, officer, partner, trustee, employee, agent or fiduciary of another corporation, partnership, joint venture, trust, enterprise or employee benefit plan, shall be indemnified by the Corporation against judgments, penalties, fines, excise taxes, settlements and reasonable expenses (including attorneys' fees) actually incurred by such person in connection with such action, suit or proceeding to the fullest extent permissible under the Maryland General Corporation Law, the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, as such statutes are now or hereinafter in force. In addition, the Corporation shall also advance expenses to its currently acting and its former directors and officers to the fullest extent that advancement of expenses is permitted by the Maryland General Corporation Law, the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended. The Board of Directors may by Bylaw, resolution or agreement make further provision for indemnification of directors, officers, employees and agents to the fullest extent permitted by the Maryland General Corporation Law.
(3) No provision of this Article VIII shall be effective to protect or purport to protect any director or officer of the Corporation against any liability to the Corporation or its security holders 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.
(4) References to the Maryland General Corporation Law in this Article VIII are to that law as from time to time amended. No amendment to the charter of the Corporation shall affect any right of any person under this Article based on any event, omission or proceeding prior to the amendment.
ARTICLE IX
AMENDMENTS
(1) The Corporation reserves the right from time to time to make any amendment to its Charter, now or hereafter authorized by law, including any amendment that alters the contract rights, as expressly set forth in its Charter, of any outstanding stock.
(2) Notwithstanding Paragraph (1) of this Article or any other provision of these Articles of Incorporation, no amendment to these Articles of Incorporation of the Corporation shall amend, alter, change or repeal any of the provisions of Articles VI, VII or IX unless the amendment effecting such amendment, alteration, change or repeal shall receive the affirmative vote of at least eighty percent (80%) of the votes of the Corporation's Common Stock and Preferred Stock entitled to be cast by stockholders, each voting as a separate class, unless, in the case of Articles VI, VII or Paragraph (1) (but not Paragraph (2)) of Article IX, such action previously has been approved, adopted or authorized by the affirmative vote of eighty percent (80%) of the total number of Continuing Directors, in which case the affirmative vote of a majority of the votes entitled to be cast by holders of the Corporation's outstanding Common Stock and Preferred Stock, voting together as a single class, shall be required to approve, adopt, or authorize such an amendment. Further, notwithstanding Paragraph (1) of Article IX or any other provision of these Articles of Incorporation, no amendment to these Articles of Incorporation shall amend, alter, change or repeal paragraph (4) of Article III or the proviso at the end of the last paragraph of Article III unless the amendment affecting such amendment, alteration, change or repeal shall receive the affirmative vote of at least eighty percent (80%) of the votes of the Corporation's Common Stock and Preferred Stock entitled to be cast by stockholders, voting as a single class, and of at least eighty percent (80%) of the votes of the Corporation's Preferred Stock entitled to be cast by stockholders, voting as a separate class.
B. The amendment and restatement of the charter of the Corporation herein set forth was approved by the sole member of the Board of Directors of the Corporation. No stock of the Corporation entitled to be voted on the charter amendment and restatement was outstanding or subscribed for at the time of approval.
C. The provisions set forth in A. above are all of the provisions of the charter of the Corporation currently in effect as hereby amended. The current address of the principal office of the Corporation and the name and address of the Corporation's current resident agent are set forth in ARTICLE IV of the charter as above amended and restated. The current number of directors and the names of those currently in office are set forth in ARTICLE VI(1) of the charter as above amended and restated.
IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment and Restatement to be signed in its name and on its behalf by its undersigned officers on this ___ day of December, 2002.
The undersigned President of the Corporation acknowledges these Articles of Amendment and Restatement to be the corporate act of the Corporation and states that to the best of his knowledge, information and belief, the matters and facts set forth in these Articles of Amendment and Restatement with respect to the authorization and approval of the amendment and restatement of the Corporation's charter are true in all material respects, under penalties of perjury.
C/F&C PREFERRED SECURITIES
INCOME FUND I, INC.
By:
-------------------
Name: Robert M. Ettinger
Title: President
WITNESS:
---------------
Name: R. Eric Chadwick
|
Title: Secretary
Exhibit (b)(1)
AMENDED AND RESTATED
BYLAWS
OF
C/F&C PREFERRED SECURITIES INCOME FUND I, INC.
BYLAW-ONE: NAME OF COMPANY, LOCATION OF OFFICES AND SEAL.
ARTICLE 1.1. NAME. The name of the Company is C/F&C Preferred Securities Income Fund I, Inc.
ARTICLE 1.2. PRINCIPAL OFFICES. The principal office of the Company in the State of Maryland shall be located in Baltimore, Maryland. The Company may, in addition, establish and maintain such other offices and places of business within or outside the State of Maryland as the Board of Directors may from time to time determine.
ARTICLE 1.3. SEAL. The corporate seal of the Company shall be circular in form and shall bear the name of the Company, the year of its incorporation and the words "Corporate Seal, Maryland." The form of the seal shall be subject to alteration by the Board of Directors and the seal may be used by causing it or a facsimile to be impressed or affixed or printed or otherwise reproduced. Any officer or Director of the Company shall have authority to affix the corporate seal of the Company to any document requiring the same.
BYLAW-TWO: STOCKHOLDERS.
ARTICLE 2.1. PLACE OF MEETINGS. All meetings of the Stockholders shall be held at such place, whether within or outside the State of Maryland, as the Board of Directors shall determine, which shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof.
ARTICLE 2.2. ANNUAL MEETING. Commencing in 2003, the annual meeting of the Stockholders of the Company shall be held at such place as the Board of Directors shall select on such date, during the 31-day period ending four months after the end of the Company's fiscal year, as may be fixed by the Board of Directors each year, at which time the Stockholders shall elect Directors by plurality vote, and transact such other business as may properly come before the meeting. Any business of the Company may be transacted at the annual meeting without being specially designated in the notice except as otherwise provided by statute, by the Articles of Incorporation or by these Bylaws.
ARTICLE 2.3. SPECIAL MEETINGS. Special meetings of the Stockholders for any purpose or purposes, unless otherwise prescribed by statute or by the Articles of Incorporation, may be called by resolution of the Board of Directors or by the President, and shall be called by the Secretary at the request, in writing, of a majority of the Board of Directors. Special meetings of the Stockholders shall also be called by the Secretary at the request, in writing, of Stockholders
entitled to cast a majority of the votes entitled to be cast at the meeting, provided that (a) such request shall state the purpose or purposes of such meeting and the matters proposed to be acted on, and (b) the stockholders requesting such meeting shall have paid to the Company the reasonably estimated cost of preparing and mailing a notice of the meeting (which estimated cost shall be provided to such Stockholders by the Secretary of the Company).
ARTICLE 2.4. NOTICE. Written notice of every meeting of Stockholders,
stating the purpose or purposes for which the meeting is called, the time when
and the place where it is to be held, shall be served, either personally or by
mail, not less than ten nor more than ninety days before the meeting, upon each
Stockholder as of the record date fixed for the meeting who is entitled to
notice of or to vote at such meeting. If mailed (i) such notice shall be
directed to a Stockholder at his address as it shall appear on the books of the
Company (unless he shall have filed with the Transfer Agent of the Company a
written request that notices intended for him be mailed to some other address,
in which case it shall be mailed to the address designated in such request) and
(ii) such notice shall be deemed to have been given as of the date when it is
deposited in the United States mail with first-class postage thereon prepaid.
ARTICLE 2.5. NOTICE OF STOCKHOLDER BUSINESS. At any annual or special meeting of the Stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual or special meeting, the business must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (iii) otherwise properly brought before the meeting by a Stockholder.
For business to be properly brought before an annual or special meeting by a Stockholder, the Stockholder must have given timely notice thereof in writing to the Secretary of the Company. To be timely, any such notice must be delivered to or mailed and received at the principal executive offices of the Company not later than 60 days prior to the date of the meeting; provided, however, that if less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to Stockholders, any such notice by a Stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which notice of the date of the annual or special meeting was given or such public disclosure was made.
Any such notice by a Stockholder shall set forth as to each matter the Stockholder proposes to bring before the annual or special meeting (i) a brief description of the business desired to be brought before the annual or special meeting and the reasons for conducting such business at the annual or special meeting, (ii) the name and address, as they appear on the Company's books, of the Stockholder proposing such business, (iii) the class and number of shares of the capital stock of the Company which are beneficially owned by the Stockholder, and (iv) any material interest of the Stockholder in such business.
Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any annual or special meeting except in accordance with the procedures set forth in this Article 2.5. The chairman of the annual or special meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance
with the provisions of this Article 2.5, and, if he should so determine, he shall so declare to the meeting that any such business not properly brought before the meeting shall not be considered or transacted.
ARTICLE 2.6. QUORUM. The holders of a majority of the stock issued and outstanding and entitled to vote, present in person or represented by proxy, shall be requisite and shall constitute a quorum at all meetings of the Stockholders for the transaction of business except as otherwise provided by statute, by the Articles of Incorporation or by these Bylaws. If a quorum shall not be present or represented, the Stockholders entitled to vote thereat, present in person or represented by proxy, shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, to a date not more than 120 days after the original record date, until a quorum shall be present or represented. At such adjourned meeting, at which a quorum shall be present or represented, any business which might have been transacted at the original meeting may be transacted.
ARTICLE 2.7. VOTE OF THE MEETING. When a quorum is present or represented at any meeting, a majority of the votes cast thereat shall decide any question brought before such meeting, unless the question is one upon which, by express provisions of applicable statutes, of the Articles of Incorporation or of these Bylaws, a different vote is required, in which case such express provisions shall govern and control the decision of such question.
ARTICLE 2.8. VOTING RIGHTS OF STOCKHOLDERS. Each Stockholder of record having the right to vote shall be entitled at every meeting of the Stockholders of the Company to one vote for each share of stock having voting power standing in the name of such Stockholder on the books of the Company on the record date fixed in accordance with Article 6.5 of these Bylaws, with pro rata voting rights for any fractional shares, and such votes may be cast either in person or by proxy.
ARTICLE 2.9. ORGANIZATION. At every meeting of the Stockholders, the Chairman of the Board, or in his absence or inability to act, the Vice Chairman of the Board, or in his absence or inability to act, a chairman chosen by the Stockholders, shall act as chairman of the meeting. The Secretary, or in his absence or inability to act, a person appointed by the chairman of the meeting, shall act as secretary of the meeting and keep the minutes of the meeting.
ARTICLE 2.10. PROXIES. Each Stockholder entitled to vote at any meeting of
Stockholders may authorize another person to act as proxy for the Stockholder by
(a) signing a writing authorizing another person to act as proxy, or (b) any
other means permitted by law. Signing may be accomplished by the Stockholder or
the Stockholder's authorized agent signing the writing or causing the
stockholder's signature to be affixed to the writing by any reasonable means,
including facsimile signature. No proxy shall be valid after the expiration of
eleven months from its date unless it provides otherwise. Every proxy shall be
revocable at the pleasure of the person authorizing it or of his personal
representatives or assigns. Proxies shall be delivered prior to the meeting to
the Secretary of the Company or to the person acting as Secretary of the meeting
before being voted. A proxy with respect to stock held in the name of two or
more persons shall be valid if authorized by one of them unless, at or prior to
exercise of such proxy, the Company receives a specific written notice to the
contrary from any one of them. A proxy purporting to be authorized by or on
behalf of a Stockholder shall be deemed valid
unless challenged at or prior to its exercise.
ARTICLE 2.11. STOCK LEDGER AND LIST OF STOCKHOLDERS. It shall be the duty of the Secretary or Assistant Secretary of the Company to cause an original or duplicate stock ledger to be maintained at the office of the Company's Transfer Agent.
ARTICLE 2.12. ACTION WITHOUT MEETING. Any action to be taken by Stockholders of Common Stock, or of Common Stock and Preferred Stock (and any other class of stock) voting together as a single class, may be taken without a meeting if (i) all Stockholders entitled to vote on the matter consent to the action in writing, and (ii) such consents are filed with the records of the meetings of Stockholders. Except as provided above, the Stockholders of Preferred Stock and of any other class of stock (other than Common Stock entitled to vote generally in the election of directors) may take action or consent to any action by the written consent of the Stockholders of the Preferred Stock and/or such other class of stock entitled to cast not less than the minimum number of votes that would be necessary to authorize or take the action at a Stockholders' meeting if the Corporation gives notice of the action to each Stockholder of the Corporation not later than 10 days after the effective time of the action. A consent shall be treated for all purposes as a vote at a meeting.
BYLAW-THREE: BOARD OF DIRECTORS.
ARTICLE 3.1. GENERAL POWERS. Except as otherwise provided in the Articles of Incorporation, the business and affairs of the Corporation shall be managed under the direction of the Board of Directors. All powers of the Company may be exercised by or under authority of the Board of Directors except as conferred on or reserved to the Stockholders by law, by the Articles of Incorporation or by these Bylaws.
ARTICLE 3.2. BOARD OF THREE TO TWELVE DIRECTORS. The Board of Directors shall consist initially of one (1) director. Thereafter, the Board of Directors shall consist of not less than three (3) nor more than twelve (12) Directors; provided that if there are less than three stockholders, the number of Directors may be the same number as the number of stockholders but not less than one. Directors need not be Stockholders. The Directors shall have power from time to time, and at any time when the stockholders as such are not assembled in a meeting, regular or special, to increase or decrease the number of Directors by vote of a majority of the entire Board of Directors. If the number of Directors is increased, the additional Directors may be elected by a majority of the Directors in office at the time of the increase. If such additional Directors are not so elected by the Directors in office at the time they increase the number of places on the Board, or if the additional Directors are elected by the existing Directors prior to the first meeting of the Stockholders of the Company, then in either of such events the additional Directors shall be elected or re-elected by the Stockholders at their next annual meeting or at an earlier special meeting called for that purpose.
Beginning with the first annual meeting of Stockholders held after the initial public offering of the shares of the Company (the "initial annual meeting"), the Board of Directors shall be divided into three classes: Class I, Class II and Class III. The terms of office of the classes of Directors elected at the initial annual meeting shall expire at the times of the annual meetings of the Stockholders as follows: Class I on the next annual meeting, Class II on the second next
annual meeting and Class III on the third next annual meeting, or thereafter in each case when their respective successors are elected and qualified. At each subsequent annual election, the Directors chosen to succeed those whose terms are expiring shall be identified as being of the same class as the Directors whom they succeed, and shall be elected for a term expiring at the time of the third succeeding annual meeting of Stockholders, or thereafter in each case when their respective successors are elected and qualified. The number of directorships shall be apportioned among the classes so as to maintain the classes as nearly equal in number as possible. If the Corporation issues Preferred Stock entitling the holders to elect additional Directors in special circumstances and those special circumstances arise, then the number of directors that the holders of the Common Stock are entitled to elect shall be reduced to a number such that, when the requisite number of Directors has been elected by Preferred Stock holders, the total number of Directors shall not exceed 12 in number.
ARTICLE 3.3. DIRECTOR NOMINATIONS.
(a) Only persons who are nominated in accordance with the procedures set forth in this Article 3.3 shall be eligible for election or re-election as Directors. Nominations of persons for election or re-election to the Board of Directors of the Company may be made at a meeting of Stockholders by or at the direction of the Board of Directors or by any Stockholder of the Company who is entitled to vote for the election of such nominee at the meeting and who complies with the notice procedures set forth in this Article 3.3.
(b) Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice delivered in writing to the Secretary of the Company. To be timely, any such notice by a Stockholder must be delivered to or mailed and received at the principal executive offices of the Company not later than 60 days prior to the meeting; PROVIDED, HOWEVER, that if less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to Stockholders, any such notice by a Stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which notice of the date of the meeting was given or such public disclosure was made.
(c) Any such notice by a Stockholder shall set forth (i) as to each person whom the Stockholder proposes to nominate for election or re-election as a Director, (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the class and number of shares, if any, of the capital stock of the Company which are beneficially owned by such person and (D) any other information relating to such person that is required to be disclosed in solicitations of proxies for the election of Directors pursuant to Section 20(a) of the Investment Company Act of 1940, as amended, and the rules and regulations thereunder, or Regulation 14A under the Securities Exchange Act of 1934 or any successor regulation thereto (including without limitation such person's written consent to being named in the proxy statement as a nominee and to serving as a Director if elected and whether any person intends to seek reimbursement from the Company of the expenses of any solicitation of proxies should such person be elected a Director of the Company); and (ii) as to the Stockholder giving the notice, (A) the name and address, as they appear on the Company's books, of such Stockholder and (B) the class and number of shares of the capital stock of the Company which are beneficially owned by such Stockholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a Director shall furnish
to the Secretary of the Company the information required to be set forth in a Stockholder's notice of nomination which pertains to the nominee.
(d) If a notice by a Stockholder is required to be given pursuant to this Article 3.3, no person shall be entitled to receive reimbursement from the Company of the expenses of a solicitation of proxies for the election as a Director of a person named in such notice unless such notice states that such reimbursement will be sought from the Company and then only if the payment of such reimbursement has been approved by the Board of Directors. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the Bylaws, and, if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded for all purposes.
ARTICLE 3.4. VACANCIES. Subject to the provisions of the Investment Company Act of 1940, as amended, if the office of any Director or Directors becomes vacant for any reason (other than an increase in the number of Directors), the Directors in office, although less than a quorum, shall continue to act and may choose a successor or successors, who shall hold office until the next election of Directors, or any vacancy may be filled by the Stockholders at any meeting thereof.
ARTICLE 3.5. REMOVAL. At any meeting of Stockholders duly called and at which a quorum is present, the Stockholders may, by the affirmative vote of the holders of at least 80% of the votes entitled to be cast for election of the Director's successor, remove any Director or Directors from office, but only with cause, and may by a plurality vote elect a successor or successors to fill any resulting vacancies for the unexpired term of the removed Director.
ARTICLE 3.6. RESIGNATION. A Director may resign at any time by giving written notice of his resignation to the Board of Directors or the Chairman or the Vice Chairman of the Board or the Secretary of the Company. Any resignation shall take effect at the time specified in it or, should the time when it is to become effective not be specified in it, immediately upon its receipt. Acceptance of a resignation shall not be necessary to make it effective unless the resignation states otherwise.
ARTICLE 3.7. PLACE OF MEETINGS. The Directors may hold their meetings at the principal office of the Company or at such other places, either within or outside the State of Maryland, as they may from time to time determine.
ARTICLE 3.8. REGULAR MEETINGS. Regular meetings of the Board may be held at such date and time as shall from time to time be determined by resolution of the Board.
ARTICLE 3.9. SPECIAL MEETINGS. Special meetings of the Board may be called by order of the Chairman or Vice Chairman of the Board on one day's notice given to each Director either in person or by mail, telephone, telegram, cable or wireless to each Director at his residence or regular place of business. Special meetings will be called by the Chairman or Vice Chairman of the Board or Secretary in a like manner on the written request of a majority of the Directors.
ARTICLE 3.10. QUORUM. At all meetings of the Board, the presence of one-third of the entire Board of Directors shall be necessary to constitute a quorum and sufficient for the
transaction of business; provided, however, that if there are only 2 or 3 Directors, not less than 2 may constitute a quorum and provided, further, that if there is only 1 Director, the presence of such Director will constitute a quorum. The act of a majority of the Directors present at a meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute, by the Articles of Incorporation or by these Bylaws. If a quorum shall not be present at any meeting of Directors, the Directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present.
ARTICLE 3.11. ORGANIZATION. The Board of Directors shall designate one of its members to serve as Chairman of the Board. The Chairman of the Board shall preside at each meeting of the Board. In the absence or inability of the Chairman of the Board to act, another Director chosen by a majority of the Directors present, shall act as chairman of the meeting and preside at the meeting. The Secretary (or, in his absence or inability to act, any person appointed by the Chairman) shall act as secretary of the meeting and keep the minutes of the meeting.
ARTICLE 3.12. INFORMAL ACTION BY DIRECTORS AND COMMITTEES. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may, except as otherwise required by statute, be taken without a meeting if a written consent to such action is signed by all members of the Board, or of such committee, as the case may be, and filed with the minutes of the proceedings of the Board or committee. Subject to the Investment Company Act of 1940, as amended, members of the Board of Directors or a committee thereof may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time.
ARTICLE 3.13. EXECUTIVE COMMITTEE. There may be an Executive Committee of two or more Directors appointed by the Board who may meet at stated times or on notice to all by any of their own number. The Executive Committee shall consult with and advise the officers of the Company in the management of its business and exercise such powers of the Board of Directors as maybe lawfully delegated by the Board of Directors. Vacancies shall be filled by the Board of Directors at any regular or special meeting. The Executive Committee shall keep regular minutes of its proceedings and report the same to the Board when required.
ARTICLE 3.14. AUDIT COMMITTEE. There shall be an Audit Committee of two or more Directors who are not "interested persons" of the Company (as defined in the Investment Company Act of 1940, as amended) appointed by the Board who may meet at stated times or on notice to all by any of their own number. The Committee's duties shall include reviewing both the audit and other work of the Company's independent accountants, recommending to the Board of Directors the independent accountants to be retained, and reviewing generally the maintenance and safekeeping of the Company's records and documents.
ARTICLE 3.15. OTHER COMMITTEES. The Board of Directors may appoint other committees which shall in each case consist of such number of members (which may be one) and shall have and may exercise, to the extent permitted by law, such powers as the Board may determine in the resolution appointing them. A majority of all members of any such committee may determine its action, and fix the time and place of its meetings, unless the Board of Directors shall otherwise provide. The Board of Directors shall have power at any time to change the members and, to the
extent permitted by law, to change the powers of any such committee, to fill vacancies and to discharge any such committee.
ARTICLE 3.16. COMPENSATION OF DIRECTORS. The Board may, by resolution, determine what compensation and reimbursement of expenses of attendance at meetings, if any, shall be paid to Directors in connection with their service on the Board or on various committees of the Board. Nothing herein contained shall be construed to preclude any Director from serving the Company in any other capacity or from receiving compensation therefor.
BYLAW-FOUR: OFFICERS.
ARTICLE 4.1. OFFICERS. The Officers of the Company shall be fixed by the Board of Directors and shall include a President, Secretary and Treasurer. Any two offices may be held by the same person except the offices of President and Vice President. A person who holds more than one office in the Company may not act in more than one capacity to execute, acknowledge or verify an instrument required by law to be executed, acknowledged or verified by more than one officer.
ARTICLE 4.2. APPOINTMENT OF OFFICERS. The Directors shall appoint the Officers, who need not be members of the Board.
ARTICLE 4.3. ADDITIONAL OFFICERS. The Board may appoint such other Officers and agents as it shall deem necessary who shall exercise such powers and perform such duties as shall be determined from time to time by the Board.
ARTICLE 4.4. SALARIES OF OFFICERS. The salaries of all Officers of the Company shall be fixed by the Board of Directors.
ARTICLE 4.5. TERM, REMOVAL, VACANCIES. The Officers of the Company shall serve at the pleasure of the Board of Directors and hold office for one year and until their successors are chosen and qualify in their stead. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the entire Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy shall be filled by the Board of Directors.
ARTICLE 4.6. PRESIDENT. The President shall be the chief executive officer of the Company. The President shall, subject to the supervision of the Board of Directors, have general responsibility for the management of the business of the Company. The President shall see that all orders and resolutions of the Board are carried into effect.
ARTICLE 4.7. VICE PRESIDENT. The Vice President shall, in the absence or disability of the President, perform the duties and exercise the powers of the President and shall perform such other duties as the Board of Directors shall prescribe.
ARTICLE 4.8. TREASURER OR CHIEF FINANCIAL OFFICER. The Treasurer or Chief Financial Officer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Company and shall deposit all moneys and other valuable effects in the name and to the credit of the Company in
such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Company as may be ordered by the Board, taking proper vouchers for such disbursements, and shall render to the Chairman of the Board and Directors at the regular meetings of the Board, or whenever they may require it, an account of the financial condition of the Company.
Any Assistant Treasurer may perform such duties of the Treasurer or Chief Financial Officer as the Treasurer or Chief Financial Officer or the Board of Directors may assign, and, in the absence of the Treasurer or Chief Financial Officer, may perform all the duties of the Treasurer or Chief Financial Officer.
ARTICLE 4.9. SECRETARY. The Secretary shall attend meetings of the Board and meetings of the Stockholders and record all votes and the minutes of all proceedings in a book to be kept for those purposes, and shall perform like duties for the Executive Committee, or other committees, of the Board when required. He shall give or cause to be given notice of all meetings of Stockholders and special meetings of the Board of Directors and shall perform such other duties as may be prescribed by the Board of Directors. He shall keep in safe custody the seal of the Company and affix it to any instrument when authorized by the Board of Directors.
Any Assistant Secretary may perform such duties of the Secretary as the Secretary or the Board of Directors may assign, and, in the absence of the Secretary, may perform all the duties of the Secretary.
ARTICLE 4.10. SUBORDINATE OFFICERS. The Board of Directors from time to time may appoint such other officers or agents as it may deem advisable, each of whom shall serve at the pleasure of the Board of Directors and have such title, hold office for such period, have such authority and perform such duties as the Board of Directors may determine. The Board of Directors from time to time may delegate to one or more officers or agents the power to appoint any such subordinate officers or agents and to prescribe their respective rights, terms of office, authorities and duties.
ARTICLE 4.11. SURETY BONDS. The Board of Directors may require any officer or agent of the Company to execute a bond (including, without limitation, any bond required by the Investment Company Act of 1940, as amended, and the rules and regulations of the Securities and Exchange Commission) to the Company in such sum and with such surety or sureties as the Board of Directors may determine, conditioned upon the faithful performance of his duties to the Company, including responsibility for negligence and for the accounting of any of the Company's property, funds or securities that may come into his hands.
BYLAW-FIVE: GENERAL PROVISIONS.
ARTICLE 5.1. WAIVER OF NOTICE. Whenever the Stockholders or the Board of Directors are authorized by statute, the provisions of the Articles of Incorporation or these Bylaws to take any action at any meeting after notice, such notice may be waived, in writing, before or after the holding of the meeting, by the person or persons entitled to such notice, or, in the case of a Stockholder, by his duly authorized attorney-in-fact.
ARTICLE 5.2. INDEMNITY.
(a) The Company shall indemnify its Directors to the fullest extent that indemnification of directors is permitted by the Maryland General Corporation Law. The Company shall indemnify its officers to the same extent as its Directors and to such further extent as is consistent with law. The Company shall indemnify its Directors and officers who, while serving as Directors or officers, also serve at the request of the Company as a director, officer, partner, trustee, employee, agent or fiduciary of another corporation, partnership, joint venture, trust, other enterprise or employee benefit plan to the fullest extent consistent with law. The indemnification and other rights provided by this Article shall continue as to a person who has ceased to be a Director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person. This Article shall not protect any such person against any liability to the Company or any Stockholder thereof to which such person 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 ("disabling conduct").
(b) Any current or former Director or officer of the Company seeking indemnification within the scope of this Article shall be entitled to advances from the Company for payment of the reasonable expenses incurred by him in connection with the matter as to which he is seeking indemnification in the manner and to the fullest extent permissible under the Maryland General Corporation Law. The person seeking indemnification shall provide to the Company a written affirmation of his good faith belief that the standard of conduct necessary for indemnification by the Company has been met and a written undertaking to repay any such advance if it should ultimately be determined that the standard of conduct has not been met. In addition, at least one of the following additional conditions shall be met: (i) the person seeking indemnification shall provide a security in form and amount acceptable to the Company for his undertaking; (ii) the Company is insured against losses arising by reason of the advance; or (iii) a majority of a quorum of Directors of the Company who are neither "interested persons" as defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended, nor parties to the proceeding ("disinterested non-party directors"), or independent legal counsel, in a written opinion, shall have determined, based on a review of facts readily available to the Company at the time the advance is proposed to be made, that there is reason to believe that the person seeking indemnification will ultimately be found to be entitled to indemnification.
(c) At the request of any person claiming indemnification under this Article, the Board of Directors shall determine, or cause to be determined, in a manner consistent with the Maryland General Corporation Law, whether the standards required by this Article have been met. Indemnification shall be made only following: (i) a final decision on the merits by a court or other body before whom the proceeding was brought that the person to be indemnified was not liable by reason of disabling conduct or (ii) in the absence of such a decision, a reasonable determination, based upon a review of the facts, that the person to be indemnified was not liable by reason of disabling conduct by (i) the vote of a majority of a quorum of disinterested non-party directors or (ii) an independent legal counsel in a written opinion.
(d) Employees and agents who are not officers or Directors of the Company may be indemnified, and reasonable expenses may be advanced to such employees or agents, as may be provided by action of the Board of Directors or by contract, subject to any limitations imposed by the Investment Company Act of 1940, as amended.
(e) The Board of Directors may make further provision consistent with law for indemnification and advance of expenses to Directors, officers, employees and agents by resolution, agreement or otherwise. The indemnification provided by this Article shall not be deemed exclusive of any other right, with respect to indemnification or otherwise, to which those seeking indemnification may be entitled under any insurance or other agreement or resolution of stockholders or disinterested directors or otherwise.
(f) References in this Article are to the Maryland General Corporation Law and to the Investment Company Act of 1940, as amended. No amendment of these Bylaws shall affect any right of any person under this Article based on any event, omission or proceeding prior to the amendment.
ARTICLE 5.3. INSURANCE. The Company may purchase and maintain insurance on behalf of any person who is or was a Director, officer, employee or agent of the Company or who, while a Director, officer, employee or agent of the Company, is or was serving at the request of the Company as a director, officer, partner, trustee, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust, other enterprise or employee benefit plan, against any liability asserted against card incurred by such person in any such capacity or arising out of such person's position; provided that no insurance may be purchased by the Company on behalf of any person against any liability to the Company or to its Stockholders 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.
ARTICLE 5.4. CHECKS. All checks or demands for money and notes of the Company shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate.
ARTICLE 5.5. FISCAL YEAR. The fiscal year of the Company shall be determined by resolution of the Board of Directors.
BYLAW-SIX: CERTIFICATES OF STOCK.
ARTICLE 6.1. CERTIFICATES OF STOCK. The interest, except fractional interests, of each Stockholder of the Company shall be evidenced by certificates for shares of stock in such form as the Board of Directors may from time to time prescribe. The certificates shall be numbered and entered in the books of the Company as they are issued. They shall exhibit the holder's name and the number of whole shares and no certificate shall be valid unless it has been signed by the Chairman of the Board, if any, or the President or a Vice President and the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary and bears the corporate seal. Such seal may be a facsimile, engraved or printed. Where any such certificate is signed by a Transfer Agent or by a Registrar, the signatures of any such officer may be facsimile, engraved or printed. In case any of the officers of the Company whose manual or facsimile signature appears on any stock certificate delivered to a Transfer Agent of the Company shall cease to be such officer prior to the issuance of such certificate, the Transfer Agent may nevertheless countersign and deliver such certificate as though the person signing the same or whose facsimile signature appears thereon had not ceased to be such officer, unless written instructions of the Company to the contrary are delivered to the Transfer Agent.
ARTICLE 6.2. LOST, STOLEN OR DESTROYED CERTIFICATES. The Board of Directors, or the President together with the Treasurer or Chief Financial Officer or Secretary, may direct a new certificate to be issued in place of any certificate theretofore issued by the company, alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed, or by his legal representative. When authorizing such issue of a new certificate, the Board of Directors, or the President and Treasurer or Chief Financial Officer or Secretary, may, in its or their discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or his legal representative, to advertise the same in such manner as it or they shall require and/or give the Company a bond in such sum and with such surety or sureties as it or they may direct as indemnity against any claim that may be made against the Company with respect to the certificate alleged to have been lost, stolen or destroyed for such newly issued certificate.
ARTICLE 6.3. TRANSFER OF STOCK. Shares of the Company shall be transferable on the books of the Company by the holder thereof in person or by his duly authorized attorney or legal representative upon surrender and cancellation of a certificate or certificates for the same number of shares of the same class, duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, with such proof of the authenticity of the transferor's signature as the Company or its agents may reasonably require. The shares of stock of the Company may be freely transferred, and the Board of Directors may, from time to time, adopt rules and regulations with reference to the method of transfer of the shares of stock of the Company.
ARTICLE 6.4. REGISTERED HOLDER. The Company shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person whether or not it shall have express or other notice thereof, except as expressly provided by statute.
ARTICLE 6.5. RECORD DATE. The Board of Directors may fix a time not less than 10 nor more than 90 days prior to the date of any meeting of Stockholders as the time as of which Stockholders are entitled to notice of, and to vote at, such a meeting; and all such persons who were holders of record of voting stock at such time, and no other, shall be entitled to notice of, and to vote at, such meeting or to express their consent or dissent, as the case may be. If no record date has been fixed, the record date for the determination of the Stockholders entitled to notice of, or to vote at, a meeting of Stockholders shall be the later of the close of business on the day on which notice of the meeting is mailed or the thirtieth day before the meeting, or, if notice is waived by all Stockholders, at the close of business on the tenth day immediately preceding the day on which the meeting is held.
The Board of Directors may also fix a time not exceeding 90 days preceding the date fixed for the payment of any dividend or the making of any distribution, or for the delivery of evidences of rights, or evidences of interests arising out of any change, conversion or exchange of capital stock, as a record time for the determination of the Stockholders entitled to receive any such dividend, distribution, rights or interests.
ARTICLE 6.6. STOCK LEDGERS. The stock ledgers of the Company, containing the names and addresses of the Stockholders and the number of shares held by them respectively, shall be kept at the principal offices of the Company or at such other location as may be authorized by the Board of Directors from time to time, except that an original or duplicate stock ledger shall be maintained at the office of the Company's Transfer Agent.
ARTICLE 6.7. TRANSFER AGENTS AND REGISTRARS. The Board of Directors may from time to time appoint or remove Transfer Agents and/or Registrars of transfers (if any) of shares of stock of the Company, and it may appoint the same person as both Transfer Agent and Registrar. Upon any such appointment being made, all certificates representing shares of capital stock thereafter issued shall be countersigned by one of such Transfer Agents or by one of such Registrars of transfers (if any) or by both and shall not be valid unless so countersigned. If the same person shall be both Transfer Agent and Registrar, only one countersignature by such person shall be required.
BYLAW-SEVEN: SPECIAL PROVISIONS.
ARTICLE 7.1. ACTIONS RELATING TO DISCOUNT IN PRICE OF THE COMPANY'S SHARES. In the event that at any time after the third year following the initial public offering of shares of the Company's Common Stock such shares publicly trade for a substantial period of time at a significant discount from the Company's then current net asset value per share, the Board of Directors shall consider, at its next regularly scheduled meeting, taking various actions designed to eliminate the discount. The actions considered by the Board of Directors may include periodic repurchases by the Company of its shares of Common Stock or an amendment to the Company's Articles of Incorporation to make the Company's Common Stock a "redeemable security" (as such term is defined in the Investment Company Act of 1940, as amended), subject in all events to compliance with all applicable provisions of the Company's Articles of Incorporation, these Bylaws, the Maryland General Company Law and the Investment Company Act of 1940, as amended.
BYLAW-EIGHT: AMENDMENTS.
ARTICLE 8.1. GENERAL. Except as provided in the next succeeding sentence and except as otherwise required by the 1940 Act, all Bylaws of the Company shall be subject to amendment, alteration or repeal, and new Bylaws may be made, exclusively by the affirmative vote of at least a majority of the entire Board of Directors, at any regular or special meeting, the notice or waiver of notice of which shall have specified or summarized the proposed amendment, alteration, repeal or new Bylaw. The provisions of Articles 2.5, 3.2, 3.3 and 8.1 of these Bylaws shall be subject to amendment, alteration or repeal exclusively by the affirmative vote of at least a majority of the entire Board of Directors, including at least 80% of the Continuing Directors (as such term is defined in Article VII of the Company's Articles of Incorporation), at any regular or special meeting, the notice or waiver of notice of which shall have specified or summarized the proposed amendment, alteration or repeal.
Dated: December __, , 2002
EXHIBIT (b)(2)
Amendment to the By-Laws
of
C/F&C Preferred Securities Income Fund I, Inc.
Pursuant to Article 8.1 of the Amended and Restated By-Laws (the "By-Laws") of C/F&C Preferred Securities Income Fund I, Inc.:
Article 1.1 was amended in its entirety to read as follows:
"ARTICLE 1.1. NAME. The name of the Company is F&C/Claymore Preferred Securities Income Fund Incorporated."
Article 4.6 was amended in its entirety to read as follows:
"ARTICLE 4.6. CHIEF EXECUTIVE OFFICER; PRESIDENT. The Chief Executive Officer shall be the highest ranking officer of the Company and shall, subject to the supervision of the Board of Directors, have general oversight responsibility for the management of the business of the Company. The Chief Executive Officer shall see that all orders and resolutions of the Board are carried into effect. If the Board has not selected a Chief Executive Officer, the President shall be the Chief Executive Officer of the Company and shall perform the duties and exercise the powers of the Chief Executive Officer and shall perform such other duties as the Board of Directors shall prescribe."
Dated the 16th day of January, 2003.
CERTIFICATE NUMBER OF
NUMBER SHARES
- 1 - ___
F&C/CLAYMORE PREFERRED SECURITIES INCOME FUND INCORPORATED
Incorporated Under the Laws of the State of Maryland Common Stock Par Value $.01 Per Share
Cusip No.____________________
This Certifies that _________________________ is the owner of _____ fully paid and non-assessable shares of Common Stock, par value $.01 per share, of F&C/Claymore Preferred Securities Income Fund Incorporated (the "Corporation") transferable only on the books of the Corporation by the holder thereof in person or by duly authorized Attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid unless countersigned by the transfer agent and registrar.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed by its duly authorized officers and its Corporate Seal to be hereunto affixed this ____ day of _________ A.D. 2003.
PFPC, INC. F&C/CLAYMORE PREFERRED SECURITIES
As Transfer Agent and Registrar [Seal] INCOME FUND INCORPORATED
By: ____________________
President
By:____________________ By: ____________________
Authorized Signature Secretary
|
|
|
FOR VALUE RECEIVED, _____ hereby sells, assign and transfer unto______________
Shares represented by the within Certificate, and does hereby irrevocably constitute and appoint _________________________ Attorney to transfer the said Shares on the books of the within named Corporation with full power of substitution in the premises.
Dated ____________________ ____, ____ In presence of ____________ ____________ |
The Corporation will furnish to the stockholder, upon request and without charge, a full statement of the designations, preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption of each class of stock which the Corporation is authorized to issue, so far as they have been determined, and a full statement of the authority of the Board of Directors to determine the relative rights and preferences of subsequent classes or series. Any such request should be addressed to the Secretary of the Corporation.
Exhibit (g)
INVESTMENT ADVISORY AGREEMENT
January __, 2003
Flaherty & Crumrine Incorporated
301 E. Colorado Boulevard, Suite 720
Pasadena, California 91101
Ladies and Gentlemen:
F&C/Claymore Preferred Securities Income Fund Incorporated (the "Company"), a corporation organized under the laws of the State of Maryland, herewith confirms its agreement with Flaherty & Crumrine Incorporated (the "Adviser"), a corporation organized under the laws of the State of California, as follows:
1. Investment Description; Appointment
The Company desires to employ its capital by investing and reinvesting in investments of the kind and in accordance with the limitations specified in its Articles of Incorporation, as the same may from time to time be amended, and in its Registration Statement as from time to time in effect, and in such manner and to such extent as may from time to time be approved by the Board of Directors of the Company. Copies of the Company's Registration Statement and Articles of Incorporation, as amended, have been or will be submitted to the Adviser. The Company agrees to provide copies of all amendments to the Company's Registration Statement and Articles of Incorporation to the Adviser on an ongoing basis. The Company desires to employ and hereby appoints the Adviser to act as investment adviser to the Company. The Adviser accepts the appointment and agrees to furnish the services described herein for the compensation set forth below.
2. Services as Investment Adviser
Subject to the supervision and direction of the Board of Directors of the Company, the Adviser will (a) act in accordance with the Company's Articles of Incorporation, the Investment Company Act of 1940 and the Investment Advisers Act of 1940, as the same may from time to time be amended, (b) manage the Company's portfolio on a discretionary basis in accordance with its investment objective and policies as stated in the Company's Registration Statement as from time to time in effect, (c) make investment decisions and exercise voting and related rights in respect of portfolio securities for the Company, (d) place purchase and sale orders on behalf of the Company and (e) employ professional portfolio managers and securities analysts to provide research services to the Company. In providing these services, the Adviser will provide investment research and supervision of the Company's investments and conduct a continual program of investment, evaluation and, if appropriate, sale and reinvestment of the Company's assets. In addition, the Adviser will furnish the Company with whatever statistical information the Company may reasonably request with respect to the securities that the Company may hold or contemplate purchasing.
3. Brokerage
In executing transactions for the Company and selecting brokers or
dealers, the Adviser will use its best efforts to seek the best overall terms
available. In assessing the best overall terms available for any Company
transaction, the Adviser will consider all factors it deems relevant including,
but not limited to, breadth of the market in the security, the price of the
security, the financial condition and execution capability of the broker or
dealer and the reasonableness of any commission for the specific transaction and
on a continuing basis. In selecting brokers or dealers to execute any
transaction and in evaluating the best overall terms available, the Adviser may
consider the brokerage and research services (as those terms are defined in
Section 28(e) of the Securities Exchange Act of 1934) provided to the Company
and/or other accounts over which the Adviser or an affiliate exercises
investment discretion.
4. Information Provided to the Company
The Adviser will use its best efforts to keep the Company informed of developments materially affecting the Company, and will, on its own initiative, furnish the Company from time to time with whatever information the Adviser believes is appropriate for this purpose.
5. Standard of Care
The Adviser shall exercise its best judgment in rendering the services described in paragraphs 2, 3 and 4 above. The Adviser shall not be liable for any error of judgment or mistake of law or for any act or omission or any loss suffered by the Company in connection with the matters to which this Agreement relates, provided that nothing herein shall be deemed to protect or purport to protect the Adviser against any liability to the Company or its shareholders to which the Adviser would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard by it of its obligations and duties under this Agreement ("disabling conduct"). The Company will indemnify the Adviser against, and hold it harmless from, any and all losses, claims, damages, liabilities or expenses (including reasonable counsel fees and expenses), including any amounts paid in satisfaction of judgments, in compromise or as fines or penalties, not resulting from disabling conduct by the Adviser. Indemnification shall be made only following: (i) a final decision on the merits by a court or other body before whom the proceeding was brought that the Adviser was not liable by reason of disabling conduct or (ii) in the absence of such a decision, a reasonable determination, based upon a review of the facts, that the Adviser was not liable by reason of disabling conduct by (a) the vote of a majority of a quorum of directors of the Company who are neither "interested persons" of the Company nor parties to the proceeding ("disinterested non-party directors") or (b) an independent legal counsel in a written opinion. The Adviser shall be entitled to advances from the Company for payment of the reasonable expenses incurred by it in connection with the matter as to which it is seeking indemnification in the manner and to the fullest extent permissible under the Maryland General Corporation law. The Adviser shall provide to the Company a written affirmation of its good faith belief that the standard of conduct necessary for indemnification by the Company has been met and a written undertaking to repay any such advance if it should ultimately be determined that the standard of conduct has not been met. In addition, at least one of the following additional conditions shall be met: (a) the Adviser shall provide a security in form and amount acceptable to the Company for
its undertaking; (b) the Company is insured against losses arising by reason of the advance; or (c) a majority of a quorum of disinterested non-party directors, or independent legal counsel, in a written opinion, shall have determined, based on a review of facts readily available to the Company at the time the advance is proposed to be made, that there is reason to believe that the Adviser will ultimately be found to be entitled to indemnification.
6. Compensation
In consideration of the services rendered pursuant to this Agreement, the Company will pay the Adviser after the end of the calendar month during which the Closing Date (as defined below) occurs and after the end of each calendar month thereafter a fee for the previous month computed monthly at the annual rate of .525 of 1.00% on the first $200 million of the Company's average weekly total managed assets, .45 of 1.00% on the next $300 million of the Company's average weekly total managed assets and .40 of 1.00% on the Company's average weekly total managed assets above $500 million. For purposes of calculating such fee, the Company's total managed assets means the total assets of the Company (including any assets attributable to any Company auction rate preferred stock that may be outstanding or otherwise attributable to the use of leverage) minus the sum of accrued liabilities (other than debt, if any, representing financial leverage). For purposes of determining total managed assets, the liquidation preference of the Company auction rate preferred stock is not treated as a liability. The fee payable to the Adviser for the period from the date of the closing of the offering contemplated by the Company's initial registration statement (the "Closing Date") to the end of the first calendar month during which the Closing Date occurs shall be prorated according to the proportion that such period bears to the full monthly period.
Upon any termination of this Agreement before the end of a month, the fee for such part of that month shall be prorated according to the proportion that such period bears to the full monthly period and shall be payable upon the date of termination of this Agreement. For the purpose of determining fees payable to the Adviser, the value of the Company's average monthly net assets shall be computed at the times and in the manner specified in the Company's Registration Statement as from time to time in effect.
7. Expenses
The Adviser will bear all expenses in connection with the performance of its services under this Agreement, including compensation of and office space for its officers and employees connected with investment research, trading and investment advice to the Company, as well as the fees of all directors of the Company who are affiliated with the Adviser or any of its affiliates; provided that the Company shall reimburse the Adviser for the travel and out-of-pocket expenses or an appropriate portion thereof of directors, officers and employees of the Adviser in connection with attendance at meetings of the Board of Directors of the Fund or any committee thereof. The Company will bear all other expenses to be incurred in its operation other than those that other parties have agreed to bear, including: organizational expenses; taxes, interest, brokerage costs and commissions and stock exchange fees; fees of directors of the Company who are not officers, directors or employees of the Adviser; Securities and Exchange Commission fees; state Blue Sky qualification fees; charges of the custodian, any subcustodians and transfer and dividend-paying agent; expenses in connection with the Company's Dividend
Reinvestment and Cash Purchase Plan; insurance premiums; outside auditing and legal expenses; costs of maintenance of the Company's existence; costs attributable to investor services, including, without limitation, fees to the Company's shareholder servicing agent, telephone and personnel expenses; costs of printing stock certificates; costs of shareholders' reports and meetings of the shareholders of the Company and of the officers or Board of Directors of the Company; membership fees in trade associations; stock exchange listing fees and expenses; expenses in connection with auctions of shares of auction rate preferred stock proposed to be issued by the Company; litigation and other extraordinary or non-recurring expenses.
8. Services to Other Companies or Accounts
The Company understands that the Adviser now acts, will continue to act or may in the future act, as investment adviser to fiduciary and other managed accounts or as investment adviser to one or more other investment companies, and the Company has no objection to the Adviser so acting, provided that whenever the Company and one or more other accounts or investment companies advised by the Adviser have available funds for investment, investments suitable and appropriate for each will be allocated in accordance with procedures believed by the Adviser to be equitable to each entity. Similarly, opportunities to sell securities will be allocated in an equitable manner. The Company recognizes that in some cases this procedure may adversely affect the size of the position obtained for or disposed of by the Company. In addition, the Company understands that the persons employed by the Adviser to assist in the performance of the Adviser's duties hereunder will not devote their full time to such service and nothing contained herein shall be deemed to limit or restrict the right of the Adviser or any affiliate of the Adviser to engage in and devote time and attention to other businesses or to render services of whatever kind or nature.
9. Term of Agreement
This Agreement shall become effective as of the date the Company's Registration Statement is declared effective by the Securities and Exchange Commission and shall continue for an initial two-year term and shall continue thereafter so long as such continuance is specifically approved at least annually by (i) the Board of Directors of the Company or (ii) a vote of a "majority" (as defined in the Investment Company Act of 1940, as amended) of the Company's outstanding voting securities, provided that in either event the continuance is also approved by a majority of the Board of Directors who are not "interested persons" as defined in said Act) of any party to this Agreement, by vote cast in person at a meeting called for the purpose of voting on such approval. This Agreement is terminable, without penalty, on 60 days' written notice, by the Board of Directors of the Company or by vote of holders of a majority of the Company's shares, or upon 60 days' written notice, by the Adviser. This Agreement will also terminate automatically in the event of its assignment (as defined in said Act).
10. Entire Agreement
This Agreement constitutes the entire agreement between the parties hereto.
11. Miscellaneous
The Company recognizes that directors, officers and employees of the Adviser may from time to time serve as directors, trustees, officers and employees of corporations and business trusts (including other investment companies) and that such other corporations and trusts may include the name "F&C" and "Flaherty & Crumrine" as part of their names, and that the Adviser may enter into advisory or other agreements with such other corporations and trusts. If the Adviser ceases to act as the investment adviser of the Company, the Company agrees that, at the Adviser's request, the Company's license to use the words "F&C" and "Flaherty & Crumrine" will terminate and that the Company will take all necessary action to change the name of the Company to a name not including the words "F&C" or "Flaherty & Crumrine".
12. Governing Law
This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York without giving effect to the conflicts of laws principles thereof. If the foregoing accurately sets forth our agreement, kindly indicate your acceptance hereof by signing and returning the enclosed copy hereof.
Very truly yours,
F&C/CLAYMORE PREFERRED SECURITIES
INCOME FUND INCORPORATED
Title:
Accepted:
FLAHERTY & CRUMRINE INCORPORATED
EXHIBIT (h)
F&C/Claymore Preferred Securities Income Fund Incorporated
(a Maryland corporation)
[ ] Shares of Common Stock
(Par Value $.01 Per Share)
PURCHASE AGREEMENT
January [__], 2003
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Raymond James & Associates, Inc.
A.G. Edwards & Sons, Inc.
Legg Mason Wood Walker, Incorporated
RBC Dain Rauscher Inc.
Wachovia Securities, Inc.
Wells Fargo Securities, LLC
Advest, Inc.
BB&T Capital Markets, a division of Scott & Stringfellow
Robert W. Baird & Co. Incorporated
Fahnestock & Co. Inc.
Ferris, Baker Watts, Incorporated
J.J.B. Hilliard, W.L. Lyons, Inc.
Huntleigh Securities Corporation
Janney Montgomery Scott LLC
McDonald Investments Inc., a KeyCorp Company
Morgan Keegan & Company, Inc.
Ryan Beck & Co.
Wedbush Morgan Securities Inc.
c/o Merrill Lynch, Pierce, Fenner & Smith Incorporated
North Tower
World Financial Center
New York, New York 10080
Ladies and Gentlemen:
F&C/Claymore Preferred Securities Income Fund Incorporated, a Maryland corporation (the "Fund") and the Fund's investment adviser, Flaherty & Crumrine Incorporated, a California corporation (the "Adviser"), each confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and each of the other Underwriters named in Schedule A hereto (collectively, the "Underwriters", which term shall also include any underwriter substituted as hereinafter provided in Section 10 hereof), for whom Merrill Lynch and Raymond James & Associates, Inc., A.G. Edwards & Sons, Inc., Legg Mason Wood Walker, Incorporated, RBC
Dain Rauscher Inc., Wachovia Securities, Inc., Wells Fargo Securities, LLC,
Advest, Inc., BB&T Capital Markets, a division of Scott & Stringfellow, Robert
W. Baird & Co. Incorporated, Fahnestock & Co. Inc. Ferris, Baker Watts,
Incorporated, J.J.B. Hilliard, W.L. Lyons, Inc., Huntleigh Securities
Corporation Janney Montgomery Scott LLC, McDonald Investments Inc., a KeyCorp
Company, Morgan Keegan & Company, Inc., Ryan Beck & Co., Wedbush Morgan
Securities Inc. are acting as representatives (in such capacity, the
"Representatives"), with respect to the issue and sale by the Fund and the
purchase by the Underwriters, acting severally and not jointly, of the
respective number of shares of common stock, par value $.01 per share, of the
Fund ("Common Shares") set forth in said SCHEDULE A, and with respect to the
grant by the Fund to the Underwriters, acting severally and not jointly, of the
option described in Section 2(b) hereof to purchase all or any part of [ ]
additional Common Shares to cover over-allotments, if any. The aforesaid [ ]
Common Shares (the "Initial Securities") to be purchased by the Underwriters and
all or any part of the [ ] Common Shares subject to the option described in
Section 2(b) hereof (the "Option Securities") are hereinafter called,
collectively, the "Securities."
The Fund understands that the Underwriters propose to make a public offering of the Securities as soon as the Representatives deem advisable after this Agreement has been executed and delivered.
The Fund has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form N-2 (No. 333-91282 and No.
811-21129) covering the registration of the Securities under the Securities Act
of 1933, as amended (the "1933 Act"), including the related preliminary
prospectus or prospectuses, and a notification on Form N-8A of registration of
the Fund as an investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"), and the rules and regulations of the Commission under
the 1933 Act and the 1940 Act (the "Rules and Regulations"). Promptly after
execution and delivery of this Agreement, the Fund will either (i) prepare and
file a prospectus in accordance with the provisions of Rule 430A ("Rule 430A")
of the Rules and Regulations and paragraph (c) or (h) of Rule 497 ("Rule 497")
of the Rules and Regulations or (ii) if the Fund has elected to rely upon Rule
434 ("Rule 434") of the Rules and Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 497. The
information included in any such prospectus that was omitted from such
registration statement at the time it became effective but that is deemed to be
part of such registration statement at the time it became effective, if
applicable, (a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule
430A Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to as
"Rule 434 Information." Each prospectus used before such registration statement
became effective, and any prospectus that omitted, as applicable, the Rule 430A
Information or the Rule 434 Information, that was used after such effectiveness
and prior to the execution and delivery of this Agreement, including in each
case any statement of additional information incorporated therein by reference,
is herein called a "preliminary prospectus." Such registration statement,
including the exhibits thereto and schedules thereto at the time it became
effective and including the Rule 430A Information or the Rule 434 Information,
as applicable, is herein called the "Registration Statement." Any registration
statement filed pursuant to Rule 462(b) of the Rules and Regulations is herein
referred to as the "Rule 462(b) Registration Statement," and after such filing
the term "Registration Statement" shall include the Rule 462(b) Registration
Statement. The final prospectus in the form first furnished to the Underwriters
for use in connection with the offering of the Securities, including the
statement of additional information incorporated therein by reference, is herein
called the "Prospectus." If Rule 434 is relied on, the term "Prospectus" shall
refer to the preliminary prospectus dated [ ], 2002 together with
the Term Sheet and all references in this Agreement to the date of the
Prospectus shall mean the date of the Term Sheet. For purposes of this
Agreement, all references to the Registration Statement, any preliminary
prospectus, the Prospectus or any Term Sheet or any amendment or supplement to
any of the foregoing shall be deemed to include the copy filed with the
Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval
system ("EDGAR").
All references in this Agreement to financial statements and schedules and other information which is "contained," "included" or "stated" in the Registration Statement, any preliminary prospectus or
the Prospectus (or other references of like import) shall be deemed to mean and include all such financial statements and schedules and other information which is incorporated by reference in the Registration Statement, any preliminary prospectus or the Prospectus, as the case may be.
SECTION 1. Representations and Warranties.
(a) REPRESENTATIONS AND WARRANTIES BY THE FUND AND THE ADVISER. The Fund and the Adviser jointly and severally represent and warrant to each Underwriter as of the date hereof, as of the Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery (if any) referred to in Section 2(b) hereof, and agree with each Underwriter, as follows:
(i) COMPLIANCE WITH REGISTRATION REQUIREMENTS. Each of the Registration Statement and any Rule 462(b) Registration Statement has become effective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act, or order of suspension or revocation of registration pursuant to Section 8(e) of the 1940 Act, and no proceedings for any such purpose have been instituted or are pending or, to the knowledge of the Fund or the Adviser, are contemplated by the Commission, and any request on the part of the Commission for additional information has been complied with.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective and at the Closing Time (and, if any Option Securities
are purchased, at the Date of Delivery), the Registration Statement,
the Rule 462(b) Registration Statement, the notification on Form N-8A
and any amendments and supplements thereto complied and will comply in
all material respects with the requirements of the 1933 Act, the 1940
Act and the Rules and Regulations and did not and will not contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading. Neither the Prospectus nor any amendments or
supplements thereto, at the time the Prospectus or any such amendment
or supplement was issued and at the Closing Time (and, if any Option
Securities are purchased, at the Date of Delivery), included or will
include an untrue statement of a material fact or omitted or will omit
to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading. If Rule 434 is used, the Fund will comply with the
requirements of Rule 434 and the Prospectus shall not be "materially
different", as such term is used in Rule 434, from the prospectus
included in the Registration Statement at the time it became effective.
The representations and warranties in this subsection shall not apply
to statements in or omissions from the Registration Statement or
Prospectus made in reliance upon and in conformity with information
furnished to the Fund in writing by any Underwriter through Merrill
Lynch expressly for use in the Registration Statement or Prospectus.
Each preliminary prospectus and the prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 497 under the 1933 Act, complied when so filed in all material respects with the Rules and Regulations and each preliminary prospectus and the Prospectus delivered to the Underwriters for use in connection with this offering was identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
If a Rule 462(b) Registration Statement is required in connection with the offering and sale of the Securities, the Fund has complied or will comply with the requirements of Rule 111 under the 1933 Act Regulations relating to the payment of filing fees thereof.
(ii) INDEPENDENT ACCOUNTANTS. The accountants who certified the statement of assets and liabilities included in the Registration Statement are independent public accountants as required by the 1933 Act and the Rules and Regulations.
(iii) FINANCIAL STATEMENTS. The statement of assets and liabilities included in the Registration Statement and the Prospectus, together with the related notes, presents fairly in accordance with generally accepted accounting principles ("GAAP") in all material respects the financial position of the Fund at the date indicated; said statement has been prepared in conformity with GAAP.
(iv) EXPENSE SUMMARY. The information set forth in the Prospectus in the Fee Table has been prepared in accordance in all material respects with the requirements of Form N-2 and to the extent estimated or projected, such estimates or projections are reasonably believed to be attainable and reasonably based.
(v) NO MATERIAL ADVERSE CHANGE. Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated therein, (A) there has been no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Fund, whether or not arising in the ordinary course of business (a "Material Adverse Effect"), (B) there have been no transactions entered into by the Fund, other than those in the ordinary course of business, which are material with respect to the Fund, and (C) there has been no dividend or distribution of any kind declared, paid or made by the Fund on any class of its capital stock.
(vi) GOOD STANDING OF THE FUND. The Fund has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Maryland and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under this Agreement; and the Fund is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect.
(vii) NO SUBSIDIARIES. The Fund has no subsidiaries.
(viii) INVESTMENT COMPANY STATUS. The Fund is duly registered with the Commission under the 1940 Act as a closed-end diversified management investment company, and no order of suspension or revocation of such registration has been issued or proceedings therefor initiated or, to the knowledge of the Fund and the Adviser, threatened by the Commission.
(ix) OFFICERS AND DIRECTORS. No person is serving or acting as an officer, director or investment adviser of the Fund except in accordance with the provisions of the 1940 Act and the Rules and Regulations and no person is serving as an investment adviser of the Fund except in accordance with the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and the rules and regulations of the Commission promulgated under the Advisers Act (the "Advisers Act Rules and Regulations"). Except as disclosed in the Registration Statement and the Prospectus (or any amendment or supplement to either of them), to the knowledge of the Fund or the Adviser after due inquiry, no director of the Fund is an "interested person" (as defined in the 1940 Act) of the Fund or an "affiliated person" (as defined in the 1940 Act) of any Underwriter.
(x) CAPITALIZATION. The authorized, issued and outstanding shares of common stock of the Fund are as set forth in the Prospectus as of the date thereof under the caption "Description of Capital Stock." All issued and outstanding shares of common stock of the Fund have been duly authorized and validly issued and are fully paid and non-assessable, except as provided for
in the Fund's articles of incorporation, and have been offered and sold or exchanged by the Fund in compliance with all applicable laws (including, without limitation, federal and state securities laws); none of the outstanding shares of common stock of the Fund were issued in violation of the preemptive or other similar rights of any securityholder of the Fund.
(xi) AUTHORIZATION AND DESCRIPTION OF SECURITIES. The Securities to be purchased by the Underwriters from the Fund have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Fund pursuant to this Agreement against payment of the consideration set forth herein, will be validly issued and fully paid and non-assessable, except as provided for in the Fund's articles of incorporation. The Common Shares conform in all material respects to all statements relating thereto contained in the Prospectus and such description conforms in all material respects to the rights set forth in the instruments defining the same; no holder of the Securities will be subject to personal liability by reason of being such a holder; and the issuance of the Securities is not subject to the preemptive or other similar rights of any securityholder of the Fund.
(xii) ABSENCE OF DEFAULTS AND CONFLICTS. The Fund is not in violation of its articles of incorporation or by-laws, or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which it is a party or by which it may be bound, or to which any of the property or assets of the Fund is subject (collectively, "Agreements and Instruments") except for such violations or defaults that would not result in a Material Adverse Effect; and the execution, delivery and performance of this Agreement, the Advisory Agreement and the Administration Agreement referred to in the Registration Statement, the Custodian Services Agreement, dated as of January 28, 2003 between the Fund and PFPC Trust Company, and the Transfer and Dividend Disbursing Agent and Registrar Agreement, dated as of January 28, 2003 between the Fund and PFPC, Inc., (as used herein, the "Advisory Agreement," the "Administration Agreement," the "Custodian Services Agreement" and the "Transfer Agency And Registrar Agreement," respectively) and the consummation of the transactions contemplated herein and in the Registration Statement (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectus under the caption "Use of Proceeds") and compliance by the Fund with its obligations hereunder have been duly authorized by all necessary corporate action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Fund pursuant to, the Agreements and Instruments (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not result in a Material Adverse Effect), nor will such action result in any violation of the provisions of the articles of incorporation or by-laws of the Fund, nor will such action result in any violation of any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Fund or any of its assets, properties or operations, except for such violations that would not result in a Material Adverse Effect. As used herein, a "Repayment Event" means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Fund.
(xiii) ABSENCE OF PROCEEDINGS. There is no action, suit, proceeding, inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Fund or the Adviser, threatened, against or affecting the Fund, which is required to be disclosed in the Registration Statement (other than as
disclosed therein), or which would reasonably be expected to result in a Material Adverse Effect, or which would reasonably be expected to materially and adversely affect the properties or assets of the Fund or the consummation of the transactions contemplated in this Agreement or the performance by the Fund of its obligations hereunder. The aggregate of all pending legal or governmental proceedings to which the Fund is a party or of which any of its property or assets is the subject which are not described in the Registration Statement, including ordinary routine litigation incidental to the business, would not reasonably be expected to result in a Material Adverse Effect.
(xiv) ACCURACY OF EXHIBITS. There are no contracts or documents which are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits thereto by the 1933 Act, the 1940 Act or by the Rules and Regulations which have not been so described and filed as required.
(xv) POSSESSION OF INTELLECTUAL PROPERTY. The Fund owns or possesses, has the right to use or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names or other intellectual property (collectively, "Intellectual Property") necessary to carry on the business now operated by the Fund, and the Fund has not received any notice or is not otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Fund therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, singly or in the aggregate, would result in a Material Adverse Effect.
(xvi) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency is necessary or required for the performance by the Fund of its obligations hereunder, in connection with the offering, issuance or sale of the Securities hereunder or the consummation of the transactions contemplated by this Agreement, except such as have been already obtained or as may be required under the 1933 Act, the 1940 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act"), or under the rules of the National Association of Securities Dealers, Inc. ("NASD") or state securities laws.
(xvii) POSSESSION OF LICENSES AND PERMITS. The Fund possesses such permits, licenses, approvals, consents and other authorizations (collectively, "Governmental Licenses") issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to operate its properties and to conduct the business as contemplated in the Prospectus; the Fund is in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to comply would not, singly or in the aggregate, have a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except when the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not have a Material Adverse Effect; and the Fund has not received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect.
(xviii) ADVERTISEMENTS. Any advertising, sales literature or other promotional material (including "prospectus wrappers," "broker kits, " "road-show slides" and "road-show scripts" and "electronic road show presentations") authorized in writing by or prepared by the Fund or the Adviser used in connection with the public offering of the Securities (collectively, "sales material") does not contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made not misleading. Moreover, all sales material complied and will comply in all material respects with the applicable requirements of the 1933 Act, the 1940 Act, the Rules and Regulations and the rules and interpretations of the NASD.
(xix) SUBCHAPTER M. The Fund intends to direct the investment of the proceeds of the offering described in the Registration Statement in such a manner as to comply with the requirements of Subchapter M of the Internal Revenue Code of 1986, as amended ("Subchapter M of the Code" and the "Code," respectively), and intends to qualify as a regulated investment company under Subchapter M of the Code.
(xx) DISTRIBUTION OF OFFERING MATERIALS. The Fund has not distributed and, prior to the later to occur of (A) the Closing Time and (B) completion of the distribution of the Securities, will not distribute any material to the public in connection with the offering and sale of the Securities other than the Registration Statement, a preliminary prospectus, the Prospectus or other material, if any, permitted by the 1933 Act or the 1940 Act or the Rules and Regulations.
(xxi) ACCOUNTING CONTROLS. The Fund has established a system of internal accounting controls sufficient to provide reasonable assurances that (A) transactions will be executed in accordance with management's general or specific authorization and with the applicable requirements of the 1940 Act, the Rules and Regulations and the Code; (B) transactions will be recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets and to maintain compliance with the books and records requirements under the 1940 Act and the Rules and Regulations; (C) access to assets will be permitted only in accordance with the management's general or specific authorization; and (D) the recorded accountability for assets will be compared with existing assets at reasonable intervals and appropriate action will be taken with respect to any differences.
(xxii) ABSENCE OF UNDISCLOSED PAYMENTS. To the Fund's and the Adviser's knowledge, neither the Fund nor any employee or agent of the Fund has made any payment of funds of the Fund or received or retained any funds, which payment, receipt or retention of funds is of a character required to be disclosed in the Prospectus.
(xxiii) MATERIAL AGREEMENTS. This Agreement, the Advisory Agreement, the Administration Agreement, the Custodian Services Agreement and the Transfer Agency And Registrar Agreement have each been duly authorized by all requisite action on the part of the Fund and executed and delivered by the Fund, as of the dates noted therein, and each complies with all applicable provisions of the 1940 Act. Assuming due authorization, execution and delivery by the other parties thereto with respect to the Advisory Agreement, the Administration Agreement, the Custodian Services Agreement and the Transfer Agency And Registrar Agreement, each of the Advisory Agreement, the Administration Agreement, the Custodian Services Agreement and the Transfer Agency And Registrar Agreement constitutes a valid and binding agreement of the Fund, enforceable against it in accordance with its terms, except as affected by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law or an implied covenant of good faith and fair dealing).
(xxiv) REGISTRATION RIGHTS. There are no persons with registration rights or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Fund under the 1933 Act.
(xxv) NYSE LISTING. The Securities have been duly authorized for listing, upon notice of issuance, on the New York Stock Exchange ("NYSE") and the Fund's registration statement on Form 8-A under the 1934 Act has become effective.
(b) REPRESENTATIONS AND WARRANTIES BY THE ADVISER. The Adviser represents and warrants to each Underwriter as of the date hereof, as of the Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery (if any) referred to in Section 2(b) hereof as follows:
(i) GOOD STANDING OF THE ADVISER. The Adviser has been duly organized and is validly existing and in good standing as a corporation under the laws of the State of California with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required.
(ii) INVESTMENT ADVISER STATUS. The Adviser is duly registered and in good standing with the Commission as an investment adviser under the Advisers Act, and is not prohibited by the Advisers Act or the 1940 Act, or the rules and regulations under such acts, from acting under the Advisory Agreement for the Fund as contemplated by the Prospectus.
(iii) DESCRIPTION OF ADVISER. The description of the Adviser in the Registration Statement and the Prospectus (and any amendment or supplement to either of them) complied and comply in all material respects with the provisions of the 1933 Act, the 1940 Act, the Advisers Act, the Rules and Regulations and the Advisers Act Rules and Regulations and is true and correct and does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.
(iv) CAPITALIZATION. The Adviser has the financial resources available to it necessary for the performance of its services and obligations as contemplated in the Prospectus, this Agreement and under the Advisory Agreement to which it is a party.
(v) AUTHORIZATION OF AGREEMENTS; ABSENCE OF DEFAULTS AND
CONFLICTS. This Agreement, the Advisory Agreement and the Additional
Compensation Agreement have each been duly authorized, executed and
delivered by the Adviser, and (assuming due authorization, execution
and delivery by each of the other parties thereto) the Advisory
Agreement and the Additional Compensation Agreement each constitute a
valid and binding obligation of the Adviser, enforceable against it in
accordance with its terms, except as affected by bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and other
similar laws relating to or affecting creditors' rights generally and
general equitable principles (whether considered in a proceeding in
equity or at law) and except as any rights to indemnity or contribution
may be limited by federal and state securities laws and public policy
considerations; and neither the execution and delivery of this
Agreement, the Advisory Agreement or the Additional Compensation
Agreement nor the performance by the Adviser of its obligations
hereunder or thereunder will conflict with, or result in a breach of
any of the terms and provisions of, or constitute, with or without the
giving of notice or lapse of time or both, a default under, (i) any
agreement or instrument to which the Adviser is a party or by which it
is bound, (ii) the certificate of incorporation, the by-laws or other
organizational documents of the Adviser, or (iii) to the Adviser's
knowledge, by any law, order, decree, rule or regulation applicable to
it of any jurisdiction, court, federal or state regulatory body,
administrative agency or other governmental body, stock exchange or
securities association having jurisdiction over the Adviser or its
properties or operations other than, with respect to clauses (i) and
(iii), any conflict, breach or default that will not, individually or
in the aggregate, be expected to cause an Adviser Material Adverse
Effect; and no consent, approval, authorization or order of any court
or governmental
authority or agency is required for the consummation by the Adviser of the transactions contemplated by this Agreement, the Advisory Agreement and the Additional Compensation Agreement, except as have been obtained or will have been obtained prior to the Closing Time or may be required under the 1933 Act, the 1940 Act, the 1934 Act or state securities laws.
(vi) NO MATERIAL ADVERSE CHANGE. Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated therein, there has not occurred any event which would reasonably be expected to have a material adverse effect on the ability of the Adviser to perform its respective obligations under this Agreement and the Advisory Agreement to which it is a party.
(vii) ABSENCE OF PROCEEDINGS. There is no action, suit, proceeding, inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Adviser, threatened against or affecting the Adviser or any "affiliated person" of the Adviser (as such term is defined in the 1940 Act) or any partners, directors, officers or employees of the foregoing, whether or not arising in the ordinary course of business, which would reasonably be expected to result in any material adverse change in the condition, financial or otherwise, or earnings, business affairs or business prospects of the Adviser, materially and adversely affect the properties or assets of the Adviser or materially impair or adversely affect the ability of the Adviser to function as an investment adviser or perform its obligations under the Advisory Agreement, or which is required to be disclosed in the Registration Statement and the Prospectus.
(viii) ABSENCE OF VIOLATION OR DEFAULT. The Adviser is not in violation of its certificate of incorporation, by-laws or other organizational documents or in default under any agreement, indenture or instrument, except for such violations or defaults that would not have a material adverse effect on the ability of the Adviser to perform its respective obligations under this Agreement and the Advisory Agreement.
(c) OFFICER'S CERTIFICATES. Any certificate signed by any officer of the Fund or the Adviser delivered to the Representatives or to counsel for the Underwriters shall be deemed a representation and warranty by the Fund or the Adviser, as the case may be, to each Underwriter as to the matters covered thereby.
SECTION 2. Sale and Delivery to Underwriters; Closing.
(a) INITIAL SECURITIES. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Fund agrees to sell to each Underwriter, severally and not jointly, and each Underwriter, severally and not jointly, agrees to purchase from the Fund, at the price per share set forth in SCHEDULE B, the number of Initial Securities set forth in SCHEDULE A opposite the name of such Underwriter, plus any additional number of Initial Securities which such Underwriter may become obligated to purchase pursuant to the provisions of Section 10 hereof.
(b) OPTION SECURITIES. In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Fund hereby grants an option to the Underwriters, severally and not jointly, to purchase up to an additional [ ] Common Shares in the aggregate at the price per share set forth in SCHEDULE B, less an amount per share equal to any dividends or distributions declared by the Fund and payable on the Initial Securities but not payable on the Option Securities. The option hereby granted will expire 45 days after the date hereof and may be exercised in whole or in part from time to time only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Initial Securities upon notice by the Representatives to the Fund setting forth the number of Option Securities as to which the several Underwriters are then exercising the option and the time and date of payment and delivery for such
Option Securities. Any such time and date of delivery (a "Date of Delivery") shall be determined by the Representatives, but shall not be later than seven full business days after the exercise of said option, nor in any event prior to the Closing Time, as hereinafter defined. If the option is exercised as to all or any portion of the Option Securities, each of the Underwriters, acting severally and not jointly, will purchase that proportion of the total number of Option Securities then being purchased which the number of Initial Securities set forth in SCHEDULE A opposite the name of such Underwriter bears to the total number of Initial Securities, subject in each case to such adjustments as Merrill Lynch in its discretion shall make to eliminate any sales or purchases of a fractional number of Option Securities.
(c) PAYMENT. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of
[Clifford Chance US LLP, 200 Park Avenue, New York, New York 10166] or at such
other place as shall be agreed upon by the Representatives and the Fund, at
10:00 A.M. (Eastern time) on the third (fourth, if the pricing occurs after 4:30
P.M. (Eastern time) on any given day) business day after the date hereof (unless
postponed in accordance with the provisions of Section 10), or such other time
not later than ten business days after such date as shall be agreed upon by the
Representatives and the Fund (such time and date of payment and delivery being
herein called "Closing Time").
In addition, in the event that any or all of the Option Securities are purchased by the Underwriters, payment of the purchase price for, and delivery of certificates for, such Option Securities shall be made at the above-mentioned offices, or at such other place as shall be agreed upon by the Representatives and the Fund, on each Date of Delivery as specified in the notice from the Representatives to the Fund.
Payment shall be made to the Fund by wire transfer of immediately available funds to a bank account designated by the Fund, against delivery to the Representatives for the respective accounts of the Underwriters of certificates for the Securities to be purchased by them. It is understood that each Underwriter has authorized the Representatives, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Initial Securities and the Option Securities, if any, which it has agreed to purchase. Merrill Lynch, individually and not as representative of the Underwriters, may (but shall not be obligated to) make payment of the purchase price for the Initial Securities or the Option Securities, if any, to be purchased by any Underwriter whose funds have not been received by the Closing Time or the relevant Date of Delivery, as the case may be, but such payment shall not relieve such Underwriter from its obligations hereunder.
(d) DENOMINATIONS; REGISTRATION. Certificates for the Initial Securities and the Option Securities, if any, shall be in such denominations and registered in such names as the Representatives may request in writing at least one full business day before the Closing Time or the relevant Date of Delivery, as the case may be. The certificates for the Initial Securities and the Option Securities, if any, will be made available for examination and packaging by the Representatives in the City of New York not later than 10:00 A.M. (Eastern time) on the business day prior to the Closing Time or the relevant Date of Delivery, as the case may be.
SECTION 3. Covenants.
(a) The Fund, and so long as it is the investment adviser for the Fund, the Adviser, jointly and severally, covenant with each Underwriter as follows:
(i) COMPLIANCE WITH SECURITIES REGULATIONS AND COMMISSION REQUESTS. The Fund, subject to Section 3(a)(ii), will comply with the requirements of Rule 430A or Rule 434, as applicable, and will notify the Representatives immediately, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective, or any supplement to the Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any
amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information, and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes. The Fund will promptly effect the filings necessary pursuant to Rule 497 and will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 497 was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Fund will make every reasonable effort to prevent the issuance of any stop order, or order of suspension or revocation of registration pursuant to Section 8(e) of the 1940 Act, and, if any such stop order or order of suspension or revocation of registration is issued, to obtain the lifting thereof at the earliest possible moment.
(ii) FILING OF AMENDMENTS. The Fund will give the Representatives notice of its intention to file or prepare any amendment to the Registration Statement (including any filing under Rule 462(b)), any Term Sheet or any amendment, supplement or revision to either the prospectus included in the Registration Statement at the time it became effective or to the Prospectus, will furnish the Representatives with copies of any such documents a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file or use any such document to which the Representatives or counsel for the Underwriters shall reasonably object.
(iii) DELIVERY OF REGISTRATION STATEMENTS. The Fund has furnished or will deliver to the Representatives and counsel for the Underwriters, without charge, signed copies of the Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith or incorporated by reference therein) and signed copies of all consents and certificates of experts, and will also deliver to the Representatives, without charge, a conformed copy of the Registration Statement as originally filed and of each amendment thereto (without exhibits) for each of the Underwriters. The copies of the Registration Statement and each amendment thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(iv) DELIVERY OF PROSPECTUSES. The Fund has delivered to each Underwriter, without charge, as many copies of each preliminary prospectus as such Underwriter reasonably requested, and the Fund hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Fund will furnish to each Underwriter, without charge, during the period when the Prospectus is required to be delivered under the 1933 Act or the 1934 Act, such number of copies of the Prospectus (as amended or supplemented) as such Underwriter may reasonably request. The Prospectus and any amendments or supplements thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(v) CONTINUED COMPLIANCE WITH SECURITIES LAWS. If at any time when a prospectus is required by the 1933 Act to be delivered in connection with sales of the Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the Underwriters or for the Fund, to amend the Registration Statement or amend or supplement the Prospectus in order that the Prospectus will not include any untrue statements of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if it shall be necessary, in the opinion of such counsel, at any such time to amend the Registration
Statement or amend or supplement the Prospectus in order to comply with
the requirements of the 1933 Act or the Rules and Regulations, the Fund
will promptly prepare and file with the Commission, subject to Section
3(a)(ii), such amendment or supplement as may be necessary to correct
such statement or omission or to make the Registration Statement or the
Prospectus comply with such requirements, and the Fund will furnish to
the Underwriters such number of copies of such amendment or supplement
as the Underwriters may reasonably request.
(vi) BLUE SKY QUALIFICATIONS. The Fund will cooperate with the Underwriters, to qualify the Securities for offering and sale under the applicable securities laws of such states and other jurisdictions of the United States as the Representatives may designate and to maintain such qualifications in effect for so long as required for the distribution of the Securities; provided, however, that the Fund shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject.
(vii) RULE 158. The Fund will timely file such reports pursuant to the 1934 Act as are necessary in order to make generally available to its securityholders as soon as practicable an earnings statement for the purposes of, and to provide the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act.
(viii) USE OF PROCEEDS. The Fund will use the net proceeds received by it from the sale of the Securities in the manner specified in the Prospectus under "Use of Proceeds".
(ix) LISTING. The Fund will use its reasonable best efforts to effect the listing of the Securities on the NYSE, subject to notice of issuance, concurrently with the effectiveness of the Registration Statement.
(x) RESTRICTION ON SALE OF SECURITIES. During a period of 180 days from the date of the Prospectus, the Fund will not, without the prior written consent of Merrill Lynch, (A) directly or indirectly, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of Common Shares or any securities convertible into or exercisable or exchangeable for Common Shares or file any registration statement under the 1933 Act with respect to any of the foregoing or (B) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Shares, whether any such swap or transaction described in clause (A) or (B) above is to be settled by delivery of Common Shares or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (1) the Securities to be sold hereunder or (2) Common Shares issued pursuant to any dividend reinvestment plan.
(xi) REPORTING REQUIREMENTS. The Fund, during the period when the Prospectus is required to be delivered under the 1933 Act or the 1934 Act, will file all documents required to be filed with the Commission pursuant to the 1940 Act and the 1934 Act within the time periods required by the 1940 Act and the Rules and Regulations and the 1934 Act and the rules and regulations of the Commission thereunder, respectively.
(xii) SUBCHAPTER M. The Fund will use its best efforts to maintain its qualification as a regulated investment company under Subchapter M of the Code.
(xiii) NO MANIPULATION OF MARKET FOR SECURITIES. Except for the authorization of actions permitted to be taken by the Underwriters as contemplated herein or in the Prospectus, the Fund will not (a) take, directly or indirectly, any action designed to cause or to result in, or that would reasonably be expected to constitute, the stabilization or manipulation of the price of any security
of the Fund to facilitate the sale or resale of the Securities, and (b) until the Closing Date, or the Date of Delivery, if any, (i) sell, bid for or purchase the Securities or pay any person any compensation for soliciting purchases of the Securities or (ii) pay or agree to pay to any person any compensation for soliciting another to purchase any other securities of the Fund.
(xiv) RULE 462(b) REGISTRATION STATEMENT. If the Fund elects to rely upon Rule 462(b), the Fund shall file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the date of this Agreement, and the Fund shall at the time of filing either pay to the Commission the filing fee for the Rule 462(b) Registration Statement or give irrevocable instructions for the payment of such fee pursuant to Rule 111(b) under the 1933 Act.
(b) The Adviser covenants with each Underwriter that for a period of 180 days from the date of the Prospectus, the Adviser will not, without Merrill Lynch's prior written consent, which consent shall not be unreasonably withheld, act as investment adviser to any other closed-end registered investment company having an investment objective, policies and restrictions substantially similar to those of the Fund, other than Preferred Income Fund Incorporated and Preferred Income Opportunity Fund Incorporated.
SECTION 4. Payment of Expenses.
(a) EXPENSES. The Fund will pay all expenses incident to the
performance of its obligations under this Agreement, including (i) the
preparation, printing and filing of the Registration Statement (including
financial statements and exhibits) as originally filed and of each amendment
thereto, (ii) the preparation, printing and delivery to the Underwriters of this
Agreement, any Agreement among Underwriters and such other documents as may be
required in connection with the offering, purchase, sale, issuance or delivery
of the Securities, (iii) the preparation, issuance and delivery of the
certificates for the Securities to the Underwriters, including any stock or
other transfer taxes and any stamp or other duties payable upon the sale,
issuance or delivery of the Securities to the Underwriters, (iv) the fees and
disbursements of the Fund's counsel, accountants and other advisers, (v) the
qualification of the Securities under securities laws in accordance with the
provisions of Section 3(a)(vi) hereof, including filing fees and the reasonable
fees and disbursements of counsel for the Underwriters in connection therewith,
(vi) the printing and delivery to the Underwriters of copies of each preliminary
prospectus, Prospectus and any amendments or supplements thereto, (vii) the
preparation, printing and delivery to the Underwriters of copies of the Blue Sky
Survey and any supplement thereto, (viii) the fees and expenses of any transfer
agent or registrar for the Securities, (ix) the filing fees incident to, and the
reasonable fees and disbursements of counsel to the Underwriters in connection
with, the review by the NASD of the terms of the sale of the Securities, (x) the
fees and expenses incurred in connection with the listing of the Securities on
the NYSE and (xi) the printing of any sales material. Also, the Fund shall pay
to Merrill Lynch, on behalf of the Underwriters, $.0083 per share of the
securities purchased pursuant to this agreement as partial reimbursement of
expenses incurred in connection with the offering. The Adviser has agreed to pay
all organizational expenses of the Fund. The Adviser has also agreed to pay
those offering costs (other than sales load) of the Fund that exceed $.05 per
Common Share.
(b) TERMINATION OF AGREEMENT. If this Agreement is terminated by the Representatives in accordance with the provisions of Section 5 or Section 9(a)(i) hereof, the Fund and the Adviser, jointly and severally, agree that they shall reimburse the Underwriters for all of their out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the Underwriters.
SECTION 5. Conditions of Underwriters' Obligations.
The obligations of the several Underwriters hereunder are subject to the accuracy of the representations and warranties of the Fund and the Adviser contained in Section 1 hereof or in certificates
of any officer of the Fund or the Adviser delivered pursuant to the provisions hereof, to the performance by the Fund and the Adviser of their respective covenants and other obligations hereunder, and to the following further conditions:
(a) EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration Statement, including any Rule 462(b) Registration Statement, has become effective and at Closing Time no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act, no notice or order pursuant to Section 8(e) of the 1940 Act shall have been issued, and no proceedings with respect to either shall have been initiated or threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the Underwriters. A prospectus containing the Rule 430A Information shall have been filed with the Commission in accordance with Rule 497 (or a post-effective amendment providing such information shall have been filed and declared effective in accordance with the requirements of Rule 430A) or, if the Fund has elected to rely on upon Rule 434, a Term Sheet shall have been filed with the Commission in accordance with Rule 497.
(b) OPINIONS OF COUNSEL FOR FUND AND THE ADVISER. At Closing Time, the Representatives shall have received the favorable opinions, dated as of Closing Time, of Willkie Farr & Gallagher, counsel for the Fund, and Shearman & Sterling, counsel for the Adviser, in form and substance satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such letters for each of the other Underwriters as set forth in EXHIBIT A hereto and to such further effect as counsel to the Underwriters may reasonably request.
(c) OPINION OF COUNSEL FOR UNDERWRITERS. At Closing Time, the Representatives shall have received the favorable opinion, dated as of Closing Time, of Clifford Chance US LLP, counsel for the Underwriters, together with signed or reproduced copies of such letter for each of the other Underwriters with respect to the matters set forth in clauses (A) (i), (ii), (vi), (vii) (solely as to preemptive or other similar rights arising by operation of law or under the charter or by-laws of the Fund), (viii) through (x), inclusive, (xiv) (solely as to the information in the Prospectus under "Description of Capital Stock") and the last paragraph of EXHIBIT A hereto. In giving such opinion such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York and the federal law of the United States, upon the opinions of counsel satisfactory to the Representatives. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Fund and certificates of public officials.
(d) OFFICERS' CERTIFICATES. At Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Fund, whether or not arising in the ordinary course of business, and the Representatives shall have received a certificate of a duly authorized officer of the Fund and of the chief financial or chief accounting officer of the Fund and of the President or a Vice President or Managing Director of the Adviser, dated as of Closing Time, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties in Sections 1(a) and (b) hereof are true and correct with the same force and effect as though expressly made at and as of Closing Time, (iii) each of the Fund and the Adviser, respectively, has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to Closing Time, and (iv) no stop order suspending the effectiveness of the Registration Statement, or order of suspension or revocation of registration pursuant to Section 8(e) of the 1940 Act, has been issued and no proceedings for any such purpose have been instituted, or, to the knowledge of the Fund or the Adviser, are pending or are contemplated by the Commission.
(e) ACCOUNTANT'S COMFORT LETTER. At the time of the execution of this Agreement, the Representatives shall have received from KPMG, LLP a letter dated such date, in form and substance satisfactory to the Representatives, together with signed or reproduced copies of such letter for each of the
other Underwriters containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus.
(f) BRING-DOWN COMFORT LETTER. At Closing Time, the Representatives shall have received from KPMG, LLP a letter, dated as of Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (e) of this Section, except that the specified date referred to shall be a date not more than three business days prior to Closing Time.
(g) APPROVAL OF LISTING. At Closing Time, the Securities shall have been approved for listing on the NYSE, subject only to official notice of issuance.
(h) EXECUTION OF ADDITIONAL COMPENSATION AGREEMENT. At Closing Time, Merrill Lynch shall have received the Additional Compensation Agreement, dated the date of the Closing Time, as executed by the Adviser.
(i) NO OBJECTION. The NASD has confirmed that it has not raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements.
(j) CONDITIONS TO PURCHASE OF OPTION SECURITIES. In the event that the Underwriters exercise their option provided in Section 2(b) hereof to purchase all or any portion of the Option Securities, the representations and warranties of the Fund contained herein and the statements in any certificates furnished by the Fund hereunder shall be true and correct as of each Date of Delivery and, at the relevant Date of Delivery, the Representatives shall have received:
(i) OFFICERS' CERTIFICATES. Certificates, dated such Date of Delivery, of a duly authorized officer of the Fund and of the chief financial or chief accounting officer of the Fund and of the President or a Vice President or Managing Director of the Adviser confirming that the information contained in the certificate delivered by each of them at the Closing Time pursuant to Section 5(d) hereof remains true and correct as of such Date of Delivery.
(ii) OPINIONS OF COUNSEL FOR THE FUND AND THE ADVISER. The favorable opinions of Willkie Farr & Gallagher, counsel for the Fund, and Shearman & Sterling, counsel for the Adviser, in form and substance satisfactory to counsel for the Underwriters, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinions required by Section 5(b) hereof.
(iii) OPINION OF COUNSEL FOR THE UNDERWRITERS. The favorable opinion of Clifford Chance US LLP, counsel for the Underwriters, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(c) hereof.
(iv) BRING-DOWN COMFORT LETTER. A letter from KPMG, LLP, in form and substance satisfactory to the Representatives and dated such Date of Delivery, substantially in the same form and substance as the letter furnished to the Representatives pursuant to Section 5(f) hereof, except that the "specified date" in the letter furnished pursuant to this paragraph shall be a date not more than five days prior to such Date of Delivery.
(k) ADDITIONAL DOCUMENTS. At Closing Time and at each Date of Delivery, counsel for the Underwriters shall have been furnished with such documents as they may reasonably require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Fund and the Adviser in connection with the organization and registration of the Fund under the 1940 Act and the issuance and sale of the
Securities as herein contemplated shall be reasonably satisfactory in form and substance to the Representatives and counsel for the Underwriters.
(l) TERMINATION OF AGREEMENT. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of Option
Securities, on a Date of Delivery which is after the Closing Time, the
obligations of the several Underwriters to purchase the relevant Option
Securities, may be terminated by the Representatives by notice to the Fund at
any time at or prior to Closing Time or such Date of Delivery, as the case may
be, and such termination shall be without liability of any party to any other
party except as provided in Section 4 and except that Sections 1, 6, 7, 8 and 13
shall survive any such termination and remain in full force and effect.
SECTION 6. Indemnification.
(a) INDEMNIFICATION OF UNDERWRITERS. The Fund and the Adviser, jointly and severally, agree to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, and any director, officer, employee or affiliate thereof as follows:
(i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 6(e) below) any such settlement is effected with the prior written consent of the Fund and the Adviser; and
(iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by Merrill Lynch), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Fund or the Adviser by any Underwriter through Merrill Lynch expressly for use in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto); and provided further that the Fund or the Adviser will not be liable to any Underwriter with respect to any Prospectus to the extent that the Fund or the Adviser shall sustain the burden of proving that any such loss, liability, claim, damage or expense resulted from the fact that such Underwriter, in contravention of a requirement
of this Agreement or applicable law, sold Securities to a person to whom such Underwriter failed to send or give, at or prior to the Closing Time, a copy of the final Prospectus, as then amended or supplemented if: (i) the Fund has previously furnished copies thereof (sufficiently in advance of the Closing Time to allow for distribution by the Closing Time) to the Underwriter and the loss, liability, claim, damage or expense of such Underwriter resulted from an untrue statement or omission of a material fact contained in or omitted from the preliminary Prospectus which was corrected in the final Prospectus as, if applicable, amended or supplemented prior to the Closing Time and such final Prospectus was required by law to be delivered at or prior to the written confirmation of sale to such person and (ii) such failure to give or send such final Prospectus by the Closing Time to the party or parties asserting such loss, liability, claim, damage or expense would have constituted a defense to the claim asserted by such person.
(b) INDEMNIFICATION OF FUND, ADVISER, DIRECTORS AND OFFICERS. Each Underwriter severally agrees to indemnify and hold harmless the Fund and the Adviser, their respective directors and officers, each of the Fund's officers who signed the Registration Statement, and each person, if any, who controls the Fund or the Adviser within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Fund or the Adviser by such Underwriter through Merrill Lynch expressly for use in the Registration Statement (or any amendment thereto) or such preliminary prospectus or the Prospectus (or any amendment or supplement thereto).
(c) INDEMNIFICATION FOR SALES MATERIALS. In addition to the foregoing
indemnification, the Fund and the Adviser also, jointly and severally, agree to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act, against any and all loss, liability, claim, damage
and expense described in the indemnity contained in Section 6(a), as limited by
the proviso set forth therein, with respect to any sales material, as defined
herein.
(d) ACTIONS AGAINST PARTIES; NOTIFICATION. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a) above,
counsel to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Fund and the Adviser. An
indemnifying party may participate at its own expense in the defense of any such
action; provided, however, that counsel to the indemnifying party shall not
(except with the consent of the indemnified party) also be counsel to the
indemnified party. In no event shall the indemnifying parties be liable for fees
and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances. No
indemnifying party shall, without the prior written consent of the indemnified
parties, settle or compromise or consent to the entry of any judgment with
respect to any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever in
respect of which indemnification or contribution could be sought under this
Section 6 or Section 7 hereof (whether or not the indemnified parties are actual
or potential parties thereto), unless such settlement, compromise or consent (i)
includes an unconditional release of each indemnified party from all liability
arising out of such litigation, investigation, proceeding or claim and (ii) does
not include
a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party.
(e) SETTLEMENT WITHOUT CONSENT IF FAILURE TO REIMBURSE. If at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(ii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement; provided that an indemnifying party shall not be liable for any such
settlement effected without its consent if such indemnifying party, prior to the
date of such settlement, (1) reimburses such indemnified party in accordance
with such request for the amount of such fees and expenses of counsel as the
indemnifying party believes in good faith to be reasonable, and (2) provides
written notice to the indemnified party that the indemnifying party disputes in
good faith the reasonableness of the unpaid balance of such fees and expenses.
(f) INDEMNIFICATION OR CONTRIBUTION BY THE FUND. Any indemnification or
contribution by the Fund shall be subject to the requirements and limitations of
Section 17(i) of the 1940 Act.
SECTION 7. Contribution.
If the indemnification provided for in Section 6 hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Fund and the Adviser on the one hand and the Underwriters on the other hand from the offering of the Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Fund and the Adviser on the one hand and of the Underwriters on the other hand in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Fund and the Adviser on the one hand and the Underwriters on the other hand in connection with the offering of the Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Securities pursuant to this Agreement (before deducting expenses) received by the Fund and the total underwriting discount received by the Underwriters (whether from the Fund or otherwise), in each case as set forth on the cover of the Prospectus or, if Rule 434 is used, the corresponding location on the Term Sheet, bear to the aggregate initial public offering price of the Securities as set forth on such cover.
The relative fault of the Fund and the Adviser on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Fund or the Adviser or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.
The Fund, the Adviser and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in
this Section 7 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of any such untrue or alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such Underwriter, and each director of the Fund and each director of the Adviser, respectively, each officer of the Fund who signed the Registration Statement, and each person, if any, who controls the Fund or the Adviser, within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Fund and the Adviser, respectively. The Underwriters' respective obligations to contribute pursuant to this Section 7 are several in proportion to the number of Initial Securities set forth opposite their respective names in SCHEDULE A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive Delivery.
All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Fund or the Adviser submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or controlling person, or by or on behalf of the Fund or the Adviser, and shall survive delivery of the Securities to the Underwriters.
SECTION 9. Termination of Agreement.
(a) TERMINATION; GENERAL. The Representatives may terminate this Agreement, by notice to the Fund, at any time at or prior to Closing Time (i) if there has been, since the time of execution of this Agreement or since the respective dates as of which information is given in the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Fund or the Adviser, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets in the United States or the international financial markets, any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the Representatives, impracticable or inadvisable to market the Securities or to enforce contracts for the sale of the Securities, or (iii) if trading in the Common Shares of the Fund has been suspended or materially limited by the Commission or the NYSE, or if trading generally on the NYSE or the American Stock Exchange or in the Nasdaq National Market has been suspended or materially limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by such system or by order of the Commission, the NASD or any other governmental authority, or a material disruption has occurred in commercial banking or securities settlement or clearance services in the United States, or (iv) if a banking moratorium has been declared by either Federal or New York authorities.
(b) LIABILITIES. If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 6, 7, 8 and 13 shall survive such termination and remain in full force and effect.
SECTION 10. Default by One or More of the Underwriters.
If one or more of the Underwriters shall fail at Closing Time or a Date of Delivery to purchase the Securities which it or they are obligated to purchase under this Agreement (the "Defaulted Securities"), the Representatives shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting Underwriters, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the Representatives shall not have completed such arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the number of Securities to be purchased on such date, each of the non-defaulting Underwriters shall be obligated, severally and not jointly, to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the number of Securities to be purchased on such date, this Agreement or, with respect to any Date of Delivery which occurs after the Closing Time, the obligation of the Underwriters to purchase and of the Fund to sell the Option Securities to be purchased and sold on such Date of Delivery shall terminate without liability on the part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination of this Agreement or, in the case of a Date of Delivery which is after the Closing Time, which does not result in a termination of the obligation of the Underwriters to purchase and the Fund to sell the relevant Option Securities, as the case may be, either the Representatives or the Fund shall have the right to postpone Closing Time or the relevant Date of Delivery, as the case may be, for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectus or in any other documents or arrangements. As used herein, the term "Underwriter" includes any person substituted for an Underwriter under this Section 10.
SECTION 11. Notices.
All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Underwriters shall be directed to the Representatives, Merrill Lynch & Co., North Tower, 4 World Financial Center, New York, New York 10080, attention of Equity Capital Markets; and notices to the Fund or the Adviser shall be directed to the office of Flaherty & Crumrine Incorporated, 301 East Colorado Boulevard, Suite 720, Pasadena, California 91101, attention of Donald Crumrine.
SECTION 12. Parties.
This Agreement shall each inure to the benefit of and be binding upon the Underwriters, the Fund, the Adviser and their respective partners and successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the Underwriters, the Fund, the Adviser and their respective successors and the controlling persons and officers, directors and directors referred to in Sections 6 and 7 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole
and exclusive benefit of the Underwriters, the Fund, the Adviser and their respective partners and successors, and said controlling persons and officers, trustees and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Securities from any Underwriter shall be deemed to be a successor by reason merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SAID STATE. UNLESS OTHERWISE EXPLICITLY PROVIDED, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 14. Effect of Headings.
The Article and Section headings herein are for convenience only and shall not affect the construction hereof.
If the foregoing is in accordance with your understanding of our agreement, please sign and return to us a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement among the Underwriters, the Fund and the Adviser in accordance with its terms.
Very truly yours,
F&C/CLAYMORE PREFERRED SECURITIES
INCOME FUND INCORPORATED
Title:
FLAHERTY & CRUMRINE INCORPORATED
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
[other Underwriters]
For itself and as
Representatives of the
other Underwriters named
in SCHEDULE A hereto.
SCHEDULE A
NUMBER OF
NAME OF UNDERWRITER INITIAL SECURITIES
------------------- ------------------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Raymond James & Associates, Inc.
A.G. Edwards & Sons, Inc.
Legg Mason Wood Walker, Incorporated
RBC Dain Rauscher Inc.
Wachovia Securities, Inc.
Wells Fargo Securities, LLC
Advest, Inc.
BB&T Capital Markets, a division of Scott & Stringfellow, Inc.
Robert W. Baird & Co. Incorporated
Fahnestock & Co. Inc.
Ferris, Baker Watts, Incorporated
J.J.B. Hilliard, W.L. Lyons, Inc.
Huntleigh Securities Corporation
Janney Montgomery Scott LLC
McDonald Investments Inc., a KeyCorp Company
Morgan Keegan & Company, Inc.
Ryan Beck & Co.
Wedbush Morgan Securities Inc.
Total
|
Sch A-1
SCHEDULE B
F&C/Claymore Preferred Securities Income Fund Incorporated
[ ] Shares of Common Stock
(Par Value $.01 Per Share)
1. The initial public offering price per share for the Securities, determined as provided in said Section 2, shall be $25.00.
2. The purchase price per share for the Securities to be paid by the several Underwriters shall be $[ ], being an amount equal to the initial public offering price set forth above less $[ ] per share; provided that the purchase price per share for any Option Securities purchased upon the exercise of the over-allotment option described in Section 2(b) shall be reduced by an amount per share equal to any dividends or distributions declared by the Fund and payable on the Initial Securities but not payable on the Option Securities.
Sch B-1
Exhibit A
FORM OF OPINIONS OF FUND'S AND ADVISER'S
COUNSEL TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(A) With respect to the Fund:
(i) The Fund has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Maryland.
(ii) The Fund has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under the Purchase Agreement.
(iii) The Fund is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect.
(iv) To our knowledge, the Fund does not have any subsidiaries.
(v) The authorized shares of common stock of the Fund are as set forth in the Prospectus under the caption "Description of Capital Stock--Common Stock" (except for subsequent issuances, if any, pursuant to the Purchase Agreement); all issued and outstanding shares of common stock of the Fund have been duly authorized and validly issued and are fully paid and non-assessable; the Common Shares conform in all material respects as to legal matters to all statements relating thereto contained in the Prospectus under the caption "Description of Capital Stock--Common Stock"; and, to counsel's knowledge, none of the outstanding shares of Common Stock of the Fund were issued in violation of the preemptive or other similar rights of any securityholder of the Fund.
(vi) The Securities to be purchased by the Underwriters from the Fund have been duly authorized for issuance and sale to the Underwriters pursuant to the Purchase Agreement and, when issued and delivered by the Fund pursuant to the Purchase Agreement against payment of the consideration set forth in the Purchase Agreement, will be validly issued and fully paid and non-assessable, and no holder of the Securities is or will be subject to personal liability solely by reason of being such a holder.
(vii) The issuance of the Securities is not subject to preemptive or other similar rights of any securityholder of the Fund under the Charter or Bylaws of the Fund or the Maryland General Corporation Law or, to counsel's knowledge, otherwise.
(viii) The Purchase Agreement has been duly authorized, executed and delivered by the Fund.
(ix) The Registration Statement, including any Rule 462(b)
Registration Statement, has been declared effective under the 1933 Act
and the 1940 Act; any required filing of the Prospectus pursuant to
Rule 497(c) or Rule 497(h) has been made in the manner and within the
time period required by Rule 497; and, to our knowledge, no stop order
suspending the effectiveness of the Registration Statement or any Rule
462(b) Registration Statement has been issued under the 1933 Act, and,
to our knowledge, no order of suspension or revocation of
registration pursuant to Section 8(e) of the 1940 Act has been issued, and no proceedings for any such purpose have been instituted or are pending or threatened by the Commission.
(x) The Registration Statement, including any Rule 462(b) Registration Statement, the Rule 430A Information and the Rule 434 Information, as applicable, the Prospectus and each amendment or supplement to the Registration Statement and Prospectus as of their respective effective or issue dates (other than the financial statements, related notes thereto and supporting schedules included therein or omitted therefrom, as to which we need express no opinion), and the notification on Form N-8A complied as to form in all material respects with the requirements of the 1933 Act, the 1940 Act and the Rules and Regulations.
(xi) If Rule 434 has been relied upon, the Prospectus was not "materially different" as such term is used in Rule 434, from the prospectus included in the Registration Statement at the time it became effective.
(xii) The form of certificate used to evidence the Common Shares complies in all material respects with all applicable statutory requirements, with any applicable requirements of the Charter and by-laws of the Fund and the requirements of the New York Stock Exchange.
(xiii) To our knowledge, there is not pending or threatened any action, suit, proceeding, inquiry or investigation, to which the Fund is a party, or to which the property of the Fund is subject, before or brought by any United States, New York or Maryland court or governmental agency or body, domestic or foreign, which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the properties or assets of the Fund or the consummation of the transactions contemplated in the Purchase Agreement or the performance by the Fund of its obligations thereunder.
(xiv) The information in the Prospectus under "Description of Capital Stock" and "Taxation" and in the Registration Statement under Item 29 (Indemnification), to the extent that it constitutes summaries of legal matters, the Fund's Charter and by-laws or legal proceedings, or legal conclusions, has been reviewed by us and is correct in all material respects.
(xv) Each of the Advisory Agreement, the Administration Agreement, the Custodian Services Agreement, the Transfer Agency And Registrar Agreement and the Purchase Agreement comply in all material respects with all applicable provisions of the 1940 Act, Advisers Act, the Rules and Regulations and the Advisers Act Rules and Regulations.
(xvi) The Fund is duly registered with the Commission under the 1940 Act as a closed end diversified management investment company; and, to our knowledge, no order of suspension or revocation of such registration has been issued or proceedings therefor initiated or threatened by the Commission.
(xvii) To our knowledge, no director of the Fund is an "interested person" (as defined in the 1940 Act) of the Fund or an "affiliated person" (as defined in the 1940 Act) of an Underwriter.
(xviii) To our knowledge, there are no United States federal statutes or regulations that are required to be described in the Prospectus that are not described as required.
(xix) All descriptions in the Registration Statement of contracts and other documents to which the Fund is a party and which are included as exhibits to the Registration Statement are accurate in all material respects. To our knowledge, after due inquiry, there are no franchises, contracts, indentures, mortgages, loan agreements, notes, leases or other instruments required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other
than those described or referred to therein or filed or incorporated by reference as exhibits thereto, and the descriptions thereof or references thereto are correct in all material respects.
(xx) To our knowledge, no filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any United States, New York or Maryland court or governmental authority or agency (other than under the 1933 Act, the 1934 Act, the 1940 Act and the Rules and Regulations, which have been obtained, or as may be required under the securities or blue sky laws of the various states, as to which we need express no opinion) is necessary or required in connection with the due authorization, execution and delivery of the Purchase Agreement or for the offering, issuance or sale of the Securities or the consummation of the transactions contemplated by this Agreement.
(xxi) The execution, delivery and performance of the Purchase Agreement and the consummation of the transactions contemplated in the Purchase Agreement and in the Registration Statement (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectus under the caption "Use of Proceeds") and compliance by the Fund with its obligations under the Purchase Agreement do not and will not, whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined in Section 1(a)(xii) of the Purchase Agreement) under or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Fund pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any other agreement or instrument, known to us, to which the Fund is a party or by which it or any of them may be bound, or to which any of the property or assets of the Fund is subject, nor will such action result in any violation of the provisions of the charter or by-laws of the Fund, or any applicable law, statute, rule, regulation, judgment, order, writ or decree, known to us and that is normally applicable to transactions of the type contemplated by the Purchase Agreement., of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Fund or any of its properties, assets or operations.
(xxii) The Purchase Agreement, the Advisory Agreement, the Administration Agreement, the Custodian Services Agreement and the Transfer Agency And Registrar Agreement have each been duly authorized by all requisite action on the part of the Fund, executed and delivered by the Fund, as of the dates noted therein. Assuming due authorization, execution and delivery by the other parties thereto with respect to the Advisory Agreement, Administration Agreement, Custodian Services Agreement and the Transfer Agency And Registrar Agreement, each of the Advisory Agreement, the Administration Agreement, the Custodian Services Agreement and the Transfer Agency And Registrar Agreement constitutes a valid and binding agreement of the Fund, enforceable against it in accordance with its terms, except as affected by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing.
(B) With respect to the Adviser:
(i) The Adviser has been duly organized and is validly existing as a corporation in good standing under the laws of the State of California.
(ii) The Adviser has full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under the Purchase Agreement.
(iii) The Adviser is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify would not result in a Material Adverse Effect.
(iv) The Adviser is duly registered with the Commission as an investment adviser under the Advisers Act and is not prohibited by the Advisers Act, the Advisers Act Rules and Regulations, the 1940 Act or the Rules and Regulations from acting under the Advisory Agreement for the Fund as contemplated by the Prospectus.
(v) The Purchase Agreement, the Advisory Agreement and the Additional Compensation Agreement have been duly authorized, executed and delivered by the Adviser, and the Advisory Agreement constitutes a valid and binding obligation of the Adviser, enforceable in accordance with its terms, except as affected by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally and general equitable principles (whether considered in a proceeding in equity or at law).
(vi) To the best of our knowledge, there is not pending or threatened any action, suit, proceeding, inquiry or investigation, to which the Adviser is a party, or to which the property of the Adviser is subject, before or brought by any court or governmental agency or body, domestic or foreign, which might reasonably be expected to result in any material adverse change in the condition, financial or otherwise, in the earnings, business affairs or business prospects of the Adviser, materially and adversely affect the properties or assets of the Adviser or materially impair or adversely affect the ability of the Adviser to function as an investment adviser or perform its obligations under the Advisory Agreement or which is required to be disclosed in the Registration Statement or the Prospectus.
(vii) To the best of our knowledge, there are no franchises, contracts, indentures, mortgages, loan agreements, notes, leases or other instruments required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than those described or referred to therein or filed or incorporated by reference as exhibits thereto, and the descriptions thereof or references thereto are correct in all material respects.
(viii) To the best of our knowledge, the Adviser is not in violation of its articles of incorporation, by-laws or other organizational documents and no default by the Adviser exists in the due performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument that is described or referred to in the Registration Statement or the Prospectus or filed or incorporated by reference as an exhibit to the Registration Statement.
(ix) No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign (other than under the 1933 Act, the 1940 Act and the Rules and Regulations, which have been obtained, or as may be required under the securities or blue sky laws of the various states, as to which we need express no opinion) is necessary or required in connection with the due authorization, execution and delivery of the Purchase Agreement.
(x) The execution, delivery and performance of the Purchase Agreement and the consummation of the transactions contemplated in the Purchase Agreement and in the Registration Statement and compliance by the Adviser with their obligations under the Purchase Agreement do not and will not, whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined in Section
1(a)(xii) of the Purchase Agreement) under or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Adviser pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any other agreement or instrument, known to us, to which the Adviser is a party or by which it or any of them may be bound, or to which any of the property or assets of the Adviser is subject (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not have a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or by-laws of the Adviser, or any applicable law, statute, rule, regulation, judgment, order, writ or decree, known to us, of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Adviser or any of its properties, assets or operations.
In addition, we have participated in the preparation of the Registration Statement and the Prospectus and participated in discussions with certain officers, directors and employees of the Fund, representatives of KPMG, LLP, the independent accountants who examined the statement of assets and liabilities of the Fund included or incorporated by reference in the Registration Statement and the Prospectus, and you and your representatives and we have reviewed certain Fund records and documents. While we have not independently verified and are not passing upon, and do not assume any responsibility for, the accuracy, completeness or fairness of the information contained in the Registration Statement and the Prospectus, except to the extent necessary to enable us to give the opinions with respect to the Fund in paragraphs (A)(v), (xiv) and (xix), on the basis of such participation and review, nothing has come to our attention that would lead us to believe that the Registration Statement (except for financial statements and schedules and other financial data included therein or omitted therefrom, as to which we do not express any belief), at the time such Registration Statement became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus (except for financial statements and schedules and other financial data included therein or omitted therefrom, as to which we do not express any belief), at the time the Prospectus was issued, or at the Closing Time, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.
EXHIBIT (j)(1)
CUSTODIAN SERVICES AGREEMENT
THIS AGREEMENT is made as of January , 2003 by and between PFPC Trust Company, a limited purpose trust company incorporated under the laws of Delaware ("PFPC Trust"), and F&C/CLAYMORE PREFERRED SECURITIES INCOME FUND INCORPORATED, a Maryland corporation (the "Fund").
W I T N E S S E T H:
WHEREAS, the Fund is registered as a closed-end management investment company under the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Fund wishes to retain PFPC Trust to provide custodian services, and PFPC Trust wishes to furnish custodian services, either directly or through an affiliate or affiliates, as more fully described herein.
NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows:
1. DEFINITIONS. AS USED IN THIS AGREEMENT:
(a) "1933 ACT" means the Securities Act of 1933, as amended.
(b) "1934 ACT" means the Securities Exchange Act of 1934, as amended.
(c) "AUTHORIZED PERSON" means any officer of the Fund and any other person authorized by the Fund to give Oral or Written Instructions on behalf of the Fund. An Authorized Person's scope of authority may be limited by setting forth such limitation in a written document signed by both parties hereto.
(d) "BOOK-ENTRY SYSTEM" means Federal Reserve Treasury book-entry system for United States and federal agency securities, its successor or successors, and its nominee or nominees and any book-entry system maintained by an exchange registered with the SEC under the 1934 Act.
(e) "CEA" means the Commodities Exchange Act, as amended.
(f) "ORAL INSTRUCTIONS" mean oral instructions received by PFPC Trust from an Authorized Person or from a person reasonably believed by PFPC Trust to be an Authorized Person. PFPC Trust may, in its sole discretion in each separate instance, consider and rely upon instructions it receives from an Authorized Person via electronic mail as Oral Instructions.
(g) "PFPC TRUST" means PFPC Trust Company.
(h) "SEC" means the Securities and Exchange Commission.
(i) "SECURITIES LAWS" mean the 1933 Act, the 1934 Act, the 1940 Act and the CEA.
(j) "SHARES" mean the shares of beneficial interest of any series or class of the Fund.
(k) "PROPERTY" means:
(i) any and all securities and other investment items
which the Fund may from time to time deposit, or
cause to be deposited, with PFPC Trust or which PFPC
Trust may from time to time hold for the Fund;
(ii) all income in respect of any of such securities or
other investment items;
(iii) all proceeds of the sale of any of such securities
or investment items; and
(iv) all proceeds of the sale of securities issued by
the Fund, which are received by PFPC Trust from
time to time, from or on behalf of the Fund.
(l) "WRITTEN INSTRUCTIONS" mean (i) written instructions signed by two Authorized Persons and received by PFPC Trust or (ii) trade instructions transmitted by means of an electronic transaction reporting system which requires the use of a password or other authorized identifier in order to gain access. The instructions may be delivered electronically or by hand, mail, tested telegram, cable, telex or facsimile sending device.
2. APPOINTMENT. The Fund hereby appoints PFPC Trust to provide custodian services to the Fund and PFPC Trust accepts such appointment and agrees to furnish such services.
3. DELIVERY OF DOCUMENTS. The Fund has provided or, where applicable, will provide PFPC Trust with the following:
(a) at PFPC Trust's request, certified or authenticated copies of the resolutions of the Fund's Board of Directors, approving the appointment of PFPC Trust to provide services;
(b) a copy of the Fund's most recent effective registration statement;
(c) a copy of the Fund's advisory agreement;
(d) a copy of the Fund's administration agreement;
(e) certified or authenticated copies of any and all amendments or supplements to the foregoing.
4. COMPLIANCE WITH LAWS.
PFPC Trust undertakes to comply with all applicable requirements of the Securities Laws and any laws, rules and regulations of governmental authorities having jurisdiction with respect to the duties to be performed by PFPC Trust hereunder. Except as specifically set forth herein, PFPC Trust assumes no responsibility for such compliance by the Fund or any other entity.
5. INSTRUCTIONS.
(a) Unless otherwise provided in this Agreement, PFPC Trust shall act only upon Oral Instructions or Written Instructions.
(b) PFPC Trust shall be entitled to rely upon any Oral Instruction or Written Instruction it receives from an Authorized Person (or from a person reasonably believed by PFPC Trust to be an Authorized Person) pursuant to this Agreement. PFPC Trust may assume that any Oral Instructions or Written Instructions received hereunder are not in any way inconsistent with the provisions of organizational documents of the Fund or of any vote, resolution or proceeding of the Fund's Board of Directors or of the Fund's shareholders, unless and until PFPC Trust receives Written Instructions to the contrary.
(c) The Fund agrees to forward to PFPC Trust Written Instructions confirming Oral Instructions (except where such Oral Instructions are given by PFPC Trust or its affiliates) so that PFPC Trust receives the Written Instructions by the close of business on the same day that such Oral Instructions are received. The fact that such confirming Written Instructions are not received by PFPC Trust or differ from the Oral Instructions shall in no way invalidate the transactions or enforceability of the transactions authorized by the Oral Instructions or PFPC Trust ability to rely upon such Oral Instructions. Where Oral Instructions or Written Instructions reasonably appear to have been received from an Authorized Person, PFPC Trust shall incur no liability to the Fund in acting upon such Oral Instructions or Written Instructions provided that PFPC Trust actions comply with the other provisions of this Agreement.
6. RIGHT TO RECEIVE ADVICE.
(a) ADVICE OF THE FUND. If PFPC Trust is in doubt as to any action it should or should not take, PFPC Trust may request directions or advice, including Oral Instructions or Written Instructions, from the Fund.
(b) ADVICE OF COUNSEL. If PFPC Trust shall be in doubt as to any question of law pertaining to any action it should or should not take, PFPC Trust may request advice from counsel of its own choosing (who may be counsel for the Fund, the Fund's investment adviser or PFPC Trust , at the option of PFPC Trust).
(c) CONFLICTING ADVICE. In the event of a conflict between directions or advice or Oral Instructions or
Written Instructions PFPC Trust receives from the Fund, and the advice it receives from counsel, PFPC Trust shall be entitled to rely upon and follow the advice of counsel.
(d) PROTECTION OF PFPC TRUST . PFPC Trust shall be protected in any action it takes or does not take in reliance upon directions or advice or Oral Instructions or Written Instructions it receives from the Fund or from counsel and which PFPC Trust believes, in good faith, to be consistent with those directions or advice or Oral Instructions or Written Instructions. The preceding sentence shall not excuse PFPC Trust when an action performed by PFPC Trust following receipt of directions or advice or Oral or Written Instructions is performed by PFPC Trust in bad faith or in a manner that is negligent, reckless or willfully misfeasant. Nothing in this section shall be construed so as to impose an obligation upon PFPC Trust (i) to seek such directions or advice or Oral Instructions or Written Instructions, or (ii) to act in accordance with such directions or advice or Oral Instructions or Written Instructions unless, under the terms of other provisions of this Agreement, the same is a condition of PFPC Trust properly taking or not taking such action.
7. RECORDS; VISITS. The books and records pertaining to the Fund, which are in the possession or under the control of PFPC Trust , shall be the property of the Fund. Such books and records shall be prepared and maintained as required by the 1940 Act and other applicable securities laws, rules and regulations. The Fund and Authorized Persons shall have access to such books and records at all times during PFPC Trust normal business hours. Upon the reasonable request of the Fund, copies of any such books and records shall be provided by PFPC Trust to the Fund or to an authorized representative of the Fund, at the Fund's expense.
8. CONFIDENTIALITY. Each party shall keep confidential any information relating to the other party's business ("Confidential Information"). Confidential Information shall include (a) any data or information that is competitively sensitive material, and not generally known to the public, including, but not limited to, information about product plans, marketing strategies, finances, operations, customer relationships, customer profiles, customer lists, sales estimates, business plans, and internal performance results relating to the past, present or future business activities of the Fund or PFPC Trust , their respective subsidiaries and affiliated companies and the customers, clients and suppliers of any of them; (b) any scientific or technical information, design, process, procedure, formula, or improvement that is commercially valuable and secret
in the sense that its confidentiality affords the Fund or PFPC Trust a
competitive advantage over its competitors; (c) all confidential or
proprietary concepts, documentation, reports, data, specifications,
computer software, source code, object code, flow charts, databases,
inventions, know-how, and trade secrets, whether or not patentable or
copyrightable; and (d) anything designated as confidential.
Notwithstanding the foregoing, information shall not be subject to such
confidentiality obligations if it: (a) is already known to the
receiving party at the time it is obtained; (b) is or becomes publicly
known or available through no wrongful act of the receiving party; (c)
is rightfully received from a third party who, to the best of the
receiving party's knowledge, is not under a duty of confidentiality;
(d) is released by the protected party to a third party without
restriction; (e) is required to be disclosed by the receiving party
pursuant to a requirement of a court order, subpoena, governmental or
regulatory agency or law (provided the receiving party will provide the
other party written notice of such requirement, to the extent such
notice is permitted); (f) is relevant to the defense of any claim or
cause of action asserted against the receiving party; or (g) has been
or is independently developed or obtained by the receiving party.
9. COOPERATION WITH ACCOUNTANTS. PFPC Trust shall cooperate with the Fund's independent public accountants and shall take all reasonable action to make any requested information available to such accountants as reasonably requested by the Fund.
10. PFPC SYSTEM. PFPC Trust shall retain title to and ownership of any and all data bases, computer programs, screen formats, report formats, interactive design techniques, derivative works, inventions, discoveries, patentable or copyrightable matters, concepts, expertise, patents, copyrights, trade secrets, and other related legal rights utilized by PFPC Trust in connection with the services provided by PFPC Trust to the Fund.
11. DISASTER RECOVERY. PFPC Trust shall enter into and shall maintain in effect with appropriate parties one or more agreements making reasonable provisions for emergency use of electronic data processing equipment to the extent appropriate equipment is available. In the event of equipment failures, PFPC Trust shall, at no additional expense to the Fund, take reasonable steps to minimize service interruptions. PFPC Trust shall have no liability with respect to the loss of data or service interruptions caused by equipment failure provided such loss or interruption is not caused by PFPC Trust own willful misfeasance, bad faith, negligence or reckless disregard of its duties or obligations under this Agreement.
12. COMPENSATION. As compensation for custody services rendered by PFPC Trust during the term of this Agreement, the Fund will pay to PFPC Trust a fee or fees as may be agreed to in writing from time to time by the Fund and PFPC Trust . The Fund acknowledges that PFPC Trust may receive float benefits in connection with maintaining certain accounts required to provide services under this Agreement.
13. INDEMNIFICATION. The Fund agrees to indemnify and hold harmless PFPC Trust and its affiliates from all taxes, charges, expenses, assessments, claims and liabilities (including, without limitation, attorneys' fees and disbursements and liabilities arising under the Securities Laws and any state and foreign securities and blue sky laws) arising directly or indirectly from any action or omission to act which PFPC Trust takes in connection with the provision of services to the Fund. Neither PFPC Trust, nor any of its affiliates, shall be indemnified against any liability (or any expenses incident to such liability) caused by PFPC Trust or its affiliates' own willful misfeasance, bad faith, negligence or reckless disregard of its duties and obligations under this Agreement. Notwithstanding anything in this Agreement to the contrary, the Fund shall not be required to indemnify or hold harmless either PFPC Trust or its affiliates for any consequential, special or indirect losses or damages, whether or not the likelihood of such losses or damages was known by the Fund.
14. RESPONSIBILITY OF PFPC TRUST .
(a) PFPC Trust shall be under no duty to take any action hereunder on behalf of the Fund except as specifically set forth herein or as may be specifically agreed to by PFPC Trust and the Fund in a written amendment hereto. PFPC Trust shall be obligated to exercise care and diligence in the performance of its duties hereunder and to act in good faith in performing services provided for under this Agreement. PFPC Trust shall be liable only for any damages arising out of PFPC Trust failure to perform its duties under this Agreement to the extent such damages arise out of PFPC Trust willful misfeasance, bad faith, negligence or reckless disregard of its duties under this Agreement.
(b) Without limiting the generality of the foregoing or of any other provision of this Agreement, (i) PFPC Trust shall not be liable for losses beyond its control, including without limitation (subject to Section 11), delays or errors or loss of data occurring by reason of circumstances beyond PFPC Trust control, provided that PFPC Trust has acted in accordance with the standard set forth in
Section 14(a) above; and (ii) PFPC Trust shall not be under any duty or obligation to inquire into and shall not be liable for the validity or invalidity or authority or lack thereof of any Oral Instruction or Written Instruction, notice or other instrument which PFPC Trust reasonably believes to be genuine.
(c) Notwithstanding anything in this Agreement to the contrary, neither PFPC Trust nor its affiliates shall be liable for any consequential, special or indirect losses or damages, whether or not the likelihood of such losses or damages was known by PFPC Trust or its affiliates.
(d) No party may assert a cause of action against PFPC Trust or any of its affiliates more than 12 months after the date facts are known (or should have been known) to the Fund that should have alerted it that a basis for such cause of action might exist.
(e) Each party shall have a duty to mitigate damages for which the other party may become responsible.
15. DESCRIPTION OF SERVICES.
(a) DELIVERY OF THE PROPERTY. The Fund will deliver or arrange for delivery to PFPC Trust , all the Property owned by the Fund, including cash received as a result of the distribution of Shares, during the term of this Agreement. PFPC Trust will not be responsible for such property until actual receipt.
(b) RECEIPT AND DISBURSEMENT OF MONEY. PFPC Trust shall open and maintain a separate custodial account for the Fund (the "Account"). PFPC Trust shall make cash payments from or for the Account only for:
(i) purchases of securities in the name the Fund, PFPC Trust, PFPC Trust nominee or a sub-custodian or nominee thereof as provided in sub-section (j) and for which PFPC Trust has received a copy of the broker's or dealer's confirmation or payee's invoice, as appropriate;
(ii) purchase of Shares of the Fund delivered to PFPC Trust;
(iii) payment of, subject to Written Instructions, interest, taxes, administration, accounting, distribution, advisory, management fees or similar expenses which are to be borne by the Fund;
(iv) payment to, subject to receipt of Written Instructions, the Fund's transfer agent, as agent for the shareholders, of an amount equal to the amount of dividends and distributions stated in the Written Instructions to be distributed in cash by the transfer agent to shareholders, or, in lieu of paying the Fund's transfer agent, PFPC Trust may arrange for the direct payment of cash dividends and distributions to shareholders in accordance with
procedures mutually agreed upon from time to time by and among the Fund, PFPC Trust and the Fund's transfer agent;
(v) payments, upon receipt of Written Instructions, in connection with the conversion, exchange or surrender of securities owned or subscribed to by the Fund and held by or delivered to PFPC Trust ;
(vi) payments of the amounts of dividends received with respect to securities sold short;
(vii) payments made to a sub-custodian pursuant to provisions in sub-section (c) of this Section; and
(viii) other payments, upon Written Instructions.
PFPC Trust is hereby authorized to endorse and collect all checks, drafts or other orders for the payment of money received as custodian for the Account.
(c) RECEIPT OF SECURITIES; SUBCUSTODIANS.
PFPC Trust shall hold all securities and other investment items received by it for the Account in a separate account that physically segregates such securities and other investment items from those of any other persons, firms or corporations, except for securities held in a Book-Entry System. All such securities and other investment items shall be held or disposed of only upon Written Instructions of the Fund pursuant to the terms of this Agreement. PFPC Trust shall have no power or authority to assign, hypothecate, pledge or otherwise dispose of any such securities or investments, except upon the express terms of this Agreement or upon Written Instructions authorizing the transaction. In no case may any member of the Fund's Board of Directors, or any officer, employee or agent of the Fund withdraw any securities.
At PFPC Trust own expense and for its own convenience, PFPC Trust may enter into sub-custodian agreements with other banks or trust companies to perform duties described in this sub-section (c) with respect to domestic assets. Such bank or trust company shall have an aggregate capital, surplus and undivided profits, according to its last published report, of at least one million dollars ($1,000,000), if it is a subsidiary or affiliate of PFPC Trust , or at least twenty million dollars ($20,000,000) if such bank or trust company is not a subsidiary or affiliate of PFPC Trust . In addition, such bank or trust company must be qualified to act as custodian and agree to comply with the relevant provisions of applicable rules and regulations. Any such arrangement will not be entered into without prior written notice to the Fund and as otherwise provided in the 1940 Act.
In addition, PFPC Trust may enter into arrangements with sub-custodians with respect to services regarding foreign assets. Any such arrangement will not be entered into without prior written notice to the Fund and as otherwise provided in the 1940 Act.
PFPC Trust shall remain responsible for the performance of all of its duties as described in this Agreement and shall hold the Fund harmless from its own acts or omissions, under the standards of care provided for herein, or the acts and omissions of any sub-custodian
chosen by PFPC Trust under the terms of this sub-section (c).
(d) TRANSACTIONS REQUIRING INSTRUCTIONS. Upon receipt of Oral Instructions or Written Instructions and not otherwise, PFPC Trust , directly or through the use of the Book-Entry System, shall:
(i) deliver any securities held for the Fund against the receipt of payment for the sale of such securities;
(ii) execute and deliver to such persons as may be designated in such Oral Instructions or Written Instructions, proxies, consents, authorizations, and any other instruments whereby the authority of the Fund as owner of any securities may be exercised;
(iii) deliver any securities to the issuer thereof, or its agent, when such securities are called, redeemed, retired or otherwise become payable at the option of the holder; provided that, in any such case, the cash or other consideration is to be delivered to PFPC Trust ;
(iv) deliver any securities held for the Fund against receipt of other securities or cash issued or paid in connection with the liquidation, reorganization, refinancing, tender offer, merger, consolidation or recapitalization of any corporation, or the exercise of any conversion privilege;
(v) deliver any securities held for the Fund to any protective committee, reorganization committee or other person in connection with the reorganization, refinancing, merger, consolidation, recapitalization or sale of assets of any corporation, and receive and hold under the terms of this Agreement such certificates of deposit, interim receipts or other instruments or documents as may be issued to it to evidence such delivery;
(vi) make such transfer or exchanges of the assets of the Fund and take such other steps as shall be stated in said Oral Instructions or Written Instructions to be for the purpose of effectuating a duly authorized plan of liquidation, reorganization, merger, consolidation or recapitalization of the Fund;
(vii) release securities belonging to the Fund to any bank or trust company for the purpose of a pledge or hypothecation to secure any loan incurred by the Fund; provided, however, that securities shall be released only upon payment to PFPC Trust of the monies borrowed, except that in cases where additional collateral is required to secure a borrowing already made subject to proper prior authorization, further securities may be released for that purpose; and repay such loan upon redelivery to it of the securities pledged or hypothecated therefor and upon surrender of the note or notes evidencing the loan;
(viii) release and deliver securities owned by the Fund in connection with any repurchase agreement entered into on behalf of the Fund, but only on receipt of payment therefor; and pay out moneys of the Fund in connection with such repurchase agreements, but only upon the delivery of the securities;
(ix) release and deliver or exchange securities owned by the Fund in connection with any conversion of such securities, pursuant to their terms, into other securities;
(x) release and deliver securities to a broker in connection with the broker's custody of margin collateral relating to futures and options transactions;
(xi) release and deliver securities owned by the Fund for the purpose of redeeming in kind shares of the Fund upon delivery thereof to PFPC Trust ; and
(xii) release and deliver or exchange securities owned by the Fund for other purposes.
PFPC Trust must also receive a certified resolution describing the nature of the corporate purpose and the name and address of the person(s) to whom delivery shall be made when such action is pursuant to sub-paragraph d(xii).
(e) USE OF BOOK-ENTRY SYSTEM. PFPC Trust is authorized and instructed, on a continuous basis, to deposit in the Book-Entry System all securities belonging to the Fund eligible for deposit therein and to utilize the Book-Entry System to the extent possible in connection with settlements of purchases and sales of securities by the Fund, and deliveries and returns of securities loaned, subject to repurchase agreements or used as collateral in connection with borrowings. PFPC Trust shall continue to perform such duties until it receives Written Instructions or Oral Instructions authorizing contrary actions.
PFPC Trust shall administer the Book-Entry System as follows:
(i) With respect to securities of the Fund which are maintained in the Book-Entry System, the records of PFPC Trust shall identify by Book-Entry or otherwise those securities belonging to the Fund.
(ii) Assets of the Fund deposited in the Book-Entry System will at all times be segregated from any assets and cash controlled by PFPC Trust in other than a fiduciary or custodian capacity but may be commingled with other assets held in such capacities.
PFPC Trust will provide the Fund with such reports on its own system of internal control as the Fund may reasonably request from time to time.
(f) REGISTRATION OF SECURITIES. All Securities held for the Fund which are issued or issuable only in bearer form, except such securities held in the Book-Entry System, shall be held by PFPC Trust in bearer form; all other securities held for the Fund may be registered in the name of the Fund, PFPC Trust , the Book-Entry System, a sub-custodian, or any duly appointed nominee of the Fund, PFPC Trust , Book-Entry System or sub-custodian. The Fund reserves the right to instruct PFPC Trust as to the method of registration and safekeeping of the securities of the Fund. The Fund agrees to furnish to PFPC Trust appropriate instruments to enable PFPC Trust to hold or deliver in proper form for transfer, or to register in the name of its nominee or in the name of the Book-Entry System or in the name of another appropriate entity, any securities which it may hold for the Account and which may from time to time be registered in the name of the Fund.
(g) VOTING AND OTHER ACTION. Neither PFPC Trust nor its nominee shall vote any of the securities held pursuant to this Agreement by or for the account of the Fund, except in accordance with Written Instructions. PFPC Trust , directly or through the use of the Book-Entry System, shall execute in blank and promptly deliver all notices, proxies and proxy soliciting materials received by PFPC Trust as custodian of the Property to the registered holder of such securities. If the registered holder is not the Fund, then Written Instructions or Oral Instructions must designate the person who owns such securities.
(h) TRANSACTIONS NOT REQUIRING INSTRUCTIONS. In the absence of contrary Written Instructions, PFPC Trust is authorized to take the following actions:
(i) COLLECTION OF INCOME AND OTHER PAYMENTS.
(A) collect and receive for the account of the Fund, all income, dividends, distributions, coupons, option premiums, other payments and similar items, included or to be included in the Property, and, in addition, promptly advise the Fund of such receipt and credit such income, as collected, to the Fund's custodian account;
(B) endorse and deposit for collection, in the name of the Fund, checks, drafts, or other orders for the payment of money;
(C) receive and hold for the account of the Fund all securities received as a distribution on the Fund's securities as a result of a stock dividend, share split-up or reorganization, recapitalization, readjustment or other rearrangement or distribution of rights or similar securities issued with respect to any securities belonging to the Fund and held by PFPC Trust hereunder;
(D) present for payment and collect the amount payable upon all securities which may mature or be, on a mandatory basis, called, redeemed, or retired, or otherwise become payable on the date such securities become payable; and
(E) take any action which may be necessary and proper in connection with the collection and receipt of such income and other payments and the endorsement for collection of checks, drafts, and other negotiable instruments.
(ii) MISCELLANEOUS TRANSACTIONS.
(A) PFPC Trust is authorized to deliver or cause to be delivered Property against payment or other consideration or written receipt therefor in the following cases:
(1) for examination by a broker or dealer selling for the account of the Fund in accordance with street delivery custom;
(2) for the exchange of interim receipts or temporary securities for definitive securities; and
(3) for transfer of securities into the name of the Fund or PFPC Trust or a sub-custodian or a nominee of one of the foregoing, or for exchange of
securities for a different number of bonds, certificates, or other evidence, representing the same aggregate face amount or number of units bearing the same interest rate, maturity date and call provisions, if any; provided that, in any such case, the new securities are to be delivered to PFPC Trust .
(B) unless and until PFPC Trust receives Oral Instructions or Written Instructions to the contrary, PFPC Trust shall:
(1) pay all income items held by it which call for payment upon presentation and hold the cash received by it upon such payment for the account of the Fund;
(2) collect interest and cash dividends received, with notice to the Fund, to the account of the Fund;
(3) hold for the account of the Fund all stock dividends, rights and similar securities issued with respect to any securities held by PFPC Trust ; and
(4) execute as agent on behalf of the Fund all necessary ownership certificates required by the Internal Revenue Code or the Income Tax Regulations of the United States Treasury Department or under the laws of any state now or hereafter in effect, inserting the Fund's name on such certificate as the owner of the securities covered thereby, to the extent it may lawfully do so.
(i) SEGREGATED ACCOUNTS.
(i) PFPC Trust shall upon receipt of Written Instructions or Oral Instructions establish and maintain segregated accounts on its records for and on behalf of the Fund. Such accounts may be used to transfer cash and securities, including securities in the Book-Entry System:
(A) for the purposes of compliance by the Fund with the procedures required by a securities, option or futures exchange, providing such procedures comply with the 1940 Act and any releases of the SEC relating to the maintenance of segregated accounts by registered investment companies; and
(B) upon receipt of Written Instructions, for other purposes.
(ii) PFPC Trust shall arrange for the establishment of IRA custodian accounts for such shareholders holding Shares through IRA accounts, in accordance with the Fund's prospectus, the Internal Revenue Code of 1986, as amended (including regulations promulgated thereunder), and with such other procedures as are mutually agreed upon from time to time by and among the Fund, PFPC Trust and the Fund's transfer agent.
(j) PURCHASES OF SECURITIES. PFPC Trust shall settle purchased securities upon receipt of Oral Instructions or Written Instructions that specify:
(i) the name of the issuer and the title of the securities, including CUSIP number if applicable;
(ii) the number of shares or the principal amount purchased and accrued interest, if any;
(iii) the date of purchase and settlement;
(iv) the purchase price per unit;
(v) the total amount payable upon such purchase; and
(vi) the name of the person from whom or the broker through whom the purchase was made. PFPC Trust shall upon receipt of securities purchased by or for the Fund pay out of the moneys held for the account of the Fund the total amount payable to the person from whom or the broker through whom the purchase was made, provided that the same conforms to the total amount payable as set forth in such Oral Instructions or Written Instructions.
(k) SALES OF SECURITIES. PFPC Trust shall settle sold securities upon receipt of Oral Instructions or Written Instructions that specify:
(i) the name of the issuer and the title of the security, including CUSIP number if applicable;
(ii) the number of shares or principal amount sold, and accrued interest, if any;
(iii) the date of trade and settlement;
(iv) the sale price per unit;
(v) the total amount payable to the Fund upon such sale;
(vi) the name of the broker through whom or the person to whom the sale was made; and
(vii) the location to which the security must be delivered and delivery deadline, if any.
PFPC Trust shall deliver the securities upon receipt of the total amount payable to the Fund upon such sale, provided that the total amount payable is the same as was set forth in the Oral Instructions or Written Instructions. Notwithstanding the other provisions thereof, PFPC Trust may accept payment in such form as shall be satisfactory to it, and may deliver securities and arrange for payment in accordance with the customs prevailing among dealers in securities.
(l) REPORTS; PROXY MATERIALS.
(i) PFPC Trust shall furnish to the Fund the following reports:
(A) such periodic and special reports as the Fund may reasonably request;
(B) a monthly statement summarizing all transactions and entries for the account of the Fund, listing each portfolio security belonging to the Fund with the adjusted average cost of each issue and the market value at the end of such month and stating the cash account of the Fund including disbursements;
(C) the reports required to be furnished to the Fund pursuant to Rule 17f-4 of the 1940 Act; and
(D) such other information as may be agreed upon from time to time between the Fund and PFPC Trust .
(ii) PFPC Trust shall transmit promptly to the Fund any proxy statement, proxy material, notice of a call or conversion or similar communication received by it as custodian of the Property. PFPC Trust shall be under no other obligation to inform the Fund as to such actions or events.
(m) CREDITING OF ACCOUNTS. If PFPC Trust in its sole discretion credits an Account with respect to (a) income, dividends, distributions, coupons, option premiums, other payments or similar items on a contractual payment date or otherwise in advance of PFPC Trust actual receipt of the amount due, (b) the proceeds of any sale or other disposition of assets on the contractual settlement date or otherwise in advance of PFPC Trust actual receipt of the amount due or (c) provisional crediting of any amounts due, and (i) PFPC Trust is subsequently unable to collect full and final payment for the amounts so credited within a reasonable time period using reasonable efforts or (ii) pursuant to standard industry practice, law or regulation PFPC Trust is required to repay to a third party such amounts so credited, or if any Property has been incorrectly credited, PFPC Trust shall have the absolute right in its sole discretion without demand to reverse any such credit or payment, to debit or deduct the amount of such credit or payment from the Account, and to otherwise pursue recovery of any such amounts so credited from the Fund. Nothing herein or otherwise shall require PFPC Trust to make any advances or to credit any amounts until PFPC Trust actual receipt thereof. The Fund hereby grants a first priority contractual possessory security interest in and a right of setoff against the assets maintained in an Account hereunder in the amount necessary to secure the return and payment to PFPC Trust of any advance or credit made by PFPC Trust (including charges related thereto) to such Account.
(n) COLLECTIONS. All collections of monies or other property in respect, or which are to become part, of the Property (but not the safekeeping thereof upon receipt by PFPC Trust ) shall be at the sole risk of the Fund. If payment is not received by PFPC Trust within a reasonable time after proper demands have been made, PFPC Trust shall notify the Fund in writing, including copies of all demand letters, any written responses and memoranda of all oral responses and shall await instructions from the Fund. PFPC Trust shall not be obliged to take legal action for collection unless and until reasonably indemnified to its satisfaction. PFPC Trust shall also notify the Fund
as soon as reasonably practicable whenever income due on securities is not collected in due course and shall provide the Fund with periodic status reports of such income collected after a reasonable time.
16. DURATION AND TERMINATION. This Agreement shall continue until terminated by the Fund or PFPC Trust on sixty (60) days' prior written notice to the other party. In the event this Agreement is terminated (pending appointment by the Fund of a successor to PFPC Trust or vote of the shareholders of the Fund to dissolve or to function without a custodian of its cash, securities or other property), PFPC Trust shall not deliver cash, securities or other property to the Fund, although it may deliver them to a bank or trust company of PFPC Trust choice, having an aggregate capital, surplus and undivided profits, as shown by its last published report, of not less than twenty million dollars ($20,000,000), as a custodian for the Fund to be held under terms similar to those of this Agreement. PFPC Trust shall not be required to make any delivery or payment of assets upon termination until full payment shall have been made to PFPC Trust of all of its fees, compensation, costs and expenses (such expenses include, without limitation, expenses associated with movement (or duplication) of records and materials and conversion thereof to a successor service provider, or to a bank or trust company pending appointment of such successor, and all trailing expenses incurred by PFPC Trust ). PFPC Trust shall have a security interest in and shall have a right of setoff against the Property as security for the payment of such fees, compensation, costs and expenses.
17. NOTICES. Notices shall be addressed (a) if to PFPC Trust at 8800
Tinicum Boulevard, Suite 200, 3rd Floor, Philadelphia, PA 19153 (b) if
to the Fund, at 301 E. Colorado Blvd., Pasadena, CA 91101, Attention:
Donald F. Crumrine; or (c) if to neither of the foregoing, at such
other address as shall have been given by like notice to the sender of
any such notice or other communication by the other party. If notice is
sent by confirming telegram, cable, telex or facsimile sending device,
it shall be deemed to have been given immediately. If notice is sent by
first-class mail, it shall be deemed to have been given five days after
it has been mailed. If notice is sent by messenger, it shall be deemed
to have been given on the day it is delivered.
18. AMENDMENTS. This Agreement, or any term hereof, may be changed or waived only by a written amendment, signed by the party against whom enforcement of such change or waiver is sought.
19. ASSIGNMENT. PFPC Trust may assign this Agreement to any affiliate of PFPC Trust or of The PNC Financial Services Group, Inc., provided that PFPC Trust gives the Fund 60 days' prior written notice of such assignment and the assignee agrees to be bound by the same terms of this Agreement that previously applied to PFPC Trust .
20. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
21. FURTHER ACTIONS. Each party agrees to perform such further acts and execute such further documents as are necessary to effectuate the purposes hereof.
22. MISCELLANEOUS.
(a) ENTIRE AGREEMENT. This Agreement embodies the entire agreement and understanding between the parties and supersedes all prior agreements and understandings relating to the subject matter hereof, provided that the parties may embody in one or more separate documents their agreement, if any, with respect to delegated duties.
(b) NO REPRESENTATIONS OR WARRANTIES. Except as expressly provided in this Agreement, PFPC Trust hereby disclaims all representations and warranties, express or implied, made to the Fund or any other person, including, without limitation, any warranties regarding quality, suitability, merchantability, fitness for a particular purpose or otherwise (irrespective of any course of dealing, custom or usage of trade), of any services or any goods provided incidental to services provided under this Agreement. PFPC Trust disclaims any warranty of title or non-infringement except as otherwise set forth in this Agreement.
(c) CAPTIONS. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect.
(d) GOVERNING LAW. This Agreement shall be deemed to be a contract made in Delaware and governed by Delaware law, without regard to principles of conflicts of law.
(e) PARTIAL INVALIDITY. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby.
(f) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and permitted assigns.
(g) FACSIMILE SIGNATURES. The facsimile signature of any party to this Agreement shall constitute the valid and binding execution hereof by such party.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written.
PFPC TRUST COMPANY
By: ______________________________
Title: ______________________________
F&C/CLAYMORE PREFERRED SECURITIES
INCOME FUND INCORPORATED
By: ______________________________
Title: ______________________________
Exhibit (j)(2)
TRANSFER AGENCY AND REGISTRAR AGREEMENT
The Transfer Agency and Registrar Agreement of F&C/CLAYMORE
PREFERRED SECURITIES INCOME FUND INCORPORATED, (the "Fund"), a corporation
organized under the laws of Maryland and having its principal place of business
at 301 E. Colorado Blvd., Pasadena, California 91101, made and agreed to by and
between the Fund and PFPC INC. (the "Transfer Agent"), a Massachusetts
corporation with principal offices at 400 Bellevue Parkway, Wilmington, DE 19809
on January __, 2003, to read in its entirety as follows:
WI T N E S S E T H
That for and in consideration of the mutual covenants and promises hereinafter set forth, the Fund and the Transfer Agent agree as follows:
1. Definitions. Whenever used in this Agreement, the following words and phrases, unless the context otherwise requires, shall have the following meanings:
(a) "Articles of Incorporation" shall mean the Articles of Incorporation, Declaration of Trust, Partnership Agreement, or similar organizational document as the case may be, of the Fund as the same may be amended from time to time.
(b) "Authorized Person" shall be deemed to include any person,
whether or not such person is an officer or employee of the Fund, duly
authorized to give Oral Instructions or Written Instructions on behalf of the
Fund as indicated in a certificate furnished to the Transfer Agent pursuant to
Section 4(c) hereof as may be received by the Transfer Agent from time to time.
(c) "Board of Directors" shall mean the Board of Directors, Board of Trustees or, if the Fund is a limited partnership, the General Partner(s) of the Fund, as the case may be.
(d) "Commission" shall mean the Securities and Exchange Commission.
(e) "Custodian" refers to any custodian or subcustodian of securities and other property which the Fund may from time to time deposit, or cause to be deposited or held under the name or account of such a custodian pursuant to a Custodian Agreement.
(f) "Fund" shall mean the entity executing this Agreement, and if it is a series fund, as such term is used in the 1940 Act, such term shall mean each series of the Fund hereafter created, except that appropriate documentation with respect to each series must be presented to the Transfer Agent before this Agreement shall become effective with respect to each such series.
(g) "1940 Act" shall mean the Investment Company Act of 1940.
(h) "Oral Instructions" shall mean instructions, other than Written Instructions, actually received by the Transfer Agent from a person reasonably believed by the Transfer Agent to be an Authorized Person.
(i) "Prospectus" shall mean the most recently dated Fund Prospectus, including any supplements thereto if any, which has become effective under the Securities Act of 1933 and the 1940 Act.
(j) "Shares" refers collectively to such shares of capital stock, beneficial interest or limited partnership interests, as the case may be, of the Fund as may be issued from time to time and, if the Fund is a closed-end or a series fund, as such terms are used in the 1940 Act any other classes or series of stock, shares of beneficial interest or limited partnership interests that may be issued from time to time.
(k) "Shareholder" shall mean a holder of shares of capital stock, beneficial interest or any other class or series, and also refers to partners of limited partnerships.
(l) "Written Instructions" shall mean a written communication signed by a person reasonably believed by the Transfer Agent to be an Authorized Person and actually received by the Transfer Agent. Written Instructions shall include manually executed originals and authorized electronic transmissions, including telefacsimile of a manually executed original or other process.
2. Appointment of the Transfer Agent. The Fund hereby appoints and constitutes the Transfer Agent as transfer agent, registrar and dividend disbursing agent for Shares of the Fund, as shareholder servicing agent for the Fund, and as plan agent under the Fund's Dividend Reinvestment and Cash Purchase Plan. The Transfer Agent accepts such appointments and agrees to perform the duties hereinafter set forth.
3. Compensation. As compensation for custody services rendered by PFPC during the term of this Agreement, the Fund will pay to PFPC or cause PFPC to be paid a fee or fees as may be agreed to in writing from time to time by the Fund and PFPC. The Fund acknowledges that PFPC may receive float benefits in connection with maintaining certain accounts required to provide services under this Agreement.
4. Documents. In connection with the appointment of the Transfer Agent, the Fund shall deliver or caused to be delivered to the Transfer Agent the following documents on or before the date this Agreement goes into effect, but in any case within a reasonable period of time for the Transfer Agent to prepare to perform its duties hereunder:
(a) If applicable, specimens of the certificates for Shares of the Fund;
(b) All account application forms and other documents relating to Shareholder accounts or to any plan, program or service offered by the Fund;
(c) A signature card bearing the signatures of any officer of the Fund or other Authorized Person who will sign Written Instructions or is authorized to give Oral Instructions;
(d) A certified copy of the Articles of Incorporation, as amended;
(e) A certified copy of the By-laws of the Fund, as amended;
(f) A copy of the resolution of the Board of Directors authorizing the execution and delivery of this Agreement;
(g) A certified list of Shareholders of the Fund with the name, address and taxpayer identification number of each Shareholder, and the number of Shares of the Fund held by each, certificate numbers and denominations (if any certificates have been issued), lists of any accounts against which stop transfer orders have been placed, together with the reasons therefore, and the number of Shares redeemed by the Fund; and
(h) An opinion of counsel for the Fund with respect to the validity of the Shares and the status of such Shares under the Securities Act of 1933, as amended.
5. Further Documentation. The Fund will also furnish the Transfer Agent with copies of the following documents promptly after the same shall become available:
(a) each resolution of the Board of Directors authorizing the issuance of Shares;
(b) any registration statements filed on behalf of the Fund and all pre-effective and post-effective amendments thereto filed with the Commission;
(c) a certified copy of each amendment to the Articles of Incorporation or the By-laws of the Fund;
(d) certified copies of each resolution of the Board of Directors or other authorization designating Authorized Persons; and
(e) such other certificates, documents or opinions as the Transfer Agent may reasonably request in connection with the performance of its duties hereunder.
6. Representations of the Fund. The Fund represents to the Transfer Agent that all outstanding Shares are validly issued, fully paid and non-assessable. When Shares are hereafter issued in accordance with the terms of the Fund's Articles of Incorporation and its Prospectus, such Shares shall be validly issued, fully paid and non-assessable.
7. Distributions Payable in Shares. In the event that the Board of
Directors of the Fund shall declare a distribution payable in Shares, the Fund
shall deliver or cause to be delivered to the Transfer Agent written notice of
such declaration signed on behalf of the Fund by an officer thereof, upon which
the Transfer Agent shall be entitled to rely for all purposes, certifying (i)
the identity of the Shares involved, (ii) the number of Shares involved, and
(iii) that all appropriate action has been taken.
8. Duties of the Transfer Agent. The Transfer Agent shall be responsible for administering and/or performing those functions typically performed by a transfer agent; for acting as service agent in connection with dividend and distribution functions; and for performing shareholder account and administrative agent functions in connection with the issuance, transfer and redemption or repurchase (including coordination with the Custodian) of Shares in accordance with the terms of the Prospectus and applicable law. The operating
standards and procedures to be followed shall be determined from time to time by agreement between the Fund and the Transfer Agent and shall initially be as described in Schedule A attached hereto. In addition, the Fund shall deliver to the Transfer Agent all notices issued by the Fund with respect to the Shares in accordance with and pursuant to the Articles of Incorporation or By-laws of the Fund or as required by law and shall perform such other specific duties as are set forth in the Articles of Incorporation including the giving of notice of any special or annual meetings of shareholders and any other notices required thereby.
9. Record Keeping and Other Information. The Transfer Agent shall create and maintain all records required of it pursuant to its duties hereunder and as set forth in Schedule A in accordance with all applicable laws, rules and regulations, including records required by Section 31(a) of the 1940 Act. All records shall be available during regular business hours for inspection and use by the Fund. Where applicable, such records shall be maintained by the Transfer Agent for the periods and in the places required by Rule 31a-2 under the 1940 Act.
Upon reasonable notice by the Fund, the Transfer Agent shall make available during regular business hours such of its facilities and premises employed in connection with the performance of its duties under this Agreement for reasonable visitation by the Fund, or any person retained by the Fund as may be necessary for the Fund to evaluate the quality of the services performed by the Transfer Agent pursuant hereto.
10. Other Duties. In addition to the duties set forth in Schedule A, the Transfer Agent shall perform such other duties and functions, and shall be paid such amounts therefor, as may from time to time be agreed upon in writing between the Fund and the Transfer Agent. The compensation for such other duties and functions shall be as may be agreed to in writing from time to time by the Fund and PFPC.
11. Reliance by Transfer Agent; Instructions
(a) The Transfer Agent will have no liability when acting upon Written or Oral Instructions believed to have been executed or orally communicated by an Authorized Person and will not be held to have any notice of any change of authority of any person until receipt of a Written Instruction thereof from the Fund pursuant to Section 4(c). The Transfer Agent will also have no liability when processing Share certificates which it reasonably believes to bear the proper manual or facsimile signatures of the officers of the Fund and the proper countersignature of the Transfer Agent.
(b) At any time, the Transfer Agent may apply to any Authorized Person of the Fund for Written Instructions and may seek advice from legal counsel for the Fund, or its own legal counsel, with respect to any matter arising in connection with this Agreement, and it shall not be liable for any action taken or not taken or suffered by it in good faith in accordance with such Written Instructions or in accordance with the opinion of counsel for the Fund or for the Transfer Agent. Written Instructions requested by the Transfer Agent will be provided by the Fund within a reasonable period of time. In addition, the Transfer Agent, its officers, agents or employees, shall accept Oral Instructions or Written Instructions given to them by any person representing or acting on behalf of the Fund only if said representative is an Authorized Person. The Fund agrees that all Oral Instructions shall be followed within one business day by
confirming Written Instructions, and that the Fund's failure to so confirm shall not impair in any respect the Transfer Agent's right to rely on Oral Instructions. The Transfer Agent shall have no duty or obligation to inquire into, nor shall the Transfer Agent be responsible for, the legality of any act done by it upon the request or direction of a person reasonably believed by the Transfer Agent to be an Authorized Person.
(c) Notwithstanding any of the foregoing provisions of this Agreement, the Transfer Agent shall be under no duty or obligation to inquire into, and shall not be liable for: (i) the legality of the issuance or sale of any Shares or the sufficiency of the amount to be received therefor; (ii) the legality of the redemption of any Shares, or the propriety of the amount to be paid therefor; (iii) the legality of the declaration of any dividend by the Board of Directors, or the legality of the issuance of any Shares in payment of any dividend; or (iv) the legality of any recapitalization or readjustment of the Shares.
12. Acts of God, etc. Neither party shall be liable or responsible for delays or errors by acts of God or by reason of circumstances beyond its control, including acts of civil or military authority, acts of terrorism, national emergencies, labor difficulties, mechanical breakdown, insurrection, war, riots, or failure or unavailability of transportation, communication or power supply, fire, flood or other catastrophe.
13. Duty of Care and Indemnification. The Fund will indemnify the Transfer Agent against and defend and hold it harmless from any and all losses, claims, damages, liabilities or expenses of any sort or kind (including reasonable counsel fees and expenses) resulting from any claim, demand, action or suit or other proceeding (a "Claim") unless such Claim has been judicially determined to have resulted from a negligent failure to act or omission to act or bad faith of the Transfer Agent in the performance of its duties hereunder. In addition, the Fund will indemnify the Transfer Agent against and defend and hold it harmless from any Claim, damages, liabilities or expenses (including reasonable counsel fees) that is a result of: (i) any action taken in accordance with Written or Oral Instructions, or any other instructions, or share certificates reasonably believed by the Transfer Agent to be genuine and to be signed, countersigned or executed, or orally communicated by an Authorized Person; (ii) any action taken in accordance with written or oral advice reasonably believed by the Transfer Agent to have been given by counsel for the Fund or its own counsel; or (iii) any action taken as a result of any error or omission in any record (including but not limited to magnetic tapes, computer printouts, hard copies and microfilm copies) delivered, or caused to be delivered by the Fund to the Transfer Agent in connection with this Agreement.
In any case in which the Fund may be asked to indemnify or hold the Transfer Agent harmless, the Fund shall be advised of all pertinent facts concerning the situation in question. The Transfer Agent will notify the Fund promptly after identifying any situation which it believes presents or appears likely to present a claim for indemnification against the Fund although the failure to do so shall not prevent recovery by the Transfer Agent. The Fund shall have the option to defend the Transfer Agent against any Claim which may be the subject of this indemnification, and, in the event that the Fund so elects, such defense shall be conducted by counsel chosen by the Fund and satisfactory to the Transfer Agent, and thereupon the Fund shall take over complete defense of the Claim and the Transfer Agent shall sustain no further legal or other expenses in respect of such Claim. The Transfer Agent will not confess any Claim or make
any compromise in any case in which the Fund will be asked to provide indemnification, except with the Fund's prior written consent. The obligations of the parties hereto under this Section shall survive the termination of this Agreement.
14. Consequential Damages. In no event and under no circumstances shall either party under this Agreement be liable to the other party for consequential or indirect loss of profits, reputation or business or any other special damages under any provision of this Agreement or for any act or failure to act hereunder.
15. Term and Termination.
(a) This Agreement shall be effective on the date first written above and shall continue in effect from year to year so long as such continuance is specifically approved at least annually by the Board of Directors of the Fund, provided that it may be terminated by either party upon 90 days written notice.
(b) In the event a termination notice is given by the Fund, it shall be accompanied by a resolution of the Board of Directors, certified by the Secretary of the Fund, designating a successor transfer agent or transfer agents. Upon such termination and at the expense of the Fund, the Transfer Agent will deliver to such successor a certified list of shareholders of the Fund (with names and addresses), and all other relevant books, records, correspondence and other Fund records or data in the possession of the Transfer Agent, and the Transfer Agent will cooperate with the Fund and any successor transfer agent or agents in the substitution process.
16. Confidentiality. Both parties hereto agree that any non public information obtained hereunder concerning the other party is confidential and may not be disclosed to any other person without the consent of the other party, except as may be required by applicable law or at the request of the Commission or other governmental agency. Notwithstanding the foregoing, each party that any Nonpublic Personal Information, as defined under Section 248.3 of Regulation S-P ("Regulation S-P"), promulgated under the Gramm-Leach-Bliley Act (the "Act"), disclosed by a party hereunder is for the specific purpose of permitting the other party to perform the services set forth in this Agreement. Each party agrees that, with respect to such information, it will comply with Regulation S-P and the Act and that it will not disclose any nonpublic Personal Information received in connection with this Agreement, to any other party, except to the extent as necessary to carry out the services set forth in this Agreement or as otherwise permitted by Regulation S-P or the Act. The parties further agree that a breach of this provision would irreparably damage the other party and accordingly agree that each of them is entitled, without bond or other security, to an injunction or injunctions to prevent breaches of this provision.
17. Amendment. This Agreement may only be amended or modified by a written instrument executed by both parties.
18. Subcontracting. The Fund agrees that the Transfer Agent may, in its discretion, subcontract for certain of the services described under this Agreement or the Schedules hereto;
provided that the appointment of any such Transfer Agent shall not relieve the Transfer Agent of its responsibilities hereunder.
19. Miscellaneous.
(a) Notices. Any notice or other instrument authorized or required by this Agreement to be given in writing to the Fund or the Transfer Agent, shall be sufficiently given if addressed to that party and received by it at its office set forth below or at such other place as it may from time to time designate in writing.
To the Fund:
F&C/Claymore Preferred Securities Income Fund Incorporated 301 E. Colorado Blvd., Suite 720 Pasadena, California 91101 Attention: Donald F. Crumrine
To the Transfer Agent:
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
Attention: President
(with copy to General Counsel - same address)
(b) Successors. This Agreement shall extend to and shall be binding upon the parties hereto, and their respective successors and assigns, provided, however, that this Agreement shall not be assigned to any person other than a person controlling, controlled by or under common control with the assignor without the written consent of the other party, which consent shall not be unreasonably withheld.
(c) Governing Law. This Agreement shall be deemed to be a contract made in Delaware and governed by Delaware law, without regard to principles of conflicts of law.
(d) Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original; but such counterparts shall, together, constitute only one instrument.
(e) Captions. The captions of this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect.
(f) Use of Transfer Agent's Name. The Fund shall not use the name of the Transfer Agent in any Prospectus, Statement of Additional Information, shareholders' report, sales literature or other material relating to the Fund in a manner not approved prior thereto in writing; provided, that the Transfer Agent need only receive notice of all reasonable uses of its
name which merely refer in accurate terms to its appointment hereunder or which are required by any government agency or applicable law or rule. Notwithstanding the foregoing, any reference to the Transfer Agent shall include a statement to the effect that it is a wholly owned subsidiary of American Express Information Services Corporation.
(g) Use of Fund's Name. The Transfer Agent shall not use the name of the Fund or material relating to the Fund on any documents or forms for other than internal use in a manner not approved prior thereto in writing; provided, that the Fund need only receive notice of all reasonable uses of its name which merely refer in accurate terms to the appointment of the Transfer Agent or which are required by any government agency or applicable law or rule.
(h) Independent Contractors. The parties agree that they are independent contractors and not partners or co-venturers.
(i) Entire Agreement; Severability. This Agreement and the Schedules attached hereto constitute the entire agreement of the parties hereto relating to the matters covered hereby and supersede any previous agreements. If any provision is held to be illegal, unenforceable or invalid for any reason, the remaining provisions shall not be affected or impaired thereby.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers, as of the day and year first above written.
F&C/CLAYMORE PREFERRED SECURITIES
INCOME FUND INCORPORATED
By: _________________
Title:
PFPC, INC.
By: _________________
Title:
Exhibit (j)(2)
Schedule A
DUTIES OF THE TRANSFER AGENT
1. Shareholder Information. The Transfer Agent or its agent shall maintain a record of the number of Shares held by each holder of record which shall include name, address, taxpayer identification and which shall indicate whether such Shares are held in certificates or uncertificated form.
2. Shareholder Services. The Transfer Agent or its agent will investigate all inquiries from shareholders of the Fund relating to Shareholder accounts and will respond to all communications from Shareholders and others relating to its duties hereunder and such other correspondence as may from time to time be mutually agreed upon between the Transfer Agent and the Fund.
3. Share Certificates.
(a) At the expense of the Fund, it shall supply the Transfer Agent or its agent with an adequate supply of blank share certificates to meet the Transfer Agent or its agent's requirements therefor. Such Share certificates shall be properly signed by facsimile. The Fund agrees that, notwithstanding the death, resignation, or removal of any officer of the Fund whose signature appears on such certificates, the Transfer Agent or its agent may continue to countersign certificates which bear such signatures until otherwise directed by Written Instructions.
(b) The Transfer Agent or its agent shall issue replacement Share certificates in lieu of certificates which have been lost, stolen or destroyed, upon receipt by the Transfer Agent or its agent of properly executed affidavits and lost certificate bonds, in form satisfactory to the Transfer Agent or its agent, with the Fund and the Transfer Agent or its agent as obligees under the bond.
(c) The Transfer Agent or its agent shall also maintain a record of each certificate issued, the number of Shares represented thereby and the holder of record. With respect to Shares held in open accounts or uncertificated form, i.e., no certificate being issued with respect thereto, the Transfer Agent or its agent shall maintain comparable records of the record holders thereof, including their names, addresses and taxpayer identification. The Transfer Agent or its agent shall further maintain a stop transfer record on lost and/or replaced certificates.
4. Mailing Communications to Shareholders; Proxy Materials. The Transfer Agent or its agent will address and mail to Shareholders of the Fund, all reports to Shareholders, dividend and distribution notices and proxy material for the Fund's meetings of Shareholders. In connection with meetings of Shareholders, the Transfer Agent or its Agent will prepare Shareholder lists, mail and certify as to the mailing of proxy materials, process and tabulate returned proxy cards, report on proxies voted prior to meetings, act as inspector of election at meetings and certify Shares voted at meetings.
5. Sales of Shares.
(a) Suspension of Sale of Shares. The Transfer Agent or its agent shall not be required to issue any Shares of the Fund where it has received a Written Instruction from the Fund or official notice from any appropriate authority that the sale of the Shares of the Fund has been suspended or discontinued. The existence of such Written Instructions or such official notice shall be conclusive evidence of the right of the Transfer Agent or its agent to rely on such Written Instructions or official notice.
(b) Returned Checks. In the event that any check or other order for the payment of money is returned unpaid for any reason, the Transfer Agent or its agent will: (i) give prompt notice of such return to the Fund or its designee; (ii) place a stop transfer order against all Shares issued as a result of such check or order; and (iii) take such actions as the Transfer Agent may from time to time deem appropriate.
6. Transfer.
(a) Requirements for Transfer of Shares. The Transfer Agent or its agent shall process all requests to transfer Shares in accordance with oral or written instructions or otherwise pursuant to the transfer procedures set forth in the Fund's Prospectus. The Transfer Agent or its agent will transfer Shares upon receipt of Oral or Written Instructions or otherwise pursuant to the Prospectus and Share certificates, if any, properly endorsed for transfer, accompanied by such documents as the Transfer Agent or its agent reasonably may deem necessary.
The Transfer Agent or its agent reserves the right to refuse to transfer Shares until it is satisfied that the endorsement on the instructions is valid and genuine. The Transfer Agent or its agent also reserves the right to refuse to transfer Shares until it is satisfied that the requested transfer is legally authorized, and it shall incur no liability for the refusal, in good faith, to make transfers which the Transfer Agent or its agent, in its good judgment, deems improper or unauthorized, or until it is reasonably satisfied that there is no basis to any claims adverse to such transfer.
7. Dividends.
(a) Notice to Agent and Custodian. Upon the declaration of each dividend and each capital gains distribution by the Board of Directors of the Fund with respect to Shares of the Fund, the Fund shall furnish or cause to be furnished to the Transfer Agent or its agent a copy of a resolution of the Fund's Board of Directors certified by the Secretary of the Fund setting forth the date of the declaration of such dividend or distribution, the ex-dividend date, the date of payment thereof, the record date as of which shareholders entitled to payment shall be determined, the amount payable per Share to the shareholders of record as of that date, the total amount payable to the Transfer Agent or its agent on the payment date and whether such dividend or distribution is to be paid in Shares of such class at net asset value.
On or before the payment date specified in such resolution of the Board of Directors, the Custodian of the Fund will pay to the Transfer Agent sufficient cash to make payment to the shareholders of record as of such payment date that are not participating in the Fund's Dividend Reinvestment and Cash Purchase Plan.
(b) Insufficient Funds for Payments. If the Transfer Agent or its agent does not receive sufficient cash from the Custodian to make total dividend and/or distribution payments to all shareholders of the Fund as of the record date, the Transfer Agent or its agent will, upon notifying the Fund, withhold payment to all Shareholders of record as of the record date until sufficient cash is provided to the Transfer Agent or its agent.
Exhibit 1 to Schedule A
Summary of Services
The services to be performed by the Transfer Agent or its agent shall be as follows:
A. DAILY RECORDS
Maintain daily the following information with respect to each Shareholder account as received:
Name and Address (Zip Code)
Class of Shares
Taxpayer Identification Number
Balance of Shares held by Agent
Beneficial owner code: i.e., male, female, joint tenant, etc.
Dividend code (reinvestment)
Number of Shares held in certificate form
B. OTHER DAILY ACTIVITY
Answer written inquiries relating to Shareholder accounts (matters relating to portfolio management, distribution of Shares and other management policy questions will be referred to the Fund).
Process additional payments into established Shareholder accounts in accordance with Written Instruction from the Agent.
Upon receipt of proper instructions and all required documentation, process requests for repurchase of Shares.
Identify redemption requests made with respect to accounts in which Shares have been purchased within an agreed-upon period of time for determining whether good funds have been collected with respect to such purchase and process as agreed by the Agent in accordance with written instruments set forth by the Fund.
Examine and process all transfers of Shares, ensuring that all transfer requirements and legal documents have been supplied.
Issue and mail replacement checks.
Open new accounts and maintain records of exchanges between accounts.
C. DIVIDEND ACTIVITY
Calculate and process Share dividends and distributions as instructed by the Fund.
Compute, prepare and mail all necessary reports to Shareholders or various authorities as requested by the Fund. Report to the Fund reinvestment plan share purchases and determination of the reinvestment price.
D. MEETINGS OF SHAREHOLDERS
Cause to be mailed proxy and related material for all meetings of Shareholders. Tabulate returned proxies (proxies must be adaptable to mechanical equipment of the Agent or its agents) and supply daily reports when sufficient proxies have been received.
Prepare and submit to the Fund an Affidavit of Mailing.
At the time of the meeting, furnish a certified list of Shareholders, hard copy, microfilm or microfiche and, if requested by the Fund, Inspection of Election.
E. PERIODIC ACTIVITIES
Cause to be mailed reports, Prospectuses, and any other enclosures requested by the Fund (material must be adaptable to mechanical equipment of Agent or its agents).
Receive all notices issued by the Fund with respect to the Preferred Shares in accordance with and pursuant to the Articles of Incorporation and the Indenture and perform such other specific duties as are set forth in the Articles of Incorporation including a giving of notice of a special meeting and notice of redemption in the circumstances and otherwise in accordance with all relevant provisions of the Articles of Incorporation.
Exhibit (j)(3)
ADMINISTRATION AGREEMENT
The Administration Agreement of F&C/CLAYMORE PREFERRED SECURITIES INCOME FUND INCORPORATED, a Maryland corporation (the "Fund") made and agreed to by and between the Fund and PFPC Inc., a Massachusetts corporation ("PFPC"), on January __, 2003, to read in its entirety as follows:
WHEREAS, the Fund is registered as a diversified, closed-end management investment company under the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Fund desires to retain PFPC to render certain administrative services to the Fund and PFPC is willing to render such services;
WITNESSETH:
NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Fund hereby appoints PFPC to act as Administrator of the Fund on the terms set forth in this Agreement. PFPC accepts such appointment and agrees to render the services herein set forth for the compensation herein provided.
2. Delivery of Documents. The Fund has furnished PFPC with copies properly certified or authenticated of each of the following:
(a) Resolutions of the Fund's Board of Directors authorizing the appointment of PFPC to provide certain administrative services to the Fund and approving this Agreement;
(b) The Fund's Articles of Incorporation filed with the Maryland Department of Assessments and Taxation on May 23, 2002 and all amendments thereto (the "Articles");
(c) The Fund's By-Laws and all amendments thereto (the "By-Laws");
(d) The Investment Advisory Agreement between Flaherty & Crumrine Incorporated (the "Adviser") and the Fund dated as of January __, 2003 as amended and restated from time to time (the "Advisory Agreement");
(e) The Custody Agreement between PFPC Trust Company and the Fund dated as of January __, 2003 as amended and restated from time to time (the "Custody Agreement");
(f) The Transfer Agency and Registrar Agreement between PFPC and the Fund dated as of January __, 2003 as amended and restated from time to time;
(g) The Fund's most recent Registration Statement on Form N-2 (the "Registration Statement") under the Securities Act of 1933 and under the 1940 Act (File Nos. 333-91282 and 811-21129), as filed with the Securities and Exchange Commission ("SEC") on June 26, 2002 relating to shares of the Fund's Common Stock, $.01 par value per share, and all amendments thereto; and
(h) The Fund's most recent prospectus (the "Prospectus").
The Fund will furnish PFPC from time to time with copies, properly certified or authenticated, of all amendments of or supplements to the foregoing. Furthermore, the Fund will provide PFPC with any other documents that PFPC may reasonably request and will notify PFPC as soon as possible of any matter materially affecting the performance of PFPC of its services under this agreement.
3. Duties as Administrator. Subject to the supervision and direction of the Board of directors of the Fund, PFPC, as Administrator, will assist in supervising various aspects of the Fund's administrative operations and undertakes to perform the following specific services:
(a) Maintaining office facilities (which may be in the offices of PFPC or a corporate affiliate);
(b) Furnishing statistical and research data, data processing services, clerical services, and internal legal, executive the administrative services and stationery and office supplies in connection with the foregoing;
(c) Furnishing corporate secretarial services including preparation and distribution of materials for Board of Directors meetings;
(d) Accounting and bookkeeping services (including the maintenance of such accounts, books and records of the Fund as may be required by section 31(a) of the 1940 Act and the rules thereunder);
(e) Internal auditing;
(f) Valuing the Fund's assets and calculating the net asset value of the shares of the Fund at the close of trading on the New York Stock Exchange (the "NYSE") on the last day on which the NYSE is open for trading of each week and month and at such other times as the Board of Directors may reasonably request;
(g) Accumulating information for and, subject to approval by the Fund's Treasurer, preparing reports to the Fund's shareholders of record and the SEC including, but not necessarily limited to, Annual Reports and Semi-Annual Reports on Form N-SAR;
(h) Preparing and filing various reports or other documents required by federal, state and other applicable laws and regulations and by stock exchanges on which the shares of the Fund are listed, other than those filed or required to be filed by the Adviser or Transfer Agent;
(i) Preparing and filing the Fund's tax returns;
(j) Assisting the Adviser, at the Adviser's request, in monitoring and developing compliance procedures for the Fund which will include, among other matter, procedures to assist the Adviser in monitoring compliance with the Fund's investment objective, policies, restrictions, tax matters and applicable laws and regulations;
(k) Preparing and furnishing the Fund (at the Fund's request) with the performance information (including yield and total return information) calculated in accordance with applicable U.S. securities laws and reporting to external databases such information as may reasonably be requested; and
(l) Upon request from the Fund (which request may be a standing request), PFPC will arrange for the sweep of the Fund's daily net excess cash balance in accordance with written instructions (which may be standing instructions) acceptable to PFPC which are received from or on behalf of the Fund.
In performing all services under this Agreement, PFPC shall act in conformity with the Fund's Articles and By-Laws; the 1940 Act and the Investment Advisers Act of 1940, as the same may be amended from time to time; and the investment objective, investment policies and other practices and policies set forth in the Fund's Registration Statement as such Registration Statement and practices and policies may be amended from time to time.
4. Allocation of Expenses. PFPC shall bear all expenses in connection with the performance of its services under this Agreement.
(a) PFPC will from time to time employ or associate with itself such person or persons as PFPC may believe to be particularly suited to assist it in performing services under this Agreement. Such person or persons may be officers and employees who are employed by both PFPC and the Fund. The compensation of such person or persons shall be paid by PFPC and no obligation shall be incurred on behalf of the Fund in such respect.
(b) PFPC shall not be required to pay any of the following expenses incurred by the Fund: membership dues in the Investment Company Institute or any similar organization; investment advisory expenses; costs of printing and mailing stock certificates, prospectuses, reports and notices; interest on borrowed money; brokerage commissions; taxes and fees payable to Federal, state and other governmental agencies; fees of Directors of the Fund who are not affiliated with PFPC; outside auditing expenses; outside legal expenses; or other expenses not specified in this Section 4 which may be properly payable by the Fund.
(c) For the services to be rendered, the facilities to be furnished and the payments to be made by PFPC, as provided for in this Agreement, the Fund will pay PFPC the fees in accordance with the Fee Agreement among the Fund, PFPC Trust Company and PFPC dated January __, 2003 and attached hereto as Schedule A.
(d) The Fund will compensate PFPC for its services rendered pursuant to this Agreement in accordance with the fees set forth above. Such fees do not include out-of-pocket disbursements of PFPC. PFPC shall be entitled to bill the Fund for such out-of-pocket expenses only upon the prior written approval of the Fund.
(e) PFPC will bill the Fund as soon as practicable after the end of each calendar month, and said billings will be detailed in accordance with the out-of-pocket schedule. The Fund will promptly pay to PFPC the amount of such billing.
5. Limitation of Liability.
(a) PFPC shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Fund in connection with the performance of its obligations and duties under this Agreement, except a loss resulting from PFPC willful misfeasance, bad faith or gross negligence in the performance of such obligations and duties, or by reason of its reckless disregard thereof. The Fund will indemnify PFPC against and defend and hold it harmless from any and all losses, claims, damages, liabilities of expenses (including reasonable counsel fees and expenses) resulting from any claim, demand, action or suit not resulting from the willful misfeasance, bad faith or gross negligence of PFPC in the performance of such obligations and duties or by reason of its reckless disregard thereof.
(b) Notwithstanding anything in this Agreement to the contrary, neither PFPC nor the Fund, including their respective affiliates shall be liable for any consequential, special or indirect losses or damages, whether or not the likelihood of such losses or damages was known by either party or its affiliates.
6. Termination of Agreement.
(a) This Agreement shall become effective on the date hereof and shall remain in force from year to year so long as such continuance is specifically approved at least annually by the Board of Directors of the Fund or unless terminated pursuant to the provisions of subsection (b) of this Section 6.
(b) This Agreement may be terminated at any time without payment of any penalty, upon 60 days' written notice, by vote of the holders of a majority of the outstanding voting securities of the Fund, or by vote of a majority of the Board of Directors of the Fund, or by the PFPC.
7. Amendment to this Agreement. No provisions of this Agreement may be changed, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, discharge or termination is sought.
8. Miscellaneous.
(a) Any notice or other instrument authorized or required by this Agreement to be given in writing to the Fund or PFPC shall be sufficiently given if addressed to that
party and received by it at its office set forth below or at such other place as it may from time to time designate in writing.
To the Fund:
F&C/Claymore Preferred Securities Income Fund Incorporated
c/o Flaherty & Crumrine Incorporated
301 E. Colorado Blvd-Suite 720
Pasadena, CA 91101
Attention: Donald F. Crumrine
To PFPC:
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
(b) This Agreement shall extend to and shall be binding upon the parties hereto and their respective successors and assigns; provided, however, that this Agreement shall not be assignable without the written consent of the other party.
(c) This Agreement shall be deemed to be a contract made in Delaware and governed by Delaware law, without regard to principles of conflicts of law.
(d) This Agreement may be executed in any number of counterparts each of which shall be deemed to be an original and which collectively shall be deemed to constitute shall be deemed to constitute only one instrument.
(e) The captions of this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect.
(f) Neither party shall be liable or responsible for delays or errors by acts of God or by reason of circumstances beyond its control, including acts of civil or military authority, acts of terrorism, national emergencies, labor difficulties, mechanical breakdown, insurrection, war, riots, or failure or unavailability of transportation, communication or power supply, fire, flood or other catastrophe.
9. Confidentiality. All books, records, information and data pertaining to the business of the Fund that are exchanged or received pursuant to the performance of PFPC duties under this Agreement shall remain confidential and shall not be voluntarily disclosed to any other person, except as specifically authorized by the Fund or as may be required by law.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be duly executed and delivered by their duly authorized officers as of the date, first written above.
PFPC INC.
F&C/CLAYMORE PREFERRED SECURITIES
INCOME FUND INCORPORATED
Exhibit (j)(4)
SERVICING AGREEMENT
Agreement made as of January , 2003, between F & C/ Claymore Preferred Securities Income Fund Incorporated, a Maryland Corporation (the "Fund") and Claymore Securities, Inc., a Kansas corporation ("Claymore").
WHEREAS, the Fund intends to operate as a closed-end management investment company, and is so registered under the Investment Company act of 1940, as amended (the "1940 Act");
WHEREAS, the Fund has authorized the issuance of its common stock, par value $.01 per share (the "Common Shares") and a class of preferred shares with preference rights, the relative rights, terms and preferences of which are to be determined in the future by the Board of Directors of the Fund (the "Preferred Shares") (holders of the Common Shares and Preferred Shares are referred to collectively herein as the "Shareholders");
WHEREAS, the Fund wishes to retain Claymore to provide certain services to the Fund, under the terms and conditions stated below, and Claymore is willing to provide such services for the compensation set forth below:
NOW, THEREFORE, In consideration of the premises and mutual covenants contained herein, the parties agree as follows:
1. APPOINTMENT. The Fund hereby appoints Claymore as Servicing Agent of the Fund, and Claymore accepts such appointment and agrees that it will furnish the services set forth in paragraph 2 below.
2. SERVICES AND DUTIES OF CLAYMORE. Subject to the supervision of the Fund's Board of Directors (the "Board"), Claymore will:
(a) Reply to requests for information concerning the Fund from Shareholders or prospective shareholders, brokers or the public;
(b) Aid in the secondary market support of the Fund through regular written and oral communications with the Fund's New York Stock Exchange specialist, the closed end fund analyst community and various information providers specializing in the dissemination of closed end fund information;
(c) Assist in the preparation of reports to be sent to the Fund Shareholders, and assist in the printing and dissemination of such reports to Shareholders;
(d) Assist in the preparation of all reports required to be filed with the Securities and Exchange Commission (the "SEC") on Form N-SAR, or such other form as the SEC may substitute for Form N-SAR, and file such completed form with the SEC;
(e) Assist in the dissemination to Shareholders of the Fund's proxy materials and assist in the filing of such materials with the Fund's regulators, and oversee the tabulation of proxies by the Fund's transfer agent;
(f) Assist in analyzing the amounts available for distribution as dividends and distributions to be paid by the Fund to its Shareholders and in the preparation of materials relevant to the Fund's Dividend Reinvestment Plan;
(l) Establish and maintain a dedicated toll-free number for sales support and marketing requests on an ongoing basis;
(m) Assist in the production of marketing and road-show materials for the offerings of the Fund's Common Shares and Preferred Shares;
(n) Develop and maintain a website for the Fund which will provide quarterly updates and monthly distribution notifications, as well as hyperlinks to the websites of Claymore and Flaherty & Crumrine Incorporated (the "Adviser") for added information;
(o) Make the Adviser aware of trading strategies that might be used for the Fund and communicate to the investment community any changes made to the Fund's trading strategies;
(p) Assist in the provision of materials regarding the Fund to the investment community and current and prospective investors;
(q) Assist in the review of materials made available to shareholders and prospective investors to assure compliance with applicable laws, rules and regulations;
(r) Assist in the filing of advertisements and sales materials, including information on the Fund's website, as necessary, with the Securities and Exchange Commission ("SEC"), the New York Stock Exchange, the National Association of Securities Dealers and any regulatory bodies having jurisdiction over the Fund and its operations;
(s) Assist in the dissemination of the Fund's net asset value, market price and discount;
(t) Host analyst meetings as appropriate;
(u) Provide persons to serve as officers and directors of the Fund, as the Fund may request;
(v) Maintain ongoing contact with brokers in branch offices whose clients hold Fund shares or whose clients may have an interest in acquiring Fund shares, including providing, among other things, progress reports on the Fund, dividend announcements and performance updates;
(w) Assist in the drafting of press releases to the public;
(x) Make such reports and recommendations to the Board as the Board reasonably requests or deems appropriate; and
(y) Provide such other services as the parties may mutually agree from time to time.
3. COMPLIANCE WITH THE FUND'S GOVERNING DOCUMENTS AND APPLICABLE LAW. In all matters pertaining to the performance of this Agreement, the Servicing Agent will act in conformity with the Fund's Articles of Incorporation, By-Laws and registration statements of the Fund and with the directions of the Board and Fund executive officers and will conform to and comply with the requirements of the 1940 Act and the rules and regulations thereunder and all other applicable federal or state laws and regulations.
4. SERVICE NOT EXCLUSIVE. The Servicing Agent's services hereunder are not deemed to be exclusive, and the Servicing Agent is free to render such services to other funds or clients as long as the Servicing Agent's services under this Agreement are not impaired thereby.
5. REPRESENTATIONS AND WARRANTIES OF CLAYMORE
(a) Claymore represents and warrants that it has obtained all necessary registrations, licenses and approvals in order to perform the services provided in this Agreement. Claymore covenants to maintain all necessary registrations, licenses and approvals in effect during the term of this Agreement.
(b) Claymore represents that it has adopted a written Code of Ethics in compliance with Rule 17j-1 under the 1940 Act and will provide the Fund with any amendments to such Code and any certifications required by Rule 17j-1.
(c) Claymore agrees that it shall promptly notify the Fund
(i) in the event that the SEC or any other regulatory
authority has censured its activities, functions or
operations; suspended or revoked any registration,
license or approval; or has commenced proceedings or an
investigation that may result in any of these actions,
and (ii) in the event that there is a change in
Claymore, financial or otherwise, that adversely
affects its ability to perform services under this
Agreement.
(d) The Fund shall be given access to the records of Claymore at reasonable times solely for the purpose of monitoring compliance with the terms of this Agreement. Claymore agrees to cooperate with the Fund and their representatives in connection with any such monitoring efforts.
6. COMPENSATION. As compensation for its services, the Fund pays the Servicing Agent a fee computed and paid monthly at the annual rate of 0.025% on the first $200 million of the Fund's average weekly total managed assets, 0.10% on the next $300 million of the Fund's average weekly total managed assets and 0.15% on the Fund's average weekly total managed assets above $500 million. Total managed assets means the net asset value Of the outstanding Common Shares plus the liquidation preferences of any outstanding Preferred Shares.
7. LIMITATION OF LIABILITY OF THE SERVICING AGENT. The Servicing Agent will not be liable for any error of judgment or mistake of law or for any loss suffered by the Fund or its Shareholders in connection with the performance of its duties under this Agreement, except a loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard by it of its duties under this Agreement ("disabling conduct").
Claymore agrees to indemnify, defend and hold the Fund, the Adviser, their several officers and directors, and any person who controls the Fund or the Adviser within the meaning of Section 15 of the Securities Act of 1933 (collectively, "Fund Indemnified Persons"), free and harmless from and against any and all claims, demands, liabilities and expenses (including the costs of investigating or defending such claims,
demands or liabilities and any reasonable counsel fees
incurred in connection therewith) which Fund Indemnified
Persons may incur, but only to the extent that such
liability or expense incurred by the Fund Indemnified
Persons or resulting from such claims or demands shall arise
out of or be based upon (a) any disabling conduct with
respect to the provision of services under this Agreement,
(b) any violation of law relating to the provision of
services under this Agreement or (c) the breach by Claymore
of this Agreement.
8. LIMITATION OF LIABILITY OF THE DIRECTORS AND SHAREHOLDERS OF THE FUND. Pursuant to the provisions of the Fund's Articles of Incorporation, this Agreement is entered into by the Board not individually, but as Directors and the obligations of the Fund hereunder is not binding upon any such Directors or Shareholders of the Fund, but binds only the Fund itself.
9. DURATION AND TERMINATION. This Agreement shall continue for
an initial period of two years and thereafter shall continue
automatically for successive annual periods, provided such
continuance is specifically approved at least annually by
(a) a vote of a majority of the Fund's Board and (b) a vote
of a majority of the Fund's Board members who are not
interested persons (as defined in the 1940 Act) of any party
to this Agreement, by vote cast in person at a meeting
called for the purpose of voting on such approval. This
Agreement is terminable (a) by the Fund, without penalty, on
thirty (30) days' written notice, by a vote of a majority of
the Fund's Board, or (b) on sixty (60) days' written notice
by Claymore. This Agreement shall automatically terminate in
the event of its assignment as the term is defined in the
1940 Act.
10. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver or discharge or termination is sought.
11. LICENSE.
Claymore hereby grants to the Fund the nonexclusive right and license to use the mark "Claymore" (the "Licensed Mark") in the Fund's name and in connection with the formation, issuance, marketing, and/or promotion of, or disclosure related to, the Fund. Claymore agrees that it shall receive no compensation for any such use by the Fund. Claymore hereby warrants and represents that it has filed applications and/or owns rights in the Licensed Mark sufficient to grant this license. No right, title or interest in the Licensed Mark, except the right to use the Licensed Mark as provided in this Agreement, is or will be transferred to the Fund by this Agreement. Should this Agreement be terminated, the Fund agrees that it will take necessary steps to change its name to a name not including the word "Claymore."
12. CONFIDENTIALITY.
Claymore agrees on behalf of itself and its employees to treat confidentially and as proprietary information of the Fund all records and other information relative to the Fund, the Adviser and all prior, current or potential shareholders of the Fund and not to use such records and information for any purpose other than the performance of its duties hereunder. Claymore also agrees that, without the prior written consent of the Fund, it will not disclose personal information of any Shareholders of the Fund ("Personal Shareholder Information"), including to its affiliates, unless it is required by law to disclose the information to the recipient of such information. Claymore further agrees, represents and warrants that (a) only those employees of Claymore who need to do so in carrying out their job responsibilities may access Personal Shareholder Information; (b) it maintains physical, electronic and procedural safeguards that comply with federal
standards to protect confidentiality; and (c) it may use Personal Shareholder Information only for the purposes set forth in this Agreement.
13. GOVERNING LAW. This Agreement shall be construed in accordance with the laws of the State of Maryland and the 1940 Act, without giving effect to the principles of conflicts of law thereof. To the extent that the applicable laws of the State of Maryland conflict with the applicable provisions of the 1940 Act, the latter shall control.
14. BOOKS AND RECORDS
(a) In compliance with the requirements of the 1940 Act, Claymore hereby agrees that all records which it maintains for the Fund are the property of the Fund and further agrees to surrender promptly to the Fund any of such records upon request. Claymore further agrees to preserve for the periods prescribed under the 1940 Act the records required to be maintained under the 1940 Act.
(b) Claymore hereby agrees to furnish to regulatory authorities having the requisite authority any information or reports in connection with services that Claymore renders pursuant to this Agreement which may be requested in order to ascertain whether the operations of the Fund are being conducted in a manner consistent with applicable laws and regulations.
15. MISCELLANEOUS. The captions of this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby.
16. NOTICES.
All notices required or permitted to be sent under this Agreement shall be sent, if to the Fund, to:
F&C/Claymore Preferred Securities Income Fund Incorporated c/o Flaherty & Crumrine Incorporated 301 East Colorado Blvd.
Suite 720
Pasadena, CA 91101
Attention: Donald Crumrine, Chief Executive Officer
Telephone No.: (626) 795-7300
Fax No.: (626) 795-0269
Or if to Claymore, to:
Claymore Securities, Inc.
210 N. Hale Street
Wheaton, IL 60187
Attention: Nicholas Dalmaso, COO and General Counsel
Telephone No.: (630) 315-2036
Fax No.: (630) 784-6303
IN WITNESS WHEREOF, the parties hereto have caused the instrument to be executed by their officers designated below as of the day and year first above written.
Attest: F & C / Claymore Preferred Securities Income Fund Incorporated
Attest: Claymore Securities, Inc.
Exhibit (k)
ADDITIONAL COMPENSATION AGREEMENT
ADDITIONAL COMPENSATION AGREEMENT (the "Agreement"), dated as of [ ], 2003, between Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Flaherty & Crumrine Incorporated ("Flaherty & Crumrine").
WHEREAS, F&C/Claymore Preferred Securities Income Fund Incorporated (including any successor by merger or otherwise, the "Fund") is a newly organized, diversified, closed-end management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"), and its common shares are registered under the Securities Act of 1933, as amended; and
WHEREAS, Flaherty & Crumrine is the investment advisor of the Fund;
WHEREAS, Merrill Lynch is acting as lead underwriter in an offering of the Fund's common shares;
WHEREAS, Flaherty & Crumrine desires to provide additional compensation to Merrill Lynch for acting as lead underwriter in an offering of the Fund's common shares; and
WHEREAS, Flaherty & Crumrine desires to retain Merrill Lynch to provide after-market support services designed to maintain the visibility of the Fund on an ongoing basis, and Merrill Lynch is willing to render such services;
NOW, THEREFORE, in consideration of the mutual terms and conditions set forth below, the parties hereto agree as follows:
1. (a) Flaherty & Crumrine hereby employs Merrill Lynch, for the period and on the terms and conditions set forth herein, to provide the following services at the reasonable request of Flaherty & Crumrine Incorporated:
(1) to provide after-market support services designed to
maintain the visibility of the Fund on an ongoing basis;
(2) to provide relevant information, studies or reports
regarding general trends in the closed-end investment
company and asset management industries, if reasonably
obtainable, and consult with representatives of Flaherty &
Crumrine in connection therewith; and
(3) to provide information to and consult with Flaherty &
Crumrine with respect to applicable strategies designed to
address market value discounts, if any.
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(b) At the request of Flaherty & Crumrine, Merrill Lynch shall limit
or cease any action or service provided hereunder to the extent and
for the time period requested by Flaherty & Crumrine; provided,
however, that pending termination of this Agreement as provided for
in Section 5 hereof, any such limitation or cessation shall not
relieve Flaherty & Crumrine of its payment obligations pursuant to
Section 2 hereof.
(c) Merrill Lynch will promptly notify Flaherty & Crumrine if it learns of any material inaccuracy or misstatement in, or material omission from, any written information, as of the date such information was published, provided by Merrill Lynch to Flaherty & Crumrine in connection with the performance of services by Merrill Lynch under this Agreement.
2. Flaherty & Crumrine shall pay Merrill Lynch a fee computed weekly and payable quarterly in arrears commencing [April 1], 2003 at an annualized rate of 0.10% of the Fund's managed assets for a term as described in Section 5 hereof; provided that the total amount of the fee hereunder shall not exceed 4.5% of the total price (including all Initial Securities and Option Securities as such terms are described in the Purchase Agreement, dated [ ], 2003, by and among the Fund, Flaherty & Crumrine and each of the Underwriters named therein, the "Purchase Agreement") to the public of the Fund's common shares offered by the prospectus dated [ ], 2003; and provided further, that in determining when this maximum fee amount has been paid, the value of each of the quarterly payments made hereunder shall be discounted at the annual rate of 10% to the closing date of offering. All quarterly fees payable hereunder shall be paid to Merrill Lynch within 15 days following the end of each calendar quarter.
3. Flaherty & Crumrine acknowledges that the services of Merrill Lynch provided for hereunder do not include any advice as to the value of securities or regarding the advisability of purchasing or selling any securities for the Fund's portfolio. No provision of this Agreement shall be considered as creating, nor shall any provision create, any obligation on the part of Merrill Lynch, and Merrill Lynch is not hereby agreeing, to: (i) furnish any advice or make any recommendations regarding the purchase or sale of portfolio securities or (ii) render any opinions, valuations or recommendations of any kind or to perform any such similar services in connection with providing the services described in Section 1 hereof.
4. Nothing herein shall be construed as prohibiting Merrill Lynch or its affiliates from providing similar or other services to any other clients (including other registered investment companies or other investment managers), so long as Merrill Lynch's services to Flaherty & Crumrine are not impaired thereby.
5. The term of this Agreement shall commence upon the date referred to above and shall be in effect so long as Flaherty & Crumrine acts as the investment manager to the Fund pursuant to the Investment Management Agreement (as such term is defined in the Purchase Agreement) or other subsequent advisory agreement.
6. Flaherty & Crumrine will furnish Merrill Lynch with such information as Merrill Lynch believes appropriate to its assignment hereunder (all such information so furnished being the "Information"). Flaherty & Crumrine recognizes and confirms that Merrill Lynch (a) will use and rely primarily on the Information and on information available from generally recognized public sources in performing the services contemplated by this Agreement without having independently verified the same and (b) does not assume responsibility for the accuracy or completeness of the Information and such other information. To the best of Flaherty & Crumrine's knowledge, the Information to be furnished by Flaherty & Crumrine when delivered, will be true and correct in all material respects and will not contain any material misstatement of fact or omit to state any material fact necessary to make the statements contained therein not misleading. Flaherty & Crumrine will promptly notify Merrill Lynch if it learns of any material inaccuracy or misstatement in, or material omission from, any Information delivered to Merrill Lynch.
7. It is understood that Merrill Lynch is being engaged hereunder solely to provide the services described above to Flaherty & Crumrine and that Merrill Lynch is not acting as an agent or fiduciary of, and shall have no duties or liability to the current or future shareholders of the Fund or any other third party in connection with its engagement hereunder, all of which are hereby expressly waived.
8. Flaherty & Crumrine agrees that Merrill Lynch shall have no liability to Flaherty & Crumrine or the Fund for any act or omission to act by Merrill Lynch in the course of its performance under this Agreement, in the absence of gross negligence or willful misconduct on the part of Merrill Lynch. Flaherty & Crumrine agrees to the indemnification and other agreement set forth in the Indemnification Agreement attached hereto, the provisions of which are incorporated herein by reference and shall survive the termination, expiration or supersession of this Agreement.
9. This Agreement and any claim, counterclaim or dispute of any kind or nature whatsoever arising out of or in any way relating to this Agreement ("Claim") shall be governed by and construed in accordance with the laws of the State of New York.
10. No Claim may be commenced, prosecuted or continued in any court other than the courts of the State of New York located in the City and County of New York or in the United States District Court for the Southern District of New York, which courts shall have exclusive jurisdiction over the adjudication of such matters, and Flaherty & Crumrine and Merrill Lynch consent to the jurisdiction of such courts and personal service with respect thereto. Each of Merrill Lynch and Flaherty & Crumrine waives all right to trial by jury in any proceeding (whether based upon contract, tort or otherwise) in any way arising out of or relating to this Agreement. Flaherty & Crumrine agrees that a final judgment in any proceeding or counterclaim brought in any such court shall be conclusive and binding upon Flaherty & Crumrine and may be enforced in any other courts to the jurisdiction of which Flaherty & Crumrine is or may be subject, by suit upon such judgment.
11. This Agreement may not be assigned by either party without the prior written consent of the other party.
12. This Agreement (including the attached Indemnification Agreement) embodies the entire agreement and understanding between the parties hereto and supersedes all prior agreements and understandings relating to the subject matter hereof. If any provision of this Agreement is determined to be invalid or unenforceable in any respect, such determination will not affect such provision in any other respect or any other provision of this Agreement, which will remain in full force and effect. This Agreement may not be amended or otherwise modified or waived except by an instrument in writing signed by both Merrill Lynch and Flaherty & Crumrine.
13. All notices required or permitted to be sent under this Agreement shall be sent, if to Flaherty & Crumrine:
Flaherty & Crumrine Incorporated
301 East Colorado Boulevard, Suite 720
Pasadena, California 91101
Attention: Donald Crumrine
or if to Merrill Lynch:
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower, World Financial Center
New York, New York 10080
Attention: Patrick Moran
or such other name or address as may be given in writing to the other parties. Any notice shall be deemed to be given or received on the third day after deposit in the US mail with certified postage prepaid or when actually received, whether by hand, express delivery service or facsimile transmission, whichever is earlier.
14. This Agreement may be executed in separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement.
IN WITHESS WHEREOF, the parties hereto have duly executed this Additional Compensation Agreement as of the date first above written.
FLAHERTY & CRUMRINE INCORPORATED MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
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By: _____________________________ By: _____________________________
Name: Name:
Title: Title:
MERRILL LYNCH & CO. INDEMNIFICATION AGREEMENT
[ ], 2003
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower, World Financial Center
New York, New York 10080
Ladies and Gentlemen:
In connection with the engagement of Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") to advise and
assist the undersigned (together with its affiliates and subsidiaries, referred
to as the "Company") with the matters set forth in the Agreement dated [ ], 2003
between the Company and Merrill Lynch (the "Agreement"), in the event that
Merrill Lynch becomes involved in any capacity in any claim, suit, action,
proceeding, investigation or inquiry (including, without limitation, any
shareholder or derivative action or arbitration proceeding) (collectively, a
"Proceeding") in connection with any matter in any way relating to or referred
to in the Agreement or arising out of the matters contemplated by the Agreement,
including, without limitation, related services and activities prior to the date
of the Agreement, the Company agrees to indemnify, defend and hold Merrill Lynch
harmless to the fullest extent permitted by law, from and against any losses,
claims, damages, liabilities and expenses in connection with any matter in any
way relating to or referred to in the Agreement or arising out of the matters
contemplated by the Agreement, including, without limitation, related services
and activities prior to the date of the Agreement, except to the extent that it
shall be determined by a court of competent jurisdiction in a judgment that has
become final in that it is no longer subject to appeal or other review, that
such losses, claims, damages, liabilities and expenses resulted solely from the
gross negligence or willful misconduct of Merrill Lynch. In addition, in the
event that Merrill Lynch becomes involved in any capacity in any Proceeding in
connection with any matter in any way relating to or referred to in the
Agreement or arising out of the matters contemplated by the Agreement,
including, without limitation, related services and activities prior to the date
of the Agreement, the Company will reimburse Merrill Lynch for its legal and
other expenses (including the cost of any investigation and preparation) as such
expenses are reasonably incurred by Merrill Lynch in connection therewith. If
such indemnification were not to be available for any reason, the Company agrees
to contribute to the losses, claims, damages, liabilities and expenses involved
(i) in the proportion appropriate to reflect the relative benefits received or
sought to be received by the Company and its stockholders and affiliates and
other constituencies, on the one hand, and Merrill Lynch, on the other hand, in
the matters contemplated by the Agreement or (ii) if (but only if and to the
extent) the allocation provided for in clause (i) is for any reason held
unenforceable, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) but also the relative fault of the
Company and its stockholders and affiliates and other constituencies, on the one
hand, and the party entitled to contribution, on the other hand, as well as any
other relevant equitable considerations. The Company agrees that for the
purposes of this paragraph the relative benefits received, or sought to be
received, by the Company and its stockholders and affiliates, on the one hand,
and the party entitled to contribution, on the other hand, of a transaction as
contemplated shall be deemed to be in the same proportion that the total value
received or paid or contemplated to be received or paid by the Company or its
stockholders or affiliates and other constituencies, as the case may be, as a
result of or in connection with the transaction (whether or not consummated) for
which Merrill Lynch has been retained to perform financial services bears to the
fees paid to Merrill Lynch under the Agreement; provided, that in no event shall
the
Company contribute less than the amount necessary to assure that Merrill Lynch is not liable for losses, claims, damages, liabilities and expenses in excess of the amount of fees actually received by Merrill Lynch pursuant to the Agreement. Relative fault shall be determined by reference to, among other things, whether any alleged untrue statement or omission or any other alleged conduct relates to information provided by the Company or other conduct by the Company (or its employees or other agents), on the one hand, or by Merrill Lynch, on the other hand. The Company will not settle any Proceeding in respect of which indemnity may be sought hereunder, whether or not Merrill Lynch is an actual or potential party to such Proceeding, without Merrill Lynch's prior written consent. For purposes of this Indemnification Agreement, Merrill Lynch shall include Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, any of its affiliates, each other person, if any, controlling Merrill Lynch or any of its affiliates, their respective officers, current and former directors, employees and agents, and the successors and assigns of all of the foregoing persons. The foregoing indemnity and contribution agreement shall be in addition to any rights that any indemnified party may have at common law or otherwise.
The Company agrees that neither Merrill Lynch nor any of its affiliates, directors, agents, employees or controlling persons shall have any liability to the Company or any person asserting claims on behalf of or in right of the Company in connection with or as a result of either Merrill Lynch's engagement under the Agreement or any matter referred to in the Agreement, including, without limitation, related services and activities prior to the date of the Agreement, except to the extent that it shall be determined by a court of competent jurisdiction in a judgment that has become final in that it is no longer subject to appeal or other review that any losses, claims, damages, liabilities or expenses incurred by the Company resulted solely from the gross negligence or willful misconduct of Merrill Lynch in performing the services that are the subject of the Agreement.
THIS INDEMNIFICATION AGREEMENT AND ANY CLAIM, COUNTERCLAIM OR DISPUTE OF ANY KIND OR NATURE WHATSOEVER ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT ("CLAIM"), DIRECTLY OR INDIRECTLY, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT AS SET FORTH BELOW, NO CLAIM MAY BE COMMENCED, PROSECUTED OR CONTINUED IN ANY COURT OTHER THAN THE COURTS OF THE STATE OF NEW YORK LOCATED IN THE CITY AND COUNTY OF NEW YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, WHICH COURTS SHALL HAVE EXCLUSIVE JURISDICTION OVER THE ADJUDICATION OF SUCH MATTERS, AND THE COMPANY AND MERRILL LYNCH CONSENT TO THE JURISDICTION OF SUCH COURTS AND PERSONAL SERVICE WITH RESPECT THERETO. THE COMPANY HEREBY CONSENTS TO PERSONAL JURISDICTION, SERVICE AND VENUE IN ANY COURT IN WHICH ANY CLAIM ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT IS BROUGHT BY ANY THIRD PARTY AGAINST MERRILL LYNCH OR ANY INDEMNIFIED PARTY. EACH OF MERRILL LYNCH AND THE COMPANY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY PROCEEDING OR CLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT. THE COMPANY AGREES THAT A FINAL JUDGMENT IN ANY PROCEEDING OR CLAIM ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT BROUGHT IN ANY SUCH COURT SHALL BE CONCLUSIVE AND BINDING UPON THE COMPANY AND MAY BE ENFORCED IN ANY OTHER COURTS TO THE JURISDICTION OF WHICH THE COMPANY IS OR MAY BE SUBJECT, BY SUIT UPON SUCH JUDGMENT.
The foregoing Indemnification Agreement shall remain in full force and effect notwithstanding any termination of Merrill Lynch's engagement. This Indemnification Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same agreement.
Very truly yours,
FLAHERTY & CRUMRINE INCORPORATED
By: ______________________
Name:
Title:
Accepted and agreed to as of
the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By ______________________
Name:
Title:
Exhibit (l)(1)
[Willkie Farr and Gallagher Letterhead]
January 28, 2003
F&C/Claymore Preferred Securities Income Fund Incorporated
301 E. Colorado Boulevard
Suite 720
Pasadena, California 91101
Ladies and Gentlemen:
We have acted as counsel to F&C/Claymore Preferred Securities Income Fund Incorporated (the "Fund"), a corporation organized under the laws of the State of Maryland, in connection with the preparation of a Registration Statement on Form N-2 (as amended, the "Registration Statement") relating to the offer and sale of shares (the "Shares") of the common stock of the Fund, $0.01 par value per share.
We have examined copies of the Articles of Incorporation and By-Laws of the Fund, and any amendments thereto, the Registration Statement, all resolutions adopted by the Fund's Board of Directors (the "Board") and the Pricing Committee of the Board and other records and documents that we have deemed necessary for the purpose of this opinion. We have also examined such other documents, papers, statutes and authorities as we have deemed necessary to form a basis for the opinion hereinafter expressed.
In our examination of material, we have assumed the genuineness of all signatures and the conformity to original documents of all copies submitted to us. As to various questions of fact material to our opinion, we have relied on statements and certificates of officers and representatives of the Fund and others. As to matters governed by the laws of the State of Maryland, we have relied on the opinion of Venable, Baetjer and Howard, LLP appended to this letter.
Based on and subject to the foregoing, we are of the opinion that: (1) the Fund is duly organized and validly existing as a corporation in good standing under the laws of the State of Maryland; and (2) when the Pricing Committee of the Board of Directors has determined certain of the issuance terms of the Shares pursuant to authority delegated to it by the Board of Directors, the Shares to be offered for sale pursuant to the Prospectus that forms part of the Registration Statement (the "Prospectus") will have been duly authorized and, when thereafter, sold, issued and paid for as contemplated by the Prospectus, will have been validly and legally issued and will be fully paid and nonassessable.
F&C/Claymore Preferred Securities Income Fund Incorporated
January 28, 2003
We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to us in the Prospectus included as part of the Registration Statement.
Very truly yours,
/s/Willkie Farr and Gallagher |
Exhibit (l)(2)
[Letterhead of Venable, Baetjer and Howard, LLP]
January 28, 2003
Willkie Farr & Gallagher
787 Seventh Avenue
New York, NY 10019-6099
Re: F&C/CLAYMORE PREFERRED SECURITIES INCOME FUND INCORPORATED
Ladies and Gentlemen:
We have acted as special Maryland counsel for F&C/Claymore Preferred Securities Income Fund Incorporated, a Maryland corporation (the "Company"), in connection with the organization of the Company and the issuance of shares of its Common Stock, par value $.01 per share (the "Shares").
As special Maryland counsel for the Company, we are familiar with its Charter and Bylaws. We have examined the prospectus included in its Registration Statement on Form N-2, File No. 333-91282 (the "Registration Statement"), substantially in the form in which it is to become effective (the "Prospectus"). We have further examined and relied on a certificate of the Maryland State Department of Assessments and Taxation to the effect that the Company is duly incorporated and existing under the laws of the State of Maryland and is in good standing and duly authorized to transact business in the State of Maryland.
We have also examined and relied on such corporate records of the Company and other documents and certificates with respect to factual matters as we have deemed necessary to render the opinion expressed herein. We have assumed, without independent verification, the genuineness of all signatures on documents submitted to us for examination, the authenticity of all documents submitted to us as originals, and the conformity with originals of all documents submitted to us as copies.
Based on such examination, we are of the opinion that:
Willkie Farr & Gallagher
January 28, 2003
1. The Company is duly organized and validly existing as a corporation in good standing under the laws of the State of Maryland.
2. When the Pricing Committee of the Board of Directors has determined certain of the issuance terms of the Shares pursuant to authority delegated to it by the Board of Directors, the Shares to be offered for sale pursuant to the Prospectus will have been duly authorized and, when thereafter, sold, issued and paid for as contemplated by the Prospectus, will have been validly and legally issued and will be fully paid and nonassessable.
This letter expresses our opinion with respect to the Maryland General Corporation Law governing matters such as due organization and the authorization and issuance of stock. It does not extend to the securities or "Blue Sky" laws of Maryland, to federal securities laws or to other laws.
You may rely on this opinion in rendering your opinion to the Company that is to be filed as an exhibit to the Registration Statement. We consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to us in the Prospectus under the caption "Legal Matters." We do not thereby admit that we are "experts" within the meaning of the Securities Act of 1933 and the regulations thereunder. This opinion may not be relied on by any other person or for any other purpose without our prior written consent.
Very truly yours,
/s/ Venable, Baetjer and Howard, LLP |
EXHIBIT (n)(1)
CONSENT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
F&C/Claymore Preferred Securities Income Fund Incorporated:
We consent to the use of our report dated January 23, 2003, included in this Registration Statement, and to the references to our firm under the caption "EXPERTS" in the prospectus.
KPMG LLP
Boston, Massachusetts
January 28, 2003
EXHIBIT (q)(1)
F&C/CLAYMORE PREFERRED SECURITIES INCOME FUND
INCORPORATED
CODE OF ETHICS
I. INTRODUCTION
A. GENERAL PRINCIPLES
This Code of Ethics ("Code") establishes rules of conduct for "Covered Persons" (as defined herein) of the F&C/Claymore Preferred Securities Income Fund Incorporated (the "Fund") and is designed to govern the personal securities activities of Covered Persons. In general, in connection with personal securities transactions, Covered Persons should (1) always place the interests of the Fund's shareholders first; (2) ensure that all personal securities transactions are conducted consistent with this Code and in such a manner as to avoid any actual or potential conflict of interest or any abuse of a Covered Person's position of trust and responsibility; and (3) not take inappropriate advantage of their positions.
B. APPLICABILITY
For purposes of this Code, "Covered Person" shall mean:
1. Any officer or employee of the Fund
2. Any director, officer, general partner, or employee of any company in a control relationship to the Fund who, in connection with his or her regular functions or duties, makes, participates in or obtains information regarding the purchase or sale of securities by the Fund or whose functions relate to the making of any recommendation to the Fund regarding the purchase or sale of securities or any natural person in a control relationship to the Fund who obtains information concerning recommendations made to the Fund with regard to the purchase or sale of a security (collectively, an "Advisory Person"), including the person or persons with the direct responsibility and authority to make investment decisions affecting the Fund (the "Portfolio Manager");
3. Any natural person in a control relationship to the Fund who obtains information concerning recommendations made to the Fund with regard to the purchase or sale of a security; and
4. Any Director of the Fund.
II. RESTRICTIONS ON ACTIVITIES
A. BLACKOUT PERIODS
1. No Covered Person shall purchase or sell, directly or indirectly, any "security" in which he or she has, or by reason of such transaction acquires, any direct or indirect beneficial ownership (as defined in Attachment A to this Code) on a day during which the Fund has a pending "buy" or "sell" order in that same security until that order is executed or withdrawn.
2. No Portfolio Manager shall purchase or sell, directly or indirectly, any security in which he or she has, or by reason of such transaction acquires, any direct or indirect beneficial ownership (as defined in Attachment A to this Code) within seven (7) calendar days before or after the Fund trades in that security.
B. INTERESTED TRANSACTIONS
No Covered Person shall recommend any securities transactions by the Fund without having disclosed his or her interest, if any, in such securities or the issuer thereof, including without limitation:
1. Any direct or indirect beneficial ownership (as defined in Attachment A to this Code) of any securities of such issuer;
2. Any contemplated transaction by such person in such securities;
3. Any position with such issuer or its affiliates; and
4. Any present or proposed business relationship between such issuer or its affiliates and such person or any parties in which such person has a significant interest.
C. INITIAL PUBLIC OFFERINGS
No Advisory Person shall acquire, directly or indirectly, beneficial ownership of any securities in an initial public offering without the prior approval of the Designated Supervisory Person (as hereinafter defined) who has been provided by such Advisory Person with full details of the proposed transaction. In granting this prior approval, the Designated Supervisory Person shall take into consideration, among other factors, whether the investment opportunity should be reserved for the Fund and its shareholders and whether the opportunity is being offered to the Advisory Person by virtue of his or her position with the Fund. Purchases of initial public offerings of volatile securities which are difficult to
obtain, such as certain common stocks, will ordinarily not be approved. In contrast, purchases of generally available initial public offerings of less volatile securities such as municipal bonds in which the Fund does not customarily invest would usually be approved.
D. PRIVATE PLACEMENTS
No Advisory Person shall acquire, directly or indirectly, beneficial ownership of any securities in a private placement without the prior approval of the Designated Supervisory Person who has been provided by such Advisory Person with full details of the proposed transaction. In granting this prior approval, the Designated Supervisory Person shall take into consideration, among other factors, whether the investment opportunity should be reserved for the Fund and its shareholders and whether the opportunity is being offered to the Advisory Person by virtue of his or her position with the Fund. Advisory Persons who have been authorized to acquire securities in a private placement are required to disclose that investment when they play a part in the Fund's subsequent consideration of an investment in the issuer. In such circumstances, the Fund's decision to purchase securities of the issuer will be subject to an independent review by Advisory Persons with no personal interest in the issuer.
E. GIFTS
No Advisory Person shall receive any gift or other things of more than DE MINIMIS value from any person or entity that does business with or on behalf of the Fund.
F. SERVICE AS A DIRECTOR
No Advisory Person shall serve on the board of directors of any publicly traded company without prior authorization from a committee comprised of the Designated Supervisory Person and two others (the "Compliance Committee") based upon a determination that such board service would be consistent with the interests of the Fund and its shareholders. If such service is authorized, the Advisory Person will be isolated from making investment decisions relating to such service through the implementation of appropriate "Chinese Wall" procedures established by the Compliance Committee.
III. EXEMPT TRANSACTIONS
A. For purposes of this Code, the term "security" shall not include the following:
1. Securities issued or guaranteed as to principal or interest by the Government of the United States or its instrumentalities;
2. Bankers' acceptances;
3. Bank certificates of deposit;
4. Commercial paper;
5. High quality short-term debt instruments, including repurchase agreements(1); and
6. Shares of registered open-end investment companies.
"Security" shall include options, futures contracts as well as "related securities," such as convertible securities and warrants.
B. The prohibitions described in paragraph (A) of Article II shall not apply to:
1. Purchases or sales effected in any account over which the Covered Person has no direct or indirect influence or control;
2. Purchases or sales that are non-volitional on the part of the Covered Person;
3. Purchases that are part of an automatic dividend reinvestment plan;
4. 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 the issuer, and sales of such rights so acquired; or
5. Subject to the advance approval by a Designated Supervisory Person (as defined below) purchases or sales which are only remotely potentially harmful to the Fund because such purchases or sales would be unlikely to affect a highly institutional market, or because such purchases or sales are clearly not related economically to the securities held, purchased or sold by the Fund.
IV. COMPLIANCE PROCEDURES
A. PRECLEARANCE
A Covered Person, excluding those officers of the Fund who are also employees of the Fund's administrator, may directly or indirectly, acquire or dispose of beneficial ownership of a security, including shares of the Fund, only if (1) such purchase or sale has been approved by a supervisory person designated by the Fund or, in the case of a person employed by the Fund's investment adviser, by such investment adviser (the "Designated Supervisory Person"), (2) the approved transaction is completed on the same day approval is received and (3) the Designated Supervisory Person has not rescinded such approval prior to execution of the transaction.
B. REPORTING - QUARTERLY TRANSACTION REPORTS
Every Covered Person must report certain information about EACH non-exempt transaction by which the Covered Person acquires ANY direct or indirect beneficial ownership (as defined in Attachment A to this Code) of a security, PROVIDED, HOWEVER, that a Covered Person shall not be required to make a report with respect to any transaction effected for any account over which such person does not have any direct or indirect influence or control or which would duplicate information recorded pursuant to Rules 204-2(a)(12) or 204-2(a)(13) under the Investment Advisers Act of 1940, as amended.
A Covered Person must submit the report required by this Article IV to the Designated Supervisory Person no later than 10 days after the end of the calendar quarter in which the transaction to which the report relates was effected. A report must contain the following information:
1. The date of the transaction, the title, the interest rate and maturity date (if applicable), the number of shares and the principal amount of each security involved:
2. The nature of the transaction (i.e., purchase, sale or other acquisition or disposition);
3. The price of the security at which the transaction was effected;
4. The name of the broker, dealer or bank with or through whom the transaction was effected; and
5. The date that the report is submitted by the Covered Person.
Any report submitted to comply with the requirements of this Article IV may contain a statement that the report shall not be construed as an admission by the person making such report that such person has any direct or indirect beneficial ownership (as defined in Attachment A to this Code) in the securities to which the report relates.
The broker or futures commission merchant through which the transaction was effected shall be directed by the Covered Person to supply to the Designated Supervisory Person, on a timely basis, duplicate confirmations and monthly brokerage statements for all securities accounts. A Covered Person employed by the Fund's investment adviser will be deemed to have complied with the requirements of this Article IV by satisfying the preclearance and reporting requirements established by the Code of Ethics of such investment adviser if as strict as or stricter than this Code.
C. DISCLOSURE OF PERSONAL HOLDINGS -INITIAL AND ANNUAL HOLDINGS REPORTS
INITIAL HOLDINGS REPORT. No later than 10 days after a person becomes a Covered Person, the following information shall be submitted to the Designated Supervisory Person:
1. The title, number of shares and principal amount of all Covered Securities owned directly or indirectly by the Covered Person when the Covered Person became a Covered Person;
2. The name of any broker, dealer or bank with whom the Covered Person maintained an account in which any Covered Securities were held for the benefit of the Covered Person as of the date the person became a Covered Person; and
3. The date that the report is submitted by the Covered Person.
ANNUAL HOLDINGS REPORT. Each Covered Person shall submit to the Designated Supervisory Person the information listed in C(i), (ii) and (iii) above on an annual basis, which information shall not be more than 30 days old.
D. NON-INTERESTED DIRECTORS
Any person who is a Covered Person with respect to the Fund by virtue of being a Director of the Fund, but who is not an "interested person" (as defined in the Investment Company Act of 1940, as amended) of the Fund, shall be required to comply with paragraphs (A), (B) and (C) above with respect to a transaction only if such person, at the time of that transaction, knew, or in the ordinary course of fulfilling his or her official duties as a Director of the Fund should have known, that during the 15-day period immediately preceding the date of the transaction by such person, the security such person purchased or sold is or was purchased or sold by the Fund or was being considered for purchase or sale by the Fund or its investment adviser.
E. CERTIFICATION OF COMPLIANCE
Each Covered Person is required to certify annually that he or she has read and understood the Fund's Code and recognizes that he or she is subject to such Code. Further, each Covered Person is required to certify annually that he or she has complied with all the requirements of the Code and that he or she has disclosed or reported all personal securities transactions required to be disclosed or reported pursuant to the requirements of the Code.
F. REVIEW BY THE BOARD OF DIRECTORS
At least annually, the Fund and its investment adviser shall provide a written report to the Board of Directors which lists the following information:
1. All existing procedures concerning Covered Persons' personal trading activities and any procedural changes made during the past year;
2. Any recommended changes to the Fund's Code or procedures; and
3. A summary of any violations with respect to the Fund's Code or the investment adviser's Code of Ethics which occurred during the past year with respect to which remedial action was taken.
V. SANCTIONS/ANNUAL REPORT OF COMPLIANCE COMMITTEE
Upon discovering that a Covered Person has not complied with the requirements of this Code, the Designated Supervisory Person shall submit findings to the Compliance Committee. The Compliance Committee may impose on that Covered Person whatever sanctions the Compliance Committee deems
appropriate, including, among other things, disgorgement of profits, censure, suspension or termination of employment. Any significant sanction imposed shall be reported to the Board of Directors in accordance with Section IV(F)(3) above.
VI. CERTIFICATION OF ADEQUACY
The Fund and its investment adviser shall each provide to the Board of Directors of the Fund, no less frequently than annually, a written certification that each, respectively, have adopted procedures reasonably necessary to prevent Covered Persons from violating their respective Code of Ethics.
VII. CONFIDENTIALITY
All information obtained from any Covered Person hereunder shall be kept in strict confidence, except that reports of securities transactions hereunder may be made available to the Securities and Exchange Commission or any other regulatory or self-regulatory organization, and may otherwise be disclosed to the extent required by law or regulation.
VIII. OTHER LAWS, RULE AND STATEMENTS OF POLICY
Nothing contained in this Code shall be interpreted as relieving any Covered Person from acting in accordance with the provision of any applicable law, rule, or regulation or any other statement of policy or procedures governing the conduct of such person adopted by the Fund.
IX. AMENDMENTS
Any material change to this Code of Ethics must be approved by the Board of Directors of the Fund (including a majority of the non-interested Directors) within six months of such change.
X. FURTHER INFORMATION
If any person has any questions with regard to the applicability of the provisions of this Code generally or with regard to any securities transaction or transactions such person should consult the Designated Supervisory Person.
Dated: December 16, 2002
Attachment A
The term "beneficial ownership" as used in the attached Code of Ethics (the "Code") is to be interpreted by reference to Rule 16a-1(a)(2) under the Securities Exchange Act of 1934 (the "Rule"), except that the determination of direct or indirect beneficial ownership for purposes of the Code must be made with respect to all securities that a Covered Person has or acquires. Under the Rule, a person is generally deemed to have beneficial ownership of securities if the person, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares a direct or indirect pecuniary interest in the securities.
The term "pecuniary interest" in particular securities is generally defined in the Rule to mean the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in the securities. A person is refutably deemed to have an "indirect pecuniary interest" within the meaning of the Rule in any securities held by members of the person's immediate family sharing the same household, the term "immediate family" including any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law, as well as adoptive relationships. Under the Rule, an indirect pecuniary interest also includes, among other things: a general partner's proportionate interest in the portfolio securities held by a general or limited partnership; a performance-related fee, other than an asset-based fee, received by any broker, dealer, bank, insurance company, investment company, investment adviser, investment manager, trustee or person or entity performing a similar function; a person's right to dividends that is separated or separable from the underlying securities; a person's interest in securities held by certain trusts; and a person's right to acquire equity securities through the exercise or conversion of any derivative security, whether or not presently exercisable, the term "derivative security" being generally defined as any option, warrant, convertible security, stock appreciation right, or similar right with an exercise or conversion privilege at a price related to an equity security, or similar securities with, or value derived from, the value of an equity security. For purposes of the Rule, a person who is a shareholder of a corporation or similar entity is NOT deemed to have a pecuniary interest in portfolio securities held by the corporation or entity, so long as the shareholder is not a controlling shareholder of the corporation or the entity and does not have or share investment control over the corporation's or the entity portfolio.
EXHIBIT (q)(2)
FLAHERTY & CRUMRINE INCORPORATED
CODE OF ETHICS/STATEMENT OF POLICY AND PROCEDURES
REGARDING PERSONAL SECURITIES TRANSACTIONS
I. POLICY STATEMENT ON PERSONAL SECURITIES TRANSACTIONS
Flaherty & Crumrine Incorporated ("F&C") forbids any officer, director or
employee of F&C ("Covered Persons") from taking any action in conflict
with or potentially in conflict with F&C's investment advisory clients
(the "Clients") including registered investment companies (the "Funds")
and private accounts. Personal securities (as hereinafter defined)
transactions are permitted by such Covered Persons if no reasonable basis
exists for believing that a transaction would disadvantage Clients. This
Code of Ethics/Statement of Policies and Procedures Regarding Personal
Securities Transactions (the "Code") establishes rules of conduct for
Covered Persons regarding securities transactions in their personal
accounts and those accounts in which they have a direct or indirect
beneficial ownership (as defined in Attachment A to this Code) consistent
with F&C Policy.
II. RESTRICTIONS ON ACTIVITIES
A. BLACKOUT PERIODS
1. No Covered Person shall purchase or sell, directly or indirectly, any security (as hereinafter defined) in which he or she has, or by reason of such transaction acquires, any direct or indirect beneficial ownership (as defined in Attachment A to this Code) on a day during which Clients have pending "buy" or "sell" orders in the same security until such orders are executed or withdrawn.
2. No Covered Person shall purchase or sell, directly or indirectly, any security in which he or she has, or by reason of such transaction acquires, any direct or indirect beneficial ownership (as defined in Attachment A to this Code) within seven (7) calendar days before or after the Funds trade in that security.
B. INTERESTED TRANSACTIONS
No Covered Person shall recommend or complete any securities transactions by the Clients without having disclosed to F&C his or her interest, if any, in such securities or the issuer thereof, including without limitation:
1. Any direct or indirect beneficial ownership (as defined in Attachment A to this Code) of any securities of such issuer;
2. Any contemplated transaction by such person in such securities;
3. Any position with such issuer or its affiliates; and
4. Any present or proposed business relationship between such issuer or its affiliates and such person or any parties in which such person has a significant interest.
C. INITIAL PUBLIC OFFERINGS
No Covered person shall acquire, directly or indirectly, beneficial ownership of any securities in an initial public offering without the prior approval of the Designated Supervisory Person (as hereinafter defined) who has been provided by such Covered Person with full details of the proposed transaction. In granting this prior approval, the Designated Supervisory person shall take into consideration, among other factors, whether the investment opportunity should be reserved for the Clients and whether the opportunity is being offered to the Covered Person by virtue of his or her position with F&C and the Funds. Purchases of initial public offerings of volatile securities which are difficult to obtain, such as certain common stocks, will ordinarily not be approved. In contrast, purchases of generally available initial public offerings of less volatile securities such as municipal bonds would usually be approved.
D. PRIVATE PLACEMENTS
No Covered Person shall acquire, directly or indirectly, beneficial ownership of any securities in a private placement without the prior approval of the Designated Supervisory Person who has been provided by such Covered Person with full details of the proposed transaction. In granting this prior approval, the Designated Supervisory Person shall take into consideration, among other factors, whether the investment opportunity should be reserved for the Clients and whether the opportunity is being offered to the Covered Person by virtue of his or her position with F&C and the Funds. Covered Persons who have been authorized to acquire securities in a private placement are required to disclose that investment when they play a part in the subsequent consideration of an investment in the issuer by the Clients. In such circumstances, the decision to purchase securities of the issuer will be subject to an independent review by persons with no personal interest in the issuer.
E. BROKERAGE OR INVESTMENT BANKING SECURITIES
No transaction may be effected in the publicly owned securities of any company, the primary business of which is stock brokerage or investment banking.
F. GIFTS
No Covered Person shall receive any gift or other things of more than DE MINIMUS value from any person or entity that does business with or on behalf of F&C or the Funds.
G. SERVICE AS A DIRECTOR
No Covered Person shall serve on the board of directors of any publicly traded company without prior authorization from a committee comprised of a Designated Supervisory Person and two others (the "Compliance Committee") based upon a determination that such board service would be consistent with the interests of the Clients'. If such service is authorized, the Covered Person will be isolated from making investment decisions relating to such service through the implementation of appropriate "Chinese Wall" procedures established by the Compliance Committee.
III. EXEMPT TRANSACTIONS
A. For purposes of this Code, the term "security" shall not include the following:
1. Securities issued or guaranteed as to principal or interest by the Government of the United States or its instrumentalities;
2. Bankers' acceptances;
3. Bank certificates of deposit;
4. Commercial paper;
5. High quality short-term debt instruments, including repurchase agreements(1); and
6. Shares of registered open-end investment companies.
"Security" or "securities" shall include options, futures contracts and other derivative securities as well as related securities, such as convertible securities and warrants.
B. The prohibitions described in Paragraph A. of Article II and the compliance procedures described in Article IV. shall not apply to:
1. Purchases or sales effected in any account over which the Covered Person has no direct or indirect influence or control;
2. Purchases or sales of securities that are non-volitional on the part of the Covered Person;
3. Purchases that are part of an automatic dividend reinvestment plan;
4. 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 the issuer, and sales of such rights so acquired; or
5. Subject to the advance approval by a Designated Supervisory Person, purchases or sales which are only remotely potentially harmful to the Clients because such purchases or sales would be unlikely to affect a highly institutional market, or because such purchases or sales are clearly not related economically to the securities held, purchased or sold by the Clients.
6. Gifts of securities to recognized charities, charitable gift funds or those entities in which the Covered Person has neither a direct or indirect beneficial ownership.
IV. COMPLIANCE PROCEDURES
A. PRECLEARANCE
A Covered Person may directly or indirectly, acquire or dispose of beneficial ownership of a security, including shares of the Funds, only if (1) such purchase or sale has been approved by a supervisory person designated by F&C (the "Designated Supervisory Person" or "DSP"), (2) the approved transaction is completed on the same day approval is received and (3) the Designated Supervisory Person has not rescinded such approval prior to execution of the transaction. On the effective date of this Code, Robert M. Ettinger and Donald F. Crumrine are such Designated Supervisory Persons. Mr. Ettinger shall act as a DSP for Mr. Crumrine, Mr. Crumrine for Mr. Ettinger, and, if either Mr. Ettinger or Mr. Crumrine is not available, Peter C. Stimes shall, in these instances, act as a DSP for Mr. Crumrine or Mr. Ettinger.
B. REPORTING
Every Covered Person must report certain information about EACH non-exempt transaction by which the Covered Person acquires ANY direct or
indirect beneficial ownership (as defined in Attachment A to this Code) of a security, PROVIDED, HOWEVER, that a Covered Person shall not be required to make a report with respect to any transaction effected for any account over which such person does not have any direct or indirect influence or control or which would duplicate information recorded pursuant to Rules 204-2(a)(12) or 204-2(a)(13) under the Investment Advisors Act of 1940, as amended.
After verbal prior approval for each non-exempt securities transaction required this Article IV. is granted, the Covered Person must ensure that written approval of the DSP is filed in the Covered Person's confidential Personal Securities Transaction File (the "Transaction File") except as provided for below. The broker or futures commission merchant through which the transaction was effected shall be directed by the Covered Person to supply to the Designated Supervisory Person, on a timely basis, duplicate confirmations of each transaction. Such confirmations will then be matched with the written prior approval in the Covered Person's Transaction File.
By the seventh day of each month, all Covered Persons must file with F&C a confidential Personal Securities Transaction Report (the "Transaction Report") for the immediately preceding month including all non-exempt transactions. A Transaction Report must be filed whether or not there were any reportable transactions. Participation in dividend reinvestment plans of publicly held companies need be indicated only on the line provided under "Purchases" on the monthly Transaction report. The Transaction Report must contain the following information:
1. The date of the transaction, the title including interest rate and maturity date (if applicable), and the number of shares, contracts, or the principal amount of each security involved;
2. The nature of the transaction (i.e., purchase , sale or other acquisition or disposition);
3. The price of the security at which the transaction was effected;
4. The name of the broker, dealer or bank with or through whom the transaction was effected; and
5. The date that the report is submitted by the Covered Person.
Any report submitted to comply with the requirements of this Article
IV. may contain a statement that the report shall not be construed
as an admission by the person making such report that such person
has any
direct or indirect beneficial ownership (as defined in Attachment A to this Code) in the securities to which the report relates.
A Covered Person will be deemed to be in full compliance with the reporting requirements of this Article IV. Paragraph B. by causing duplicate confirmations AND monthly brokerage statements on which all transactions required to be reported hereunder are described to be sent to the Designated Supervisory Person. The maintenance of records for the Covered Person's beneficial ownership of securities and commodities holdings on F&C's standard client account record keeping system will be deemed to be full compliance with the approval, reporting and disclosure requirements of this Code.
C. DISCLOSURE OF PERSONAL HOLDINGS - INITIAL AND ANNUAL HOLDINGS REPORTS
1. Initial Holdings Report. No later than 10 days after a person becomes a Covered Person, the following information shall be submitted to the Designated Supervisory Person:
a. The title, number of shares, contracts or the principal amount of all Covered Securities owned directly or indirectly by the Covered Person when the Covered Person became a Covered Person;
b. The name of any broker, dealer or bank with whom the Covered Person maintained an account in which any Covered Securities were held for the benefit of the Covered Person as of the date the person became a Covered Person; and
c. The date that the report is submitted by the Covered Person.
2. Annual Holdings Report. Each Covered Person shall submit to
the Designated Supervisory Person the information listed in C.
1.a., b. and c. above on an annual basis, which information
shall not be more than 30 days old.
D. CERTIFICATION OF COMPLIANCE
Each Covered Person is required to certify annually that he or she has read and understood the Code and recognizes that he or she is subject to such Code. Further, each Covered Person is required to certify annually that he or she has complied with all the requirements of the Code and that he or she has disclosed or reported all personal securities transactions required to be disclosed or reported pursuant to the requirements of the Code.
V. SANCTIONS
Upon discovering that a Covered Person has not complied with the requirements of this Code, F&C may impose on that Covered Person whatever sanctions it deems appropriate, including, among other things, disgorgement of profits, censure, suspension or termination of employment.
VI. CONFIDENTIALLY
All information obtained from any Covered Person hereunder shall be kept in strict confidence, except that reports of securities transactions hereunder may be made available to the Securities and Exchange Commission or any other regulatory or self-regulatory organization, and may otherwise be disclosed to the extent required by law or regulation.
VII. AMENDMENTS
Any material change to this Code must be approved by F&C's Board of Directors within six months of such change.
VIII. FURTHER INFORMATION
If any person has any questions with regard to the applicability of the provisions of this Code generally or with regard to any securities transaction or transactions, such person should consult the Designated Supervisory Person.
DATED: DECEMBER 19, 2002
IX. ACKNOWLEDGMENT
I have read and understand the foregoing Code and will comply in all respects with it.
ATTACHMENT A
The term "beneficial ownership" as used in the attached Code of Ethics (the "Code") is to be interpreted by reference to Rule 16a-1(a)(2) under the Securities Exchange Act of 1934 (the "Rule"), except that the determination of direct or indirect beneficial ownership for purposes of the Code must be made with respect to all securities that a Covered Person has or acquires. Under the Rule, a person is generally deemed to have beneficial ownership of securities if the person, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares a direct or indirect pecuniary interest in the securities.
The term "pecuniary interest" in particular securities is generally defined in the Rule to mean the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in the securities. A person is refutably deemed to have an "indirect pecuniary interest" within the meaning of the Rule in any securities held by members of the person's immediate family sharing the same household, the term "immediate family" including any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law, as well as adoptive relationships. Under the Rule, an indirect pecuniary interest also includes, among other things: a general partner's proportionate interest in the portfolio securities held by a general or limited partnership; a performance-related fee, other than an asset-based fee, received by any broker, dealer, bank, insurance company, investment company, investment adviser, investment manager, trustee or person or entity performing a similar function; a person's right to dividends that is separated or separable from the underlying securities; a person's interest in securities held by certain trusts; and a person's right to acquire equity securities through the exercise or conversion of any derivative security, whether or not presently exercisable, the term "derivative security being generally defined as any option, warrant, convertible security, stock appreciation right, or similar right with an exercise or conversion privilege at a price related to an equity security, or similar securities with, or value derived from, the value of an equity security. For purposes of the Rule, a person who is a shareholder of a corporation or similar entity is NOT deemed to have a pecuniary interest in portfolio securities held by the corporation or the entity and does not have or share investment control over the corporation's or the entity's portfolio.
Exhibit (q)(3)
CLAYMORE UNIT INVESTMENT TRUSTS
AND
CLAYMORE SECURITIES, INC.
Conflicts of interest can arise when certain investment company personnel (e.g., those who may have knowledge of impending investment company transactions) buy and sell securities for their personal accounts ("PERSONAL INVESTMENT ACTIVITIES"). These conflicts arise because such personnel have the opportunity to profit from information about investment company transactions, often to the detriment of investors.
Section 17(j) of the Investment Company Act of 1940 (the "ACT") and
rule 17j-1 thereunder are intended to address the potential conflicts arising
from the personal investment activities of investment company personnel,
including the company's principal underwriter. Rule 17j-1, among other things,
(a) prohibits fraudulent, deceptive or manipulative acts by investment company
affiliates and certain other persons in connection with their personal
transactions in securities held or to be acquired by the investment company, (b)
requires investment companies and principal underwriters to adopt codes of
ethics reasonably designed to prevent their "access persons" from engaging in
conduct prohibited by the rule, (c) requires access persons to periodically
report their securities holdings and personal securities transactions and (d)
requires the investment company and principal underwriter to use reasonable
diligence and institute procedures reasonably necessary to prevent violations of
the code. Accordingly, all current and future series of unit investment trust
for which Claymore Securities acts as depositor or principal underwriter (the
"TRUST") and Claymore Securities, Inc. ("CLAYMORE"), as the depositor and
principal underwriter to the Trust, have each adopted this code of ethics (the
"CODE").
It should be noted that this Code is applicable to all employees of Claymore and members of Claymore's board of directors (as applicable), unless otherwise indicated below. The Code addresses personal transactions in securities within the context of section 17(j) and rule 17j-1 of the Act. The Code does not encompass all possible areas of potential liability under the federal securities laws, including the Act. For instance, the federal securities laws preclude investors from trading on the basis of material, nonpublic information or communicating this information in breach of a fiduciary duty ("INSIDER TRADING" OR "TIPPING"). Other provisions of the Act also address transactions involving investment companies and their affiliated persons (such as the investment advisor) which may involve fraud or raise other conflict issues. For example, section 17(a) of the Act generally prohibits sales or purchases of securities or other property between a registered investment company and an affiliated person and section 17(d) and rule 17d-1 thereunder generally prohibits an affiliated person of a registered investment company (or an affiliated person of such person) from participating in any joint enterprise, arrangement, or profit sharing plan with the investment company absent an exemptive order from the Securities and Exchange
Commission. Accordingly, persons covered by this Code are advised to seek advice before engaging in any transactions other than the purchase or redemption of Trust units or the regular performance of their normal business duties if the transaction directly or indirectly involves themselves and the Trust or other clients of Claymore.
This Code of Ethics consists of six sections - 1. Statement of General
Principles; 2. Definitions; 3. Exempted Transactions; 4. Prohibited Activities;
5. Compliance Procedures; and 6. Sanctions.
I. STATEMENT OF GENERAL PRINCIPLES
The Code is based upon the principle that the officers, directors, and employees of Claymore owe a fiduciary duty to, among others, the unitholders of the Trust, to conduct their personal securities transactions in a manner which does not interfere with Trust portfolio transactions or otherwise take unfair advantage of their relationship to the Trust. In accordance with this general principle, all Access Persons (as defined below) must: (1) place the interests of unitholders of the Trust first; (2) execute personal securities transactions in compliance with the Code; (3) avoid any actual or potential conflict of interest or any abuse of their positions of trust and responsibility; (4) not take inappropriate advantage of their positions. Persons covered by this Code must adhere to its general principles as well as comply with the Code's specific provisions. It bears emphasis that technical compliance with the Code's procedures will not automatically insulate from scrutiny trades which show a pattern of abuse of the individual's fiduciary duties to the Trust or its unitholders. In addition, a violation of the general principles of the Code may constitute a punishable violation.
II. DEFINITIONS
As used herein:
A. "ACCESS PERSON" shall mean any director, officer or Advisory Person of the Trust (if applicable) or Claymore. A list of persons deemed to be Access Persons is attached as Exhibit A.
B. "ACT" means the Investment Company Act of 1940, as amended.
C. "ADVISORY PERSON" shall mean:
1. Any employee of Claymore (or of any company in a control relationship to the Trust or Claymore) who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of Covered Securities by the Trust or whose functions relate to the making of any recommendations with respect to such purchases or sales; and
2. Any natural person in a control relationship to the Trust or Claymore who obtains information concerning recommendations made to such Trust with regard to the purchase or sale of Covered Securities by the Trust.
D. A security is "BEING CONSIDERED FOR PURCHASE OR SALE" when a recommendation to purchase or sell a security has been made and communicated and, with respect to the person making the recommendation, when such person considers making such recommendation.
E. "BENEFICIAL OWNERSHIP" shall be interpreted in the same manner as it would be under rule 16a-1(a)(2) of the Securities Exchange Act of 1934 (the "EXCHANGE ACT") in determining whether a person has beneficial ownership of a security for purposes of section 16 of the Exchange Act and the rules and regulations thereunder. In this regard, beneficial ownership will be deemed to exist if a person, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise has a direct or indirect pecuniary interest in the securities (i.e., an opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in the securities). Under this definition, beneficial ownership by a person includes, but is not limited to, securities held by members of a person's immediate family sharing the same household, securities held in certain trusts, and a general partner's proportionate interest in the portfolio securities held by a general or limited partnership. A person will not be deemed to be the beneficial owner of securities held in the portfolio of a registered investment company solely by reason of his or her ownership of shares or units of such registered investment company.
F. "COMPLIANCE OFFICER" shall be the General Counsel of Claymore or his/her designees. A list of the Compliance Officers is attached as Exhibit B.
G. "CONTROL" shall have the same meaning as set forth in section 2(a)(9) of the Act.
H. "COVERED SECURITY" shall mean any stock, bond, debenture, evidence of indebtedness or in general any other instrument defined to be a security in section 2(a)(36) of the Act except that is shall not include shares of registered open-end investment companies, direct obligations of the Government of the United States, bankers' acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements.
I. "CLAYMORE" means Claymore Securities, Inc.
J. "INVESTMENT PERSONNEL" of the Trust or Claymore shall mean: (1) any employee of or Claymore (or of any company in a control relationship to the Trust or Claymore) who, in connection with his or her regular functions or duties, makes or participates in making recommendations regarding the purchase or sale of securities by the Trust, and (2) any natural person who controls the Trust or Claymore and who obtains information concerning recommendations made to the Trust regarding the purchase or sale of securities by the Trust. A list of investment personnel is attached as Exhibit C.
K. "PORTFOLIO SUPERVISOR" shall mean any employee of Claymore who is entrusted with the direct responsibility and authority to make investment decisions affecting the Trust. A list of portfolio supervisors is attached as Exhibit D.
L. "PURCHASE OR SALE OF A COVERED SECURITY" includes, among other things, the writing of an option to purchase or sell a Covered Security.
M. "SECURITY HELD OR TO BE ACQUIRED" by the Trust means (a) any Covered Security which, within the most recent fifteen days (i) is or has been held by the Trust or (ii) is being or has been considered by
the Trust or Claymore for purchase by the Trust; and (b) any option to purchase or sell, and any security convertible into or exchangeable for, a Covered Security described in (a) of this item M.
III. EXEMPTED TRANSACTIONS
The prohibitions of Section IV (A) and IV(C) of this Code of Ethics shall not apply to:
A. Purchases or sales effected in any account over which the Access Person has no direct or indirect influence or control;
B. Purchases or sales of securities which are not eligible for purchase or sale by the Trust;
C. Purchases or sales of securities of companies with a market capitalization of $500 million or more;
D. Purchases or sales which are non-volitional on the part of either the Access Person or the Trust (e.g., transactions in corporate mergers, stock splits, tender offers);
E. Purchases which are part of an automatic dividend reinvestment plan;
F. 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 so acquired, and
G. Purchases or sales which receive the prior approval of the Compliance Officer because they are only remotely potentially harmful to the Trust or its unitholders, or because they clearly are not related economically to the securities to be purchased, sold or held by the Trust.
IV. PROHIBITED ACTIVITIES
A. Access Persons shall not purchase or sell, directly or indirectly, any Covered Security in which he or she 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 (a) is being considered for purchase or sale by the Trust; or (b) is being purchased or sold by the Trust.
Without limiting the generality of the foregoing (a) no Portfolio supervisor may purchase or sell any Covered Security within fifteen calendar days before and after any series of the Trust which he or she supervises trades in that security; and (b) no Access Person shall purchase or sell any Covered Security on the same day there is a pending buy or sell order in that security by the Trust. Any profits realized on trades within the proscribed periods will be disgorged to a charitable organization.
B. Investment personnel shall not acquire directly or indirectly
beneficial ownership in securities pursuant to a private placement or initial
public offering without prior approval from the Compliance Officer described in
Section (V) below.
C. Investment personnel shall not profit in the purchase and sale, or sale and purchase, of the same (or equivalent) security within sixty calendar days. Trades made in violation of this prohibition shall be unwound or, if that is impracticable, any profits must be disgorged to a charitable organization.
D. Investment personnel shall not receive 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 Trust or any other client of Claymore.
E. Investment personnel shall not serve on the board of directors of a publicly traded company, without prior authorization by the Compliance Officer. Investment personnel may submit a request for authorization and such request shall state the position sought, the reason service is desired and any possible conflicts of interest known at the time of the request. No such position shall be accepted without the prior clearance by the Compliance Officer. Service may be cleared by the Compliance Officer only if such officer determines that service in that capacity would be consistent with the interests of the Trust, any unitholders affected, and any other clients of Claymore. In addition, Investment personnel who receive authorization to serve in such a capacity must be isolated through "Chinese Wall" procedures from making investment decisions regarding securities issued by the entity involved.
V. COMPLIANCE PROCEDURES
A. PRE-CLEARANCE.
Investment personnel must receive prior approval of their personal investment transactions in Covered Securities, as defined above, from the Compliance Officer. A request for approval shall state the title and principal amount of the security proposed to be purchased or sold, the nature of the transaction, the price at which the transaction is proposed to be effected, and the name of the broker, dealer or bank through whom the transaction is proposed to be effected. Any approval shall be valid for three business days. In determining whether approval should be granted, the Compliance Officer should consider:
1. whether the investment opportunity should be reserved for the Trust (if such investment is a permissible investment for the Trust), its unitholders, or other clients of Claymore; and
2. whether the opportunity is being offered to an individual by virtue of his/her position with respect to the Trust or Claymore's relationship with any other client.
In the event approval is granted, the Access Person must disclose the investment when he/she plays a role in any client's, including the Trust's, subsequent investment decision regarding the same issuer. In such circumstances, the decision to purchase or sell securities of the issuer will be subject to an independent review by Investment personnel with no personal interest in the issuer or another designee.
The pre-clearance requirement shall not apply to Exempted Transactions
listed in Section III. This exception does not eliminate or modify the
requirement that Investment personnel receive pre-approval before acquiring
securities in a private placement or initial public offering, as required under
Section IV(B) above.
B. REPORTING REQUIREMENTS.
Unless excepted by Subsection C of this Section V, every Access Person of the Trust and of Claymore must report to the Compliance Officer the following:
1. INITIAL HOLDINGS REPORTS. No later than ten days after the person becomes an Access Person, the following information:
a. the title, number of shares and principal amount of each Covered Security in which the Access Person had any direct or indirect beneficial ownership when the person became an Access Person;
b. the name of any broker, dealer or bank with whom the Access Person maintained an account in which any securities were held for the direct or indirect benefit of the Access Person as of the date the person became an Access Person; and
c. the date that the report is submitted by the Access Person.
2. QUARTERLY TRANSACTION REPORTS. No later than ten days after the end of the calendar quarter, the following information:
a. With respect to any transaction during the quarter in a Covered Security in which the Access Person had any direct or indirect beneficial ownership:
1. The date of the transaction, the title, the interest rate and maturity date (if applicable), the number of shares and the principal amount of each Covered Security involved;
2. The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition);
3. The price of the Covered Security at which the transaction was effected;
4. The name of the broker, dealer or bank with or through which the transaction was effected; and
5. The date that the report is submitted by the Access Person.
b. With respect to any account established by the Access Person in which any securities were held during the quarter for the direct or indirect benefit of the Access Person:
1. The name of the broker, dealer or bank with whom the Access Person established the account;
2. The date the account was established; and
3. The date that the report is submitted by the Access Person.
In addition to the above, every Access Person shall direct his or her broker or brokers to supply to the Compliance Officer, on a timely basis, duplicate copies of confirmations of all securities transactions and copies of periodic statements for all securities accounts involving Covered Securities in which such Access Person acquires or foregoes direct or indirect beneficial ownership. Such duplicate confirmations and periodic statements received during the proscribed period shall satisfy the reporting requirements set forth in this paragraph if all the information required to be included in the quarterly transaction report is contained in the broker confirmations or account statements.
3. ANNUAL HOLDINGS REPORT. No later than ten days after the end of the calendar year the following information (which information must be current as of a date no more than thirty days before the report is submitted):
a. The title, number of shares and principal amount of each Covered Security in which the Access Person had any direct or indirect beneficial ownership;
b. The name of any broker, dealer or bank with whom the Access Person maintains an account in which any securities are held for the direct or indirect benefit of the Access Person; and
c. The date that the report is submitted by the Access Person.
C. EXCEPTIONS TO REPORTING REQUIREMENTS.
1. A person need not make a report under Section V(B) of this Code with respect to transactions effected for, and Covered Securities held in, any account over which the person has no direct or indirect influence or control.
2. An Access Person to Claymore need not make a quarterly transaction report to the Compliance Officer under Section V(B)(2) of this Code if all the information in the report would duplicate information required to be recorded under Rules 204-2(a)(12) or 204-2(a)(13) of the Investment Advisers Act of 1940.
D. CERTIFICATION
1. All Access Persons shall certify annually that:
a. They have read and understood the Code and recognized that they are subject thereto; and
b. They have complied with the requirements of the Code and disclosed or reported all personal securities transactions required to be disclosed or reported pursuant to the Code.
E. DUTIES OF THE COMPLIANCE OFFICER.
1. REVIEW REPORTS. The Compliance Officer of Claymore shall review the reports
submitted under Section V(B).
2. NOTIFICATION OF REPORTING OBLIGATION. The Compliance Officer shall update Exhibits A, B, C and D as necessary to include new Access Persons, Investment personnel and Portfolio supervisors and shall notify those persons of their reporting obligations hereunder and to update the Compliance Officer or designee responsible to review reports.
3. The Compliance Officer or his designee shall maintain all records required under rule 17j-1 of the Act for the periods required under the Rule.
VI. SANCTIONS
Upon discovery of a violation of this Code, including either violations of the enumerated provisions or the general principles provided, the Trust or Claymore may impose such sanctions as it deems appropriate, including, INTER ALIA, a letter of censure or suspension or termination of the employment of the violator.
VII. AMENDMENT TO THIS CODE
The Trust's depositor must approve any material change to this Code of Ethics no later than six months after the adoption of the material change.