As filed with the Securities and Exchange Commission on July 24, 2007
Securities Act File No. 33-_____
Investment Company Act File No. 811-02201
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
|X| REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
|_| Pre-Effective Amendment No. ___
|_| Post-Effective Amendment No. ___
and/or
|X| REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 4
THE HERZFELD CARIBBEAN BASIN FUND, INC.
(Exact Name of Registrant as Specified in Charter)
The Herzfeld Building
P.O. Box 161465
Miami, FL 33116
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (305) 271-1900
Thomas J. Herzfeld
The Herzfeld Caribbean Basin Fund, Inc.
The Herzfeld Building
P.O. Box 161465
Miami, FL 33116
Copies to:
Thomas J. Herzfeld Joseph V. Del Raso, Esq.
The Herzfeld Building Pepper Hamilton LLP
P.O. Box 161465 3000 Two Logan Square
Miami, FL 33116 18th and Arch Streets
Philadelphia, PA 19103
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Approximate date of proposed public offering: As soon as practicable after the
effective date of this Registration Statement.
If any 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, as amended, other than securities offered in connection with a dividend reinvestment plan, check the following box. |_|
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
Proposed Maximum Proposed Maximum
Title of Securities Amount Being Offering Price Per Aggregate Offering Amount of
Being Registered Registered Share (1) Price (2) Registration Fee
--------------------- ------------ ------------------ ------------------ ----------------
Common Stock 3,375,112 $13.24 $44,686,478 1371.87
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(1) Calculated pursuant to Rule 457(c) under the Securities Act of 1933 based upon the market price of $13.24 reported on the NASDAQ Capital Market on July 24, 2007. The subscription price per share will be set as a percentage of the average volume-weighted closing sale price at which the common stock trades on the NASDAQ Capital Market on the expiration date and the four preceding trading days.
(2) Estimated solely for the purpose of calculating the registration fee.
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 that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. A registration statement relating to the Securities has been filed with the Securities and Exchange Commission but is not currently effective. We may not sell these securities until this registration statement 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, solicitation or sale is not permitted.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JULY [____], 2007
PROSPECTUS
1,687,556 Shares
THE HERZFELD CARIBBEAN BASIN FUND, INC.
Common Stock
Issuable Upon Exercise of Rights
to Subscribe for Such Shares of Common Stock
The Herzfeld Caribbean Basin Fund, Inc. (the "Fund") is issuing non-transferable
rights to its stockholders of record on [____], 2007 (the "Record Date"),
entitling the holders of rights to subscribe for an aggregate of approximately
1,687,556 shares of the Fund's common stock (the "Offer"). Each stockholder of
record on the Record Date will receive one right for each full share of the
Fund's common stock owned on the Record Date. The rights will entitle the
holders to purchase one share of the Fund's common stock, par value $0.001 per
share ("Common Stock") for each right held, and stockholders of record on the
Record Date who fully exercise their rights will be entitled to subscribe for
additional shares of Common Stock ("Over-Subscription Shares") subject to the
limitations set forth in this prospectus. The Over-Subscription Shares will be
allocated pro rata to stockholders who over-subscribe based on the number of
rights originally issued to them. The Fund may increase the number of shares of
Common Stock subject to subscription by up to 100% of the shares, or up to an
[____] additional shares of Common Stock, for an aggregate total of [____]
shares of Common Stock.
The rights are non-transferable and, therefore, may not be purchased or sold. The Fund's Common Stock is listed, and the shares of Common Stock issued pursuant to this Offer will be listed on the NASDAQ Capital Market under the symbol "CUBA."
The Offer will expire at 5:00 p.m., Eastern Time, on [____], 2007 (the
"Expiration Date"), unless extended as described herein. The Fund announced its
intention to make the Offer on July [____], 2007. The net asset value ("NAV")
per share of common stock at the close of business on July [____], 2007 and on
[____], 2007 [ex-rights date] was $[____] and $[____], respectively, and the
last reported sale price of a share of Common Stock on the NASDAQ Capital Market
on those dates was $[____] and $[____], respectively.
The subscription price per share will be [__]% of the average volume-weighted closing sale price at which the Common Stock trades on the NASDAQ Capital Market on the Expiration Date and the four preceding trading days.
Once you subscribe for shares of Common Stock pursuant to the Offer and the Fund receives payment or guarantee of payment, you will not be able to change your investment decision.
The Fund is a non-diversified, closed-end management investment company organized in the State of Maryland on March 10, 1992. Its investment adviser is HERZFELD / CUBA, a division of Thomas J. Herzfeld Advisors, Inc. (the "Adviser"). The Fund's investment objective is long-term capital appreciation. To achieve its objective, the Fund invests in issuers that are likely, in the Adviser's view, to benefit from economic, political, structural and technological developments in the countries in the Caribbean Basin, which include, among others, Cuba, Jamaica, Trinidad and Tobago, the Bahamas, the Dominican Republic, Barbados, Aruba, Haiti, the Netherlands Antilles, the Commonwealth of Puerto Rico, Mexico, Honduras, Guatemala, Belize, Costa Rica, Panama, Colombia, the United States and Venezuela. The Fund invests at least 80% of its total assets in a broad range of securities of issuers, including U.S.-based companies which engage in substantial trade with, and derive substantial revenue from, operations in the Caribbean Basin Countries. An investment in the Fund is not appropriate for all investors and should not constitute a complete investment program. No assurances can be given that the Fund's objective will be achieved.
Neither the Securities and Exchange Commission ("SEC") nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Estimated Subscription Estimated Proceeds
Price(1) Estimated Sales Load to the Fund(2)
---------------------- -------------------- ------------------
Per Share None
Total None
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As a result of the terms of the Offer, Stockholders who do not fully exercise their Rights, including the Over-Subscription Privilege described in the section of this Prospectus entitled "The Offer--Over-Subscription Privilege," will, upon the completion of the Offer, own a smaller proportional interest in the Fund than they owned before the Offer. The Offer will result in either a dilution or accretion of NAV for all Stockholders, whether or not they exercise some or all of their Rights, because the Subscription Price per Share may be less than or greater than the then-current NAV. The amount of dilution or accretion might be significant. See "Risk Factors and Special Considerations" on page [____] of this prospectus.
(2) Proceeds to the Fund before deduction of expenses incurred by the Fund in connection with the Offer which are estimated to be $_____. Amounts received by check prior to the final dueH date of this Offer will be deposited in a segregated interest-bearing account pending allocation and distribution of Common Stock. Interest on subscription monies will be paid to the Fund regardless of whether Common Stock is issued by the Fund.
The employees of the Fund's Adviser and the Directors and officers of the Fund may purchase Shares through the Primary Subscription and the Over-Subscription Privilege on the same terms as other Stockholders.
This prospectus sets forth concisely certain information about the Fund that a prospective investor should know before investing. Please read this prospectus carefully before investing and keep it for future reference. All subscription questions and inquiries relating to the Offer should be directed to State Street Bank and Trust Company, P.O. Box 642, Mail Code OPS22, Boston, MA 02116 or by calling the (617) 937-6870.
Copies of the Fund's Annual Report and Semi-Annual Report may be obtained, free
of charge, upon request by writing to The Herzfeld Caribbean Basin Fund, P.O.
Box 161465, Miami, FL 33116 or calling (800) TJH-FUND. Information about the
Fund can be also be reviewed and copied at the SEC's Public Reference Room in
Washington, D.C. Information on the operation of the Public Reference Room may
be obtained by calling the SEC at (202) 551-8090 or toll free at (800) 732-0330.
This information is also available on the EDGAR database on the SEC's internet
site at: http://www.sec.gov, and copies may be obtained, after paying a
duplicating fee, by electronic request at the following e-mail address:
publicinfo@sec.gov or by writing the Public Reference Section of the Securities
and Exchange Commission, 100 F Street, NE, Washington, D.C. 20549.
No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations not contained in this prospectus as if the fund had authorized it. The fund is offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. . This prospectus does not constitute an offer to sell or the solicitation of an offer to buy any security other than the shares of common stock offered by this prospectus, nor does it constitute an offer to sell or the solicitation of an offer to buy shares of common stock by anyone in any jurisdiction in which such offer or solicitation would be unlawful. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of common stock.
TABLE OF CONTENTS
PROSPECTUS SUMMARY.............................................................1
The Offer..................................................................1
Important Terms of the Offer...............................................1
Important Dates for the Offer..............................................2
Key Elements of the Offer..................................................2
Information Regarding the Fund.............................................5
Information Regarding the Adviser and Custodian............................5
Risk Factors and Special Considerations....................................5
Fee Table..................................................................7
FINANCIAL HIGHLIGHTS...........................................................8
THE FUND......................................................................10
Share Price Data..........................................................10
THE OFFERING..................................................................11
Terms of the Offer........................................................11
Purpose of the Offer......................................................12
Subscription Price........................................................14
Over-Subscription Privilege...............................................14
Expiration of the Offer...................................................15
Subscription Agent........................................................15
Method of Exercising Rights...............................................15
Payment for Shares........................................................15
Delivery of Stock Certificates............................................17
Foreign Restrictions......................................................17
Federal Income Tax Consequences Associated With the Offer.................17
Employee Plan Considerations..............................................18
USE OF PROCEEDS...............................................................18
RISK FACTORS AND SPECIAL CONSIDERATIONS.......................................19
Dilution of Net Asset Value and Effect of Non-Participation in the Offer..19
Discount From Net Asset Value.............................................19
Risks of Investing in Caribbean Basin Countries...........................20
Geographic Concentration Risk.........................................21
Foreign Securities Risk...............................................21
Foreign Economy Risk..................................................21
Currency Risk.........................................................21
Governmental Supervision and Regulation/Accounting Standards..........22
Certain Risks of Holding Fund Assets Outside the United States........22
Settlement Risk.......................................................23
Emerging Markets Risk.................................................23
INVESTMENT OBJECTIVE AND POLICIES.............................................24
Investment Policies - General.............................................24
Special Leverage Considerations...........................................25
Hedging Transactions..................................................25
Forward Foreign Currency Exchange Contracts...........................26
Options on Foreign Currencies.........................................26
Futures Contracts.....................................................27
Options on Securities and Options on Indices..........................27
Repurchase Agreements.....................................................28
Debt Securities...........................................................29
Securities Lending........................................................29
Portfolio Turnover........................................................30
Investment Restrictions...................................................30
MANAGEMENT OF THE FUND........................................................31
Board of Directors........................................................31
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Information About Directors and Officers..............................31
Committees of the Board...............................................32
Ownership of the Fund By Directors....................................33
Investment Adviser and Portfolio Manager..................................34
Investment Adviser....................................................34
Portfolio Manager.....................................................34
Investment Advisory Agreement.............................................35
Benefit to the Adviser....................................................36
Expenses of the Fund......................................................36
PORTFOLIO TRANSACTIONS AND BROKERAGE..........................................37
CODE OF ETHICS................................................................37
PROXY VOTING POLICIES AND PROCEDURES..........................................38
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS...............................38
DESCRIPTION OF COMMON STOCK...................................................38
Share Repurchases and Tender Offers.......................................38
Certain Provisions of Articles of Incorporation and Bylaws................40
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN.......................41
TAXATION......................................................................43
Federal Taxation of the Fund and its Distributions........................44
Sales of Shares...........................................................46
Backup Withholding........................................................47
Other Tax Considerations..................................................47
DETERMINATION OF NET ASSET VALUE..............................................47
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND REGISTRAR...........48
LEGAL MATTERS.................................................................48
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.................................48
FINANCIAL STATEMENTS..........................................................48
APPENDIX A...................................................................A-1
APPENDIX B...................................................................B-1
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PROSPECTUS SUMMARY
This summary highlights some information that is described more fully elsewhere in this prospectus and is qualified in its entirety by the more detailed information included elsewhere in the prospectus. The summary may not contain all of the information that is important to you. To understand the Offer fully you should read the entire document carefully, including the risk factors.
The Offer
The Board of Directors of the Fund (the "Board") has determined that it is in the best interests of the Fund and its existing stockholders to increase the assets of the Fund so that the Fund may be in a better position to take advantage of investment opportunities that may arise. In addition, the Board believes that increasing the size of the Fund may lower the Fund's expenses as a proportion of average net assets because the Fund's fixed costs would be spread over a larger asset base. There can be no assurance, however, that an increase in the size of the Fund will lower the Fund's expense ratio. Also the Fund has had significant gains in NAV, and has realized gains. For the calendar year ended December 31, 2006, the Fund paid a large year-end distribution. In addition, the recent announcement that Florida East Coast Industries, currently the Fund's largest holding, will be acquired by Fortress Investment Group LLC could result in significant realized gains for the current calendar year ending December 31, 2007. Net realized gains of the Fund are required to be distributed to stockholders in order to maintain the Fund's status as a "regulated investment company" under Subchapter M of the Internal Revenue Code. Accordingly, the Fund may be required to make a large distribution to shareholders to maintain its status as a regulated investment company, thereby reducing the net assets of the Fund. If successful, the Offer will allow the Fund to make the required distributions without causing a reduction in the amount of cash available for additional investment opportunities. The Board also believes that a larger number of outstanding shares and a larger number of beneficial owners of shares could increase the level of market interest in and visibility of the Fund and improve the trading liquidity of the Fund's common stock on the NASDAQ Capital Market. The Offer seeks to reward existing stockholders by giving them the right to purchase additional shares at a price below market without incurring any commission or other transaction charges. See "Purpose of the Offer."
At a Board meeting held on May 16, 2007, the Board discussed at length with the Adviser and counsel to the Fund the details of a proposed rights offering. At that meeting, the Board approved a non-transferable rights offering, the substantive terms of which would permit stockholders to acquire one new share of the Fund for each Right held (i.e., a one-for-one rights offering) for a subscription price equal to [____]% of the volume-weighted average market price of a share of common stock on the Expiration Date and the four immediately preceding trading days.
Important Terms of the Offer
Total number of shares of Common Stock
available for primary subscription:....... 1,687,556
Number of Rights you will receive for each
outstanding share of Common Stock you own
on the Record Date:....................... One Right for every one Share *
Number of shares of Common Stock you
may purchase with your Rights at the
Subscription Price per share.............. One share for every one Right **
Subscription Price:....................... [__]% of the average volume-weighted
sales price per share of the Fund's
Common Stock on the NASDAQ Capital
Market on [____], 2007 and the four
preceding trading days.
Estimated Subscription Price.............. $[____]
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* The number of Rights to be issued to a stockholder on the Record Date will be rounded up to the nearest whole number of Rights; no fractional Rights will be issued.
** Stockholders will be able to acquire additional shares of Common Stock pursuant to an over-subscription privilege in certain circumstances.
Important Dates for the Offer
Record Date:.............................. [____], 2007
Subscription Period:...................... [____], 2007 to [____], 2007
Expiration Date and Pricing Date:......... [____], 2007*
Subscription Certificate and
Payment for Shares Due**......... [____], 2007*
Notice of Guaranteed Delivery Due**....... [____], 2007*
Final Payment for Shares (if any) Due***.. [____], 2007*
Confirmation Mailed to Participants....... [____], 2007*
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* Unless the Offer is extended.
** Record Date Stockholders (defined below) exercising Rights must deliver to the Subscription Agent by the Expiration Date either (i) the Subscription Certificate together with the estimated payment or (ii) a Notice of Guaranteed Delivery.
*** Additional amounts may be due at settlement for additional shares purchased upon exercising Rights because the Estimated Subscription Price may be less than the actual Subscription Price. See "The Offer -- Payment for Shares."
Key Elements of the Offer
One-for-One Offering.......... The Offer will give stockholders on the Record
Date ("Record Date Stockholders") the right to
purchase one share of Common Stock for every
one Right received. For example, if you own 100
shares of common stock on the Record Date, you
will receive 100 Rights entitling you to
purchase 100 shares of Common Stock of the
Fund. Stockholders may exercise all or some of
their Rights. However, stockholders who do not
exercise all of their Rights will not be able
to participate in the Over-Subscription
Privilege. See "Over-Subscription Privilege"
below.
Non-Transferable Rights....... The Rights issued in the Offer will be
"non-transferable" and, therefore, may not be
purchased or sold. Rights not exercised will
expire without residual value at the Expiration
Date. The Rights will not be listed for trading
on the NASDAQ Capital Market or any other
securities exchange. However, the shares of
Common Stock to be issued pursuant to the Offer
will be listed for trading on the NASDAQ
Capital Market, subject to the NASDAQ Capital
Market being officially notified of the
issuance of those shares.
Dilution/Non-Participation
in Offer:................... Record Date Stockholders who do not fully
exercise their Rights including the
Over-Subscription Privilege described in the
section of this Prospectus entitled "The
Offer-Over-Subscription Privilege," will, at
the completion of the Offer, own a smaller
proportional interest in the Fund than if they
exercised their Rights. If the Subscription
Price per Share is below the then current NAV
per share, stockholders will experience an
immediate dilution of the aggregate NAV of
their Shares if they do not participate in the
Offer and will experience a reduction in the
NAV per share whether or not they participate
in the Offer. In contrast, Stockholders who
fully exercise their rights and over-subscribe
benefit from a slight accretion to the value of
their shares to the extent the non-subscribing
stockholders fail to fully exercise their
rights.The Fund cannot state precisely the
extent of this dilution (if any) if
stockholders do not exercise their Rights
because the Fund does not know what the NAV per
share will be at the time of the Offer or what
proportion of the Rights will be exercised.
See "Risk Factors and Special Considerations-
Dilution of Net Asset Value and Effect of
Non-Participation in the Offer."
Subscription Price............ Shares of Common Stock issued upon exercise of
Rights will be sold at a price equal to [____]%
of the volume-weighted average closing sales
price of a share of common stock on the NASDAQ
Capital Market on the Expiration Date and the
four preceding trading days. The Subscription
Price is discussed further under "The
Offer--Subscription Price." In addition,
information with respect to the quarterly high
and low sale prices of the Fund's Common Stock
on the NASDAQ Capital Market and the
corresponding NAVs per share of Common Stock is
provided under "The "Fund."
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Over-Subscription Privilege... Each Record Date Stockholder who fully
exercises all Rights issued to him is entitled
to subscribe for shares which were not
otherwise subscribed for by others in the
primary subscription (the "Over-Subscription
Privilege"). If enough shares are available,
all of these requests will be honored in full.
If these requests for shares exceed the shares
available, the Fund may determine after the
expiration of the Offer, at the discretion of
the Fund, to issue additional Common Stock up
to an amount equal to 100% of the shares
available pursuant to the Offer (up to an
additional [____] shares of Common Stock) in
order to cover these requests. Regardless of
whether the Fund issues such additional shares,
to the extent shares are not available to honor
all requests, the available shares will be
allocated pro rata among those Record Date
Stockholders who over-subscribe based on the
number of Rights originally issued to them by
the Fund.
Exercising Rights............. Except as described below, subscription
certificates evidencing the Rights
("Subscription Certificates") will be sent to
Record Date Stockholders or their nominees.
There is no minimum number of Rights which must
be exercised for the Offer to close. If you
wish to exercise your Rights, you may do so in
the following ways:
1. Complete, sign and date the Subscription
Certificate. Enclose it in the envelope
provided, together with payment in full
and mail or deliver the envelope to the
Subscription Agent at the address
indicated on the Subscription Certificate
calculating the total payment on the
basis of the Estimated Subscription Price
of [____] per share (i.e., the estimated
subscription price based on the Fund's
market price on [____], 2007). Your
Subscription Certificate and payment must
be received by the Expiration Date.
Payment pursuant to this method must be
in United States dollars by money order
or check drawn on a bank located in the
United States and must be payable to The
Herzfeld Caribbean Fund, Inc.
2. Contact your broker, banker or trust
company, which can arrange, on your
behalf, to guarantee delivery of payment
and delivery of a properly completed and
executed Subscription Certificate
pursuant to a notice of guaranteed
delivery ("Notice of Guaranteed
Delivery") by the close of business on
the third Business Day after the
Expiration Date. For purposes of this
prospectus, a "Business Day" shall mean
any day on which trading is conducted on
the NASDAQ Capital Market. A fee may be
charged for this service. The Notice of
Guaranteed Delivery must be received by
the Expiration Date. Rights holders will
have no right to rescind a purchase after
the Subscription Agent has received the
Subscription Certificate or Notice of
Guaranteed Delivery. See "The
Offer--Method of Exercising Rights" and
"The Offer--Payment for Shares." The
Subscription Agent will deposit all
checks received by it prior to the final
due date into a segregated interest
bearing account at [____] pending
distribution of the shares from the
Offer. All interest will accrue to the
benefit of the Fund and investors will
not earn interest on payments submitted.
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Restrictions on Foreign
Stockholders:................. The Fund will not mail Subscription
Certificates to stockholders whose record
addresses are outside the United States or who
have an APO or FPO address. Stockholders whose
addresses are outside the United States or who
have an APO or FPO address and who wish to
subscribe to the Offer either partially or in
full should contact the Subscription Agent by
written instruction or recorded telephone
conversation no later than three Business Days
prior to the Expiration Date.
Purpose of the Offer:......... The Board of the Fund has determined that it is
in the best interests of the Fund and its
stockholders to increase the assets of the Fund
available for investment so that the Fund will
be in a better position to take full advantage
of investment opportunities. The Board believes
that increasing the size of the Fund will
increase the liquidity of the Fund's shares of
Common Stock and also may reduce the Fund's
expenses as a proportion of average net assets.
The Offer also may allow the Fund to make
capital gain distributions required to maintain
its tax status as a regulated investment
company without causing a reduction in the net
assets of the Fund. Any such reduction will
reduce the amount of cash available for
additional investment opportunities.The Board
also believes that a larger number of
outstanding shares and a larger number of
beneficial owners of shares could increase the
level of market interest in and visibility of
the Fund and improve the trading liquidity of
the Fund's common stock on the NASDAQ Capital
Market.
In addition, the Offer seeks to reward the
Fund's stockholders by giving them the right
to purchase additional shares of Common Stock
at a price that will be below the market price
without incurring any direct transaction
costs. The Offer will benefit both the Fund
and its stockholders by providing the Fund
with the ability to make additional investments
without selling current investments if
otherwise not desirable. Moreover, if the
Subscription Price is greater than the NAV per
share of Common Stock of the Fund on the
Expiration Date (less offering expenses), the
Offer will increase the NAV per share. See
"The Offer--Purpose of the Offer."
Use of Proceeds:.............. The net proceeds of the Offer are estimated to
be approximately [____]. This figure is based
on the Estimated Subscription Price per share
of $[____] and assumes all shares offered are
sold and that the expenses related to the Offer
estimated at approximately $[____] are paid.
The Adviser anticipates that it will take no
longer than six months for the Fund to invest
these proceeds in accordance with its
investment objective and policies under current
market conditions. Pending investment, the
proceeds will be invested in short-term
cash-equivalent instruments. See "Use of
Proceeds" below.
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Information Regarding the Fund
The Herzfeld Caribbean Basin Fund, Inc. is a non-diversified, closed-end management investment company organized in the State of Maryland on March 10, 1992. The Fund's investment objective is long-term capital appreciation. To achieve its objective, the Fund invests in issuers that are likely, in the Adviser's view, to benefit from economic, political, structural and technological developments in the countries in the Caribbean Basin, which includes, among others, of Cuba, Jamaica, Trinidad and Tobago, the Bahamas, the Dominican Republic, Barbados, Aruba, Haiti, the Netherlands Antilles, the Commonwealth of Puerto Rico, Mexico, Honduras, Guatemala, Belize, Costa Rica, Panama, Colombia, the United States and Venezuela. The Fund invests at least 80% of its total assets in a broad range of securities of issuers, including U.S.-based companies, which engage in substantial trade with, and derive substantial revenue from, operations in the Caribbean Basin Countries. See "Investment Objective and Policies." An investment in the Fund is not appropriate for all investors and should not constitute a complete investment program. No assurances can be given that the Fund's objective will be achieved.
As of [____], 2007, the Fund had 1,687,556 shares of common stock outstanding. The Fund's common stock trades on the NASDAQ Capital Market under the symbol "CUBA." The average weekly trading volume of the common stock on the NASDAQ Capital Market during the fiscal year ended June 30, 2007 was approximately 91,544 shares. As of [____], 2007, the aggregate net assets of the Fund were approximately [____].
Information Regarding the Adviser and Custodian
The Adviser has acted as the investment adviser to the Fund since the Fund's inception in 1993. The Fund pays the Adviser a monthly fee at the annual rate of 1.45% of the Fund's average daily net assets. See "Management of the Fund - Investment Adviser."
State Street Bank and Trust Company acts as custodian for the Fund's assets. State Street Bank and Trust Company also serves as the Fund's transfer agent, dividend/distribution disbursing agent, dividend reinvestment plan agent and as registrar for the Fund's common stock. For its services as custodian, the Fund currently pays State Street Bank and Trust Company a monthly fee of $4,500. For its services as transfer agent, dividend reinvestment plan agent and registrar for the Fund's common stock, the Fund currently pays State Street Bank and Trust Company a monthly fee of $1,458 plus related expenses.
Risk Factors and Special Considerations
Dilution/Non-Participation
in Offer: Stockholders who do not fully exercise their
Rights including the Over-Subscription
Privilege described in the section of this
Prospectus entitled "The
Offer-Over-Subscription Privilege," will, at
the completion of the Offer, own a smaller
proportional interest in the Fund than if they
exercised their Rights. If the Subscription
Price per Share is below the then current NAV
per share, stockholders will experience an
immediate dilution of the aggregate NAV of
their Shares if they do not participate in the
Offer and will experience a reduction in the
NAV per share whether or not they participate
in the Offer. The Fund cannot state precisely
the extent of this dilution (if any) if
stockholders do not exercise their Rights
because the Fund does not know what the NAV per
share will be at the time of the Offer or what
proportion of the Rights will be exercised. In
contrast, Stockholders who fully exercise their
rights and over-subscribe benefit from a slight
accretion to the value of their shares to the
extent the non-subscribing stockholders fail to
fully exercise their rights. "Accretion" is the
dilution experienced by the non-exercising
stockholders less the pro-rata share of the
offering expenses. Assuming, for example, that
all Rights are exercised, the Estimated
Subscription Price is [____] and the Fund's NAV
per share is [____], the Fund's NAV per share
(after payment of estimated offering expenses)
would be reduced by approximately $[____] per
share. See "Risk Factors and Special
Considerations- Dilution of Net Asset Value and
Effect of Non-Participation in the Offer"
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Discount From NAV............. Shares of closed-end funds frequently trade at
a market price that is less than the value of
the net assets attributable to those shares (a
"discount"). The possibility that the Fund's
shares will trade at a discount from NAV is a
risk separate and distinct from the risk that
the Fund's NAV will decrease. The risk of
purchasing shares of a closed-end fund that
might trade at a discount or unsustainable
premium is more pronounced for investors who
wish to sell their shares in a relatively short
period of time after purchasing them because,
for those investors, realization of a gain or
loss on their investments is likely to be more
dependent upon the existence of a premium or
discount than upon portfolio performance.
Caribbean Basin Countries..... Investing in the securities of non-U.S. issuers
involves certain risks and considerations not
typically associated with investing in
securities of U.S. issuers. These risks include
currency fluctuations, political and economic
risks, including nationalization and
expropriation, reduced levels of publicly
available information concerning issuers and
reduced levels of government regulation of
foreign securities markets. Also, investment in
Caribbean Basin Countries may involve special
considerations, such as limited liquidity and
small market capitalization of the Caribbean
Basin securities markets, currency
devaluations, high inflation and repatriation
restrictions.
Cuba Specific Issues.......... Investment in Cuban securities or any
investment in Cuba directly or indirectly is
currently prohibited under U.S. law. There can
be no assurances that the U.S. trade embargo
against Cuba will ever be lifted or eased or,
if and when such a normalization commences,
that the Adviser will be able to identify
direct investments in issuers domiciled in Cuba
that are acceptable for the Fund.
|
However, if investment in securities issued by
companies domiciled in Cuba were to be
permitted under U.S. law, certain
considerations not typically associated with
investing in securities of U.S. companies
should be considered, including: (1)
restrictions on foreign investment and on
repatriation of capital invested in Cuba; (2)
unstable currency exchange and fluctuation; (3)
the cost of converting foreign currency into
U.S. Dollars; (4) potential price volatility
and lesser or lack of liquidity of shares
listed on a securities market (if one is
established); (5) continued political and
economic risks including a new government that
if not properly stabilized may lead to the risk
of nationalization or expropriation of assets
and the risk of civil war; (6) the absence of a
developed legal structure governing private
property; (7) the absence of a capital market
structure or market oriented economy; and (8)
the difficulty of assessing the financial
status of particular companies.
"Non-diversified" Investment
Company: As a "non-diversified" investment company, the
Fund's investments involve greater risks than
would be the case for a similar diversified
investment company because the Fund is not
limited by the Investment Company Act of 1940,
as amended (the "1940 Act"), in the proportion
of its assets that may be invested in the
assets of a single issuer. Although the Fund is
not diversified for the purposes of the 1940
Act, it must maintain a certain degree of
diversification in order to comply with certain
requirements of the U.S. Internal Revenue Code
of 1986, as amended (the "Code"), applicable to
regulated investment companies. See "Risk
Factors/Special Considerations" and "Taxation."
Dividends and Distributions:.. The Fund distributes annually to its
stockholders substantially all of its net
investment income and net short-term capital
gains. The Fund determines annually whether to
distribute any net realized long-term capital
gains in excess of net realized short-term
capital losses. See "Dividends and
Distributions" and "Taxation."
Certain Charter Provisions.... The Fund's Articles of Incorporation include
provisions that could have the effect of:
inhibiting the Fund's possible conversion to
open-end status; limiting the ability of other
entities or persons to acquire control of the
Fund or to change the composition of its Board;
and depriving stockholders 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. See
"Description of Common Stock."
|
Fee Table
The following Fee Table is intended to assist prospective investors in understanding the costs and expenses that an investor in the Offer will bear directly or indirectly.
Stockholder Transaction Expenses:
Sales Load.................................................. None
Expenses of the Offer (as a percentage of offering price)... [____] %
Dividend Reinvestment Plan Fees............................. None
Annual Expenses (as a percentage of net assets):
Management Fees........................................... 1.45%
Other Expenses (1)........................................ [____] %
Acquired Fund Fees and Expenses (2)....................... [____] %
Total Annual Expenses................................... [____] %
|
(1) "Other Expenses" does not include expenses of the Fund incurred in connection with the Offer, estimated at $__. However, these expenses will be borne by the holders of the shares of Common Stock of the Fund and result in a reduction in the NAV of the shares of Common Stock.
(2) Fees and expenses incurred indirectly as a result of investment in shares of one or more "Acquired Funds," which include (i) investment companies, or (ii) companies that would be an investment company under Section 3(a) of the 1940 Act except for exceptions under Sections 3(c)(1) and 3(c)(7) under the 1940 Act.
Cumulative Expenses Paid for the
Period of:
----------------------------------
Example 1 year 3 years 5 years 10 years
----------------------------------------- ------ ------- ------- --------
An investor would pay the following
expenses on a $1,000 investment, assuming
a 5% annual return throughout the periods
|
The foregoing Fee Table and Example are intended to assist investors in understanding the costs and expenses that an investor will bear directly or indirectly. "Other Expenses" are based on estimated amounts for the current fiscal year. See "Management of the Fund" for additional information.
The Example assumes the reinvestment of all dividends and distributions at NAV and an expense ratio of [____]%. The tables above and the assumption in the Example of a 5% annual return are required by U.S. Securities and Exchange Commission (the "SEC") regulations applicable to all investment companies. The Example should not be considered a representation of past or future expenses or annual rates of return and actual expenses or annual rates of return may be more or less than those assumed for purposes of the Example. In addition, while the Example assumes the reinvestment of all dividends and distributions at NAV, participants in the Dividend Reinvestment Plan may receive shares purchased or issued at a price or value different from NAV. See "Dividends and Distributions; Dividend Reinvestment Plan."
FINANCIAL HIGHLIGHTS
The table below sets forth selected data for a share of Common Stock outstanding
for each period presented. The information for the fiscal years ended June 30,
2007 and June 30, 2006 contained in the table has been audited by
[______________], the Fund's independent registered public accounting firm. The
information for the fiscal years ending prior to June 30, 2006 was audited by
[FORMER AUDITOR], the Fund's previous independent registered public accounting
firm. Audited financial statements for the Fund for the fiscal year ended June
30, 2007, are included in the Annual Report to stockholders. The Annual Report
to stockholders is available without charge on by calling (800) TJH-FUND.
Year Ended June 30,
----------------------------------------------
2007 2006 2005 2004 2003
------- ------- ------- ------- ------
Per Share Operating Performance
(For a share of capital stock
outstanding for each time period
indicated)
Net asset value, beginning
of year $ 7.33 $ 5.43 $ 3.95 $ 3.92
------- ------- ------- ------- ------
Operations:
Net investment loss(1) (0.16) (0.09) (0.07) (0.11)
Net realized and unrealized gain
(loss) on investment transactions (1) 1.08 1.99 1.55 0.22
------- ------- ------- ------- ------
Total from operations 0.92 1.90 1.48 0.11
------- ------- ------- ------- ------
Distributions:
From net investment income -- -- -- --
From net realized gains (0.17) -- -- (0.08)
------- ------- ------- ------- ------
Total distributions (0.17) -- -- (0.08)
------- ------- ------- ------- ------
Net asset value, end of year $ 8.08 $ 7.33 $ 5.43 $ 3.95
======= ======= ======= ======= ======
Per share market value, end of year $ 7.57 $ 6.30 $ 4.87 $ 3.49
Total investment return (loss) based
on market value per share 22.86% 29.36% 39.54% 2.70%
Ratios And Supplemental Data
Net assets, end of year (in 000's) $13,553 $12,292 $ 9,109 $6,626
Ratio of expenses to average net assets 3.37% 3.55% 3.67% 4.46%
Ratio of net investment loss to
average net assets (1.95)% (1.47)% (1.39)% (3.15)%
Portfolio turnover rate 40% 30% 23% 30%
Average commission rate (per share) 0.0424 0.0481 0.0473 0.05
|
Year Ended June 30,
-----------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
Per Share Operating Performance
(For a share of capital stock
outstanding for each time period
indicated)
Net asset value, beginning
of period $ 5.15 $ 5.02 $ 6.12 $ 6.43 $ 6.34
------- ------- ------- ------- -------
Operations:
Net investment loss(1) (0.10) (0.07) (0.10) (0.11) (0.01)
Net realized and unrealized gain
(loss) on investment transactions (1) (0.98) 0.20 (1.00) 0.51 0.54
------- ------- ------- ------- -------
Total from operations (1.08) 0.13 (1.10) 0.40 0.53
------- ------- ------- ------- -------
Distributions:
From net investment income (0.10) -- -- -- --
From net realized gains (0.05) -- -- (0.71) (0.44)
------- ------- ------- ------- -------
Total distributions (0.15) -- -- (0.71) (0.44)
------- ------- ------- ------- -------
Net asset value, end of period $ 3.92 $ 5.15 $ 5.02 $ 6.12 $ 6.43
======= ======= ======= ======= =======
Per share market value, end of period $ 3.48 $ 4.20 $ 5.06 $ 6.00 $ 6.00
Total investment return (loss) based
on market value per share (13.45)% (17.04)% (15.63)% 11.83% 23.54%
Ratios And Supplemental Data
Net assets, end of period (in 000's) $ 6,568 $ 8,643 $ 8,424 $10,272 $10,784
Ratio of expenses to average net assets 3.77% 3.11% 3.11% 3.30% 3.21%
Ratio of net investment loss to
average net assets (2.45)% (1.33)% (1.76)% (1.95)% (0.14)%
Portfolio turnover rate 18% 27% 10% 59% 40%
|
THE FUND
The Herzfeld Caribbean Basin Fund, Inc. is a non-diversified, closed-end management investment company incorporated under the laws of the State of Maryland on March 10, 1992, and registered under the Investment Company Act of 1940 (the "1940 Act"). The Fund is designed for investors seeking long-term capital appreciation. The Fund seeks to achieve its objective primarily by investing in issuers that are likely, in the opinion of the Adviser, to benefit from political, legal and economic developments in Cuba and the Caribbean Basin. At such time as it becomes legally permissible for U.S. entities to invest directly in Cuba, the Fund will consider such investments. See "Investment Objective and Policies". The Fund maintains its principal offices at The Herzfeld Building, P.O. Box 161465, Miami, Florida 33116. No assurance can be given that the Fund's investment objective will be achieved.
The Fund's investment adviser is HERZFELD/CUBA, a division of Thomas J. Herzfeld Advisors, Inc., a Miami-based U.S. investment adviser.
As of the Record Date, the Fund had 1,687,556 shares of common stock outstanding. The Fund's common stock is publicly held and is listed and traded on the NASDAQ Capital Market under the symbol "CUBA." The average weekly trading volume of the common stock on the NASDAQ Capital Market during the fiscal year ended June 30, 2007 was approximately 91,544 shares. As of [____], 2007, the aggregate net assets of the Fund were approximately [____], the NAV per share was [____], the share price was [____], and the premium was [____]%. Historically, the Fund's common stock has traded at both premiums and discounts to its NAV.
The following table sets forth, for the periods indicated, the high and low closing sales prices for the shares on the NASDAQ Capital Market, the NAVs per share on the date of the high and low closing sales prices, and the discount or premium that each sales price represented as a percentage of the preceding NAV:
Share Price Data
NAV Premium/Discount NAV Premium/Discount
Quarter High (on High (on High Close Low (on Low (on Low Close
Ended Close Close Date) Date) Close Close date) Date)
---------- ------ ----------- ---------------- ------ ----------- ----------------
6/30/2007 $14.34 $9.66 48.45% $10.20 $8.70 17.24%
3/31/2007 $17.40 $8.15 113.50% $11.15 $8.08 38.00%
12/31/2006 $16.25 $8.07 101.36% $ 7.75 $8.17 -5.14%
9/30/2006 $ 8.81 $7.61 15.77% $ 7.05 $7.55 -6.62%
6/30/2006 $ 8.36 $8.83 -5.32% $ 7.20 $8.07 -10.78%
3/31/2006 $ 8.25 $8.91 -7.41% $ 7.41 $8.13 -8.86%
12/31/2005 $ 8.46 $8.02 5.49% $ 6.35 $7.53 -15.67%
9/30/2005 $ 7.25 $7.66 -5.35% $ 6.15 $7.37 -16.55%
6/30/2005 $ 6.39 $7.31 -12.59% $ 5.47 $6.61 -17.25%
3/31/2005 $ 6.44 $6.91 -6.80% $ 5.76 $6.67 -13.64%
|
THE OFFERING
Terms of the Offer
The Fund is issuing to its holders of common stock on the Record Date ("Record Date Stockholders") Rights to subscribe for additional shares of the Fund's common stock as of the close of business on [____], 2007 (the "Record Date"). Each Record Date Stockholder will receive one non-transferable Right for each share of common stock owned on the Record Date. The Rights entitle the holder to acquire one share of common stock at the Subscription Price for every one Right held.
Rights may be exercised at any time during the period which commences on [____],
2007, and ends at 5:00 p.m., Eastern Time, on [____], 2007 (the "Subscription
Period"), unless extended by the Fund to a date not later than [____], at 5:00
p.m., Eastern Time. See "Expiration of the Offer" below. The right to acquire
one additional share of Common Stock for every one Right held during the
Subscription Period at the Subscription Price is herein after referred to as the
"Primary Subscription."
In addition, any Record Date Stockholder who fully exercises all Rights
initially issued to him is entitled to subscribe for shares which were not
otherwise subscribed for by others in the Primary Subscription (the
"Over-Subscription Privilege"). If enough shares are available, all of these
requests will be honored in full. If these requests for shares exceed the shares
available, the Fund may determine after the expiration of the Offer, in the
discretion of the Fund, to issue additional Common Stock up to an amount equal
to 100% of the Shares available pursuant to the Offer (up to an additional
[____] shares of Common Stock) in order to cover these requests, provided that
the Fund's per share NAV on the Expiration Date is equal to or less than the
Subscription Price. Regardless of whether the Fund issues such additional Common
Stock, to the extent shares are not available to honor all requests, the
available shares will be allocated pro rata among those Record Date Stockholders
who over-subscribe based on the number of Rights originally issued to them by
the Fund.
In the event that the Fund, in its sole discretion, issues additional Common Shares in an amount of up to 100% of the Primary Subscription Shares (the "Secondary Over-Subscription Shares") for purposes of determining the maximum number of shares a Record Date Stockholder may acquire pursuant to the Offer, broker-dealers whose shares are held of record by Cede, as nominee for The Depository Trust Company, or by any other depository or nominee, will be deemed to be the holders of the Rights that are issued to Cede or such other depository or nominee on their behalf. Shares acquired pursuant to the Over-Subscription Privilege are subject to allotment, which is more fully discussed below under "Over-Subscription Privilege."
Officers of the Adviser have indicated to the Fund that the Affiliated Parties, as Record Date Stockholders, have been authorized to purchase Common Stock through the Primary Subscription and the Over-Subscription Privilege to the extent the Common Stock becomes available to it in accordance with the Primary Subscription and the allotment provisions of the Over-Subscription Privilege. Such over-subscriptions by the Affiliated Parties may disproportionately increase their already existing ownership resulting in a higher percentage ownership of outstanding shares of the Fund. Any Common Stock acquired in the Offer by the Affiliated Parties as "affiliates" of the Fund, as that term is defined under the Securities Act of 1933 (the "Securities Act"), may only be sold in accordance with Rule 144 under the Securities Act or another applicable exemption or pursuant to an effective registration statement under the Securities Act. In general, under Rule 144, as currently in effect, an "affiliate" of the Fund is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of 1% of the then outstanding shares of common stock or the average weekly reported trading volume of the common stock during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain restrictions on the manner of sale, to notice requirements and to the availability of current public information about the Fund.
Rights will be evidenced by certificates ("Subscription Certificates"). The number of Rights issued to each Record Date Stockholder will be stated on the Subscription Certificate delivered to the holder. The method by which Rights may be exercised and shares paid for is set forth below in "Method of Exercising Rights" and "Payment for Shares." A Rights holder will have no right to rescind a purchase after the Subscription Agent has received payment. See "Payment for Shares" below.
The Rights are non-transferable and, therefore may not be purchased or sold. Rights not exercised will expire without residual value at the Expiration Date. The Rights will not be listed for trading on the NASDAQ Capital Market or any other securities exchange. Common Stock issued pursuant to an exercise of Rights will be listed and available for trading on the NASDAQ Capital Market.
There is no minimum number of Rights which must be exercised in order for the Offer to close.
Purpose of the Offer
The Board has determined that it is in the best interests of the Fund and its existing stockholders to increase the assets of the Fund so that the Fund may be in a better position to take advantage of investment opportunities that may arise. Without additional capital, the Fund is limited in its ability to take advantage of new investment opportunities. The only practical means of increasing the Fund's assets available for investment other than through the Offer would be through the sale of portfolio securities, which could subject the Fund to certain adverse tax consequences under the Code.
The Offer affords the Fund a means of increasing its assets available for investment without requiring the sale of portfolio securities at a time when it would not be desirable to do so. The Offer will permit the Fund to take advantage of investment opportunities as they arise, without necessarily having to liquidate Fund holdings to raise cash. When the Adviser identifies an investment opportunity, it wants to be able to take advantage of it quickly and make investments, without having to sell current holdings in the process. The Adviser believes that having the cash resources available to make new investments without liquidating current portfolio holdings will allow the investment adviser to more fully implement its investment strategy in pursuit of the Fund's investment objective
In addition, the Board believes that increasing the size of the Fund may lower the Fund's expenses as a proportion of average net assets because the Fund's fixed costs would be spread over a larger asset base. As a fund's assets decrease, its expense ratio (i.e., the ratio of expenses to fund assets) will increase. This occurs because funds have certain fixed costs (e.g., fidelity bond insurance, D&O liability insurance, legal fees, custodian fees, transfer agent fees, accounting fees, regulatory filing fees etc.) which are not charged in proportion to a fund's size. As a fund gets smaller, these fixed costs are spread over fewer assets, thus resulting in a higher expense ratio. The opposite occurs as a fund's assets increase, that is, the fixed costs are spread across a larger asset base thus resulting in a lower expense ratio. There can be no assurance, however, that an increase in the size of the Fund will lower the Fund's expense ratio.
Also the Fund has had significant gains in NAV, and has realized gains. For the calendar year ended December 31, 2006, the Fund paid a large year-end distribution. In addition, the recent announcement that Florida East Coast Industries, currently the Fund's largest holding, will be acquired by Fortress Investment Group LLC could result in significant realized gains for the current calendar year ending December 31, 2007. Net realized gains of the Fund are required to be distributed to stockholders in order to maintain the Fund's status as a "regulated investment company" under Subchapter M of the Internal Revenue Code. Accordingly, the Fund may be required to make a large distribution to shareholders to maintain its status as a regulated investment company, thereby reducing the net assets of the Fund. If successful, the Offer will allow the Fund to make the required distributions without causing a reduction in the amount of cash available for additional investment opportunities.
The Board also believes that a larger number of outstanding shares and a larger number of beneficial owners of shares could increase the level of market interest in and visibility of the Fund and improve the trading liquidity of the Fund's common stock on the NASDAQ Capital Market. If the Offer is successful, the larger number of shares of common stock outstanding after the Offer should help create a more efficient and active market for the Fund's shares and reduce the effect of individual transactions on market price, all of which are believed generally to increase liquidity.
The Offer seeks to reward existing stockholders by giving them the right to purchase additional shares at a price below market without incurring any commission or other transaction charges that they would normally incur when buying shares in the market.
The Board considered, among other things, advice by the Investment Adviser, using fixed pricing versus variable pricing for the Offer, the benefits and drawbacks of conducting a non-transferable versus a transferable rights offering and the effect on the Fund if the Offer is undersubscribed. The Board also considered the extent to which the Adviser will benefit from the Offer because the Adviser's fee is based on the average net assets of the Fund. It is not possible to state precisely the amount of additional compensation the Adviser will receive as a result of the Offer because the proceeds of the Offer will be invested in additional portfolio securities which will fluctuate in value. In addition, the Board determined to proceed with the offer of rights after having considered the dilutive effects of the offering on stockholders who are unwilling or unable to fully exercise their rights, as well as the alternatives of a secondary offering. The Board has voted unanimously to approve the terms of the Offer as set forth in this Prospectus.
It should be further understood by investors that the Fund's Adviser will benefit from the Offer because the Adviser's fee is based on the average net assets of the Fund. See "Management of the Fund." It is impossible to state precisely the amount of additional compensation the Adviser will receive as a result of the Offer because the proceeds of the Offer will be invested in additional portfolio securities which will fluctuate in value. However, assuming all Rights are exercised at the Estimated Subscription Price of $____, the annual compensation to be received by the Adviser would be increased by approximately $[____].
The Fund may, in the future and at its discretion, choose to make additional rights offerings from time to time for a number of shares and on terms which may or may not be similar to the Offer. Any such future rights offering will be made in accordance with the 1940 Act. Under the laws of Maryland, the state in which the Fund is organized, the Board is authorized to approve rights offerings without obtaining stockholder approval. The staff of the Securities and Exchange Commission has interpreted the 1940 Act as not requiring stockholder approval of a rights offering at a price below the then current NAV so long as certain conditions are met, including a good faith determination by the Board that such offering would result in a net benefit to existing stockholders.
Subscription Price
The Subscription Price for the shares of Common Stock issued in the Offer will be a price equal to [____]% of the volume-weighted average closing sales price of a share of common stock on the NASDAQ Capital Market on the Expiration Date and the four preceding trading days. Stockholders who exercise their Rights will have no right to rescind a purchase after receipt of their completed Subscription Certificates for Shares by the Subscription Agent. The Fund does not have the right to withdraw the Offer after the Rights have been distributed.
The Fund announced its intention to make the Offer on [____], 2007. The NAV per share of common stock at the close of business on [____], 2007 [the announcement date] and on [____], 2007 [ex-rights or Record Date] was $[____] and $[____], respectively, and the last reported sale price of a share of Common Stock on the NASDAQ Capital Market on those dates was $[____] and $[____], respectively.
Over-Subscription Privilege
If some Record Date Stockholders do not exercise all of the Rights initially issued to them to purchase Common Stock of the Fund, those Record Date Stockholders who have exercised all of the Rights initially issued to them will be offered, by means of the Over-Subscription Privilege, the right to acquire more than the number of shares for which the Rights issued to them are exercisable. Record Date Stockholders who exercise all the Rights initially issued to them will have the opportunity to indicate on the Subscription Certificate how many shares of Common Stock they are willing to acquire pursuant to the Over-Subscription Privilege. In addition, if the Fund's NAV per share on the Expiration Date is equal to or less than the Subscription Price, the Fund, in its sole discretion, can issue additional Common Shares in an amount of up to 100% of the Primary Subscription Shares (the "Secondary Over-Subscription Shares").
If sufficient Primary Subscription Shares remain after the Primary Subscriptions have been exercised, all over-subscriptions will be honored in full. If sufficient Primary Subscription Shares are not available to honor all subscription requests, the available Common Shares will be allocated among those Record Date Stockholders who over-subscribe based on the number of Rights originally issued to them by the Fund. Should the Fund determine to issue some or all of the Secondary Over-Subscription Shares, they will be allocated only among Record Date Stockholders that submitted over-subscription requests. Secondary Over-Subscription Shares will be allocated pro rata among those fully exercising Record Date Stockholders who over-subscribe based on the number of Rights originally issued to them by the Fund. Any Secondary Over-Subscription Shares issued by the Fund, collectively with any Primary Subscription Shares not subscribed through the Primary Subscription, will be referred to in this Prospectus as the "Excess Shares."
The percentage of Excess Shares each over-subscribing Record Date Stockholder may acquire will be rounded down to result in delivery of whole Common Shares; provided, however, that if a pro rata allocation results in any holder being allocated a greater number of Excess Shares than the holder subscribed for pursuant to the exercise of such holder's Over-Subscription Privilege, then such holder will be allocated only such number of Excess Shares as such holder subscribed for and the remaining Excess Shares will be allocated among all other holders then entitled to receive Excess Shares whose over-subscription requests have not been fully honored. The allocation process may be iterative in order to assure that the total number of Excess Shares is distributed in accordance with the method described above.
The formula to be used in allocating the Excess Shares is as follows:
Stockholder's Record Date Position ----------------------------------------------------- X Excess Shares Remaining Total Record Date Position of All Over-Subscribers
The Fund will not offer or sell any shares which are not subscribed for under the Primary Subscription or the Over-Subscription Privilege.
Expiration of the Offer
The Offer will expire at 5:00 p.m., Eastern Time, on the Expiration Date ([____], 2007), unless extended by the Fund to a date not later than [____], at 5:00 p.m., Eastern Time (the "Extended Expiration Date"). Rights will expire on the Expiration Date (or Extended Expiration Date as the case may be) and thereafter may not be exercised.
Subscription Agent
The Subscription Agent is Colbent Corporation, 161 Bay State Drive, Braintree, MA 02184.
Stockholders may also contact the Fund for information about the Offer by writing to The Herzfeld Caribbean Basin Fund, P.O. Box 161465, Miami, FL 33116 or calling (800) TJH-FUND. Stockholders may also contact their brokers or nominees for information with respect to the Offer.
Method of Exercising Rights
Rights may be exercised by filling in and signing the Subscription Certificate and mailing it in the envelope provided, or otherwise delivering the completed and signed Subscription Certificate to the Subscription Agent, together with payment of the Estimated Subscription Price for the Shares as described below under "Payment for Shares." Rights holders may also exercise Rights by contacting a broker, bank or trust company who can arrange, on behalf of the Rights holder, to guarantee delivery of payment and of a properly completed and executed Subscription Certificate. A fee may be charged for this service. Completed Subscription Certificates and full payment for the Shares subscribed for must be received by the Subscription Agent prior to 5:00 p.m., Eastern Time, on the Expiration Date (unless payment is effected by means of a notice of guaranteed delivery as described below under "Payment for Shares") at the office of the Subscription Agent at the addresses set forth above.
Qualified financial institutions that hold Shares as nominee for the account of others should notify the respective beneficial owners of such Shares as soon as possible to ascertain such beneficial owners' intentions and to obtain instructions with respect to the Rights. For purposes of this Prospectus, "Qualified Financial Institution" shall mean a registered broker-dealer, commercial bank or trust company, securities depository or participant therein, or nominee thereof. If the beneficial owner so instructs, the nominee should complete the Subscription Certificate and submit it to the Subscription Agent with the proper payment. In addition, beneficial owners of Common Stock or Rights held through such a nominee should contact the nominee and request the nominee to effect transactions in accordance with the beneficial owners' instructions.
Stockholders who are registered holders can choose between either option set forth under "Payment for Shares" below.
Payment for Shares
Payment for shares shall be calculated by multiplying the Estimated Subscription
Price of $[____] per share times the sum of (i) the number of Rights held and
intended to be exercised in the Primary Subscription, plus (ii) the number of
additional shares for which a stockholder wishes to over-subscribe under the
Over-Subscription Privilege. For example, if a stockholder receives 100 Rights
and wishes to subscribe for 100 shares of Common Stock in the Primary
Subscription, and also wishes to over-subscribe for 50 additional shares
pursuant to the Over-Subscription Privilege, he, she or it would send in [____]
x 100 plus ([____]) x 50. Rights holders who wish to acquire shares in the
Primary Subscription or pursuant to the Over-Subscription Privilege may choose
between the following methods of payment:
a. Notice of Guaranteed Delivery and Subscription Certificate (with payment) sent separately. If, prior to 5:00 p.m., Eastern Time, on the Expiration Date, the Subscription Agent shall have received a notice of guaranteed delivery by telegram or otherwise, from a bank or trust company or a NYSE member firm guaranteeing delivery of (i) payment of the Estimated Subscription Price of $ [____] per share for the shares subscribed for in the Primary Subscription and any additional shares subscribed for pursuant to the Over-Subscription Privilege and (ii) a properly completed and executed Subscription Certificate, the subscription will be accepted by the Subscription Agent. The Subscription Agent will not honor a notice of guaranteed delivery unless a properly completed and executed Subscription Certificate is received by the Subscription Agent prior to 5:00 p.m., Eastern Time, on the third Business Day after the Expiration Date (the "Protection Period").
b. Subscription Certificate sent with Payment. Alternatively, a stockholder can, together with the properly completed and executed Subscription Certificate, send payment for the shares acquired in the Primary Subscription and any additional shares subscribed for pursuant to the Over-Subscription Privilege, to the Subscription Agent based on the Estimated Subscription Price of $[____] per share. To be accepted, such payment, together with the Subscription Certificate, must be received by the Subscription Agent prior to 5:00 p.m., Eastern Time, on the Expiration Date.
Any excess payment will be refunded to the stockholder to the extent that additional shares are unavailable.
A PAYMENT, PURSUANT TO THE SECOND METHOD DESCRIBED ABOVE, MUST ACCOMPANY ANY SUBSCRIPTION CERTIFICATE FOR SUCH SUBSCRIPTION CERTIFICATE TO BE ACCEPTED.
Within ten (10) Business Days following the completion of the Protection Period (the "Confirmation Date"), a confirmation will be sent by the Subscription Agent to each stockholder (or, if the Fund's shares on the Record Date are held by Cede or any other depository or nominee, to Cede or such other depository or nominee). The confirmation will show (i) the number of shares acquired pursuant to the Primary Subscription; (ii) the number of shares, if any, acquired pursuant to the Over-Subscription Privilege; (iii) the Subscription Price and total purchase price for the shares; and (iv) any additional amount payable by such stockholder to the Fund (e.g., if the Estimated Subscription Price was less than the Subscription Price on the Pricing Date) or any excess to be refunded by the Fund to such stockholder (e.g., if the Estimated Subscription Price was more than the Subscription Price on the Pricing Date). Any additional payment required from a stockholder must be received by the Subscription Agent prior to 5:00 p.m., Eastern Time, on the tenth Business Day after the Confirmation Date, and any excess payment to be refunded by the Fund to such stockholder will be mailed by the Subscription Agent within ten (10) Business Days after the Confirmation Date. All payments by a stockholder must be made in United States Dollars by money order or by checks drawn on banks located in the Continental United States payable to "The Herzfeld Caribbean Basin Fund, Inc."
Whichever of the above two methods is used, issuance and delivery of certificates for the shares of Common Stock subscribed for are subject to collection of funds and actual payment pursuant to any notice of guaranteed delivery.
The Subscription Agent will deposit all checks received by it prior to the final due date into a segregated interest bearing account pending distribution of the shares from the Offer. All interest will inure to the benefit of the Fund and investors will not earn interest on payments submitted.
YOU WILL HAVE NO RIGHT TO RESCIND YOUR SUBSCRIPTION AFTER THE SUBSCRIPTION AGENT HAS RECEIVED THE SUBSCRIPTION CERTIFICATE OR NOTICE OF GUARANTEED DELIVERY.
If a holder of Rights who acquires shares pursuant to the Primary Subscription or the Over-Subscription Privilege does not make payment of any amounts due, the Fund reserves the right to take any or all of the following actions: (i) find other stockholders or Rights holders to purchase such subscribed-for and unpaid-for shares; (ii) apply any payment actually received by it toward the purchase of the greatest whole number of shares which could be acquired by such holder upon exercise of the Primary Subscription or the Over-Subscription Privilege; (iii) sell all or a portion of the shares purchased by the holder in the open market, and apply the proceeds to the amounts owed; and (iv) exercise any and all other rights or remedies to which it may be entitled, including, without limitation, the right to set off against payments actually received by it with respect to such subscribed shares and to enforce the relevant guaranty of payment.
Holders who hold shares of common stock for the account of others, such as brokers, trustees or depositaries for securities, should notify the respective beneficial owners of the shares as soon as possible to ascertain the beneficial owners' intentions and to obtain instructions with respect to the Rights. If the beneficial owners so instruct, the record holder of the Rights should complete Subscription Certificates and submit them to the Subscription Agent with the proper payment. In addition, beneficial owners of common stock or Rights held through such a holder should contact the holder and request the holder to effect transactions in accordance with the beneficial owner's instructions.
The instructions accompanying the Subscription Certificates should be read carefully and followed in detail. DO NOT SEND SUBSCRIPTION CERTIFICATES TO THE FUND.
The method of delivery of Subscription Certificates and payment of the
Subscription Price to the Subscription Agent will be at the election and risk of
the Rights holders, but if sent by mail it is recommended that the Subscription
Certificates and payments be sent by registered mail, properly insured, with
return receipt requested, and that a sufficient number of days be allowed to
ensure delivery to the Subscription Agent and clearance of payment prior to 5:00
p.m., Eastern Time, on the Expiration Date. Because uncertified personal checks
may take at least five Business Days to clear, you are strongly urged to pay, or
arrange for payment, by means of a certified or cashier's check or money order.
All questions concerning the timeliness, validity, form and eligibility of any exercise of Rights will be determined by the Fund, whose determinations will be final and binding. The Fund in its sole discretion may waive any defect or irregularity, or permit a defect or irregularity to be corrected within such time as it may determine, or reject the purported exercise of any Right. Subscriptions will not be deemed to have been received or accepted until all irregularities have been waived or cured within such time as the Fund determines in its sole discretion. Neither the Fund nor the Subscription Agent will be under any duty to give notification of any defect or irregularity in connection with the submission of Subscription Certificates or incur any liability for failure to give such notification.
Delivery of Stock Certificates
Stock certificates representing shares purchased pursuant to the Primary Subscription will be delivered to subscribers as soon as practicable after the corresponding Rights have been validly exercised and full payment for the shares has been received and cleared. Stock certificates representing shares purchased pursuant to the Over-Subscription Privilege will be delivered to subscribers as soon as practicable after the Expiration Date and after all allocations have been effected.
Foreign Restrictions
Subscription Certificates will only be mailed to Record Date Stockholders whose addresses are within the United States (other than an APO or FPO address). Record Date Stockholders whose addresses are outside the United States or who have an APO or FPO address and who wish to subscribe to the Offer either in part or in full should contact the Subscription Agent, Colbent Corporation, by written instruction or recorded telephone conversation no later than three Business Days prior to the Expiration Date. The Fund will determine whether the Offer may be made to any such stockholder.
Federal Income Tax Consequences Associated With the Offer
The following discussion describes certain United States Federal income tax consequences of the Offer generally applicable to citizens or residents of the United States and U.S. trusts, estates, corporations and any other person who is generally subject to U.S. Federal income tax ("U.S. Stockholders"). This summary is intended to be descriptive only and does not purport to be a complete analysis or listing of all potential tax effects relevant to the ownership of Rights or Common Stock. It assumes that each U.S. Stockholder holds Common Stock as a capital asset. Additionally, this summary does not specifically address the U.S. Federal income tax consequences that might be relevant to holders of Rights or Common Stock entitled to special treatment under the U.S. Federal income tax laws, such as individual retirement accounts and other tax deferred accounts, financial institutions, life insurance companies and tax-exempt organizations, and does not discuss the effect of state, local and other tax laws. Further, this summary is based on interpretations of existing law as of the date of this Prospectus as contained in the Code, applicable current and proposed Treasury Regulations, judicial decisions and published administrative positions of the Internal Revenue Service, all of which are subject to change either prospectively or retroactively.
1. U.S. Stockholders who receive Rights pursuant to the Offer should not recognize taxable income for U.S. Federal income tax purposes upon their receipt of the Rights. If Rights issued to a U.S. Stockholder expire without being exercised, no basis should be allocated to such Rights, and such Stockholder should not recognize any gain or loss for U.S. Federal income tax purposes upon such expiration.
2. The tax basis of a U.S. Stockholder's Common Stock should remain unchanged and the stockholder's basis in the Rights should be zero, unless such U.S. Stockholder affirmatively and irrevocably elects (in a statement attached to such stockholder's U.S. Federal income tax return for the year in which the Rights are received) to allocate the basis in the Common Stock between such Common Stock and the Rights in proportion to their respective fair market values on the date of distribution.
3. A U.S. Stockholder who exercises Rights should not recognize any gain or loss for U.S. Federal income tax purposes upon the exercise. The tax basis of the newly acquired Common Stock should equal the Subscription Price paid for the Common Stock (plus the basis, if any, allocated to the Rights in the manner described in the immediately preceding paragraph). The holding period for Common Stock acquired upon the exercise of Rights should begin on the date of exercise of the Rights.
4. Each U.S. Stockholder is urged to consult his or her own tax adviser with respect to the specific Federal, state and local tax consequences to such U.S. Stockholder of receiving Rights in this offer.
Employee Plan Considerations
Stockholders that are employee benefit plans subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (including corporate savings and 401(k) plans), Keogh or H.R. 10 plans of self-employed individuals and Individual Retirement Accounts ("IRAs") (collectively, "Plans") should be aware of the complexity of the rules and regulations governing Plans and the penalties for noncompliance, and Plans should consult with their counsel regarding the consequences of their exercise of Rights under ERISA and the Internal Revenue Code of 1986, as amended (the "Code").
USE OF PROCEEDS
The net proceeds of the Offer, assuming the Offer is fully subscribed, are estimated to be approximately $____million, based on an Estimated Subscription Price of $[____]per share, and after deducting expenses related to the Offer estimated at approximately $[____]. The foregoing estimate of the net proceeds of the Offer is based on the closing price of the Fund's shares on [____], 2007. Accordingly, the assumptions and projections contained in this prospectus are subject to change significantly depending on changes in market conditions for the Fund's shares and performance of the Fund's portfolio. The Fund will invest the net proceeds of the Offer in accordance with its investment objective and policies. The Adviser anticipates that the proceeds will be invested promptly as investment opportunities are identified, depending on market conditions and the availability of appropriate securities, and it is anticipated to take not more than approximately six months. Pending investment, the proceeds will be invested in short-term cash-equivalent instruments.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investing in the Fund's common stock provides an equity ownership interest in the Fund. Investing in any investment company security involves risk, including the risk that a Stockholder may receive little or no return on the Stockholder's investment or that the Stockholder may lose part or all of the Stockholder's investment. Therefore, before investing, Stockholders should consider carefully the following risks that are assumed when investing in the Fund through the Offer.
Dilution of Net Asset Value and Effect of Non-Participation in the Offer
If a Stockholder does not exercise all of his Rights, the Stockholder will likely own a smaller proportional interest in the Fund when the Offer is over (i.e., proportional dilution). In addition, whether or not a Stockholder exercises his Rights, because the Subscription Price (and net proceeds to the Fund) may be below the Fund's NAV per share on the Expiration Date the per share net asset value of a Stockholder's shares may be diluted (reduced) immediately as a result of the Offer (i.e., economic dilution).
In other words, a Stockholder may experience economic dilution in addition to proportional dilution because:
o The Subscription Price per share is [____]% of the average volume-weighted closing sales price of a share of common stock on the NASDAQ Capital Market on the Pricing Date and the four immediately preceding trading days (which may be lower than the NAV);
o All Stockholders will indirectly bear the expenses of the Offer; and
o the number of shares outstanding after the Offer will have increased proportionately more than the increase in the size of the Fund's net assets
The Fund cannot state precisely the amount of any dilution/accretion because it is not known at this time (i) what the average volume-weighted closing sale price of a share on the NASDAQ Capital Market will be on the Pricing Date and the four immediately preceding trading days, or (ii) what proportion of the Rights will be exercised.
The impact of the Offer on NAV per share is shown by the following example, assuming a Subscription Price of $[____], full primary and over-subscription privilege exercise and $[____] in expenses related to the Offer.
Net Asset Value ("NAV") $[____]
Subscription Price $[____]
[Increase/Reduction] in NAV ($) $[____]
[Increase/Reduction] in NAV (%) [____]%
|
Discount From Net Asset Value
Shares of closed-end funds frequently trade at a market price that is less than the value of the net assets attributable to those shares (a "discount"). The possibility that the Fund's shares will trade at a discount from NAV is a risk separate and distinct from the risk that the Fund's NAV will decrease. The risk of purchasing shares of a closed-end fund that might trade at a discount or unsustainable premium is more pronounced for investors who wish to sell their shares in a relatively short period of time after purchasing them because, for those investors, realization of a gain or loss on their investments is likely to be more dependent upon the existence of a premium or discount than upon portfolio performance. The Fund's shares are not redeemable at the request of stockholders. The Fund may repurchase its shares in the open market or in private transactions, although it has no present intention to do so. Stockholders desiring liquidity may, subject to applicable securities laws, trade their shares in the Fund on the NASDAQ Capital Market or other markets on which such shares may trade at the then current market value, which may differ from the then current NAV.
Risks of Investing in Caribbean Basin Countries
The economies of Caribbean Basin Countries have in the past experienced considerable difficulties, including high inflation rates and high interest rates. The emergence of the economies and securities markets of the Caribbean Basin Countries will require continued economic and fiscal discipline that has been lacking at times in the past, as well as stable political and social conditions. International economic conditions, particularly those in the United States, as well as world prices for oil and other commodities may also influence the development of the economies of the Caribbean Basin Countries.
The currencies of some Caribbean Basin Countries have experienced steady devaluations relative to the U.S. Dollar and certain Caribbean Basin Countries have had to make major adjustments in their currencies from time to time. Also many Caribbean Basin Countries have experienced substantial, and in some periods extremely high, rates of inflation for many years. For companies that keep accounting records in the local currency, inflation accounting rules in some Caribbean Basin Countries require, for both tax and accounting purposes, that certain assets and liabilities be restated on the company's balance sheet in order to express items in terms of currency of constant purchasing power. Inflation accounting may indirectly generate losses or profits for certain Caribbean Basin Companies. Inflation and rapid fluctuations in inflation rates have had, and could, in the future, have very negative effects on the economies and securities markets of certain Caribbean Basin Countries.
In addition, governments of many Caribbean Basin Countries have exercised and continue to exercise substantial influence over many aspects of the private sector. Governmental actions in the future could have a significant effect on economic conditions in Caribbean Basin Countries, which could affect the companies in which the Fund invests and, therefore, the value of Fund shares. Investments in foreign markets may be adversely affected by governmental actions such as the imposition of punitive taxes. In addition, the governments of certain countries may prohibit or impose substantial restrictions on foreign investing in their capital markets or in certain industries. Substantial limitations may exist in certain countries with respect to the Fund's ability to repatriate investment income, capital or the proceeds of sales of securities. The Fund could be adversely affected by delays in, or a refusal to grant, any required governmental approval for repatriation of capital, as well as by the application to the Fund of any restrictions on investments. Any of these actions could severely affect security prices, impair the Fund's ability to purchase or sell foreign securities or transfer the Fund's assets or income back into the United States, or otherwise adversely affect the Fund's operations.
Certain Caribbean Basin Countries have entered into regional trade agreements that are designed to, among other things, reduce barriers between countries, increase competition among companies and reduce government subsidies in certain industries. No assurance can be given that these changes will be successful in the long term, or that these changes will result in the economic stability intended. There is a possibility that these trade arrangements will not be fully implemented, or will be partially or completely unwound. It is also possible that a significant participant could choose to abandon a trade agreement, which could diminish its credibility and influence. Any of these occurrences could have adverse effects on the markets of both participating and non-participating countries, including sharp appreciation or depreciation of participants' national currencies and a significant increase in exchange rate volatility, a resurgence in economic protectionism, an undermining of confidence in the Caribbean Basin markets, an undermining of Caribbean Basin economic stability, the collapse or slowdown of the drive towards economic unity, and/or reversion of the attempts to lower government debt and inflation rates that were introduced in anticipation of such trade agreements. Such developments could have an adverse impact on the Fund's investments in the Caribbean Basin generally or in specific countries participating in such trade agreements.
The Caribbean Basin has experienced natural disasters, including hurricanes, droughts and floods, which have caused substantial damage to parts of the Caribbean Basin and have harmed the region's economies. The possibility exists that another natural disaster could materially disrupt and adversely affect the economies of Caribbean Basin Countries. In addition, companies and industries in which the Fund invests may experience substantial disruptions in operations as a result of any such natural disasters.
Other Caribbean Basin market risks include foreign exchange controls, difficulties in pricing securities, defaults on sovereign debt, difficulties in enforcing favorable legal judgments in local courts and political and social instability. Legal remedies available to investors in certain Caribbean Basin countries may be less extensive than those available to investors in the United States or other foreign countries.
Geographic Concentration Risk
The Fund may invest from time to time a substantial amount of its assets in issuers located in a single country or a limited number of countries. If the Fund concentrates its investments in this manner, it assumes the risk that economic, political and social conditions in those countries will have a significant impact on its investment performance. The Fund's investment performance may also be more volatile if it concentrates its investments in certain countries, especially emerging market countries.
Foreign Securities Risk
Securities traded in foreign markets have often (though not always) performed differently from securities traded in the United States. However, such investments often involve special risks not present in U.S. investments that can increase the chances that the Fund will lose money. In particular, the Fund is subject to the risk that because there may be fewer investors on foreign exchanges and a smaller number of securities traded each day, it may be more difficult for the Fund to buy and sell securities on those exchanges. In addition, prices of foreign securities may go up and down more than prices of securities traded in the United States.
Foreign Economy Risk
The economies of certain foreign markets may not compare favorably with the economy of the United States with respect to such issues as growth of gross national product, reinvestment of capital, resources and balance of payments position. Certain foreign economies may rely heavily on particular industries or foreign capital and are more vulnerable to diplomatic developments, the imposition of economic sanctions against a particular country or countries, changes in international trading patterns, trade barriers and other protectionist or retaliatory measures. Investments in foreign markets may also be adversely affected by governmental actions such as the imposition of capital controls, nationalization of companies or industries, expropriation of assets or the imposition of punitive taxes. In addition, the governments of certain countries may prohibit or impose substantial restrictions on foreign investments in their capital markets or in certain industries. Any of these actions could severely affect securities prices or impair the Fund's ability to purchase or sell foreign securities or transfer the Fund's assets or income back into the United States, or otherwise adversely affect the Fund's operations.
Other potential foreign market risks include foreign exchange controls, difficulties in pricing securities, defaults on foreign government securities, difficulties in enforcing legal judgments in foreign courts and political and social instability. Legal remedies available to investors in certain foreign countries may be less extensive than those available to investors in the United States.
Currency Risk
Securities and other instruments in which the Fund invests may be denominated or quoted in currencies other than the U.S. Dollar. Changes in foreign currency exchange rates may affect the value of the Fund's portfolio. Because the Fund's assets are primarily invested in securities of Caribbean Basin Companies, and because some portion of revenues and income may be received in foreign currencies while Fund distributions will be made in dollars, the dollar equivalent of the Fund's net assets and distributions would be adversely affected by reductions in the value of the foreign currencies relative to the dollar. For this reason, changes in foreign currency exchange rates can affect the value of the Fund's portfolio. Generally, when the U.S. Dollar rises in value against a foreign currency, a security denominated in that currency loses value because the currency is worth fewer U.S. Dollars. Conversely, when the U.S. Dollar decreases in value against a foreign currency, a security denominated in that currency gains value because the currency is worth more U.S. Dollars. This risk, generally known as "currency risk," means that a strong U.S. Dollar may reduce returns for U.S. investors while a weak U.S. Dollar may increase those returns. The Fund is managed with the assumption that most of its stockholders hold their assets in U.S. Dollars. As a result, and because distributions are made in U.S. Dollars, other non-U.S. investors will be adversely affected by reductions in the value of the U.S. Dollar relative to their home currency.
Governmental Supervision and Regulation/Accounting Standards
Foreign issuers are generally not bound by uniform accounting, auditing, and financial reporting requirements and standards of practice comparable to those applicable to U.S. issuers. Some of the securities held by the Fund may not be registered with the U.S. Securities and Exchange Commission nor may the issuers be subject to the SEC's reporting requirements. Thus, there may be less available information concerning foreign issuers of securities held by the Fund than is available concerning U.S. issuers. Adequate public information on foreign issuers may not be available, and it may be difficult to secure dividends and information regarding corporate actions on a timely basis. In general, there is less overall governmental supervision and regulation of securities exchanges, brokers, and listed companies than in the United States. OTC markets tend to be less regulated than stock exchange markets and, in certain countries, may be totally unregulated. Regulatory enforcement may be influenced by economic or political concerns, and investors may have difficulty enforcing their legal rights in foreign countries.
In addition, the U.S. Government has from time to time imposed restrictions, through penalties and otherwise, on foreign investments by U.S. investors, including current prohibitions on U.S. investment in Cuba. Investments in securities of Cuban companies, if permitted by U.S. law, may be subject to certain political and economic risks in addition to the risks associated with investment in the securities of issuers domiciled in other foreign countries. The risks include (i) less social, political and economic stability; (ii) the small current size of the markets for such securities and the currently low or nonexistent volume of trading, which result in a lack of liquidity and in greater price volatility; (iii) certain national policies which may restrict the Fund's investment opportunities, including restrictions on investment in issuers or industries deemed sensitive to national interests; (iv) the absence of developed legal structures governing private or foreign investment or allowing for judicial redress for injury to private property; (V) the absence of a capital market structure or market-oriented economy; and (vi) the possibility that recent favorable economic developments may be slowed or reversed by unanticipated political or social events in such countries. Investments in securities of Cuban companies, if and when the Fund is permitted to invest in such securities, will be speculative and involve risks not usually associated with investments in securities of issuers in more developed market economies. See "Emerging Markets Risk" below.
Some foreign securities or nations impose restrictions on transfer within the United States or to U.S. persons. Although securities subject to such transfer restrictions may be marketable abroad, they may be less liquid than foreign securities of the same class that are not subject to such restrictions.
Accounting standards in other countries are not necessarily the same as in the United States. If the accounting standards in another country do not require as much detail as U.S. accounting standards, it may be harder for the Adviser to completely and accurately determine a company's financial condition. In instances where the financial statements of an issuer are not deemed to reflect accurately the financial situation of the issuer, the Adviser will take appropriate steps to evaluate the proposed investment, which may include on-site inspection of the issuer (including Cuba, if U.S. restrictions on travel to Cuba are lifted), interviews with its management and consultation with accountants, bankers and other specialists.
Certain Risks of Holding Fund Assets Outside the United States
The Fund generally holds its foreign securities and cash in foreign banks and securities depositories. Some foreign banks and securities depositories may be recently organized or new to the foreign custody business. In addition, there may be limited or no regulatory oversight of their operations. Also, the laws of certain countries limit the Fund's ability to recover its assets if a foreign bank, depository or issuer of a security, or any of their agents, goes bankrupt. In addition, it is often more expensive for the Fund to buy, sell and hold securities in certain foreign markets than in the United States. The increased expense of investing in foreign markets reduces the amount the Fund can earn on its investments and typically results in a higher operating expense ratio for the Fund than for investment companies invested only in the United States.
Settlement Risk
Settlement and clearance procedures in certain foreign markets differ significantly from those in the United States. Foreign settlement and clearance procedures and trade regulations also may involve certain risks (such as delays in payment for or delivery of securities) not typically associated with the settlement of U.S. investments. Communications between the United States and emerging market countries may be unreliable, increasing the risk of delayed settlements or losses of security certificates in markets that still rely on physical settlement. At times, settlements in certain foreign countries have not kept pace with the number of securities transactions. These problems may make it difficult for the Fund to carry out transactions. If the Fund cannot settle or is delayed in settling a purchase of securities, it may miss attractive investment opportunities and certain of its assets may be uninvested with no return earned thereon for some period. If the Fund cannot settle or is delayed in settling a sale of securities, it may lose money if the value of the security then declines or, if it has contracted to sell the security to another party, the Fund could be liable for any losses incurred. Dividends or interest on, or proceeds from the sale of, foreign securities may be subject to foreign withholding taxes.
Emerging Markets Risk
The risks of foreign investments are usually much greater for emerging markets. Investments in emerging markets, including many Caribbean Basin Countries, may be considered speculative. Emerging markets are riskier than more developed markets because they tend to develop unevenly and may never fully develop. Since these markets are often small, they may be more likely to suffer sharp and frequent price changes or long-term price depression because of adverse publicity, investor perceptions or the actions of a few large investors. Many emerging markets have histories of political instability and abrupt changes in policies. As a result, their governments are more likely to take actions that are hostile or detrimental to private enterprise or foreign investment than those of more developed countries. Certain emerging markets may also face other significant internal or external risks, including the risk of war, and civil unrest. In addition, governments in many emerging market countries participate to a significant degree in their economies and securities markets, which may impair investment and economic growth.
Investments in the securities of issuers domiciled in countries with emerging
capital markets involve certain additional risks that do not generally apply to
investments in securities of issuers in more developed capital markets, such as
(i) low or non-existent trading volume, resulting in a lack of liquidity and
increased volatility in prices for such securities, as compared to securities of
comparable issuers in more developed capital markets; (ii) uncertain national
policies and social, political and economic instability, increasing the
potential for expropriation of assets, confiscatory taxation, high rates of
inflation or unfavorable diplomatic developments; (iii) possible fluctuations in
exchange rates, differing legal systems and the existence or possible imposition
of exchange controls, custodial restrictions or other foreign or U.S.
governmental laws or restrictions applicable to such investments; (iv) national
policies that may limit the Fund's investment opportunities such as restrictions
on investment in issuers or industries deemed sensitive to national interests;
and (v) the lack or relatively early development of legal structures governing
private and foreign investments and private property. In addition to withholding
taxes on investment income, some countries with emerging markets may impose
differential capital gains taxes on foreign investors.
Emerging capital markets are developing in a dynamic political and economic environment brought about by events over recent years that have reshaped political boundaries and traditional ideologies. In such a dynamic environment, there can be no assurance that any or all of these capital markets will continue to present viable investment opportunities for the Fund. In the past, governments of such nations have expropriated substantial amounts of private property, and most claims of the property owners have never been fully settled. There is no assurance that such expropriations will not reoccur. In such an event, it is possible that the Fund could lose the entire value of its investments in the affected market.
Also, there may be less publicly available information about issuers in emerging markets than would be available about issuers in more developed capital markets, and such issuers may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those to which U.S. companies are subject. In certain countries with emerging capital markets, reporting standards vary widely. As a result, traditional investment measurements used in the United States, such as price/earnings ratios, may not be applicable. Emerging market securities may be substantially less liquid and more volatile than those of mature markets, and company shares may be held by a limited number of persons. This may adversely affect the timing and pricing of the Fund's acquisition or disposal of securities. Communications between the United States and emerging market countries may be unreliable, increasing the risk of delayed settlements or losses of security certificates.
Practices in relation to settlement of securities transactions in emerging markets involve higher risks than those in developed markets, in part because the Fund may need to use brokers and counterparties that are less well capitalized, and custody and registration of assets in some countries may be unreliable. The possibility of fraud, negligence, undue influence being exerted by the issuer or refusal to recognize ownership exists in some emerging markets, and, along with other factors, could result in ownership registration being completely lost. The Fund would absorb any loss resulting from such registration problems and may have no successful claim for compensation.
INVESTMENT OBJECTIVE AND POLICIES
Investment Policies - General
The Fund's investment objective is to obtain long-term capital appreciation. This objective may not be changed without the prior approval of the holders of a majority of the Fund's outstanding voting securities. The Fund pursues its objective by investing primarily in equity and equity-linked securities of public and private companies, including U.S.-based companies, (i) whose securities are traded principally on a stock exchange in a Caribbean Basin country, (ii) that have at least 50% of the value of their assets in a Caribbean Basin Country or (iii) that derive at least 50% of their total revenue from operations in a Caribbean Basin country (collectively referred to herein as "Caribbean Basin Companies"). Current income through receipt of interest or dividends from the Fund's securities is incidental to the Fund's efforts to attain its investment objective. The Fund invests in Caribbean Basin Companies that are likely, in the opinion of the Adviser, to benefit from political, legal and economic developments in the Caribbean Basin Countries. Under normal market conditions, the Fund invests at least 80% of its total assets in equity and equity-linked securities of Caribbean Basin Companies. The Fund may invest more than 25% of its total assets in the securities of U.S.-based companies. U.S. law currently prohibits the Fund from investing its assets in securities of companies that benefit from free trade with Cuba ("companies strategically linked to Cuba"). Companies strategically linked to Cuba may include a company that benefits from free trade with Cuba, but does not meet the definition of Caribbean Basin Company set forth above. If permitted to make such investments upon a lifting or easing of the U.S. trade embargo against Cuba or pursuant to regulations promulgated by a department or agency of the U.S. Government, the Fund may invest up to 20% of its assets in equity and equity-linked securities of non-Caribbean Basin Companies strategically linked to Cuba.
The Fund's investment objective is fundamental and may not be changed without the approval of the Fund's outstanding voting securities. As used in this Prospectus, a majority of the Fund's outstanding voting securities means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are present in person or represented by proxy or (ii) more than 50% of the outstanding shares. The Fund's investment policies may be changed by its Board without stockholder approval, but the Fund will not change its investment policies without notice to its stockholders. The Fund is designed primarily for long-term investment, and investors should not consider it a trading vehicle. An investment in the Fund's shares should not constitute a complete investment program. The Fund's NAV can be expected to fluctuate, and no assurance can be given that the Fund will continue to achieve its investment objective.
Equity securities of public and private companies that may be purchased by the Fund consist of common stock, convertible and non-convertible preferred stock (whether voting or non-voting), debt with equity warrants and unattached warrants. Debt issued with a warrant entitles the holder to purchase equity shares and differs from convertible debt because the conversion feature is in the form of a separately traded warrant. Equity-linked securities of public and private companies that may be purchased by the Fund consist of debt securities convertible into equity and securities such as warrants, options and futures, the prices of which are functions of the value of the equity securities receivable upon exercise or settlement thereof.
The Fund may also invest in the shares of other registered investment companies,
some of which may be Caribbean Basin Companies. By investing in shares of
investment companies, the Fund would indirectly pay a portion of the operating
expenses, management expenses and brokerage costs of such companies as well as
the expense of operating the Fund. Thus, the Fund's investors may indirectly pay
higher total operating expenses and other costs than they might pay by owning
the underlying investment companies directly. The Adviser will continue to
attempt to identify investment companies that have demonstrated superior
management in the past, thus possibly offsetting these factors by producing
better results and/or lower expenses than other investment companies. There can
be no assurance that this result will continue to be achieved. In addition,
Section 12(d)(1)(A) of the 1940 Act imposes limits on the amount of the
investment of the Fund's assets, and those of its affiliates, in any investment
company and that provision may adversely affect the Fund's ability to purchase
or redeem shares issued by an investment company.
The Fund may invest in securities that lack an established secondary trading market or otherwise are considered illiquid. Liquidity of a security relates to the ability to dispose easily of the security and the price to be obtained upon disposition of the security, which may be less than would be obtained for a comparable more liquid security. Illiquid securities may trade at a discount from comparable, more liquid investments. Investment of the Fund's assets in illiquid securities may restrict the ability of the Fund to dispose of its investments in a timely fashion and for a fair price as well as its ability to take advantage of market opportunities. The risks associated with illiquidity will be particularly acute where the Fund's operations require cash, such as when the Fund redeems shares or pays a distribution, and could result in the Fund borrowing to meet short-term cash requirements or incurring capital losses on the sale of illiquid investments.
The Fund may invest in securities that are not registered under the Securities Act of 1933, as amended ("restricted securities"). Restricted securities may be sold in private placement transactions between issuers and their purchasers and may be neither listed on an exchange nor traded in other established markets. In many cases, privately placed securities may not be freely transferable under the laws of the applicable jurisdiction or due to contractual restrictions on resale. As a result of the absence of a public trading market, privately placed securities may be less liquid and more difficult to value than publicly traded securities. To the extent that privately placed securities may be resold in privately negotiated transactions, the prices realized from the sales, due to illiquidity, could be less than those originally paid by the Fund or less than their fair market value. In addition, issuers whose securities are not publicly traded may not be subject to the disclosure and other investor protection requirements that may be applicable if their securities were publicly traded. If any privately placed securities held by the Fund are required to be registered under the securities laws of one or more jurisdictions before being resold, the Fund may be required to bear the expenses of registration. Certain of the Fund's investments in private placements may consist of direct investments and may include investments in smaller, less seasoned issuers, which may involve greater risks. These issuers may have limited product lines, markets or financial resources, or they may be dependent on a limited management group. In making investments in such securities, the Fund may obtain access to material nonpublic information, which may restrict the Fund's ability to conduct portfolio transactions in such securities.
The Fund may vary its investment policy for temporary defensive purposes when, in the opinion of the Adviser, such a change is warranted due to changes in the securities markets in which the Fund may invest or other economic or political conditions affecting such markets. For temporary defensive purposes, the Fund may reduce its position in equity and equity-linked securities and invest in U.S. Treasury bills and U.S. Dollar denominated bank time deposits and certificates of deposit rated high quality or better by any nationally recognized statistical rating service or, if unrated, of equivalent investment quality as determined by the Adviser. The banks whose obligations may be purchased by the Fund will include any member of the U.S. Federal Reserve System. The Fund does not seek to achieve its stated investment objective when it has assumed a temporary defensive position.
Special Leverage Considerations
Hedging Transactions
The Fund may employ one or more of the hedging techniques described below, primarily to protect against a decrease in the U.S. Dollar equivalent value of its portfolio securities denominated in foreign currencies or in the payments thereon that may result from an adverse change in foreign currency exchange rates. Conditions in the securities, futures, options and foreign currency markets will continue to determine whether and under what circumstances the Fund will employ any of the techniques or strategies described below. The Fund's ability to pursue certain of these strategies may be limited by applicable regulations of the Commodity Futures Trading Commission ("CFTC") and the Federal tax requirements applicable to regulated investment companies. See "Taxation-General".
Pursuant to applicable law and subject to certain restrictions, the Fund may effect hedging transactions on a variety of U.S. and foreign exchanges. The operations of U.S. exchanges are considered to be subject to more stringent regulation and supervision than those of certain non-U.S. exchanges.
If any percentage limitations applicable to the transactions described below are exceeded due to market fluctuations after an initial investment, the Fund may not enter into new transactions of the type to which the exceeded limitation applies until the total of the Fund's commitments with respect to such transactions falls within the applicable limitation.
Forward Foreign Currency Exchange Contracts
The Adviser believes that in some circumstances the purchase and sale of forward foreign currency exchange contracts ("forward contracts") may help offset declines in the U.S. Dollar equivalent value of the Fund's assets denominated in foreign currencies and in the income available for distribution to the Fund's stockholders that would result from adverse changes in the exchange rate between the U.S. Dollar and such foreign currencies. For example, the U.S. Dollar equivalent value of the principal of and rate of return on, the Fund's foreign denominated securities will decline if the exchange rate fluctuates between the U.S. Dollar and such foreign currency whereby the U.S. Dollar increases in value. Such a decline could be partially or completely offset by an increase in the value of a foreign currency forward contract. The Fund may purchase forward contracts involving either the currencies in which certain of its portfolio securities are denominated or, in cross-hedging transactions, other currencies, changes in the value of which correlate closely with the changes in the value of the currencies in which its portfolio securities are denominated. The Fund will enter into such cross-hedging transactions (i) only with respect to currencies whose foreign exchange rate changes historically have shown a high degree of correlation to changes in the foreign exchange rate of the currency in which the hedged asset is denominated (a "correlated currency") and (ii) only when the Adviser believes that the increase in correlation risk is offset by the lower transaction costs and increased liquidity available for financial instruments denominated in the correlated currency.
The Fund may enter into forward contracts or maintain a net exposure on such contracts only if (i) the consummation of the contracts would not obligate the Fund to deliver an amount of foreign currency in excess of the value of the Fund's portfolio securities or other assets denominated in that currency or (ii) the Fund maintains cash, U.S. Government securities or other liquid, high-grade debt securities in a segregated account in an amount not less than the value of the Fund's total assets committed to the consummation of the contract.
Although the use of forward contracts may protect the Fund against declines in the U.S. Dollar equivalent value of the Fund's assets, such use may reduce the possible gain from advantageous changes in the value of the U.S. Dollar against particular currencies in which the Fund's assets are denominated. Moreover, the use of forward contracts will not eliminate fluctuations in the underlying U.S. Dollar equivalent value of the prices of, or rates of return on, the assets held in the Fund's portfolio.
The use of forward contracts subjects the Fund to certain risks. The matching of the increase in value of a forward contract and the decline in the U.S. Dollar equivalent value of the asset that is the subject of the hedge generally is not precise. The success of any of these techniques depends on the ability of the Adviser to predict correctly movements in foreign currency exchange rates. If the Adviser incorrectly predicts the direction of such movements or if unanticipated changes in foreign currency exchange rates occur, the Fund's performance may be poorer than if it had not entered into such contracts. The cost to the Fund of engaging in forward contracts varies with such factors as the foreign currency involved, the length of the contract period and the prevailing market conditions, including general market expectations as to the direction of the movement of various foreign currencies against the U.S. Dollar. Consequently, because the Fund may not always be able to enter into forward contracts at attractive prices, it may be limited in its ability to use such contracts to hedge its assets or for other risk management purposes. In addition, there can be no assurance that historical correlations between the movements of certain foreign currencies relative to the U.S. Dollar will continue.
Options on Foreign Currencies
The Fund may purchase and write put and call options on foreign currencies to protect against a decline in the U.S. Dollar equivalent value of its portfolio securities or payments due thereon or a rise in the U.S. Dollar equivalent cost of securities that it intends to purchase. A foreign currency put option grants the holder the right, but not the obligation, at a future date to sell a specified amount of a foreign currency to its counterparty at a predetermined price. A foreign currency call option grants the holder the right, but not the obligation, to purchase at a future date a specified amount of a foreign currency at a predetermined price.
As in the case of other types of options, the benefit to the Fund from purchases of foreign currency options will be reduced by the amount of the premium and related transaction costs. In addition, if currency exchange rates do not move in the direction or to the extent anticipated, the Fund could sustain losses on transactions in foreign currency options which would require it to forego a portion or all of the benefits of advantageous changes in such rates.
Any options on foreign currencies written by the Fund will be covered. A call option is "covered" if the Fund owns the underlying foreign currency covered by the call or has an absolute and immediate right to acquire that foreign currency without additional cash consideration (or for additional cash consideration held in a segregated account by its custodian) upon conversion or exchange of other foreign currency held in its portfolio. A call option is also covered if the Fund has a call on the same foreign currency and in the same principal amount as the call written, so long as the exercise price of the call held (i) is equal to or less than the exercise price of the call written or (ii) is greater than the exercise price of the call written if the difference is maintained by the Fund in cash, U.S. government securities or other liquid, high-grade debt securities in a segregated account with its custodian. The Fund covers any put option it writes on foreign currencies by holding with its custodian, in a segregated account, cash, U.S. government securities or other liquid, high-grade debt securities in an amount equal to the option price.
The Fund may not purchase or write options on foreign currencies if, as a result, the Fund will have more than 20% of the value of its total assets invested in, or at risk with respect to, such options.
Futures Contracts
The Fund may enter into contracts for the purchase or sale for future delivery ( "futures contracts") of foreign stock or bond indices or other financial indices that the Adviser and the Manager determine are appropriate to hedge the risks associated with changes in interest rates or general fluctuations in the value of the Fund's portfolio securities.
Pursuant to the regulations of the CFTC, and subject to certain restrictions, the Fund may purchase or sell futures contracts that are traded on U.S. exchanges that have been designated as contract markets by the CFTC. The Fund may also generally purchase or sell futures contracts that are subject to the rules of any foreign board of trade ("foreign futures contracts"). The Fund may not, however, trade a foreign futures contract based on a foreign stock index unless the contract has been approved by the CFTC for trading by U.S. persons.
The Fund is required to make a margin deposit in cash or government securities with a broker or custodian to initiate and maintain positions in futures contracts. Minimal initial margin requirements are established by the futures exchange and brokers may establish margin requirements which are higher than the exchange requirements. After a futures contract position is opened, the value- of the contract is marked to market daily. If the futures contract price changes to the extent that the margin on deposit does not satisfy margin requirements, payment of additional "variation" margin is required. Conversely, reduction in the contract value may reduce the required margin resulting in a repayment of excess margin to the Fund. Variation margin payments are made to and from the futures broker for as long as the contract remains open.
In accordance with CFTC regulations, the Fund may not purchase or sell futures contracts if immediately thereafter the sum of the amounts of initial margin deposits and premiums on the Fund's existing futures contracts would exceed 5% of the fair market value of the Fund's total assets. The Adviser reserves the right to comply with such different standards as may be established by the CFTC with respect to the purchase or sale of futures contracts and foreign futures contracts.
Options on Securities and Options on Indices
The Fund may purchase or sell exchange traded or over-the-counter put and call options on its portfolio securities.
The Fund may write covered put and call options on portfolio securities to generate additional revenue for the Fund and, in certain circumstances, as a partial hedge (to the extent of the premium received less transaction costs) against a decline in the value of portfolio securities and in circumstances in which the Adviser anticipates that the price of the underlying securities will not increase above or fall below (in the case of put options) the exercise price of the option by an amount greater than the premium received (less transaction costs incurred) by the Fund. Although writing put and call options may generate additional revenue for the Fund, such revenue is incidental to the Fund's efforts to achieve its investment objective. The Fund's strategy limits potential capital appreciation in the portfolio securities subject to the options.
The Fund may write only covered options. "Covered" means that, so long as the Fund is obligated as the writer of a call option, it will own either the underlying securities or an option to purchase the same underlying securities having an expiration date not earlier than the expiration date of the covered option and an exercise price equal to or less than the exercise price of the covered option, or establish or maintain with its custodian for the term of the option a segregated account consisting of cash, U.S. government securities or other liquid, high-grade debt obligations having a value equal to the fluctuating market value of the option securities. The Fund will continue to cover any put option it writes by maintaining a segregated account with its custodian as described above.
The Fund may not purchase or write options on securities or options on indices if, as a result, the Fund will have more than 5% of the value of its total assets invested in, or at risk with respect to, either such class of options.
The Fund's successful use of options and futures depends on the ability of the Adviser to predict the direction of the market, and is subject to various additional risks. The investment techniques and skills required to use options and futures successfully are different from those required to select equity and equity-linked securities for investment. The correlation between movements in the price of the option or future and the price of the securities being hedged is imperfect and the risk from imperfect correlation increases, with respect to stock index futures and options, as the composition of the Fund's portfolio diverges from the composition of the index underlying such index futures and options. In addition, the ability of the Fund to close out a futures or options position depends on a liquid secondary market. There is no assurance that liquid secondary markets will exist for any particular option or futures contract at any particular time. The securities the Fund are required to maintain in segregated accounts in connection with its hedging transactions are not available for investment in accordance with the Fund's investment objective of long-term capital appreciation.
On U.S. exchanges, once an option contract has been accepted for clearance, the exchange clearing organization is substituted as both buyer and seller of the contract, thereby guaranteeing the financial integrity of the option contract. Options on securities and on indices traded on certain non-U.S. exchanges may not be so guaranteed by a clearing organization. The absence of such a role for a clearing organization on such a non-U.S. exchange would expose the Fund to the credit risk of its counterparty. If its counterparty were to default on its obligations, the Fund could lose the expected benefit of the transaction.
Repurchase Agreements
When cash may be available to the Fund for only a few days, the Fund may invest such cash in repurchase agreements until such time as it otherwise may be invested or used for payments of obligations of the Fund. In these transactions, the Fund purchases a security and simultaneously commits to resell that security to the seller at an agreed-upon price and date. The resale price reflects the purchase price plus an agreed-upon market rate of interest, which is unrelated to the coupon rate or maturity of the security purchased. The obligation of the seller to pay the agreed-upon price is secured by the value of the underlying securities, which is maintained at the Fund's custodian at a value at least equal to the resale price. The Adviser monitors the adequacy of the collateral on a daily basis to ensure that the collateral always equals or exceeds the repurchase price. Repurchase agreements could involve certain risks in the event of default or insolvency of the other party, including possible delays or restrictions upon the Fund's ability to dispose of the underlying securities. The Fund could suffer a loss to the extent proceeds from the sale of collateral were less than the value of the contract. The Fund may not invest its assets in repurchase agreements with a maturity of more than seven days, but the collateral securities may have maturities of more than one year. The Fund has not adopted an investment restriction limiting the value of its total assets not invested in accordance with its fundamental investment policy that may be invested in repurchase agreements. To minimize the risks of such investments, however, the Fund enters into repurchase agreements only with its custodian, other member banks of the Federal Reserve System having assets in excess of $1 billion, and recognized primary U.S. Government securities dealers determined by the Adviser, subject to review by the Board of the Fund, to be creditworthy. Repurchase agreements do not constitute cash, cash items, receivables or government securities for purposes of the federal tax diversification test. Therefore, the Fund limits its investments in repurchase agreements with any one bank, dealer, broker or other entity in order to comply with the federal tax diversification test.
Debt Securities
The Fund may invest up to 20% of its assets in non-equity linked debt securities including foreign denominated corporate debt and sovereign debt issued by foreign governments, their agencies or instrumentalities, or other government-related entities. Debt securities, such as bonds, involve credit risk. This is the risk that the issuer will not make timely payments of principal and interest. The degree of credit risk depends on the issuer's financial condition and on the terms of the debt securities. Changes in an issuer's credit rating or the market's perception of an issuer's creditworthiness may also affect the value of a Fund's investment in that issuer. All debt securities are subject to interest rate risk. This is the risk that the value of the security may fall when interest rates rise. If interest rates move sharply in a manner not anticipated by the Adviser, a Fund's investments in debt securities could be adversely affected and the Fund could lose money. In general, the market price of debt securities with longer maturities will go up or down more in response to changes in interest rates than will the market price of shorter-term debt securities. In addition, debt securities issued in foreign currency denominations will be subject to currency risk.
Investment in sovereign debt can involve a high degree of risk. The governmental entity that controls the repayment of sovereign debt may not be able or willing to repay the principal and/or interest when due in accordance with the terms of such debt. A governmental entity's willingness or ability to repay principal and interest due in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the governmental entity's policy towards the International Monetary Fund and the political constraints to which a governmental entity may be subject. Governmental entities may also be dependent on expected disbursements from foreign governments, multilateral agencies and others abroad to reduce principal and interest arrearages on their debt. The commitment on the part of these governments, agencies and others to make such disbursements may be conditioned on the implementation of economic reforms and/or economic performance and the timely service of such debtor's obligations. Failure to implement such reforms, achieve such levels of economic performance or repay principal or interest when due may result in the cancellation of such third parties' commitments to lend funds to the governmental entity, which may further impair such debtor's ability or willingness to timely service its debts. Consequently, governmental entities may default on their sovereign debt. Holders of sovereign debt may be requested to participate in the rescheduling of such debt and to extend further loans to governmental entities. In the event of a default by a governmental entity, there may be few or no effective legal remedies for collecting on such debt.
Securities Lending
The Fund may lend portfolio securities with a value not exceeding 33 1/3% of its total assets or the limit prescribed by applicable law to banks, brokers and other financial institutions. In return, the Fund receives collateral in cash or securities issued or guaranteed by the U.S. Government, which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. The Fund maintains the ability to obtain the right to vote or consent on proxy proposals involving material events affecting securities loaned. The Fund receives the income on the loaned securities. Where the Fund receives securities as collateral, the Fund receives a fee for its loans from the borrower and does not receive the income on the collateral. Where the Fund receives cash collateral, it may invest such collateral and retain the amount earned, net of any amount rebated to the borrower. As a result, the Fund's yield may increase. Loans of securities are terminable at any time and the borrower, after notice, is required to return borrowed securities within the standard time period for settlement of securities transactions. The Fund is obligated to return the collateral to the borrower at the termination of the loan. The Fund could suffer a loss in the event the Fund must return the cash collateral and there are losses on investments made with the cash collateral. In the event the borrower defaults on any of its obligations with respect to a securities loan, the Fund could suffer a loss where there are losses on investments made with the cash collateral or where the value of the securities collateral falls below the market value of the borrowed securities. The Fund could also experience delays and costs in gaining access to the collateral. The Fund may pay reasonable finder's, lending agent, administrative and custodial fees in connection with its loans.
Portfolio Turnover
It is the Fund's policy to sell any security whenever, in the opinion of the Adviser, the appreciation possibilities of the security have been substantially realized or the business or market prospects for the issuer of such security have deteriorated, irrespective of the length of time that such security has been held. In addition, the Fund from time to time may engage in short-term transactions in order to take advantage of what the Adviser believes to be market inefficiencies in the pricing of equity and equity-linked securities. The Adviser expects that the Fund's annual rate of portfolio turnover may exceed 100% at times when the Fund is taking advantage of short-term trading opportunities or if a complete reallocation of the Fund's investment portfolio becomes advisable. A 100% annual turnover rate would occur if all of the securities in the Fund's portfolio were replaced once within a period of one year. The turnover rate has a direct effect on the transaction costs borne by the Fund.
Investment Restrictions
The Fund has adopted certain investment restrictions that may not be changed without the prior approval of a majority of the Board. For purposes of the non-fundamental restrictions listed below and other investment restrictions of the Fund described in this Prospectus, 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 investment restrictions, the Fund may not:
1. Purchase any securities (other than obligations of the U.S. government, its agencies or instrumentalities or securities of other regulated investment companies) if as a result more than 25% of the Fund's total assets would be invested in securities of any single issuer.
2. Invest 25% or more of the value of its total assets in a particular industry. This restriction does not apply to securities issued or guaranteed by the U.S. government, its agencies or instrumentalities, but will apply to foreign government obligations until such time as the Securities and Exchange Commission permits their exclusion.
3. Purchase more than 10% of the outstanding voting securities of any one issuer.
4. Issue senior securities, pledge its assets or borrow money in excess of 10% of the total value of its assets (including the amount borrowed) less its liabilities (not including its borrowings) and other than for temporary or emergency purposes or for the clearance of transactions, except that the Fund may borrow from a bank or other entity in a privately arranged transaction for repurchases and/or tenders for its shares, if after such borrowing there is asset coverage of at least 300% as defined in the 1940 Act, and may pledge its assets to secure any permitted borrowing. For the purposes of this investment restriction, the Fund will not purchase additional portfolio securities while borrowings exceed 5% of the Fund's total assets; and collateral arrangements with respect to the writing of options or the purchase or sale of futures contracts are not deemed a pledge of assets or the issuance of a senior security.
5. Make loans, except through purchasing debt obligations, lending portfolio securities and entering into repurchase agreements consistent with the Fund's investment objective and policies.
6. Purchase or sell real estate or real estate mortgage loans, except that the Fund may purchase and sell securities secured by real estate or interests therein.
7. Make short sales of securities or maintain a short position in any security.
8. Purchase securities on margin, except such short-term credits as may be necessary or routine for the clearance or settlement of transactions, and except that the Fund may engage in transactions as described under "Investment Objective and Policies--Hedging Transactions" and post margin in connection therewith consistent with its investment policies.
9. Underwrite securities of other issuers, except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933 in selling portfolio securities.
10. Buy or sell commodities, commodity contracts or futures contracts (other than as described under "Investment Objective and Policies--Hedging Transactions").
11. Buy, sell or write put or call options (other than as described under "Special Leverage Considerations--Hedging Transactions").
The Fund is also subject to certain diversification requirements under the Internal Revenue Code of 1986, as amended, with respect to its qualification as a "regulated investment company" under the Code. See "Taxation--U.S. Taxation General".
As an additional non-fundamental investment restriction, the Fund will not guarantee the obligations of third parties. The Fund may invest in other investment companies, subject to limitations set forth in the 1940 Act.
MANAGEMENT OF THE FUND
Board of Directors
The Board is responsible for the overall management of the Fund, including oversight of the Adviser and other service providers. There are three directors of the Fund. One of the directors is an "interested person" (as defined in the 1940 Act). Information about both the Fund's directors and officers is set forth in the tables below.
Information About Directors and Officers
Number of
Portfolios in
Principal Fund Other
Position(s) Length of Occupation(s) Complex Directorships
Held With Term Served, and During the PastFive Overseen by Held by
Name, Address, Age Fund Term of Office Years Director Director
------------------------------ ----------- ---------------- ------------------- ------------- -------------------
Disinterested Directors
Ann S. Lieff Director Director since President of the 1 Hastings
c/o The Herzfeld Caribbean 1998. Three Lieff Company, a Entertainment,
Basin Fund, Inc. year term of management Inc; and
P.O. Box 161465 office. consulting firm Birks &
Miami, Florida 33116 that offers ongoing Mayors, Inc.
Age: 55 advisory services
as a corporate
director to
several leading
regional and
national
retail operations,
1998 to present;
former CEO Spec's
Music, 1980-1998, a
retailer of
recorded music.
Michael A. Rubin Director Director since Partner of Michael 1 Margo Caribe,
c/o The Herzfeld Caribbean 2002. Three A. Rubin, P.A., Inc.
Basin Fund, Inc. year term of attorney at law;
P.O. Box 161465 office. Broker, Oaks
Miami, Florida 33116 Management & Real
Age: 65 Estate Corp., a
real estate
brokerage
corporation
Interested Directors and
Officers
Thomas J. Herzfeld * President, Director of Fund Chairman and 1** None
P.O. Box 161465 Chairman of since 1993. President of
Miami, Florida 33116 the Board, Three year term Thomas J. Herzfeld
Age: 62 and of office. & Co., Inc., and
Director
Thomas J. Herzfeld
Advisors, Inc.
Cecilia Gondor * Secretary, Officer since Executive Vice N/A None
P.O. Box 161465 Treasurer 1993. President of
Miami, Florida 33116 and Chief Thomas J. Herzfeld
Age: 45 Compliance & Co., Inc., and
Officer Thomas J. Herzfeld
Advisors, Inc.
|
* Each of Mr. Herzfeld and Ms. Gondor is an "interested person" of the Fund because each is an officer of the Fund's Adviser.
** Mr. Herzfeld also serves as a director of The Cuba Fund, Inc., a registered closed-end investment company which has not yet commenced operations.
Committees of the Board
The Board has formed an Audit Committee and a Nominating Committee.
The Board has adopted a written charter for the Audit Committee, which became effective February 5, 2004. The Audit Committee of the Board currently consists of each Ms. Lieff and Mr. Rubin, none of whom is an "interested person" of the Fund. Each member of the Audit Committee is considered independent under the applicable NASDAQ Capital Market listing standards. During the fiscal year ended June 30, 2007 the Audit Committee met twice. The Audit Committee reviews the scope of the audit by the Fund's independent accountants, confers with the accountants with respect to the audit and the internal accounting controls of the Fund and with respect to such other matters as may be important to an evaluation of the audit and the financial statements of the Fund, and makes recommendations with respect to the selection of accountants for the Fund.
The Nominating Committee is comprised of Ms. Lieff and Mr. Rubin, each of whom is an independent director under the 1940 Act and under NASDAQ Capital Market listing standards. During the fiscal year ended June 30, 2007 the Audit Committee met once. The Nominating Committee is responsible for reviewing and recommending qualified candidates in the event that a directorship is vacated or created. The Nominating Committee will not consider nominees recommended by stockholders. The Nominating Committee believes that candidates for director should have certain minimum qualifications, including (i) the ability to apply good business judgment; (ii) the ability to properly exercise their duties of loyalty and care; (iii) proven leadership capabilities, high integrity and moral character, significant business experience and a high level of responsibility within their chosen fields; (iii) the ability to quickly grasp complex principles of business, finance, international transactions and the regulatory environment in which investment companies must operate; and (iv) the ability to read and understand basic financial statements. The Committee retains the right to modify these minimum qualifications from time to time. In general, candidates will be preferred who hold an established senior or executive level position in business, finance, law, education, research or government. The Committee's process for identifying and evaluating nominees is as follows: In the case of incumbent directors whose terms of office are set to expire, the Nominating Committee reviews such directors' overall service to the Fund during their term, including the number of meetings attended, level of participation, quality of performance, and transactions of such directors with the Fund, if any, during their term, and confirms their independence, if applicable. In the case of new director candidates, the committee first determines whether the nominee must be independent for purposes of The NASDAQ Capital Market and whether the candidate must be considered a disinterested director under the 1940 Act. In either case, determinations are based upon the Fund's charter and bylaws, applicable securities laws, the rules and regulations of the SEC, and the advice of counsel, if necessary. The Committee then uses its network of contacts to compile a list of potential candidates, but may also engage, if it deems appropriate, a professional search firm. The Committee then meets to discuss and consider such candidates' qualifications and recommend the nominee.
Ownership of the Fund By Directors
Set forth in the following table are the directors of the Fund, together with the dollar range of equity securities beneficially owned by each director as of June 30, 2007, as well as the aggregate dollar range of equity securities in all funds overseen or to be overseen in a family of investment companies (i.e., funds managed by the Adviser).
Aggregate Dollar Range of
Equity Securities in All Funds
Dollar Range of Equity in Family of Investment
Name of Director Securities in the Fund Companies
----------------------- ---------------------- ------------------------------
Disinterested Directors
Ann S. Lieff........... $10,001- $50,000 $10,001- $50,000
Michael A. Rubin....... $10,001- $50,000 $10,001- $50,000
Interested Directors
Thomas J. Herzfeld..... Over $100,000 Over $100,000
|
None of the disinterested directors, and no immediate family member of any disinterested director, own beneficially or of record any securities of the Fund's Adviser, or any person directly or indirectly controlling, controlled by, or under common control with the Adviser.
As of June 30, 2007, directors and executive officers (5 persons) beneficially owned an aggregate of less than 1% of the Fund's outstanding shares on that date.
DIRECTOR COMPENSATION
The Fund pays the disinterested directors of the Fund $1,000 per year in addition to $400 for each meeting of the board, plus reimbursement for expenses. Such fees totaled $7,800 for the fiscal year ended June 30, 2007. The aggregate compensation paid by the Fund to each of its directors serving during the fiscal year ended June 30, 2007 is set forth in the compensation table below. Mr. Herzfeld serves on the Fund's Board. Mr. Herzfeld does not receive direct compensation for his services on either board. None of the other directors serves on the board of any other registered investment company to which the Fund's investment adviser or an affiliated person of the Fund's investment adviser provides investment advisory services. Directors and executive officers of the Fund do not receive pension or retirement benefits from the Fund.
Pension or
Retirement Total Compensation
Aggregate Benefits Accrued from the Fund and
Name of Person and Compensation As Part of Fund Fund Complex Paid
Position with the Fund from the Fund Expenses to Directors
----------------------- ------------- ---------------- -------------------
Disinterested Directors
Ann S. Lieff......... $2,600 $0 $2,600
Michael A. Rubin..... $2,600 $0 $2,600
Albert L. Weintraub*. $2,600 $0 $2,600
Interested Directors
Thomas J. Herzfeld..... $ 0 $0 $ 0
|
* Mr. Weintraub resigned his position as a director of the Fund on July 23, 2007.
Investment Adviser and Portfolio Manager
Investment Adviser
The Fund is advised by HERZFELD/CUBA (the "Adviser"), a division of Thomas J. Herzfeld Advisors, Inc., whose principal business address is The Herzfeld Building, P.O. Box 161465, Miami, Florida 33116. The Adviser has been providing advisory services to the Fund since September 1993. Thomas J. Herzfeld Advisors, Inc. has provided advisory services since 1984 and is beneficially owned by Thomas J. Herzfeld.
Pursuant to an investment advisory agreement with the Fund (the "Investment Advisory Agreement") and under the direction and control of the Board, the Adviser manages the Fund's portfolio and makes investment decisions pursuant to the Fund's stated investment objective, policies and restrictions. The Adviser is authorized to transmit purchase and sale orders and select brokers and dealers to execute portfolio transactions on behalf of the Fund. The Adviser determines the timing of portfolio transactions and other matters related to execution.
Portfolio Manager
Thomas J. Herzfeld is primarily responsible for the day-to-day management of the
Fund. Mr. Herzfeld currently serves as the Chairman, President and Director of
the Fund. In addition, Mr. Herzfeld also serves as the Chairman and President of
Thomas J. Herzfeld & Co., Inc. and Thomas J. Herzfeld Advisors, Inc. since 1981
and 1984, respectively. Prior to these positions he was Executive Vice President
and Director of a New York Stock Exchange member firm. Mr. Herzfeld has authored
or edited a number of books, including The Investors Guide to Closed-End Funds
(McGraw Hill, 1980), Herzfeld's Guide to Closed End Funds (McGraw Hill, 1993)
and co-authored High Return, Low Risk Investment (1st edition, G.P. Putnam's
Sons, 1981 and 2nd edition, McGraw Hill, 1993). He is considered the first and a
leading expert in the field of closed-end funds. Mr. Herzfeld has been quoted in
thousands of articles and written hundreds of articles on the subject of closed
end funds. He has written periodically for Barron's and has made television
appearances on Wall Street Week, The Nightly Business Report and CNBC.
Other Accounts Managed. Thomas J. Herzfeld is primarily responsible for the day-to-day management of the Fund's portfolio. As of June 30, 2007, Mr. Herzfeld was primarily responsible for the day-to-day management of the following other accounts in addition to the Fund:
Total Assets
Type of Account Number of Accounts (in millions)
------------------------------- ------------------ ------------------------
Registered Investment Companies 0 $ 0
Pooled Investment Vehicles 0 $ 0
Other Accounts 44 $54.1
|
The advisory fee for these accounts is based on assets under management for these accounts and is not based on the performance of the accounts.
Material conflicts of interest that may arise in connection with Mr. Herzfeld's management of the Fund's investments and investments in other accounts include conflicts between the investment strategy of the Fund and the investment strategy of the other accounts managed by Mr. Herzfeld, and conflicts associated with the allocation of investment opportunities between the Fund and other accounts managed by Mr. Herzfeld. The Adviser has adopted policies and procedures to address conflicts of interest to ensure compliance with securities regulations and to ensure fair and equitable treatment of the Fund and other accounts should any conflict arise.
Compensation. Mr. Herzfeld receives a quarterly fixed salary from the Adviser's affiliated broker/dealer firm, Thomas J. Herzfeld & Co., Inc. Mr. Herzfeld is the sole beneficial owner of the Adviser and the affiliated broker/dealer. Mr. Herzfeld may also receive bonuses from the broker/dealer firm and/or the Adviser, as determined by the terms of his contract with the firm. Mr. Herzfeld does not receive compensation as portfolio manager from the Adviser. In addition Mr. Herzfeld's compensation is not based on the value of assets held by the Fund.
Ownership of Securities. As of the June 30, 2007, Mr. Herzfeld beneficially owned between $100,000 and $500,000 of equity securities of the Fund.
Investment Advisory Agreement
The Investment Advisory Agreement sets forth the services to be provided by the Adviser as described above. The Fund pays the Adviser an advisory fee at the annual rate of 1.45% of the Fund's average monthly net assets and payable at the end of each quarter. That fee is higher than the advisory fee paid by most investment companies. For the fiscal years ended June 30, 2007, 2006 and 2005, the Adviser received $208,505, $196,852 and $153,114, respectively, for investment advisory services provided to the Fund pursuant to the Investment Advisory Agreement.
The Investment Advisory Agreement was last approved by the Board on [____], 2007. A discussion regarding the basis for the Board's approval of the Investment Advisory Agreement is provided in the Fund's semi-annual report to stockholders for the semi-annual periods ended December 31.
The Investment Advisory Agreement provides that the Adviser bears all expenses of its employees and overhead incurred by it in connection with its duties thereunder. The Fund reimburses approximately $13,000 per year for compliance services performed by the Chief Compliance Officer. The Adviser pays the salaries and expenses of such of the Fund's officers and employees and any fees and expenses of such of the Fund's directors as are interested persons (as such term is defined in the 1940 Act) of the Adviser. The Fund bears all of its own expenses (See "Expenses of the Fund" below).
The services of the Adviser under the Investment Advisory Agreement are not deemed to be exclusive, and nothing in the Investment Advisory Agreement prevent the Adviser or any affiliate thereof, 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. When other clients of the Adviser desire to purchase or sell a security at the same time the security is purchased for or sold by the Fund, such purchases and sales are to the extent feasible, allocated among such clients and the Fund in a manner believed by the Adviser to be equitable to the Fund. The allocation of securities may adversely affect the price and quality of purchases and sales of securities by the Fund. Purchase and sale orders for the Fund may be combined with those of other clients of the Adviser in the interest of the most favorable results for the Fund.
The Investment Advisory Agreement was initially approved by the Board on June 24, 1993. The Agreement continued in effect for a period of two years from the effective date and thereafter it is required to be approved annually by the Board. The Investment Advisory Agreement continues in effect for successive periods of 12 months, provided that its continuance is specifically approved annually by (i) the vote of a majority of the Board who are not parties to such agreement or interested persons (as such term is defined in the 1940 Act) of the Adviser, cast in person at a meeting called for the purpose of voting on such approval and (ii) either (a) the vote of a majority of the outstanding voting securities of the Fund or (b) the vote of a majority of the Board. The Investment Advisory Agreement may be terminated by the Fund, without the payment of any penalty, upon vote of a majority of the Board or a majority of the outstanding voting securities of the Fund at any time upon net less than 60 days' prior written notice to the Adviser, or by the Adviser upon not less than 60 days' prior written notice to the Fund. The Investment Advisory Agreement terminates automatically in the event of its assignment (as such term is defined in the 1940 Act) by either party or upon its termination.
The Adviser is not liable for any act of omission, error of judgment, mistake of
law or loss suffered by the Fund or its investors in connection with the matters
to which the Investment Advisory Agreement relates, except for a loss resulting
from willful misfeasance, bad faith or gross negligence in the performance of,
or from reckless disregard of, its obligations and duties under the Investment
Advisory Agreement, or a loss resulting from a breach of fiduciary duty with
respect to receipt of compensation for services (in which case any award of
damages shall be limited to the period and the amount set forth in Section 36
(b) (3) of the 1940 Act).
The Adviser also performs and arranges for the performance of certain administrative and accounting functions for the Fund, including (i) providing persons satisfactory to the Directors of the Fund to serve as officers and, in that capacity, manage the daily operations of the Fund; (ii) processing the payment of expenses for the Fund; (iii) supervising the preparation of periodic reports to the Fund's stockholders; (iv) preparing materials for Fund Board and Committee meetings; (v) supervising the pricing of the Fund's investment portfolio and the publication of the NAV of the Fund's shares, earnings reports and other financial data; (vi) monitoring relationships with organizations providing services to the Fund, including the custodian, transfer agent, auction agent and printers; (vii) supervising compliance by the Fund with record-keeping requirements under the 1940 Act and regulations thereunder, maintaining books and records for the Fund (other than those maintained by the Adviser, custodian and/or transfer agent) and preparing and filing of tax reports other than the Fund's income tax returns; and (viii) providing executive, clerical and secretarial help needed to carry out these responsibilities.
Benefit to the Adviser
The Fund's Adviser will benefit from the Offer because the Adviser's fee is based on the average net assets of the Fund. It is not possible to state precisely the amount of additional compensation the Adviser will receive as a result of the Offer because the proceeds of the Offer will be invested in additional portfolio securities which will fluctuate in value. However, assuming all Rights are exercised and that the Fund receives the maximum proceeds of the Offer, the annual compensation to be received by the Adviser would be increased by approximately $[____].
The Fund may, in the future and at its discretion, choose to make additional rights offerings from time to time for a number of shares and on terms which may or may not be similar to the Offer. Any such future rights offering will be made in accordance with the 1940 Act. Under the laws of Maryland, the state in which the Fund is organized, the Board is authorized to approve rights offerings without obtaining stockholder approval. The staff of the Securities and Exchange Commission has interpreted the 1940 Act as not requiring stockholder approval of a rights offering at a price below the then current NAV so long as certain conditions are met, including a good faith determination by a Board that such offering would result in a net benefit to existing stockholders.
Expenses of the Fund
Except as indicated above, the Fund pays all of its expenses, including but not limited to the following: organizational and certain offering expenses (but not overhead or employee costs of the Adviser); advisory fees payable to the Adviser; fees and out-of-pocket travel expenses of the Fund's directors who are not interested persons (as such term is defined in the 1940 Act) of any other party and other expenses incurred by the Fund in connection with directors' meetings; interest expense; charges and expenses of the Fund's legal counsel and independent accountants; taxes and governmental fees; brokerage and other expenses connected with the execution, recording and settlement of portfolio security transactions; expenses of repurchasing shares; expenses of issuing any preferred shares or indebtedness; expenses connected with negotiating, effecting purchase or sale, or registering privately issued portfolio securities; membership dues to professional organizations; premiums allocable to fidelity bond and D&O insurance coverage; expenses of preparing stock certificates; expenses of registering and qualifying the Fund's shares for sale with the Securities and Exchange Commission and in various states and foreign jurisdictions; custodian, sub-custodian, dividend paying agent, transfer agency expenses; payment for portfolio pricing services to a pricing agent; expenses of printing and mailing share certificates, stockholder reports, notices, proxy statements and reports to governmental offices; expenses of stockholders' meetings and preparing and distributing proxies and reports to stockholders; any litigation expenses; expenses relating to investor and public relations; and NASDAQ Capital Market listing fees.
PORTFOLIO TRANSACTIONS AND BROKERAGE
In portfolio transactions involving equity securities, the Adviser places orders on behalf of the Fund directly with brokers, which may include brokers affiliated with the Adviser, except that the purchase of shares in rights offerings is made directly from the issuer. The Adviser may manage other accounts and funds that invest in equity securities of Caribbean Basin Companies. Although investment decisions for the Fund are made independently from those of other accounts or funds managed by the Adviser, investments of the type the Fund may make may also be made by those other accounts and funds. When the Fund and one or more accounts or funds managed by the Adviser are prepared to invest in, or desire to dispose of, the same security, available investments or opportunities for each will be allocated in a manner believed by the Adviser to be equitable to each. In some cases, this procedure may affect adversely the price paid or received by the Fund or the size of the position obtained or disposed of by the Fund.
The primary objective of the Adviser in placing orders for the purchase and sale of securities for the Fund's portfolio is to obtain best execution taking into account such factors as price, commission, size of order, difficulty of execution and skill required of the broker or dealer. The capability and financial condition of the broker or dealer may also be criteria for the choice of that broker or dealer. Subject to obtaining the best execution, brokers, including affiliates of the Adviser, who provide investment research services to the Adviser, including market and statistical information and quotations for portfolio evaluation purposes, may receive orders for transaction of the Fund. The terms "investment research" and "market and statistical information and quotations" include advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities and potential buyers or sellers of securities, as well as the furnishing of analyses and reports concerning issuers, industries, securities, economic factors and trends, and portfolio strategy. Neither the Fund nor the Adviser is obligated to deal with any broker or group of brokers for the execution of portfolio transactions, and there is no intention to place portfolio transactions with particular brokers or groups thereof.
Research provided to the Adviser in advising the Fund will be in addition to and not in lieu of the services required to be performed by the Adviser itself, and the Adviser's fees will not be reduced as a result of the receipt of supplemental information. This information is regarded as only supplementary to the Adviser's own research effort, since the information must be analyzed, weighed and reviewed by the Adviser's staff. This information may be useful to the Adviser in providing services to clients other than the Fund, and not all such information will necessarily be used by the Adviser in connection with the Fund. Conversely, information provided to the Adviser by brokers and dealers through whom other clients of the Adviser effect securities transactions may prove useful to the Adviser in providing services to the Fund. The Board will review at least annually the commissions allocated by the Adviser on behalf of the Fund to determine if such allocations were reasonable in relation to the benefits inuring to the Fund.
Brokerage commissions paid by the Fund for the fiscal years ended June 30, 2007, 2006 and 2005 were: $13,518, $17,171, $12,867, respectively, of which $12,076, $15,800 and $12,671, respectively , was paid to the Adviser, in connection with portfolio transactions. The percentage of the Fund's aggregate brokerage commissions paid to the affiliated broker for the one-year period ending June 30, 2007 was 89%. The percentage of the Fund's aggregate dollar amount of transactions involving the payment of commissions effected through the affiliated broker for this period was 91%.
CODE OF ETHICS
The Fund and the Adviser have adopted a joint Code of Ethics pursuant to Rule 17j-1 under the 1940 Act. The code of ethics permits personnel subject to the code to invest in securities, including securities that may be purchased or held by the Fund, following certain black-out periods specified in the code, and subject to certain other conditions and restrictions.
The code of ethics can be reviewed and copied at the SEC's Public Reference Room
in Washington, D.C. Information on the operation of the Public Reference Room
may be obtained by calling the SEC at (202) 551-8090 or toll free at
(800) 732-0330 and this code of ethics is available on the EDGAR database on the
SEC's internet site at: http://www.sec.gov. Copies of this code of ethics may be
obtained, after paying a duplicating fee, by electronic request at the following
e-mail address: publicinfo@sec.gov or by writing the SEC's Public Reference
Section, Washington, D.C. 20549-0102.
PROXY VOTING POLICIES AND PROCEDURES
The Fund's and the Adviser's proxy voting policies and procedures are attached hereto as Appendices A and B, respectively. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available without charge, upon request, by calling 800-TJH-FUND (800-854-3863); and on the SEC's website at http:/www.sec.gov.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Persons or organizations beneficially owning 25% or more of the outstanding shares of the Fund could be presumed to "control" the Fund. As a result, those persons or organizations could have the ability to take action with respect to the Fund without the consent or approval of other stockholders. To the knowledge of the Fund, as of June 30, 2007, no persons were known to own, either beneficially or of record, 5% or more of the outstanding shares of the Fund.
DESCRIPTION OF COMMON STOCK
The Fund is authorized to issue up to 100,000,000 shares of capital stock, at $.001 par value per share, all of which shares are classified as common stock. The Board is authorized, however, to classify and reclassify any unissued shares of capital stock by setting or changing in any one or more respects the designation and number of shares of any such class or series, and the nature, rates, amounts and times at which and the conditions under which dividends shall be payable on, and the voting, conversion, redemption and liquidation rights of, such class or series and any other preferences, rights, restrictions and qualifications applicable thereto.
The Fund's shares have no preemptive, conversion, exchange or redemption rights. Each share has equal voting, dividend, distribution and liquidation rights. The shares outstanding are fully paid and nonassessable. Stockholders are entitled to one vote per share. All voting rights for the election of directors are noncumulative, which means that the holders of more than 50% of the shares can elect 100% of the directors then nominated for election if they choose to do so. In such event, the holders of the remaining shares will not be able to elect any directors. The foregoing description and the description under "Certain Provisions of Articles of Incorporation and Bylaws" are subject to the provisions contained in the Fund's Articles of Incorporation and Bylaws.
The Fund will consider offering additional shares in the future based on, among other things, the lifting or easing of economic sanctions against Cuba. Other offerings of the Fund's shares, if made, will require approval of the Board. Any additional offering will be subject to the requirement of the 1940 Act that shares may not be sold at a price below the then current NAV, exclusive of underwriting discounts and commissions, except in connection with an offering to existing stockholders or with the consent of the holders of a majority of the Fund's outstanding voting securities.
Share Repurchases and Tender Offers
In recognition of the possibility that the Fund's shares might trade at a discount to NAV, the Board may determine that it would be in the best interest of stockholders of the Fund to take action to attempt to reduce or eliminate a market value discount from NAV. To that end, the Board may take action from time to time either to repurchase Fund shares in open market or private transactions or to make a tender offer for Fund shares at NAV. No assurance can be given that the directors will decide to undertake such repurchases or tender offers, or that any such repurchases or tender offers would reduce any market discount. The Board does not currently intend to undertake repurchase or tenders offers.
The Fund anticipates that the market price of its shares generally will continue to vary from NAV. The market price of the Fund's shares is determined by a number of factors, including the relative demand for and supply of such shares in the market, the Fund's investment performance, the Fund's distributions and investor perception of the Fund's overall attractiveness as an investment as compared with other investment alternatives. The fact that the Fund's shares may be the subject of share repurchases or tender offers at NAV from time to time may reduce the spread between market price and NAV that otherwise might exist. In the opinion of the Adviser, stockholders may be less inclined to accept a significant discount on sales of the Fund's shares if they have a reasonable expectation of being able to recover NAV in conjunction with a possible share repurchase or tender offer.
Subject to the Fund's investment restriction with respect to borrowing, the Fund may incur debt to finance repurchases and tenders. See "Investment Restrictions". If the Fund incurs debt to finance such repurchases and tenders, interest on any such borrowings will reduce the Fund's net income. In addition, although the Board believes that share repurchases and tenders generally would have a favorable effect on the market price of the Fund's shares, the acquisition of shares by the Fund will decrease the total assets of the Fund and therefore would have the effect of increasing the Fund's ratio of expenses to average net assets.
It is the Directors' announced policy, which may be changed by the Directors, that the Fund cannot accept tenders or effect repurchases if (1) such transactions, if consummated, would (a) impair the Fund's status as a regulated investment company under the Code (which would make the Fund a taxable entity, causing the Fund's income to be taxed at the Fund level in addition to the taxation of stockholders who receive dividends from the Fund) or (b) result in a failure to comply with applicable asset coverage requirements; (2) the amount of securities tendered would require liquidation of such a substantial portion of the Fund's securities that the Fund would not be able to liquidate portfolio securities in an orderly manner in light of the existing market conditions and such liquidation would have an adverse effect on the NAV of the Fund to the detriment of non-tendering stockholders; (3) there is any (a) in the Board's judgment, material legal action or proceeding instituted or threatened challenging such transactions or otherwise materially adversely affecting the Fund, (b) declaration of a banking moratorium by federal or state authorities or any suspension of payment by banks in the United States, (c) limitation affecting the Fund or the issuers of its portfolio securities imposed by federal or state authorities on the extension of credit by lending institutions, (d) commencement of war, armed hostilities or other international or national calamity directly or indirectly involving the United States, or (e) in the Board's judgment, other event or condition which would have a material adverse effect on the Fund or its holders of Common Stock if shares of Common Stock were repurchased; or (4) the Board determines that effecting any such transaction would constitute a breach of their fiduciary duty owed the Fund or its stockholders. The Directors may modify these conditions in light of experience.
Any tender offer made by the Fund for its shares will be at a price equal to at least 90% of the NAV of the shares as of the close of business on the date the offer ends. Each offer will be made and stockholders notified in accordance' with the requirements of the Securities Exchange Act of 1934 and the 1940 Act, either by publication or mailing or both. Each offering document will contain such information as is prescribed by such laws and the rules and regulations promulgated thereunder, including information stockholders should consider in deciding whether or not to tender their shares and detailed instructions on how to tender shares. When a tender offer is authorized to be made by the Board, a stockholder wishing to accept the offer will be required to tender all (but not less than all) of the shares owned by such stockholder (or attributed to the stockholder for Federal income tax purposes under Section 318 of the Code). The Fund will purchase all shares tendered by a holder of shares at any time during the period of the tender offer in accordance with the terms of the offer unless it determines to accept none of the shares tendered in the tender offer (based upon one of the conditions set forth above). Each person tendering shares will pay to the Fund a reasonable service charge currently anticipated to be $25.00, subject to change, to help defray the costs associated with affecting the tender offer. It is the position of the staff of the SEC that such service charge may not be deducted from the proceeds of the purchase. The Fund's transfer agent will receive the fee as an offset to these costs. The Fund expects that the cost to the Fund of affecting a tender offer will exceed the aggregate amount of all service charges received from those who tender their shares. Such excess costs associated with the tender offer will be charged against capital. During the period of a tender offer, the Fund's stockholders will be able to determine the Fund's current NAV by use of a toll-free telephone number.
Shares that have been accepted and purchased by the Fund pursuant to a tender offer or share repurchase will be held in the treasury until retired by direction of the Board. Treasury shares will be recorded and reported as an offset to stockholder' equity and, accordingly, will reduce the Fund's total assets. If treasury shares are retired, Common Stock issued and outstanding and capital in excess of par will be reduced.
Because of the nature of the Fund's investment objective and policies, if the Adviser anticipates that a share repurchase or tender offer might have an adverse effect on the Fund's investment performance and anticipate any material difficulty disposing of portfolio securities in order to consummate such share repurchase or tender offer, the Board would consider deferring the share repurchase or tender offer. If the Fund must liquidate portfolio securities in order to effect a share repurchase or tender offer, the Fund's ability to achieve its investment objective may be adversely affected.
If the Fund must liquidate portfolio securities in order to purchase shares tendered, the Fund may realize gains and losses. Such gains may be realized on securities held for less than three months. Because of the limitation of 30% on the portion of the Fund's gross income that may be derived from the sale or disposition of stocks and securities held less than three months (in order to retain the Fund's tax status as a regulated investment company under the Code), such gains would reduce the ability of the Fund to sell other securities held for less than three months that the Fund may wish to sell in the ordinary course of its portfolio management, which may adversely affect the Fund's yield. The portfolio turnover rate of the Fund may or may not be affected by the Fund's repurchases of shares pursuant to a tender offer.
In the event that the Fund engages in financial leveraging, the asset coverage requirements of the 1940 Act may restrict the Fund's ability to engage in repurchases of its shares. With respect to senior securities consisting of debt, such requirements provide that no purchases of shares may be made by the Fund unless, at the time of the purchase, the senior securities consisting of debt have an asset coverage of at least 300% after deducting the amount of the purchase price.
Certain Provisions of Articles of Incorporation and Bylaws
The Fund presently has provisions in its Articles of Incorporation and Bylaws
(together, the "Charter Documents") that could have the effect of limiting (i)
the ability of other entities or persons to acquire control of the Fund, (ii)
the Fund's freedom to engage in certain transactions or (iii) the ability of the
Fund's directors or stockholders to amend the Charter Documents or effect
changes in the Fund's management. The Charter Documents also contain provisions
which would inhibit any conversion to an open-end investment company. The
provisions of the Charter Documents may be regarded as "anti-takeover"
provisions.
The Board is divided into three classes. The term of office of the first class expired on the date of the second annual meeting of stockholders, the term of office of the second class expired on the date of the third annual meeting of stockholders and the term of office of the third class expired on the date of the fourth annual meeting of stockholders, etc. Upon the expiration of the term of office of each class as set forth above, the Directors in such class will be elected for a term of three years to succeed the Directors whose terms of office expired. Accordingly, only those Directors in one class may be changed in any one year, and such classification may prevent replacement of a majority of the Board for up to a two-year period (although under Maryland law procedures are available for the removal of Directors even if they are not then standing for re-election, and under Securities and Exchange Commission regulations, procedures are available for including stockholder proposals in the annual proxy statement). Such system of electing Directors is intended to have the effect of maintaining the continuity of management and, thus, make it more difficult for the Fund's stockholders to change the majority of the Directors. A director may be removed from office only by a vote of at least 75% of the outstanding shares of the Fund entitled to vote for the election of Directors.
Under the Fund's Articles of Incorporation, a vote of 75% (which is higher than that required under Maryland law or the 1940 Act) of the outstanding shares of Common Stock of the Fund is required to authorize (i) any merger or consolidation of the Fund with or into any other corporation; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition of assets of the Fund having an aggregate fair market value of $1,000,000 or more (other than in the regular course of its investment activities); and (iii) any amendment to the Articles of Incorporation of the Fund which converts the Fund to an open-end investment company. Any amendment to the Articles of Incorporation of the Fund which reduces the 75% vote required to authorize the enumerated actions also must be approved by vote of the holders of 75% of the outstanding shares of Common Stock. If any of the foregoing actions is approved by a vote of two-thirds of the directors who have served on the Board for a period of at least 12 months, however, the affirmative vote of the holders of a majority of the Fund's outstanding common stock will be sufficient to approve such actions.
The provisions of the Charter Documents described above could have the effect of depriving the owners of shares of opportunities to sell their shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control of the Fund in a tender offer or similar transaction. The overall effect of these provisions is to render more difficult the accomplishment of a merger or the assumption of control by a principal stockholder. However, they provide the advantage of potentially requiring persons seeking control of the Fund to negotiate with its management regarding the price to be paid and facilitating continuity of the Fund's management, objective and policies. The Board of the Fund has considered the forgoing provisions and concluded that they are in the best interests of the Fund and its stockholders.
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
Dividends and Distributions. The Fund currently intends to distribute to stockholders, at least annually at such time so as to avoid imposition of excise taxes, substantially all of its investment company taxable income (i.e. net investment income and any net short-term capital gains less expenses). Net investment income for this purpose is income other than realized net capital gain (i.e. the extent of net long-term capital gains over net short-term capital losses).
The Fund's current policy is to comply with the provisions of the Internal Revenue Code that are applicable to regulated investment companies and to distribute all its taxable income to its stockholders. Under these provisions, the Fund is not subject to federal income tax on its taxable income and no federal tax provision is required.
Dividend Reinvestment Plan. Registered stockholders of shares of Common Stock of the Fund will automatically be enrolled ("Participants") in the Fund's Dividend Reinvestment Plan (the "Plan"). The terms and conditions of the Plan are as follows:
1. State Street Bank and Trust (the "Agent") will act as agent for each Participant. The Agent will open an account for each registered stockholder as a Participant under the Plan in the same name in which such Participant's shares of Common Stock are registered.
2. CASH OPTION. Pursuant to the Fund's Plan, unless a holder of Common Stock otherwise elects, all dividend and capital gains distributions ("Distributions") will be automatically reinvested by the Agent in additional Common Stock of the Fund. Stockholders who elect not to participate in the Plan will receive all distributions in cash paid by check mailed directly to the stockholder of record (or, if the shares are held in street or other nominee name then to such nominee) by the Agent, as dividend paying agent. Stockholders and Participants may elect not to participate in the Plan and to receive all distributions of dividends and capital gains in cash by sending written instructions to the Agent, as dividend paying agent, at the address set forth below.
3. MARKET PREMIUM ISSUANCES. If on the payment date for a Distribution, the NAV per share of Common Stock is equal to or less than the market price per Common Stock plus estimated brokerage commissions, the Agent shall receive newly issued Common Stock ("Additional Common Stock") from the Fund for each Participant's account. The number of Additional Common Stock to be credited shall be determined by dividing the dollar amount of the Distribution by the greater of (i) the NAV per share of Common Stock on the payment date, or (ii) 95% of the market price per share of Common Stock on the payment date.
4. MARKET DISCOUNT PURCHASES. If the NAV per share of Common Stock exceeds the market price plus estimated brokerage commissions on the payment date for a Distribution, the Agent (or a broker-dealer selected by the Agent) shall endeavor to apply the amount of such Distribution on each Participant's Common Stock to purchase Common Stock on the open market. In the event of a market discount on the payment date, the Agent will have 30 days after the dividend payment date (the "last purchase date") to invest the dividend amount in shares acquired in open-market purchases. The weighted average price (including brokerage commissions) of all Common Stock purchased by the Agent as Agent shall be the price per Common Stock allocable to each Participant. If, before the Agent has completed its purchases, the market price plus estimated brokerage commissions exceeds the NAV of the Common Stock as of the payment date, the purchase price paid by Agent may exceed the NAV of the Common Stock, resulting in the acquisition of fewer Common Stock than if such Distribution had been paid in Common Stock issued by the Fund. Because of the foregoing difficulty with respect to open-market purchases, the Plan provides that if the Plan Agent is unable to invest the full dividend amount in open-market purchases during the purchase period or if the market discount shifts to a market premium during the purchase period, the Plan Agent may cease making open-market purchases and may invest the uninvested portion of the dividend amount in newly issued Common Stock at the NAV per share of Common Stock at the close of business on the last purchase date. Participants should note that they will not be able to instruct the Agent to purchase Common Stock at a specific time or at a specific price. Open-market purchases may be made on any securities exchange where Common Stock are traded, in the over-the-counter market or in negotiated transactions, and may be on such terms as to price, delivery and otherwise as the Agent shall determine. Each Participant's uninvested funds held by the Agent will not bear interest. The Agent shall have no liability in connection with any inability to purchase Common Stock within the time provided, or with the timing of any purchases effected. The Agent shall have no responsibility for the value of Common Stock acquired. The Agent may commingle Participants' funds to be used for open-market purchases of the Fund's shares and the price per share allocable to each Participant in connection with such purchases shall be the average price (including brokerage commissions and other related costs) of all Fund shares purchased by Agent. The rules and regulations of the Securities and Exchange Commission may require the Agent to limit the Agent's market purchases or temporarily cease making market purchases for Participants.
5. The market price of Common Stock on a particular date shall be the last sales price on the securities exchange where the Common Stock are listed on that date (currently the NASDAQ Capital Market)(the "Exchange"), or, if there is no sale on the Exchange on that date, then the average between the closing bid and asked quotations on the Exchange on such date will be used. The NAV per share of Common Stock on, a particular date shall be the amount calculated on that date (or if not calculated on such date, the amount most recently calculated) by or on behalf of the Fund.
6. Whenever the Agent receives or purchases shares or fractional interests for a Participant's account, the Agent will send such Participant a notification of the transaction as soon as practicable. The Agent will hold such shares and fractional interests as such Participant's agent and may hold them in the Agent's name or the name of the Agent's nominee. The Agent will not send a Participant stock certificates for shares unless a Participants so requests in writing or unless a Participant's account is terminated as stated below. The Agent will vote any shares so held for a Participant in accordance with any proxy returned to the Fund by such Participant in respect of the shares of which such Participant is the record holder.
7. There is presently no service charge for the Agent serving as Participants' agent and maintaining Participants' accounts. The Agent may, however, charge Participants for extra services performed at their request. The Plan may be amended in the future to impose a service charge. In acting as Participants' agent under the Plan, the Agent shall be liable only for acts, omissions, losses, damages or expenses caused by the Agent's willful misconduct or gross negligence. In addition, the Agent shall not be liable for any taxes, assessments or governmental charges which may be levied or assessed on any basis whatsoever in connection with the administration of the Plan.
8. The Agent may hold each Participant's Common Stock acquired pursuant to the Plan together with the Common Stock of other Stockholders of the Fund acquired pursuant to the Plan in non-certificated form in the Agent's name or that of the Agent's nominee. Each Participant will be sent a confirmation by the Agent of each acquisition made for his or her account as soon as practicable, but in no event later than 60 days, after the date thereof. Upon a Participant's request, the Agent will deliver to the Participant, without charge, a certificate or certificates for the full Common Stock. Although each Participant may from time to time have an undivided fractional interest in a Common Share of the Fund, no certificates for a fractional share will be issued. Similarly, Participants may request to sell a portion of the Common Stock held by the Agent in their Plan accounts by calling the Agent, writing to the Agent, or completing and returning the transaction form attached to each Plan statement. The Agent will sell such Common Stock through a broker-dealer selected by the Agent within 5 business days of receipt of the request. The sale price will equal the weighted average price of all Common Stock sold through the Plan on the day of the sale, less brokerage commissions. Participants should note that the Agent is unable to accept instructions to sell on a specific date or at a specific price. Any share dividends or split shares distributed by the Fund on Common Stock held by the Agent for Participants will be credited to their accounts. In the event that the Fund makes available to its Stockholders rights to purchase additional Common Stock, the Common Stock held for each Participant under the Plan will be added to other Common Stock held by the Participant in calculating the number of rights to be issued to each Participant.
If a Participant holds more than one Common Stock Certificate registered in similar but not identical names or if more than one address is shown for a Participant on the Fund's records, all of such Participant's shares of Common Stock must be put into the same name and address if all of them are to be covered by one account. Additional shares subsequently acquired by a Participant otherwise than through the Plan will be covered by the Plan.
9. The reinvestment of Distributions does not relieve Participants of any federal, state or local taxes which may be payable (or required to be withheld on Distributions.) Participants will receive tax information annually for their personal records and to help them prepare their federal income tax return. For further information as to tax consequences of participation in the Plan, Participants should consult with their own tax advisors.
10. Each registered Participant may terminate his or her account under the Plan by notifying the Agent in writing at State Street Bank and Trust, P.O. Box 642, Mail Code: OPS22, Boston, MA 02117, or by calling the Agent at (617) 937-6870. Such termination will be effective with respect to a particular Distribution if the Participant's notice is received by the Agent prior to such Distribution Record Date. The Plan may be terminated by the Agent or the Fund upon notice in writing mailed to each Participant at least 60 days prior to the effective date of the termination. Upon any termination, the Agent will cause a certificate or certificates to be issued for the full shares held for each Participant under the Plan and cash adjustment for any fraction of a Common Share at the then current market value of the Common Shares to be delivered to him. If preferred, a Participant may request the sale of all of the Common Shares held by the Agent in his or her Plan account in order to terminate participation in the Plan. If any Participant elects in advance of such termination to have Agent sell part or all of his shares, Agent is authorized to deduct from the proceeds the brokerage commissions incurred for the transaction. If a Participant has terminated his or her participation in the Plan but continues to have Common Shares registered in his or her name, he or she may re-enroll in the Plan at any time by notifying the Agent in writing at the address above.
11. These terms and conditions may be amended by the Agent or the Fund at any time but, except when necessary or appropriate to comply with applicable law or the rules or policies of the Securities and Exchange Commission or any other regulatory authority, only by mailing to each Participant appropriate written notice at least 30 days prior to the effective date thereof. The amendment shall be deemed to be accepted by each Participant unless, prior to the effective date thereof, the Agent receives notice of the termination of the Participant's account under the Plan. Any such amendment may include an appointment by the Agent of a successor Agent, subject to the prior written approval of the successor Agent by the Fund.
TAXATION
The following summary reflects the existing provisions of the Internal Revenue Code (the "Code") and other relevant federal income tax authorities as of the date of this prospectus and is subject to any subsequent changes therein. The federal income tax consequences described below are merely statements of general tax principles. The discussion does not deal with the federal income tax consequences applicable to all categories of investors, some of whom may be subject to special rules.
IN VIEW OF THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, EACH STOCKHOLDER IS ADVISED TO CONSULT THE STOCKHOLDER'S OWN TAX ADVISER WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF BEING A STOCKHOLDER OF THE FUND, INCLUDING THE EFFECT AND APPLICABILITY OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES THEREIN.
Federal Taxation of the Fund and its Distributions
The Fund has elected to be treated and intends to qualify annually as a
regulated investment company under the U.S. Internal Revenue Code of 1986, as
amended (the "Code"). To qualify as a regulated investment company, the Fund
must, among other things, (A) derive in each taxable year at least 90% of its
gross income from dividends, interest, payments with respect to securities
loans, net income from certain publicly traded partnerships and gains from the
sale or other disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in stocks, securities
or currencies; (B) diversify its holdings so that, at the end of each quarter of
the taxable year, (i) at least 50% of the market value of the Fund's assets is
represented by cash, U.S. Government securities, securities of other regulated
investment companies and investments in other securities which, with respect to
any one issuer do not represent more than 5% of the value of the Fund's total
assets nor more than 10% of the outstanding voting securities of such issuer and
(ii) not more than 25% of the value of its total assets is invested in (a) the
securities of any one issuer (other than U.S. Government securities and
securities of other regulated investment companies); (b) two or more controlled
issuers in the same or similar trade or business or (c) certain publicly traded
partnerships; and (C) distribute at least 90% of its investment company taxable
income (which includes, among other items for this purpose, dividends, interest
and net short-term capital gains in excess of net long-term capital losses) each
taxable year.
As a regulated investment company, the Fund generally will not be subject to U.S. federal income tax on its investment company taxable income and net capital gains (net long-term capital gains in excess of the sum of net short-term capital losses and capital loss carryovers from prior years, if any) that it distributes to Stockholders. The Fund currently intends to distribute to its Stockholders, at least annually, substantially all of its investment company taxable income, as computed for U.S. federal income tax purposes. To the extent the Fund retains its net capital gains for investment, it will be subject under current tax rates to a federal income tax at a maximum effective rate of 35% on the amount retained. See "Dividend and Distributions" above.
Amounts not distributed on a timely basis in accordance with a calendar-year distribution requirement are subject to a nondeductible 4% federal excise tax payable by the Fund. To avoid the tax, the Fund must distribute, or be deemed to have distributed, during each calendar-year at least an amount equal to the sum of (1) 98% of its ordinary income (not taking into account any capital gains or losses) for the calendar year, (2) 98% of its capital gains in excess of its capital losses (adjusted for certain ordinary losses) for the twelve-month period ending on October 31 of the calendar year, and (3) all ordinary income and capital gains for previous years that were not distributed or taxed during such years. To prevent application of the non-deductible excise tax, the Fund currently intends to make its distributions in accordance with the calendar-year distribution requirement. Compliance with the calendar year distribution requirement may limit the extent to which the Fund will be able to retain its net capital gains for investment.
A distribution will be treated as paid on December 31 of a calendar year if it is declared by the Fund in October, November or December of that year to Stockholders of record on a date in such a month and paid by the Fund during January of the following calendar year. Such distributions will be taxable to Stockholders in the calendar year in which the distributions are declared, rather than the calendar year in which the distributions are received.
If in any taxable year the Fund fails to qualify as a regulated investment company under the Code, the Fund will be taxed in the same manner as an ordinary corporation and distributions to its Stockholders will 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, will constitute dividends (eligible for the corporate dividends-received deduction in the case of corporate stockholders and eligible for treatment as qualified dividend income in the case of individual stockholders) which are taxable to Stockholders as ordinary income, even though those distributions might otherwise (at least in part) have been treated in the Stockholders' hands as long-term capital gains. If the Fund fails to qualify as a regulated investment company in any year, it will be required to pay out its earnings and profits accumulated in that year in order to qualify again as a regulated investment company and may in certain circumstances be required to pay tax on unrealized gains.
If the Fund utilizes leverage through borrowings, it may be restricted by loan covenants with respect to the declaration and payment of dividends in certain circumstances. Limits on the Fund's payment of dividends may prevent the Fund from distributing at least 90% of its net income and may therefore jeopardize the Fund's qualification for taxation as a regulated investment company and/or may subject the Fund to the nondeductible 4% federal excise tax. The Fund will endeavor to avoid restrictions on its ability to make dividend payments.
Gain or loss on the sales of securities by the Fund will generally be long-term capital gain or loss if the securities have been held by the Fund for more than one year. Gain or loss on the sale of securities held for one year or less will be short-term capital gain or loss.
The Fund's investment in so-called "section 1256 contracts," such as regulated futures contracts, certain foreign currency contracts, options on most stock indices and any listed non-equity options, are subject to special tax rules. Any such section 1256 contracts held by the Fund at the end of its taxable year are required to be marked to their market value, and any unrealized gain or loss on those positions will be included in the Fund's income as if each position had been sold for its fair market value at the end of the taxable year. The resulting gain or loss will be combined with any gain or loss realized by the Fund from positions in section 1256 contracts closed during the taxable year. Provided such positions are held as capital assets and are not part of a "hedging transaction" nor part of a "straddle," 60% of the resulting net gain or loss will be treated as long-term capital gain or loss, and 40% of such net gain or loss will be treated as short-term capital gain or loss, regardless of the period of time the positions were actually held by the Fund.
Certain of the Fund's investment practices are subject to special and complex U.S. federal income tax provisions that may, among other things, (i) disallow, suspend or otherwise limit the allowance of certain losses or deductions, including the dividends received deduction, (ii) convert lower taxed long-term capital gains and qualified dividend income into higher taxed short-term capital gains or ordinary income, (iii) convert ordinary loss or a deduction into capital loss (the deductibility of which is more limited), (iv) cause the Fund to recognize income or gain without a corresponding receipt of cash, (v) adversely affect the time as to when a purchase or sale of stock or securities is deemed to occur, (vi) adversely alter the characterization of certain complex financial transactions and (vii) produce income that will not qualify as good income for purposes of the 90% annual gross income requirement described above. The Fund monitors its transactions and may make certain tax elections and may be required to borrow money or dispose of securities to mitigate the effect of these rules and prevent disqualification of the Fund as a regulated investment company.
Because the Fund may invest in foreign securities, its income from such securities may be subject to non-U.S. taxes. Tax conventions may reduce or eliminate such taxes. If the Fund invests more than 50% of its total assets in non-U.S. securities as of year-end, the Fund may elect to have its foreign tax deduction or credit for foreign taxes paid with respect to qualifying taxes to be taken by its shareholders instead of on its own tax return. If the Fund so elects, each shareholder would be required to include in gross income, even though not actually received, his pro rata share of the foreign taxes paid by the Fund, but would be treated as having paid his pro rata share of such foreign taxes and would therefore be allowed to either deduct such amount in computing taxable income or use such amount (subject to various Code limitations) as a foreign tax credit against federal income tax (but not both). For purposes of the foreign tax credit limitation rules of the Code, each shareholder would treat as foreign source income his pro rata share of such foreign taxes plus the portion of dividends received from the Fund representing income derived from foreign sources. Each shareholder should consult his own tax adviser regarding the potential application of foreign tax credits.
The Fund may invest in securities of non-U.S. corporations that could be classified as "passive foreign investment companies" as defined for U.S. federal income tax purposes. A passive foreign investment company is, very generally, a non-U.S. corporation if (i) 75% or more of the gross income of such corporation for the taxable year is passive income (ii) the average percentage of assets held by such corporation during the taxable year that produce passive income or that are held for the production of passive income at least 50%. For U.S. federal income tax purposes, the Fund's investment in a passive foreign investment company may, among other things, cause the Fund to recognize taxable income without a corresponding receipt of cash, to incur an interest charge on taxable income that is deemed to have been deferred and/or to recognize ordinary income that would have otherwise been treated as capital gains. The Fund will monitor any investments in passive foreign investment companies in order to comply with the U.S. federal income tax rules applicable to regulated investment companies.
Gains or losses attributable to fluctuations in exchange rates between the time the Fund accrues income or receivables or expenses or other liabilities denominated in a foreign currency and the time the Fund actually collects such income or receivables or pays such liabilities are generally treated as ordinary income or loss. Similarly, gains or losses on foreign currency forward contracts and the disposition of debt securities denominated in a foreign currency, to the extent attributable to fluctuations in exchange rates between the acquisition and disposition dates, are also treated as ordinary income or loss.
Dividends paid out of the Fund's investment company taxable income (which includes any net short-term capital gains) will be taxable to a U.S. Stockholder as ordinary income. Distributions of net capital gains (net long-term capital gains in excess of the sum of net short-term capital losses and any capital loss carryovers from prior years), if any, designated by the Fund as capital gain dividends, are taxable as long-term capital gains, regardless of how long the Stockholder has held the Fund's Shares.
Ordinarily, dividends paid by the Fund will not qualify for the deduction for dividends received by corporations because the Fund's income will not consist of dividends paid by U.S. corporations. A portion of the Fund's dividends may qualify for the 15% rate on "qualified dividend income" applicable to individual shareholders to the extent that the Fund's income is derived from qualified dividends and to the extent that both the Fund and the individual Stockholder satisfy, among other requirements, a more than 60 day holding period requirement. There can be no assurance as to what portion of the Fund's distributions will qualify for favorable treatment as qualified dividend income. These special rates that apply to ordinary income dividends paid to individuals are set to expire for taxable years beginning in 2011.
The Fund may retain for investment its net capital gain. However, if the Fund retains any net capital gain or any investment company taxable income, it will be subject to a tax of 35% of such amount. If the Fund retains any net capital gain, it expects to designate the retained amount as undistributed capital gains in a notice to its shareholders, each of whom, if subject to U.S. federal income tax on long-term capital gains, (i) will be required to include in income for U.S. federal income tax purposes its share of such undistributed long-term capital gain, (ii) will be entitled to credit its proportionate share of the tax paid by the Fund against their U.S. federal income tax liability, if any, and to claim refunds to the extent that the credit exceeds such liability and (iii) will increase its tax basis in its common shares for the Fund by an amount equal to 65% of the amount of undistributed capital gain included in such shareholder's gross income.
Investment company taxable income will be increased or decreased by the amount of foreign currency gains or losses realized by the Fund in connection with the disposition of foreign currency-denominated debt securities as well as changes in foreign exchange rates between the time the Fund accrues a receivable (typically, dividends, interest and payments for securities sold) or payable (typically, expenses and payments for securities purchased) and the time such receivable or payable is satisfied. The Fund cannot predict the impact of such transactions on company taxable investment income.
See "The Offering - Federal Income Tax Consequences Associated With the Offer" above for a discussion regarding certain United States Federal income tax consequences of the Offer generally applicable to citizens or residents of the United States and U.S. trusts, estates, corporations and any other person who is generally subject to U.S. Federal income tax ("U.S. Stockholders").
Sales of Shares
Upon the sale or other disposition of Shares of the Fund, a Stockholder generally will realize a taxable gain or loss in an amount equal to the difference between the proceeds of the sale or other dispositions and the Stockholder's adjusted tax basis in the Shares. Such gain or loss will be a capital gain or loss if the Shares are capital assets in the Stockholder's hands and generally will be long-term or short-term depending upon the Stockholder's holding period for the Shares. Any loss realized on a sale or exchange will be disallowed to the extent the Shares disposed of are replaced (including replacement through the Dividend Reinvestment Plan) within a period of 61 days, beginning 30 days before and ending 30 days after the Shares are disposed of. In such a case, the basis of the Shares acquired will be adjusted to reflect the disallowed loss. Any loss realized by a Stockholder on a disposition of Fund Shares held by the Stockholder for six months or less will be treated as a long-term capital loss to the extent of any distributions of capital gain dividends received or treated as having received by the Stockholder with respect to such shares.
Backup Withholding
The Fund may be required to withhold for U.S. federal income taxes 28% of all taxable distributions payable to Stockholders who fail to provide the Fund with their certified U.S. taxpayer identification number (or certificate regarding foreign status) or to Stockholders otherwise subject to U.S. backup withholding. Similarly, proceeds from the sale or other disposition of Shares of the Fund in the United States may be subject to backup withholding if the Stockholder fails to provide a certified U.S. taxpayer identification number (or certificate regarding foreign status) and make other certifications in connection with the transaction, or if the Stockholder is otherwise subject to U.S. backup withholding. Corporate Stockholders and other Stockholders specified in the Code are exempt from such backup withholding. Backup withholding is not an additional tax. Any amounts withheld may be refunded or credited against the Stockholder's U.S. federal income tax liability, provided that the required information is furnished to the Internal Revenue Service.
Other Tax Considerations
Distributions from the Fund and sales or other dispositions of Shares of the Fund may be subject to additional state, local and foreign taxes depending on each Stockholder's particular situation. Stockholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in the Fund.
DETERMINATION OF NET ASSET VALUE
The Fund's NAV per share will be calculated by the Adviser (i) no less frequently than monthly, (ii) on the last business day of each month and (iii) at any other times determined by the Board. NAV per share is calculated by dividing the value of the Fund's net assets (the value of its assets less its liabilities) by the total number of shares of Common Stock outstanding.
An unaudited NAV per share is posted daily on the Fund's website at www.herzfeld.com.
In calculating the NAV per share at any time:
(i) the value of any cash on hand or on deposit, bills and demand notes and accounts receivable, prepaid expenses, cash dividends and interest declared or accrued and not yet received, will be its face amount, unless the Adviser has determined that its value is less, in which case its value will be deemed to be such amount as the Adviser determines to be reasonable;
(ii) the value of any security which is traded on a stock exchange (except as specified in (iii) below) will be determined by taking the latest available sales price on the primary exchange on which the security is traded or, if no such price is available, by taking the last quoted bid price;
(iii) the value of any security traded in the unregulated market will be determined, by taking the last quoted bid price;
(iv) investments (if any) in securities of the U.S. government, its agencies and instrumentalities having a maturity of 60 days or less are valued at amortized cost;
(v) the value of a forward contract is calculated by reference to the price quoted at the date of valuation of the contract by the customary banking sources of the Fund;
(vi) the value of commodity futures or option contracts entered into by the Fund are the margin deposit plus or minus the difference between the value of the contract on the date NAV is calculated and the value on the date the contract originated, value being that established on a recognized commodity or options exchange, or by reference to other customary sources, with a gain or loss being recognized;
(vii) the value of any security or property for which no price quotation is available as provided above is the fair value determined in such manner as the Board, acting in good faith, deems appropriate, although the actual calculation may be done by others; and
(viii) the liabilities of the Fund are deemed to include, without limitation, all bills and accounts payable, all other contractual obligations for the payment of money, including the amount of distributions declared and unpaid, all accrued and unpaid management fees, advisory fees and other expenses, all reserves for taxes or contingencies and all other liabilities of the Fund determined in accordance with generally accepted accounting principles.
In valuing securities or property for which no price quotation is available, the Board considers various factors, including the fundamental analytical data relating to the investment, the nature and duration of any restriction on disposition of the investment, and the forces that influence the market in which such investment is purchased and sold.
Any assets or liabilities initially expressed in terms of foreign currencies are translated into dollars at a quoted exchange rate or at such other appropriate rate as may be determined by the Adviser.
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND REGISTRAR
State Street Bank and Trust Company acts as custodian for the Fund's assets. The principal address of the Custodian is 200 Clarendon Street, P.O. Box 9130, Mail Code DPG-112, Boston, Massachusetts 02117. The Custodian employs sub-custodians in each of the jurisdictions in which the Fund invests. The custodian's services include, in addition to the custody of all cash and securities owned by the Fund, the maintenance of a custody account in the custodian's Fund department, the segregation of all certificated securities owned by the Fund, the appointment of authorized agents as sub-custodians, disbursement of funds from the custody account of the Fund, releasing and delivering securities from the custody account of the Fund, maintain records with respect to such custody account, delivering to the Fund a daily and monthly statement with respect to such custody account, and causing proxies to be executed. The custodian's fee is paid by the Fund.
State Street Bank and Trust Company also serves as the Fund's transfer agent, dividend/distribution disbursing agent, dividend reinvestment plan agent and as registrar for the Fund's common stock.
LEGAL MATTERS
Pepper Hamilton LLP, 3000 Two Logan Square, 18th and Arch Streets, Philadelphia, PA 19103 serves as counsel to the Fund.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The independent registered accounting firm of the Fund is [_______] located at 500 Ygnacio Valley Road, Suite 200, Walnut Creek, CA 94596.
FINANCIAL STATEMENTS
The financial statements of the Fund as of June 30, 2007 (which have been
incorporated into this Prospectus and the registration statement, of which this
Prospectus forms a part, by reference to the Fund's 2007 Annual Report to
Stockholders), and the financial highlights for each of the five years in the
period ended June 30, 2007, included in this Prospectus, have been so
incorporated and included in reliance on the reports of [____], independent
accountants, for the one year periods ended June 30, 2007 and 2006, and of
[FORMER AUDITOR], independent accountants for the one year periods ended June
30, 2005, 2004, and 2003, given on the authority of said firms as experts in
auditing and accounting. The address of [FORMER AUDITOR] is 2699 S. Bayshore
Drive, Miami, FL 33133.
FURTHER INFORMATION
Further information concerning these securities and the Fund may be found in the Registration Statement on file with the Commission, of which this Prospectus and the SAI incorporated by reference herein constitute a part. Financial statements of the Fund for the fiscal year ended June 30, 2007 are included in the Fund's annual reports to stockholders for such years, copies of which are on file with and may be inspected at the Commission as indicated below.
The Fund is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the 1940 Act, and in accordance therewith, is required to file periodic reports, proxy statements and other information with the Commission relating to its business, financial condition and other matters. Such information is available for inspection at the public reference facilities of the Commission at Room 1024, 100 F Street, NE, Washington, DC 20549. Copies of such information are obtainable by mail, upon payment of the Commission's customary charges, by writing to the Commission's principal office at 100 F Street, NE, Washington, DC 20549 at prescribed rates. The Commission maintains a web site (http://www.sec.gov) that contains periodic reports, proxy statements and other information regarding registrants that file documents electronically with the Commission. Such reports and other information concerning the Fund may also be inspected at the offices of the NASDAQ Capital Market.
APPENDIX A
THE HERZFELD CARIBBEAN BASIN FUND, INC.
Proxy Voting Policy and Procedures
The Board of Directors of The Herzfeld Caribbean Basin Fund, Inc. (the "Fund") hereby adopts the following policy and procedures with respect to voting proxies relating to portfolio securities held by the Fund:
Policy
It is the policy of the Board of Directors of the Fund (the "Board") to delegate the responsibility for voting proxies relating to portfolio securities held by the Fund to the Fund's investment adviser (the "Adviser") as a part of the Adviser's general management of the Fund, subject to the Board's continuing oversight.(1) The voting of proxies is an integral part of the investment management services that the Adviser provides pursuant to the advisory contract.
The Adviser may, but is not required to, delegate the responsibility for voting proxies relating to portfolio securities held by the Fund to a sub-adviser ("Sub-Adviser") retained to provide investment advisory services, if applicable. If such responsibility is delegated to a Sub-Adviser, then the Sub-Adviser shall assume the fiduciary duty and reporting responsibilities of the Adviser under these policy guidelines.
Fiduciary Duty
The right to vote a proxy with respect to portfolio securities held by the Fund is an asset of the Fund. The Adviser, to which authority to vote on behalf of the Fund is delegated, acts as a fiduciary of the Fund and must vote proxies in a manner consistent with the best interest of the Fund and its shareholders.
Procedures
The following are the procedures adopted by the Board for the administration of this policy:
A. Review of Adviser Proxy Voting Procedures. The Adviser with authority to vote proxies on behalf of the Fund shall present to the Board its policies, procedures and other guidelines for voting proxies at least annually, and must notify the Board promptly of material changes to any of these documents.
B. Voting Record Reporting. No less than annually, the Adviser shall report to the Board a record of each proxy voted with respect to portfolio securities of the Fund during the year. With respect to those proxies that the Adviser has identified as involving a conflict of interest(2), the Adviser shall submit a separate report indicating the nature of the conflict of interest and how that conflict was resolved with respect to the voting of the proxy.
Revocation
The delegation by the Board of the authority to vote proxies relating to portfolio securities of the Fund is entirely voluntary and may be revoked by the Board, in whole or in part, at any time.
(2) As it is used in this document, the term "conflict of interest" refers to a situation in which the Adviser or Sub-Adviser or affiliated persons of the Adviser or Sub-Adviser have a financial interest in a matter presented by a proxy other than the obligation it incurs as investment adviser to the Fund which compromises the Adviser's or Sub-Adviser's independence of judgment and action with respect to the voting of the proxy.
Annual Filing
The Fund shall file an annual report of each proxy voted with respect to its portfolio securities during the twelve-month period ended June 30 on Form N-PX not later than August 31 of each year.
Disclosures
The Fund shall include in its annual report to stockholders:
A description of this policy and of the policies and procedures used by the Adviser to determine how to vote proxies relating to portfolio securities(3); and
A statement disclosing that information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available without charge, upon request, by calling the Fund's toll-free telephone number and on the SEC website.(4)
The Fund shall also include in its annual and semi-annual reports to stockholders:
A statement disclosing that a description of the policies and procedures used by or on behalf of the Fund to determine how to vote proxies relating to portfolio securities of the Funds is available without charge, upon request, by calling the Fund's toll-free telephone number and on the SEC website.(5)
A statement disclosing that information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available without charge, upon request, by calling the Fund's toll-free telephone number and on the SEC website.(6)
Review of Policy.
At least annually, the Board shall review this Policy to determine its sufficiency and shall make and approve any changes that it deems necessary from time to time.
(4) Id.
(5) This disclosure shall be included in the report next filed by the Fund on or after July 1, 2003.
(6) Id..
APPENDIX B
THOMAS J. HERZFELD ADVISORS, INC.
PROXY VOTING
POLICIES AND PROCEDURES
II. POLICY
Thomas J. Herzfeld Advisors, Inc. (the "Adviser") acts as discretionary investment adviser for various clients, including The Herzfeld Caribbean Basin Fund, Inc., an investment company registered under the Investment Company Act of 1940, as amended, and clients governed by the Employee Retirement Income Security Act of 1974 ("ERISA"). Selected clients, including the Caribbean Basin Fund, Inc. have elected to have the Adviser vote proxies or act on the other shareholder actions on their behalf, while other clients vote proxies themselves..
When voting proxies or acting on corporate actions for clients, the Adviser's utmost concern is that all decisions be made in the best interest of its clients (for ERISA accounts, plan beneficiaries and participants, in accordance with the letter and spirit of ERISA). The Adviser will act in a manner deemed prudent and diligent and which is intended to enhance the economic value of the assets of its clients' accounts.
III. PURPOSE
The purpose of these Policies and Procedures is to memorialize the procedures and policies adopted by the Adviser to enable it to comply with its responsibilities and the requirements of Rule 206(4)-6 under the Investment Advisers Act of 1940, as amended ("Advisers Act"). These Policies and Procedures also reflect the fiduciary standards and responsibilities set forth by the Department of Labor for ERISA accounts.
IV. PROCEDURES
Cecilia Gondor, Executive Vice President of the Adviser, is ultimately responsible for ensuring that all proxies received by the Adviser are voted in a timely manner and voted consistently across all portfolios. Although many proxy proposals can be voted in accordance with the Adviser's established guidelines (see Section V. below) (the "Guidelines"), the Adviser recognizes that some proposals require special consideration, which may dictate that the Adviser makes an exception to the Guidelines.
Cecilia Gondor is also responsible for ensuring that all corporate actions received by the Adviser are addressed in a timely manner and consistent action is taken across all portfolios.
A. Conflicts of Interest. Where a proxy proposal raises a material conflict of interest between the Adviser's interests and that of one or more its clients, the Adviser shall resolve such conflict in the manner described below.
1. Vote in Accordance with the Guidelines. To the extent that the Adviser has little or no discretion to deviate from the Guidelines with respect to the proposal in question, the Adviser shall vote in accordance with such pre-determined voting policy.
2. Obtain Consent of Clients. To the extent that the Adviser has discretion to deviate from the Guidelines with respect to the proposal in question, the Adviser shall disclose the conflict to the relevant clients and obtain their consent to the proposed vote prior to voting the securities. The disclosure to the clients will include sufficient detail regarding the matter to be voted on and the nature of our conflict that the clients would be able to make an informed decision regarding the vote. When a client does not respond to such a conflict disclosure request or denies the request, the Adviser will abstain from voting the securities held by that client's account.
B. Limitations. In certain circumstances, in accordance with a client's investment advisory contract (or other written directive) or where the Adviser has determined that it is in the client's best interest, the Adviser will not vote proxies received. The following are some circumstances where the Adviser will limit its role in voting proxies received on client securities:
1. Client Maintains Proxy Voting Authority: Where a client has not specifically delegated the authority to vote proxies to the Adviser or that it has delegated the right to vote proxies to a third party, the Adviser will not vote the securities and will direct the relevant custodian to send the proxy material directly to the client. If any proxy material is received by the Adviser, it will promptly be forwarded to the client.
2. Terminated Account: Once a client account has been terminated with the Adviser in accordance with its investment advisory agreement, the Adviser will not vote any proxies received after the termination. However, the client may specify in writing that proxies should be directed to the client for action.
3. Limited Value: If the Adviser concludes that the client's economic interest or the value of the portfolio holding is indeterminable or insignificant, the Adviser will abstain from voting a client's proxies. The Adviser does not vote proxies received for securities which are no longer held by the client's account. In addition, the Adviser generally does not vote securities where the economic value of the securities in the client's account is less than $500.
4. Securities Lending Programs: When securities are out on loan, they are transferred into the borrower's name and are voted by the borrower, in its discretion. However, where the Adviser determines that a proxy vote (or shareholder action) is materially important to the client's account, the Adviser may recall the security.
5. Unjustifiable Costs: In certain circumstances, after doing a cost-benefit analysis, the Adviser may abstain from voting where the cost of voting a client's proxy would exceed any anticipated benefits of the proxy proposal.
V. RECORD KEEPING
In accordance with Rule 204-2 under the Advisers Act, the Adviser will maintain
for the time periods set forth in the Rule (i) these proxy voting procedures and
policies, and amendments thereto; (ii) all proxy statements received regarding
client securities (provided however, that the Adviser may rely on the proxy
statement filed on EDGAR as its records)(7); (iii) a record of votes cast on
behalf of clients; (iv) records of client requests for proxy voting information;
(v) any documents prepared by the adviser that were material to making a
decision how to vote or that memorialized the basis for the decision; and (vi)
records relating to requests made to clients regarding conflicts of interest in
voting the proxy.
The Adviser will describe in its Part II of Form ADV (or other brochure fulfilling the requirement of Rule 204-3) its proxy voting policies and procedures and advising clients how they may obtain information on how the Adviser voted their securities. Clients may obtain information on how their securities were voted or a copy of our Policies and Procedures by written request addressed to the Adviser.
VI. GUIDELINES
Each proxy issue will be considered individually. The following guidelines are a partial list to be used in voting proposals contained in the proxy statements, but will not be used as rigid rules.
--------------------------------------------------------------------------------------------------
(1) Issues regarding the issuer's Board entrenchment and anti-takeover Oppose
measures such as the following:
b. Proposals to limit the ability of shareholders to call special
meetings;
c. Proposals to require super majority votes;
d. Proposals requesting excessive increases in authorized common or
preferred shares where management provides no explanation for the
use or need for these additional shares;
e. Proposals regarding "poison pill" provisions; and
f. Permitting "green mail".
--------------------------------------------------------------------------------------------------
(1) Providing cumulative voting rights. Oppose
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(2) "Social issues," unless specific client guidelines supersede, e.g., Oppose
restrictions regarding South Africa.
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(3) Election of directors recommended by management, except if there is a Approve
proxy fight.
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(4) Election of auditors recommended by management, unless seeking to replace Approve
if there exists a dispute over policies.
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(5) Date and place of annual meeting. Approve
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(6) Limitation on charitable contributions or fees paid to lawyers. Approve
--------------------------------------------------------------------------------------------------
(7) Ratification of directors' actions on routine matters since previous Approve
annual meeting.
--------------------------------------------------------------------------------------------------
(8) Confidential voting Approve
Confidential voting is most often proposed by shareholders as a means of
eliminating undue management pressure on shareholders regarding their vote on
proxy issues.
The Adviser will generally approve these proposals as shareholders can later
divulge their votes to management on a selective basis if a legitimate reason
arises.
--------------------------------------------------------------------------------------------------
(9) Limiting directors' liability Approve
--------------------------------------------------------------------------------------------------
(10) Eliminate preemptive right Approve
Preemptive rights give current shareholders the opportunity to maintain their
current percentage ownership through any subsequent equity offerings. These
provisions are no longer common in the U.S., and can restrict management's
ability to raise new capital.
The Adviser approves the elimination of preemptive rights, but will oppose the
elimination of limited preemptive rights, e.g., on proposed issues representing
more than an acceptable level of total dilution.
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|
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(11) Employee Stock Purchase Plan Approve
--------------------------------------------------------------------------------------------------
(12) Establish 401(k) Plan Approve
--------------------------------------------------------------------------------------------------
(13) Rotate annual meeting location/date Approve
--------------------------------------------------------------------------------------------------
(14) Establish a staggered Board Approve
--------------------------------------------------------------------------------------------------
(15) Eliminate director mandatory retirement policy Case-by-Case
--------------------------------------------------------------------------------------------------
(16) Option and stock grants to management and directors Case-by-Case
--------------------------------------------------------------------------------------------------
(17) Allowing indemnification of directors and/or officers after reviewing the Case-by-Case
applicable laws and extent of protection requested.
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PART C - OTHER INFORMATION
ITEM 25. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements:
(a) Schedule of Investments as of June 30, 2007 to be filed by amendment.
(b) Statement of Assets and Liabilities as of June 30, 2007 to be filed by amendment.
(c) Statement of Operations Year Ended June 30, 2007 to be filed by amendment.
(d) Statements of Changes in Net Assets for the Years Ended June 30, 2007 and 2006 to be filed by amendment.
(e) Financial Highlights Years Ended June 30, 2003 through 2007 to be filed by amendment.
(f) Notes to Financial Statements to be filed by amendment.
(g) Report of Independent Registered Public Accounting Firm to be filed by amendment.
(2) Exhibits
(a) (1) Articles of Incorporation filed with the State of Maryland dated March 10, 1992.
(2) Articles of Amendment to Articles of Incorporation as filed with the State of Maryland on July 23, 1993.
(b) By Laws.
(c) Not applicable.
(d) (1) Form of Specimen Certificate of Common Stock.
(2) Articles Sixth, Eighth, Ninth and Tenth of the Registrant's Articles of Incorporation filed hereto as exhibit (a)(1).
(3) Articles II and III of the Registrant's By Laws filed hereto as exhibit (a)(3).
(e) Dividend Reinvestment Plan is incorporated by reference to Exhibit 99.2 to Form 8-K/A filed with the Securities and Exchange Commission ("SEC") on November 22, 2006 (File No. 811-06445).
(f) Not applicable.
(g) Investment Advisory Agreement between HERZFELD/CUBA, a division of Thomas J. Herzfeld Advisors, Inc. and the Registrant dated September 10, 1993.
(h) Not applicable.
(i) Not applicable.
(j) Custodian Agreement between Investors Bank & Trust Company and the Registrant dated March 28, 2003.
(k) Subscription Agent Agreement between Colbent Corporation and the Registrant.
(l) Opinion and Consent of Pepper Hamilton LLP to be filed by amendment.
(m) Not applicable.
(n) Consent of Independent Registered Public Accounting Firm to be filed by amendment.
(o) Not applicable.
(p) Not applicable.
(r) Joint Code of Ethics of the Registrant and Thomas J. Herzfeld Advisors, Inc.
ITEM 26. MARKETING ARRANGEMENTS
None.
ITEM 27. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred in connection with the Offer described in this Registration Statement.
Estimated
Description of Expense Expense*
---------------------- --------
Securities and Exchange Commission registration fees...............$[____]
NASDAQ listing fees for additional shares..........................$[____]
Printing (other than stock certificates) ..........................$[____]
Engraving and printing of stock certificates.......................$[____]
Accounting fees and expenses.......................................$[____]
Legal fees and expenses............................................$[____]
Subscription agent's fees and expenses.............................$[____]
Miscellaneous......................................................$[____]
Total.........................................................$[____]
|
* To be provided by amendment.
ITEM 28. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
ITEM 29. NUMBER OF HOLDERS OF SECURITIES
Number Of
Record Holders
As Of
Title Of Class June 30, 2007*
------------------------------------------- ---------------------
Common Stock, $0.001 par value [____]
|
* To be provided by amendment.
ITEM 30. INDEMNIFICATION
The General Corporation Law of the State of Maryland, Article VII Registrant's By-laws filed as exhibit (b) hereto, and Section 5 of the Investment Advisory Agreement filed as exhibit (g) hereto provide for indemnification. The Registrant has purchased insurance insuring its directors and officers against certain liabilities incurred in their capacities as such, and insuring the Registrant against any payments which it is obligated to make to such persons under the foregoing indemnification provisions.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Act"), 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 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
ITEM 31. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
Registrant is fulfilling the requirement of this Item 31 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 those entities or those of its officers and directors during the past two years, by incorporating herein by reference the information contained in the current Form ADV filed on February 12, 2007 with the Securities and Exchange Commission by Thomas J. Herzfeld Advisors, Inc. (File No. 801- 20866) pursuant to the Investment Advisers Act of 1940, as amended.
ITEM 32. LOCATION OF ACCOUNTS AND RECORDS
All such books and other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940 and Rules 31a-1 through 31a-3 thereunder are maintained at the following locations:
Thomas J. Herzfeld Advisors, Inc., P.O. Box 161465, Miami, FL 33116; and
State Street Bank and Trust Company, P.O. Box 642, Mail Code OPS22, Boston, MA 02116.
ITEM 33 MANAGEMENT SERVICES
Not applicable.
ITEM 34. UNDERTAKINGS
(1) Registrant undertakes to suspend the offering of its shares until it amends its prospectus if: (a) subsequent to the effective date of this Registration Statement, the net asset value per share declines more than 10% from its net asset value per share as of the effective date of this Registration Statement; or (b) the net asset value increases to an amount greater than its net proceeds as stated in the Prospectus.
(2) Not applicable.
(3) Not applicable.
(4) Not applicable.
(5) Registrant undertakes that: (a) for purposes of determining any liability under the Securities Act of 1933, as amended, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective; and (b) that for the purpose of determining any liability under the Securities Act of 1933, as amended, each post-effective amendment 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) Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, as amended, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Miami, and state of Florida, on the 23rd day of July 2007.
HERZFELD CARIBBEAN BASIN FUND, INC.
By: /s/ Thomas J. Herzfeld
-----------------------------------
Thomas J. Herzfeld
President and Chairman of the
Board of Directors
|
Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the date indicated.
Name Title Date
/s/Ann S. Lieff Director July 23, 2007
-----------------------
Ann S. Lieff
/s/Michael A. Rubin Director July 23, 2007
-----------------------
Michael A. Rubin
Director and President
/s/Thomas J. Herzfeld (Principal Executive Officer) July 23, 2007
-----------------------
Thomas J. Herzfeld
Secretary and Treasurer
/s/Cecilia Gondor (Principal Financial Officer) July 23, 2007
-----------------------
Cecilia Gondor
|
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
(a)(1) Articles of Incorporation
|
(a)(2) Articles of Amendment to Articles of Incorporation (b) By Laws (d) Form of Specimen Certificate of Common Stock (g) Investment Advisory Agreement (j) Custodian Agreement (k) Subscription Agent Agreement (r) Joint Code of Ethics of Registrant and Adviser |
ARTICLES OF INCORPORATION
OF
THE FIRST CUBA FUND, INC.
FIRST: The undersigned, being of legal age, in order to form a corporation under and pursuant to the laws of the State of Maryland, does hereby set forth as follows:
SECOND: The name of the corporation is THE FIRST CUBA FUND, INC. (the "Corporation").
THIRD: Corporate Purposes.
The purposes for which the Corporation is formed are to operate as and carry on the business of a closed-end management investment company under the Investment Company Act of 1940 and generally to exercise and enjoy all of the powers, rights and privileges granted to, or conferred upon, corporations by the General Laws of the State of Maryland now or hereafter in force.
FOURTH: Address and Resident Agent. The post office address of the principal office of the Corporation in the State of Maryland is c/o United Corporate Services, Inc. 20 South: Charles Street, Suite 1200, Baltimore, Maryland 21201. The name and address of the resident agent of the Corporation in the State of Maryland is United Corporate Services, Inc. 20 South Charles Street, Suite 1200, Baltimore, Maryland 21201, said agent is a corporation of the State of Maryland.
FIFTH: Capital Stock. The total number of shares of stock which the Corporation shall have authority to issue is one hundred million (100,000,000) shares, all of the one class called Common Stock of one cent ($0.001) par value each, having an aggregate par value of $100,000.
SIXTH: Board of Directors. The number of Directors of the Corporation shall be nine, which number shall be increased or decreased from time to time in the manner provided in the By-Laws of the Corporation, provided that the number of Directors shall not be less than three after the commencement of business operation. The name of the Director who shall act until the first annual meeting or until his successors are duly chosen and qualify is: Thomas J. Herzfeld. Except as provided in the By-Laws, the election of Directors may be conducted in any way approved at the meeting (whether of stockholders or Directors) at which the election is held, provided that such election shall be by ballot whenever requested by any person entitled to vote. The By-Laws may provide for the division of the Directors of the Corporation into classes and specify the term of office for each class. 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 75% of the votes entitled to be cast for the election of directors, remove any director or directors from office, with or without cause.
SEVENTH: Management of the Affairs of the Corporation.
(a) All corporate powers and authority of the corporation (except as at the time otherwise provided by statute, by these Articles of Incorporation or by the By-Laws) shall be vested in and exercised by the Board of Directors.
(b) The Board of Directors shall have the power to make, alter or repeal the By-Laws of the Corporation except to the extent that the By-Laws otherwise provide.
(c) The Board of Directors shall have the power from time to time to authorize payment of compensation to the Directors for services to the Corporation, as provided in the By-Laws, including fees for attendance at meetings of the Board of Directors and of committees.
(d) The Board of Directors shall have the power from time to time to determine whether and to what extent, and at what times and places and under what conditions and regulations, the accounts and books of the Corporation (other that the stock ledger) shall be open to the inspection of stockholders; and no stockholder shall have any right to inspect any account, book or document of the Corporation except at such time as is conferred by statute or the By-Laws.
EIGHTH: Special Vote of Stockholders.
(a) Except as otherwise provided in this Article Eighth, the vote of the holders of at least 75% of the voting power of the then outstanding shares of Voting Stock (as hereinafter defined), in addition, to any vote of the Directors of the Corporation as may be required by law or by the By-Laws, 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" (as such term is defined in the Investment Company Act of 1940) unless the Continuing Directors (as hereinafter defined) of the Corporation, by a vote of at least 75% of such Directors, approve such amendment;
(ii) any Business Combination (as hereinafter defined) unless either the condition in clause (A) below is satisfied or the conditions in clauses (B), (C), (D), (E) and (F) below are satisfied:
(A) The Business Combination shall have been approved by a vote of at least 75% of the Continuing Directors.
(B) The aggregate amount of cash and the Fair Market Value (as herinafter 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 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 Common 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) in the Threshold Transaction (as hereinafter defined), whichever is higher; and
(y) the net asset value per share of such Common 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 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 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 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).
(b) For the purposes of this Article Eighth:
(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 or consolidation 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) 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) 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 thereof, (y) issuances of any securities of the Corporation pursuant to a dividend reinvestment 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 is not an Interested Party or an Affiliate of an Interested Party and has been a member of the Board of Directors for a period of at least 12 months, or is a successor of a Continuing Director who is unaffiliated with an Interested Party and is recommended to succeed a Continuing Director by a majority of the Continuing Directors then on the Board of Directors.
(iii) "Interested Party" shall mean any person, other than an investment company advised by the Corporation's initial investment manager or any of its Affiliates, which enters, or proposes to enter, into a Business Combination with the Corporation.
(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 General Rules and Regulations under the Securities Exchange Act of 1934.
(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, 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 bid quotation 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 Systems (NASDAQ) or any system then in use, or if no such quotations are available, the fair market value on the relevant date of a share of such stock as determined by 75% 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 75% 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" has used in subparagraph (a) (iii) (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, acting by a vote of 75%, 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 (a) (iii) above have been met with respect to any Business Combination have, (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.
NINTH: Pre-Emotive Rights. No holder of the Capital Stock of the Corporation or of any other class of stock or securities which may hereafter by created shall be entitled as such, as a matter of right, to subscribe for or purchase any part of any new or additional issue of stock of any class, or of rights or options to purchase any stock, or of a securities convertible into, or carrying rights or options to purchase, stock of any class, whether now or hereafter authorized or whether issued for money, for a consideration other than money or by way of a dividend or otherwise, and all such rights are hereby waived by each holder of Capital Stock and of any other class of stock which may hereafter be created.
TENTH: Reservation of Right to Amend. From time to time any of the provisions of the Articles of Incorporation, with the exception of Articles Third, Sixth, Eighth, Ninth, and this Article Tenth, may be amended, altered or repealed (including any amendment which changes the terms of any of the outstanding stock by classification, reclassification or otherwise) upon the vote of the holders of a majority of the voting power of the then outstanding shares of Voting Stock of the Corporation at the time outstanding and entitled to vote, and other provisions which might under the statutes of the State of Maryland at the time in force be lawfully contained in articles of incorporation may be added or inserted upon the vote of the holders of a majority of the shares of Common Stock of the Corporation at the time outstanding and entitled to vote; and all rights at any time conferred upon the stockholders of the Corporation by these Articles of Incorporation are granted subject to the provisions of this Article Tenth. The provisions of Articles Third, Sixth, Eighth, Ninth and this Article Tenth may be amended, altered, or repealed only upon the vote of the holders of 75% of the voting power of the then outstanding shares of Voting Stock of the Corporation.
ELEVENTH: Duration. The duration of the corporation shall be perpetual.
IN WITNESS WHEREOF, I have signed these Articles of Incorporation and acknowledge the same be my act on the 6th day March, 1992.
/s/ Ray A. Barr ---------------------------------------- Ray A. Barr, Incorporator |
STATE OF NEW YORK )
)ss
COUNTY OF NEW YORK )
|
Be it remembered that on this sixth day of March, 1992, personally came before me, a Notary Public in and for the County and State aforesaid, Ray A. Barr party to said documents to be their act and deed and that the facts therein stated are true.
Given under my hand and seal of office the day and year aforesaid.
/s/ Grizel Muniz ---------------------------------------- Grizel Muniz - Notary Public |
GRIZEL MUNIZ
Notary Public State of New York
No. 01MU4930325
Qualified in Suttolk County
Certificate Filed in New York County
Commission Expires July 25, 1992
STATE OF MARYLAND
WILLIAM DONALD SCHAEFER Department of Assessments and Taxation
Governor CHARTER DIVISION
LLOYD W. JONES [SEAL] Room 809
Director 301 West Preston Street
Baltimore, Maryland 21201
PAUL B. ANDERSON
Administrator
|
DOCUMENT CODE 02 BUSINESS CODE 03 COUNTY 74
# ______________ ___ P.A. _____ Religious ____ Close __X__ Stock ____ Nonstock
Merging Surviving (Transferor) ________________________ (Transferee) ___________________________ _____________________________________ ________________________________________ _____________________________________ ________________________________________ _____________________________________ ________________________________________ |
CODE AMOUNT FEE REMITTED Name Change
---- ------ ------------ -----------
10 50 Expedited Fee (New Name) ____________________________
20 20 Organ. & Capitalization
61 20 Rec. Fee (Arts. of Inc.) _______________________________________
62 ______ Rec. Fee (Amendment)
63 ______ Rec. Fee (Merger or _______________________________________
Consolidation)
64 ______ Rec. Fee (Transfer) ______ Change of Name
65 ______ Rec. Fee (Dissolution) ______ Change of Principal Office
66 ______ Rec. Fee (Revival) ______ Change of Resident Agent
52 ______ Foreign Qualification ______ Change of Resident Agent
50 ______ Cert. of Qual. or Reg. Address
51 ______ Foreign Name Registration ______ Resgination of Resident Agent
13 13 1 Certified Copy 7 p ______ Designation of Resident Agent
56 ______ Penalty and Resident Agent's Address
54 ______ For. Supplemental Cert. ______ Other Change ___________________
53 ______ Foreign Resolution ________________________________
73 ______ Certificate of Conveyance
________________________________
________________________________
76 ______ Certificate of Merger/Transfer
________________________________
________________________________ Code 154
75 ______ Special Fee
80 ______ For. Limited Partnership ATTENTION: Mark Skubia
83 ______ Cert. Limited Partnership
84 ______ Amendment to Limited Partnership _______________________________________
85 ______ Termination of Limited Partnership
21 ______ Recordation Tax
22 ______ State Transfer Tax MAIL TO ADDRESS: ______________________
23 ______ Local Transfer Tax
31 ______ ______ Corp. Good Standing _______________________________________
NA ______ Foreign Corp. Registration
87 ______ ______ Limited Part. Good Standing _______________________________________
71 ______ Financial
600 ______ _________________________ Personal _______________________________________
Property Reports and _____________
late filing penalties _______________________________________
70 ______ Change of P.O., R.A. or R.A.A.
91 ______ Amend/Cancellation, For. Limited Part. _______________________________________
_____ ______ Other ________________________________
______ Other ________________________________
TOTAL
FEES 103
|
|X| Check |_| Cash NOTE:
1 Documents on 2 checks
APPROVED BY: /s/ JS
------------------------
|
ARTICLES OF INCORPORATION
OF
THE FIRST CUBA FUND, INC.
APPROVED AND RECEIVED FOR RECORD BY THE STATE DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND MARCH 10, 1992 AT 3:15 O'CLOCK P.M. AS IN CONFORMITY WITH LAW AND ORDERED RECORDED.
ORGANIZATION AND RECORDING SPECIAL
CAPITALIZATION FEE PAID FEE PAID FEE PAID
$20.00 $20.00 $____
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D3389186
TO THE CLERK OF THE COURT OF BALTIMORE CITY
IT IS HEREBY CERTIFIED, THAT THE WITHIN INSTRUMENT, TOGETHER WITH ALL INDORSEMENTS THEREON, HAS BEEN RECEIVED, APPROVED AND RECORDED BY THE STATE DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND.
RECEIVED FOR RECORD RETURN TO:
CIRCUIT COURT FOR UNITED CORPORATE SERVICES
BALTIMORE CITY MARK S.
9 EAST 40TH STREET, 6TH FLOOR
92 AUG 12 AM 9:26 NEW YORK NY 10016
SAUNDRA E. BANKS, CLERK
177C3051280
A382995
SEAL RECORDED IN THE RECORDS OF THE
STATE DEPARTMENT OF ASSESSMENTS
AND TAXATION OF MARYLAND IN LIBER, FOLIO
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232602
STATE OF MARYLAND
DEPARTMENT OF
ASSESSMENTS AND TAXATION
301 West Preston Street Baltimore, Maryland 21201
DATE: JULY 23, 1993
THIS IS TO ADVISE YOU THAT THE ARTICLES OF AMENDMENT WITH A NAME CHANGE FOR THE FIRST CUBA FUND, INC. CHANGING TO THE HERZFELD CARIBBEAN BASIN FUND, INC. WERE RECEIVED AND APPROVED FOR RECORD ON JULY 23, 1993 AT 10:14 AM.
FEE PAID: 78.00
PAULA CARY MCLEAN
SEAL CHARTER SPECIALIST
THE FIRST CUBA FUND, INC.
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
The First Cuba Fund, Inc., a Maryland corporation having its principal Maryland office in Baltimore, Maryland (the "Corporation"), hereby certifies, in accordance with Section 2-603 of the Maryland General Corporation Law, to the State Department of Assessments and Taxation of Maryland that:
FIRST: The Articles of Incorporation are hereby amended by striking out Article SECOND and inserting in lieu thereof the following:
SECOND: The name of the corporation is The Herzfeld Caribbean Basin Fund, Inc. (the "Corporation").
SECOND: The Board of Directors of the Corporation on June 24, 1993 by unanimous vote, approved changing the name of the Corporation to "The Herzfeld Caribbean Basin Fund, Inc." and adopted a resolution approving the amendment to the Articles of Incorporation herein made; at the time of such approval, no shares of stock entitled to be voted on the matter were either outstanding or subscribed for.
THIRD: The Articles of Amendment shall be effective on the date such Articles are accepted for filing by the Department of Assessments and Taxation.
IN WITNESS WHEREOF, The First Cuba Fund, Inc. has caused these Articles of Amendment to be signed in its name on it and on its behalf this 20th day of July, 1993.
THE FIRST CUBA FUND, INC.
By: /s/ Thomas J. Herzfeld
------------------------------------
Thomas J. Herzfeld
President
ATTEST:
/s/ Cecilia Gondor-Morales
-------------------------------------
Cecilia Gondor-Morales
Secretary
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STATE OF MARYLAND
I hereby certify that this is a true and complete copy of the 3 page document on file in this office. DATED: 7-23-93.
STATE DEPARTMENT OF ASSESSMENTS AND TAXATION
This stamp replaces our previous certification system. Effective: 10/84
THE UNDERSIGNED, President of THE FIRST CUBA FUND, INC., who executed on behalf of the said Corporation the foregoing Articles of Amendment, of which this instrument is made a part, hereby acknowledges, in the name of and on behalf of said Corporation, said Articles of Amendment to be the corporate act of said Corporation and further certifies that, to the best of his knowledge, information and belief, the matters and facts set forth therein with respect to the approval thereof are true in all material respects, under the penalties of perjury.
/s/ Thomas J. Herzfeld ------------------------------------ Thomas J. Herzfeld |
THE HERZFELD CARIBBEAN BASIN FUND, INC.
BY-LAWS
ARTICLE I
OFFICES
Section 1. The principal office of the Corporation shall be in the City of Baltimore, State of Maryland. The Corporation shall also have offices at such other places as the Board of Directors may from time to time determine or the business of the Corporation may require.
ARTICLE II
STOCKHOLDERS AND STOCK CERTIFICATES
Section 1. Every stockholder of record shall be entitled to a stock certificate representing the shares owned by him. Stock certificates shall be in such form as may be required by law and as the Board of Directors shall prescribe. Every stock certificate shall be signed by the Chairman or the President or a Vice President and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, and sealed with the corporate seal, which may be a facsimile, either engraved or printed. Stock certificates may bear the facsimile signatures of the officers authorized to sign such certificates.
Section 2. Shares of the capital stock of the Corporation shall be transferable only on the books of the Corporation by the person in whose name such shares are registered, or by his duly authorized attorney or representative. In all cases of transfer by
an attorney-in-fact, the original power of attorney, or an official copy thereof duly certified, shall be deposited and remain with the Corporation or its duly authorized transfer agent. In case of transfers by executors, administrators, guardians or other legal representatives, duly authenticated evidence of their authority shall be produced, and may be required to be deposited and remain with the Corporation or its duly authorized transfer agent. No transfer shall be made unless and until the certificate issued to the transferor, if any, shall be delivered to the Corporation or its duly authorized transfer agent, properly endorsed.
Section 3. Any person desiring a certificate for shares of the capital stock of the Corporation to be issued in lieu of one lost or destroyed shall make an affidavit or affirmation setting forth the loss or destruction of such stock certificate, and shall advertise such loss or destruction in such manner as the Board of Directors may require, and shall, if the Board of Directors shall so require, give the Corporation a bond or indemnity, in such form and with such security as may be satisfactory to the Board, indemnifying the Corporation against any loss that may result upon the issuance of a new stock certificate. Upon receipt of such affidavit and proof of publication of the advertisement of such loss or destruction, and the bond, if any, required by the Board of Directors, a new stock certificate may be issued of the same tenor and for the number of shares as the one alleged to have been lost or destroyed.
Section 4. The Corporation shall be entitled to treat the holder of record of any share or shares of its capital stock as the owner 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 the Corporation shall have express or other notice thereof.
ARTICLE III
MEETINGS OF STOCKHOLDERS
Section 1. The Corporation is not required to hold an Annual Meeting in any year in which the Corporation is not required to convene a meeting under the Investment Company Act of 1940. In the absence of any specific resolution, Annual Meetings, if held, shall be held at the Corporation's principal office, or at such other place within or without the State of Maryland as the Board of Directors may from time to time prescribe. Meetings of stockholders for any other purpose may be held at such place and time as shall be fixed by resolution of the Board of Directors and stated in the Notice of the Meeting, or in a duly executed Waiver of Notice thereof.
Section 2. Special meetings of the stockholders may be called at any time by the Chairman, President or a majority of the members of the Board of Directors and shall be called by the Secretary upon the written request of the holders of at least fifty percent of the shares of the capital stock of the Corporation issued and outstanding and entitled to vote at such meeting. Upon receipt of a written request from such holders entitled to call a special meeting, which shall state the purpose of the meeting and the matter proposed to be acted on at it, the Secretary shall issue notice of such meeting. The cost of preparing and mailing the notice of a special meeting of stockholders shall be borne by the Corporation. Special meetings of the stockholders shall be held at the principal office of the Corporation, or at such other place within or without the State of Maryland as the Board of Directors may from time to time direct, or at such place within or without the State of Maryland as shall be specified in the notice of such meeting.
Section 3. Notice of the time and place of the annual or any special meeting of the stockholders shall be given to each stockholder entitled to notice of such meeting not less than ten days nor more than ninety days prior to the date of such meeting. In the case of special meetings of the stockholders, the notice shall specify the object or objects of such meeting, and no business shall be transacted at such meeting other than that mentioned in the notice.
Section 4. The Board of Directors may close the stock transfer books of the Corporation for a period not exceeding twenty days preceding the date of any meeting of stockholders, or the date for payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, or for a period of not exceeding twenty days in connection with the obtaining of the consent of stockholders for any purpose; provided, however, that in lieu of closing the stock transfer books as aforesaid, the Board of Directors may fix in advance a date, not exceeding ninety days preceding the date of any meeting of stockholders, or the date for payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, or a date in connection with obtaining such consent, as a record date for the determination of the stockholders entitled to notice of, and to vote at any such meeting and any adjournment thereof, or entitled to receive payment of any such dividend, or to any such allotment of rights, or to exercise the rights in respect of any such change, conversion or exchange of capital stock or to give such consent, and in such case such stockholders and only such stockholders as shall be stockholders of record on the date so fixed shall be entitled to such notice of, and to vote at, such meeting and any adjournment thereof, or to receive payment of such dividend or to receive such allotment of rights or to exercise such rights, or to give such
consent, as the case may be, notwithstanding any transfer of any stock on the books of the Corporation after any such record date fixed as aforesaid.
Section 5. At all meetings of the stockholders a quorum shall consist of the holders of a majority of the outstanding shares of the capital stock of the Corporation entitled to vote at such meeting. In the absence of a quorum no business shall be transacted except that the stockholders present in person or by proxy and entitled to vote at such meeting shall have power to adjourn the meeting from time to time to a date not more than one hundred twenty days after the original record date without further notice other than announcement at the meeting. At any such adjourned meeting at which a quorum shall be present any business may be transacted which might have been transacted at the meeting on the date specified in the original notice. If a quorum is present at any meeting, a majority of votes cast is sufficient to approve any matter properly before the meeting, except as otherwise required in the Investment Company Act of 1940, and also except a plurality of all votes cast at a meeting at which a quorum is present shall be sufficient for the election of a director. The holders of a majority of the shares of capital stock of the Corporation issued and outstanding and entitled to vote at the meeting who shall be present in person or by proxy at such meeting shall have power to adjourn the meeting to any specific time or times, and no notice of any such adjourned meeting need be given to stockholders absent or otherwise.
Section 6. At all meetings of the stockholders the following order of business shall be substantially observed, as far as it is consistent with the purpose of the meeting:
Election of Directors;
Ratification of Selection of Independent Auditors; and
New business.
Section 7. At any meeting of the stockholders of the Corporation every stockholder having the right to vote shall be entitled, in person or by proxy appointed by an instrument in writing subscribed by such stockholder or by his duly authorized attorney-in-fact and bearing a date not more than eleven months prior to said meeting unless such instrument provides for a longer period, to one vote for each share of stock having voting power registered in his name on the books of the Corporation.
Section 8. For any proposals 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 Corporation, and the proposal must
involve a fundamental change in the structure of the Corporation. To the fullest
extent permissible under applicable law, the Chairman shall have the authority
to decide whether a stockholder proposal involves a fundamental change in
corporate structure. To be timely, any such notice must be delivered to or
mailed and received at the principal executive offices of the Corporation at
least 60 days, and no more than 90 days, prior to the date of the meeting. 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 Corporation's books, of the
stockholders proposing such business, (iii) the number of shares of the capital
stock of the Corporation which are beneficially owned by the stockholder, and
(iv) any material interest of the stockholder in such business. Notwithstanding
anything in the By-Laws to the contrary, no business shall be conducted at any
annual or special meeting except in accordance with the procedures set forth in
this Section 8. 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
Section 8, 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 IV
DIRECTORS
Section 1. The Board of Directors shall consist of not less than two nor more than twelve members; provided that if there are fewer than three stockholders, then the number of Directors may be the same number as the number of stockholders, but not less than one. The Board of Directors may by a vote of the entire board increase or decrease the number of directors without a vote of the stockholders; provided that any such decrease shall not affect the tenure of office of any director. Directors need not hold any shares of the capital stock of the Corporation.
Section 2. The directors shall be classified with respect to the year of expiration of their respective terms of office into three (3) classes, each class consisting of not fewer than one (1) nor more than three (3) directors. Directors of each class shall hold office for a term of three (3) years, with the term of one class expiring each year. Upon the adoption of this provision, the classes and the initial expiration years of their respective terms shall be as follows and shall carry forward at three-year intervals thereafter:
Class I 1997 Class II 1998 Class III 1999 |
At any meeting of stockholders at which any class of directors is to be elected, the stockholders may determine by resolution the actual number of directors of that class to be elected, subject to the limits provided above. If no such resolution is passed, the number of directors to be elected shall be the same as the number serving within that class. The directors shall be elected by the stockholders of the Corporation at an annual meeting or at a special meeting called for such purpose, and shall hold office until their successors shall be duly elected and shall qualify.
Section 3. The Board of Directors shall have the control and management of the business of the Corporation, and in addition to the powers and authority by these By-Laws expressly conferred upon them, may exercise, subject to the provisions of the laws of the State of Maryland and of the Articles of Incorporation of the Corporation, all such powers of the Corporation and do all such acts and things as are not required by law or by the Articles of Incorporation to be exercised or done by the stockholders.
Section 4. The Board of Directors shall have power to fill vacancies occurring on the Board, whether by death, resignation or otherwise. A vacancy on the Board of Directors resulting from any cause except an increase in the number of directors may be filled by a vote of the majority of the remaining members of the Board, though less than a quorum. A vacancy on the Board of Directors resulting from an increase in the number of directors may be filled by a majority of the Board of Directors then in office. A director elected by the Board of Directors to fill a vacancy shall serve until the next annual meeting, whenever held, or special meeting called for that purpose, and until his successor is elected and qualifies.
Section 5. The Board of Directors shall have power to appoint, and at its discretion to remove or suspend, any officers, managers, superintendents, subordinates,
assistants, clerks, agents and employees, permanently or temporarily, as the Board may think fit, and to determine their duties and to fix, and from time to time to change, their salaries or emoluments, and to require security in such instances and in such amounts as it may deem proper.
Section 6. In case of the absence of an officer of the Corporation, or for any other reason which may seem sufficient to the Board of Directors, the Board may delegate his or her powers and duties for the time being to any other officer of the Corporation or to any director.
Section 7. The Board of Directors may, by resolution or resolutions passed by a majority of the whole Board, designate one or more committees, each committee to consist of two or more of the directors of the Corporation which, to the extent provided in such resolution or resolutions and by applicable law, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Any such committee shall keep regular minutes of its proceedings, and shall report the same to the Board when required.
Section 8. The Board of Directors may hold their meetings and keep the books of the Corporation outside of the State of Maryland, at such place or places as it may from time to time determine.
Section 9. The Board of Directors shall have power to fix, and from time to time to change the compensation, if any, of the directors of the Corporation.
ARTICLE V
DIRECTORS MEETINGS
Section 1. The first regular meeting of the Board of Directors shall be held each year within seven business days following the annual meeting of stockholders at which the Directors are elected. Regular meetings of the Board of Directors shall also be held without notice at such times and places as may be from time to time prescribed by the Board.
Section 2. Special meetings of the Board of Directors may be called at any time by the Chairman, and shall be called by the Chairman upon the written request of a majority of the members of the Board of Directors. Unless notice is waived by all the members of the Board of Directors, notice of any special meeting shall be given to each director at least twenty-four hours prior to the date of such meeting, and such notice shall provide the time and place of such special meeting.
Section 3. One-third of the entire Board of Directors shall constitute a quorum for the transaction of business at any meeting; except that if the number of directors on the Board is less than six, two members shall constitute a quorum for the transaction of business at any meeting. The act of a majority of the directors present at any meeting where there is a quorum shall be the act of the Board of Directors except as may be otherwise required by Maryland law or the Investment Company Act of 1940.
Section 4. The order of business at meetings of the Board of Directors shall be prescribed from time to time by the Board.
ARTICLE VI
OFFICERS AND AGENTS
Section 1. At the first meeting of the Board of Directors after the election of Directors in each year, the Board shall elect a Chairman, a President and Chief Executive Officer, one or more Vice Presidents, a Secretary and a Treasurer and may elect or appoint one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers and agents as the Board may deem necessary and as the business of the Corporation may require.
Section 2. The Chairman of the Board shall be elected from the membership of the Board of Directors, but other officers need not be members of the Board of Directors. Any two or more offices may be held by the same person except the offices of President and Vice President. All officers of the Corporation shall serve for one year and until their successors shall have been duly elected and shall have qualified; provided, however, that any officer may be removed at any time, either with or without cause, by action by the Board of Directors.
ARTICLE VII
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 1. The Corporation shall indemnify each officer and director made party to a proceeding, by reason of service in such capacity, to the fullest extent, and in the manner provided, under Section 2-418 of the Maryland General Corporation Law: (i) unless it is proved that the person seeking indemnification did not meet the standard of conduct set forth in subsection (b)(1) of such section; and (ii) provided, that the Corporation shall not indemnify any officer or director for any liability to the Corporation or its security holders arising from the
wilful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person's office.
Section 2. The provisions of clause (i) of Section 1 of this Article VII notwithstanding, the Corporation shall indemnify each officer and director against reasonable expenses incurred in connection with the successful defense of any proceeding to which each such officer or director is a party by reason of service in such capacity.
Section 3. The Corporation, in the manner and to the extent provided by applicable law, shall advance to each officer and director who is made party to a proceeding by reason of service in such capacity the reasonable expenses incurred by such person in connection therewith.
ARTICLE VIII
DUTIES OF OFFICERS
CHAIRMAN OF THE BOARD
Section 1. The Chairman of the Board shall preside at all meetings of the stockholders and the Board of Directors and shall be a member ex officio of all standing committees. He shall have those duties and responsibilities as shall be assigned to him by the Board of Directors. In the absence, resignation, disability or death of the President, the Chairman shall exercise all the powers and perform all the duties of the President until his return, or until such disability shall be removed or until a new President shall have been elected.
PRESIDENT
Section 2. The President shall be the Chief Executive Officer and head of the Corporation, and in the recess of the Board of Directors shall have the general control and
management of its business and affairs, subject, however, to the regulations of the Board of Directors.
The President shall, in the absence of the Chairman, preside at all meetings of the stockholders and the Board of Directors. In the event of the absence, resignation, disability or death of the Chairman, the President shall exercise all powers and perform all duties of the Chairman until his return, or until such disability shall have been removed or until a new Chairman shall have been elected.
VICE PRESIDENTS
Section 3. The Executive Vice President, and the Vice Presidents, shall have those duties and responsibilities as shall be assigned to them by the Chairman or the President. In the event of the absence, resignation, disability or death of the chairman and President, the Executive Vice President shall exercise all the powers and perform all the duties of the President until his return, or until such disability shall be removed or until a new President shall have been elected.
THE SECRETARY AND ASSISTANT SECRETARIES
Section 4. The Secretary shall attend all meetings of the stockholders and shall record all the proceedings thereof in a book to be kept for that purpose, and he shall be the custodian of the corporate seal of the Corporation. In the absence of the Secretary, an Assistant Secretary or any other person appointed or elected by the Board of Directors, as is elsewhere in these By-Laws provided, may exercise the rights and perform the duties of the Secretary.
Section 5. The Assistant Secretary, or, if there be more than one Assistant Secretary, then the Assistant Secretaries in the order of their seniority, shall, in the absence or
disability of the Secretary, perform the duties and exercise the powers of the Secretary. Any Assistant Secretary elected by the Board shall also perform such other duties and exercise such other powers as the Board of Directors shall from time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
Section 6. The Treasurer shall keep full and correct accounts of the receipts and expenditures of the Corporation in books belonging to the Corporation, and shall deposit all monies and valuable effects in the name and to the credit of the Corporation and in such depositories as may be designated by the Board of Directors, and shall, if the Board shall so direct, give bond with sufficient security and in such amount as may be required by the Board of Directors for the faithful performance of his duties.
He shall disburse funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and Board of Directors at the regular meetings of the Board, or whenever they may require it, an account of all his transactions on behalf of the Corporation and of the financial condition of the Corporation, and shall present each year before the annual meeting of the stockholders a full financial report of the preceding fiscal year.
Section 7. The Assistant Treasurer, or, if there be more than one Assistant Treasurer, then the Assistant Treasurers in the order of their seniority, shall, in the absence or disability of the Treasurer, perform the duties and exercise the powers of the Treasurer. Any Assistant Treasurer elected by the Board shall also perform such duties and exercise such powers as the Board of Directors shall from time to time prescribe.
ARTICLE IX
CHECKS, DRAFTS, NOTES, ETC.
Section 1. All checks shall bear the signature of such person or persons as the Board of Directors may from time to time direct.
Section 2. All notes and other similar obligations and acceptances of drafts by the Corporation shall be signed by such person or persons as the Board of Directors may from time to time direct.
Section 3. Any officer of the Corporation or any other employee, as the Board of Directors may from time to time direct, shall have full power to endorse for deposit all checks and all negotiable paper drawn payable to his or their order or to the order of the Corporation.
ARTICLE X
CORPORATE SEAL
Section 1. The corporate seal of the Corporation shall have inscribed thereon the name of the Corporation, the year of its organization, and the words "Corporate Seal, Maryland." Such seal may be used by causing it or a facsimile thereof to be impressed or affixed or otherwise reproduced.
ARTICLE XI
DIVIDENDS
Section 1. Dividends upon the shares of the capital stock of the Corporation may, subject to the provisions of the Articles of Incorporation of the Corporation, if any, be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock of the Corporation.
Section 2. Before payment of any dividend there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors may, from time to time, in its absolute discretion, think proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the Board of Directors shall deem to be for the best interests of the Corporation, and the Board of Directors may abolish any such reserve in the manner in which it was created.
ARTICLE XII
FISCAL YEAR
Section 1. The fiscal year of the Corporation shall end on the last day in June of each year.
ARTICLE XIII
NOTICES
Section 1. Whenever under the provisions of these By-Laws notice is required to be given to any director or stockholder, such notice is deemed given when it is personally delivered, left at the residence or usual place of business of the director or stockholder, or mailed to such director or stockholder at such address as shall appear on the books of the Corporation and such notice, if mailed, shall be deemed to be given at the time it shall be so deposited in the United States mail postage prepaid. In the case of directors, such notice may also be given orally by telephone or by telegraph or cable.
Section 2. Any notice required to be given under these By-Laws may be waived in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein.
ARTICLE XIV
AMENDMENTS
Section 1. These By-Laws may be amended, altered or repealed by the affirmative vote of the holders of a majority of the shares of capital stock of the Corporation issued and outstanding and entitled to vote thereon, or by a majority of the Board of Directors, as the case may be.
SPECIMEN SHARE CERTIFICATE
----------------------------------------------------------------------------------------------------------------------------------
NUMBER SHARES
HCB [THE HERZFELD
CARIBBEAN BASIN
FUND, INC. LOGO]
COMMON STOCK COMMON STOCK
This Certificate Is Transferable In Incorporated Under the Laws of the State of Maryland CUSIP 42804T 10 6
The City of Boston, Massachusetts (See Reverse for Certain Definitions)
THIS CERTIFIES THAT
Is the owner of
Fully Paid and Nonassessable Shares of Common Stock of the Par Value of $.001 Each of
THE HERZFELD CARIBBEAN BASIN FUND, INC.
transferable on the books of the Corporation by the holder hereof, in person or by duly authorized attorney, upon surrender
of this Certificate properly endorsed. This Certificate is not valid until countersigned by the Transfer Agent and
registered by the Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.
Dated:
/s/ Cecilia Gondor-Morales /s/ Thomas J. Herzfeld
-------------------------- ------------------------
Secretary [SEAL] President
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THE HERZFELD CARIBBEAN BASIN FUND, INC.
The following abbreviations, when used in the inscription on the face of this Certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - _____ Custodian _____
(Cust) (Minor)
TEN ENT - as tenants by the
entireties Under Uniform Gifts
to Minors Act
JT TEN - as joint tenants with
right of survivorship and not as ________________________
tenants in common (State)
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Additional abbreviations may also be used though not in the above list.
For Value received hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_________________________________________________________________________ Shares of the Common Stock represented by the within Certificate and do hereby irrevocably constitute and appoint
_______________________________________________________________________ Attorney to transfer the said stock on the books of the within-named Corporation with full power of substitution in the premises.
Dated
----------------------------------- ------------------------------
SIGNATURE
SIGNATURES GUARANTEED
By
--------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION,
(Banks, Stockbrokers, Savings and Loan
Associations and Credit Unions) WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM PURSUANT
TO S.E.C. RULE 17AD-15.
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NOTICE THE SIGNATURE OF THE ASSIGNMENT MUST CORRESPOND WITH NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTCULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
INVESTMENT ADVISORY AGREEMENT
September 10, 1993
HERZFELD/CUBA
The Herzfeld Building
P.O. Box 161465
Miami, FL 33116
Dear Sirs:
The Herzfeld Caribbean Basin Fund, Inc. (the "Fund"), a corporation organized under the laws of the State of Maryland, confirms its investment advisory agreement with HERZFELD/CUBA, a division of Thomas J. Herzfeld Advisors, Inc. (the "Adviser"), as follows:
1. Investment Description; Appointment
The Fund 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 amended from time to time (the "Articles of Incorporation"), and in its Registration Statement on Form N-2 under the Investment Company Act of 1940 (the "1940 Act") as from time to time in effect (the "Registration Statement") and in such manner and to such extent as may from time to time be approved by the Fund's Board of Directors. Copies of the Articles of Incorporation and the registration Statement have been submitted to the Adviser. The Fund desires to employ and hereby appoints the Adviser to act as its investment adviser. The Adviser accepts the appointment and agrees to furnish the services set forth below for the compensation set forth below.
2. Services as Investment Adviser
Subject to the supervision and direction of the Fund's Board of Directors, the
Adviser will (a) act in strict conformity with the Articles of Incorporation,
the 1940 Act and the Investment Advisers Act of 1940 ("Advisers Act") and all
applicable rules and regulations, as the same may from time to time be amended,
(b) place purchase and sale orders in accordance with the Fund's investment
objective, policies and restrictions as stated in the Registration Statement and
select brokers and dealers to execute portfolio transactions on behalf of the
Fund. In addition, the Adviser will furnish the Fund with whatever statistical information the Fund may reasonably request with respect to the securities that the Fund may hold or contemplate purchasing.
3. Brokerage
In executing transactions for the Fund and selecting brokers and dealers, the
Adviser will use its best efforts to seek the best overall terms available. In
assessing the best overall terms available for any transaction on behalf of the
Fund, the Adviser will consider all factors it deems relevant including, but not
limited to, the 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 The Adviser may use an affiliated broker or brokers to
execute transactions on an agency basis on exchanges and for over-the-counter
purchases and sales and receive stated commissions therefrom in accordance with
Section 11(a) of the Securities Exchange Act of 1934 and Rule 11a2-a(T)
thereunder and subject to any other applicable laws and regulations. The Adviser
may transact over-the-counter purchases and sales with principal market makers
directly in those cases in which better prices and executions may be obtained.
Subject to obtaining best price and execution, the Adviser may direct orders for
transactions by the Fund to brokers who provide supplemental research, market
and statistical information to the Adviser or its affiliates. For purposes of
this paragraph, "research, market and statistical information" includes advice
as to the value of securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or purchasers or sellers
of securities, furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts and other materials and data that provide lawful and appropriate
assistance to the Adviser in the performance of its investment decision-making
responsibilities. Such information may be used by the Adviser and its affiliates
in providing services to clients other than the Fund.
4. Information Provided to the Fund
The adviser will keep the Fund informed of developments materially affecting the Fund, and will, furnish the Fund from time to time with whatever information the Adviser believes is appropriate for this purpose or the Fund reasonably requests.
5. Liability of the Adviser.
The Adviser may rely on information reasonably believed by it to be accurate and reliable. Except as may otherwise be provided by the 1940 Act, neither the Adviser nor its stockholders, officers, directors,
employees or agents shall be subject to, and the Fund shall indemnify and hold such persons harmless from and against, any liability for and any damages, expenses or losses incurred in connection with any act or omission in the course of, connected with or arising out of any services to be rendered hereunder, except by reason of willful misfeasance, bad faith or gross negligence in the performance of the Adviser's duties or by reason of reckless disregard of the Adviser's obligations and duties under this Agreement.
6. Compensation
In consideration of the services rendered pursuant to this Agreement, the Fund will pay the Adviser on the first business day of each month a fee for the previous month at the annual rate of 1.45% of the Fund's average weekly net assets. The fee for the period from the date of the Fund's initial registration statement is declared effective shall be prorated according to the proportion that such periods bears to the full monthly payment 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 Fund's net assets shall be computed at the times and in the manner specified in the Registration Statement.
7. Expenses
The Adviser will bear all expenses in connection with the performance of its services under this Agreement. The Fund will bear certain other expenses to be incurred in its operation, including: expenses for legal and independent accountants' services, costs of printing proxies, stock certificates, shareholder reports, charges of the custodian, any sub-custodian and transfer and dividend paying agent, Securities and Exchange Commission fees, and fees and expenses of unaffiliated directors, accounting and pricing costs, membership fees in trade associations, fidelity bond coverage for the Fund's officers and employees, directors' and officers' errors and omissions insurance coverage, interest, brokerage costs, taxes, stock exchange listing fees and expenses, expenses of qualifying the Fund's shares for sale in various states, litigation and other extraordinary or non-recurring expenses, and other expenses properly payable by the Fund.
8. Services to Other Companies or Accounts
The Fund understands that the Adviser may act in the future as investment adviser to other investment companies or portfolios, and the Fund has no objection to the Adviser so acting, provided that whenever the Fund and one or more other portfolios or investment companies advised by the adviser have available funds for investment,
investments suitable and appropriate for each will be allocated in a manner believed to be equitable to each entity. The Fund recognizes that in some cases this procedure may adversely affect the size of the position obtainable for the Fund. 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 of nature.
9. Name of the Fund
The Fund may use the word "Herzfeld" in its name only as long as the Adviser is the investment adviser of the Fund. The Fund hereby acknowledges that the Adviser may at any time permit others to use the word "Herzfeld".
10. Term of Agreement
This Agreement shall continue until September 10, 1995 and thereafter shall continue automatically for successive annual periods, provided such continuance is specifically approved at least annually by (i) the Fund's Board of Directors or (ii) a vote of a "majority" (as defined in the 1940 Act) of the Fund'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 the 1940 Act) of any party to the 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 Fund's Board of Directors, by vote of holders of a majority of the Fund's shares, or by the Adviser. This Agreement will also terminate automatically in the event of its assignment (as defined in the 1940 Act and the rules thereunder).
11. Miscellaneous
(a) This Agreement shall be construed in accordance with the laws of the State of Florida, provided that nothing herein shall be construed as being inconsistent with the 1940 Act, the Advisers Act and any rules, regulations and orders of the SEC.
(b) The captions in this Agreement are included for the convenience only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect.
(c) If any provision of the Agreement shall be held or made invalid by a court decision, statute, rule or otherwise the remainder of this Agreement shall not be effected hereby and, to this extent, the provisions of this Agreement shall be deemed to be severable.
(d) Nothing herein shall be construed as constituting the Adviser an agent of the Fund.
If the foregoing is in accordance with your understanding, kindly indicate your acceptance of this Agreement by signing and returning the enclosed copy.
Very truly yours,
THE HERZFELD CARIBBEAN BASIN FUND, INC.
By: /s/ Thomas J. Herzfeld
------------------------------------
Thomas J. Herzfeld
Chairman
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Accepted:
HERZFELD/CUBA, a division of
Thomas J. Herzfeld Advisors, Inc.
By: /s/ Thomas J. Herzfeld
---------------------------------
Thomas J. Herzfeld
President
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Cecilia Gondor
Herzfeld Advisors
10491 SW 97th Avenue
Miami, FL 33176
Re: The Custodian Contract (as amended, the "Custodian Contract") between Investors Bank & Trust Company ("CuIstodian) and The Herzfeld Caribbean Basin Fund, Inc. (the Client")
Dear Cecilia:
As you know, Rule 17f-4 under the Investment Company Act of 1940 ("Rule 17f-4") has been amended, and such amendments will become effective on March 28, 2003. In order for you to be in compliance with amended Rule 17f-4, we agree to the terms and conditions below effective March 28, 2003.
In addition to any other duties of the Custodian set forth in the Custodian Contract, the Custodian agrees that, in connection with placing and maintaining financial assets, corresponding to the Trust's security entitlements, with a securities depository or intermediary custodian:
1. The Custodian will, at a minimum, exercise due care in accordance with reasonable commercial standards in discharging its duty as a securities intermediary to obtain and thereafter maintain such financial assets;
2. The Custodian shall provide, promptly upon request by the Client, such reports as are generally made available to its clients concerning the internal accounting controls and financial strength of the Custodian; and
3. The Custodian shall use its best efforts to require any intermediary custodian at a minimum to exercise due care in accordance with reasonable commercial standards in discharging its duty as a securities intermediary to obtain and thereafter maintain financial assets corresponding to the security entitlements of its entitlement holders.
Except as set forth in the preceding paragraphs, the terms and provisions of the Custodian Contract shall remain in full force and effect. Please note that this letter shall be governed by and construed in accordance with the laws of the same jurisdiction named in the Custodian Contract, if any. Terms not defined herein have the meanings set forth in Rule l7f-4.
Very truly yours,
INVESTORS BANK & TRUST COMPANY
By: /s/ Andrew M. Nesvet
-----------------------------------
Name: Andrew M. Nesvet
Title: Managing Director
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200 Clarendon Street, Boston, Massachusetts 02116-5021. (617) 937-6700.
www.ibtco.com
CUSTODIAN AGREEMENT
Between
THE HERZFELD CARIBBEAN BASIN FUND, INC.
and
INVESTORS BANK & TRUST COMPANY
TABLE OF CONTENTS
2. Definitions 1
2.1 Authorized Person 1
2.2 Security 1
2.3 Portfolio Security 1
2.4 Officers' Certificate 1
2.5 Book-Entry System 2
2.6 Depository 2
2.7 Proper Instructions 2
2.8 Foreign Securities 2
2.9 Eligible Foreign Custodian 2
3. Separate Accounts 2
4. Certification as to Authorized Persons 2
5. Custody of Cash 3
5.1 Purchase of Securities 3
5.2 Distributions and Expenses of Fund 3
5.3 Payment in Respect of Securities 3
5.4 Repayment of Loans 3
5.5 Repayment of Cash 3
5.6 Foreign Exchange Transactions 3
5.7 Other Authorized Payments 4
5.8 Termination 4
6. Securities 4
6.1 Segregation and Registration 4
6.2 Voting and Proxies 4
6.3 Book-Entry System 5
6.4 Use of a Depository 6
6.5 Use of a Book-Entry System for Commercial Paper 7
6.6 Use of Immobilization Programs 8
6.7 Eurodollar CDs 8
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Page
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6.8 Options and Future Transactions
(a) Puts and Calls Traded on Securities Exchanges,
NASDAQ or Over-the-Counter 8
(b) Puts, Calls and Futures Traded on Commodities
Exchanges 9
6.9 Segregated Account 9
6.10 Interest Bearing Call or Time Deposits 11
6.11 Transfer of Securities 11
7. Merger, Dissolution, etc. of Fund 13
8. Actions of Bank Without Prior Authorization 13
9. Collection, Defaults 14
10. Maintenance of Records; Accounting Services 14
11. Fund Evaluation 14
12. Concerning the Bank 15
12.1 Performance of Duties; Standard of Care 15
12.2 Agents and Subcustodians 16
12.3 Insurance 16
12.4 Fees and Expenses of Bank 17
12.5 Advances by Bank 17
13. Termination 17
14. Notices 18
15. Amendments 18
16. Parties 19
17. Governing Law 19
18. Use of Name 19
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CUSTODIAN AGREEMENT
AGREEMENT made as of this 30th day of December, 1993 between THE HERZFELD CARIBBEAN BASIN FUND, INC. a Maryland corporation (the "Fund") and INVESTORS BANK & TRUST COMPANY (the "Bank").
The Fund, a closed-end management investment company, desires to place and maintain all of its portfolio securities and cash in the custody of the Bank. The Bank has at least the minimum qualifications required by Section 17(f)(l) of the Investment Company Act of 1940 (the "Act") to act as custodian of the portfolio securities and cash of the Fund, and has indicated its willingness to so act, subject to the terms and conditions this Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual agreements contained herein, the parties hereto agree as follows:
1. Bank Appointed Custodian. The Fund hereby appoints the Bank as custodian of its portfolio securities and cash delivered to the Bank as hereinafter described and the Bank agrees to act as such upon the terms and conditions hereinafter set forth.
2. Definitions. Whenever used herein, the terms listed below will have the following meaning:
2.1. Authorized Person. Authorized Person will mean any of the persons duly authorized to give Proper Instructions or otherwise act on behalf of the Fund by appropriate resolution of its Board of Directors (the `Board"), and set forth in a certificate as required by Section 4 hereof.
2.2. Security. The term security as used herein will have the same meaning as when such term is used in the Securities Act of 1933 as amended, including, without limitation, any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to a foreign currency, or, in general, any interest or instrument commonly known as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to, or option contract to purchase or sell any of the foregoing and futures, forward contracts and options thereon.
2.3. Portfolio Security. Portfolio Security will mean any Security owned by the Fund.
2.4. Officers' Certificate. Officers' Certificate will mean, unless otherwise indicated, any request, direction, instruction, or certification in writing signed by any two Authorized Persons of the Fund.
2.5. Book-Entry System. Book-Entry System shall mean the Federal Reserve-Treasury Department Book Entry System for United States government, instrumentality and agency securities operated by the Federal Reserve Bank, its successor or successors and its nominee or nominees.
2.6. Depository. Depository shall mean any clearing agency registered with the Securities and Exchange Commission under Section 17A of the Securities Exchange Act of 1934 which acts as a securities depository, and its nominee or nominees.
2.7. Proper Instructions. Proper Instructions shall mean (i) instructions regarding the purchase or sale of Portfolio Securities, and payments and deliveries in connection therewith, given by an Authorized Person, such instructions to be given in such form and manner as the Bank and the Fund shall agree upon from time to time, and (ii) instructions (which may be continuing instructions) regarding other matters signed or initialed by such one or more Authorized Persons. Oral instructions will be considered Proper Instructions if the Bank reasonably believes them to have been given by a person authorized to give such instructions with respect to the transaction involved. The Fund shall cause all oral instructions to be promptly confirmed in writing. The Bank shall act upon and comply with any subsequent Proper Instruction which modifies a prior instruction and the sole obligation of the Bank with respect to any follow-up or confirmatory instruction shall be to make reasonable efforts to detect any discrepancy between the original instruction and such confirmation and to report such discrepancy to the Fund. The Fund shall be responsible, at the Fund's expense, for taking any action, including any reprocessing, necessary to correct any such discrepancy or error, and to the extent such action requires the Bank to act the Fund shall give the Bank specific Proper Instructions as to the action required. Upon receipt of an Officers' Certificate as to the authorization by the Board accompanied by a detailed description of procedures approved by the Fund, Proper Instructions may include communication effected directly between electro-mechanical or electronic devices provided that the Board and the Bank are satisfied that such procedures afford adequate safeguards for the Fund's assets.
2.8. Foreign Securities. Foreign Securities shall have the meaning ascribed to the term in Rule 17f-5 of the Act.
2.9. Eligible Foreign Custodian. Eligible Foreign Custodian shall have the meaning ascribed to the term in Rule 17f-5 of the Act.
3. Separate Accounts. If the Fund has more than one series or portfolio, the Bank will segregate the assets of each series or portfolio to which this Agreement relates into a separate account for each such series or portfolio containing the assets of such series or portfolio (and all investment earnings thereon).
4. Certification as to Authorized Person. The Secretary or Assistant Secretary of the Fund will at all times maintain on file with the Bank his certification to the Bank, in such form as may be acceptable to the Bank, of (i) the names and signatures of the Authorized Persons and (ii) the names of the members of the Board, it being understood that upon the occurrence of any change in the information set forth in the most recent certification on file (including without limitation any person named in the most recent certification who is no longer an Authorized Person as designated therein), the Secretary or Assistant Secretary of the Fund will sign a new or amended certification setting forth the change and the new, additional or omitted names or signatures. The Bank will be entitled to rely and act upon any Officers' Certificate or Proper Instructions given to it by Authorized Persons named in the most recent certification.
5. Custody of Cash. As custodian for the Fund, the Bank will open and maintain a separate account or accounts in the name of the Fund or in the name of the Bank, as Custodian of the Fund, and will deposit to the account of the Fund all of the cash of the Fund, except for cash held by a subcustodian appointed pursuant to Section 12.2 hereof, including borrowed funds, delivered to the Bank, subject only to draft or order by the Bank acting pursuant to the terms of this Agreement. Upon receipt by the Bank of Proper Instructions (which may be continuing instructions) requesting such payment, designating the payee or the account or accounts to which the Bank will release funds for deposit, and stating that it is for a purpose permitted under the terms of this Section 5, specifying the applicable subsection, or describing such purpose with sufficient particularity to permit the Bank to ascertain the applicable subsection, the Bank will make payments of cash held for the accounts of the Fund, insofar as funds are available for that purpose, only as permitted in subsections 5.1-5.8 below.
5.1. Purchase of Securities. Upon the purchase of Portfolio
Securities for the Fund, against contemporaneous receipt of such Portfolio
Securities by the Bank registered in the name of the Fund or in the name of, or
properly endorsed and in form for transfer to, the Bank, or a nominee of the
Bank, or receipt for the account of the Bank pursuant to the provisions of
Section 6 below, each such payment to be made at the purchase price shown in the
Proper Instructions received by the Bank before such payment is made;
5.2. Distributions and Expenses of Fund. For the payment on the account of the Fund of dividends or other distributions to shareholders as may from time to time be declared by the Board, interest, taxes, management or supervisory fees, fees of the Bank for its services hereunder and reimbursement of the expenses and liabilities of the Bank as provided hereunder, fees of any transfer agent, fees for legal, accounting, and auditing services, or other operating expenses of the Fund;
5.3. Payment in Respect of Securities. For payments in connection with the conversion, exchange or surrender of Portfolio Securities or Portfolio Securities subscribed to by the Fund held by or to be delivered to the Bank;
5.4. Repayment of Loans. To repay loans of money made to the Fund, but, in the case of final payment, only upon redelivery to the Bank of any Portfolio Securities pledged or hypothecated therefor and upon surrender of documents evidencing the loan;
5.5. Repayment of Cash. To repay the cash delivered to the Fund for the purpose of collateralizing the obligation to return to the Fund certificates borrowed from the Fund representing Portfolio Securities, but only upon redelivery to the Bank of such borrowed Portfolio Securities;
5.6. Foreign Exchange Transactions. For payments in connection with foreign exchange contracts or options to purchase and sell foreign currencies for spot and future delivery which may be entered into by the Bank on behalf of the Fund upon the receipt of Proper Instructions, such Proper Instructions to specify the currency broker or banking institution (which may be the Bank, or any other subcustodian or agent hereunder, acting as principal) with which the contract or option is made, and the Bank shall have no duty with respect to the selection of such currency brokers or banking institutions with which the Fund deals or for their failure to comply with the terms of any contract or option;
5.7. Other Authorized Payments. For other authorized transactions of the Fund, or other obligations of the Fund incurred for proper Fund purposes; provided that before making any such payment the Bank will also receive a certified copy of a resolution of the Board signed by an Authorized Person (other than the Person certifying such resolution) and certified by its Secretary or Assistant Secretary, naming the person or persons to whom such payment is to be made, and either describing the transaction for which payment is to be made and declaring it to be an authorized transaction of the Fund, or specifying the amount of the obligation for which payment is to be made, setting forth the purpose for which such obligation was incurred and declaring such purpose to be a proper corporate purpose; and
5.8. Termination. Upon the termination of this Agreement as hereinafter set forth pursuant to Section 7 and Section 13 of this Agreement.
6. Securities.
6.1. Segregation and Registration. Except as otherwise provided herein, and except for Portfolio Securities to be delivered to any subcustodian appointed pursuant to Section 12.2 hereof, the Bank as custodian, will receive and hold pursuant to the provisions hereof, in a separate account or accounts and physically segregated at all times from those of other persons, any and all Portfolio Securities which may now or hereafter be delivered to it by or for the account of the Fund. All such Portfolio Securities will be held or disposed of by the Bank for, and subject at all times to, the instructions of the Fund pursuant to the terms of this Agreement. Subject to the specific provisions herein relating to Portfolio Securities that are not physically held by the Bank, the Bank will register all Portfolio Securities (unless otherwise directed by Proper Instructions or an Officers' Certificate), in the name of a registered nominee of the Bank as defined in the Internal Revenue Code and any Regulations of the Treasury Department issued thereunder, and will execute and deliver all such certificates in connection therewith as may be required by such laws or regulations or under the laws of any state. The Bank will use its best efforts to the end that the specific Portfolio Securities held by it hereunder will be at all times identifiable.
The Fund will from time to time furnish to the Bank appropriate instruments to enable it to hold or deliver in proper form for transfer, or to register in the name of its registered nominee, any Portfolio Securities which may from time to time be registered in the name of the Fund.
6.2. Voting and Proxies. Neither the Bank nor any nominee of the Bank will vote any of the Portfolio Securities held hereunder, except in accordance with Proper Instructions or an Officers' Certificate. The Bank will execute and deliver, or cause to be executed and delivered, to the Fund all notices, proxies and proxy soliciting materials with respect to such Securities, such proxies to be executed by the registered holder of such Securities (if registered otherwise than in the name of the Fund), but without indicating the manner in which such proxies are to be voted.
6.3. Book-Entry System. Provided the Bank has received a certified copy of a resolution of the Board specifically approving deposits of Fund assets in the Book-Entry System, and the Bank has not received an Officer's Certificate indicating that the Board has withdrawn its approval:
(a) The Bank may keep Portfolio Securities in the Book-Entry System provided that such Portfolio Securities are represented in an account ("Account") of the Bank (or its agent) in such System which shall not include any assets of the Bank (or such agent) other than assets held as a fiduciary, custodian, or otherwise for customers.
(b) The records of the Bank (and any such agent) with respect to the
Fund's participation in the Book-Entry System through the Bank (or any
such agent) will identify by book entry Portfolio Securities which are
included with other securities deposited in the Account and shall at all
times during the regular business hours of the Bank (or such agent) be
open for inspection by duly authorized officers, employees or agents of
the Fund. Where Portfolio Securities are transferred to the Fund's
account, the Bank shall also, by book entry or otherwise, identify as
belonging to the Fund a quantity of Portfolio Securities in fungible bulk
of securities (i) registered in the name of the Bank or its nominee, or
(ii) shown on the Bank's account on the books of the Federal Reserve Bank.
(c) The Bank (or its agent) shall pay for Portfolio Securities purchased for the account of the Fund or shall pay cash collateral against the return of Portfolio Securities loaned by the Fund upon (i) receipt of advice from the Book-Entry System that such Securities have been transferred to the Account, and (ii) the making of an entry on the records of the Bank (or its agent) to reflect such payment and transfer for the account of the Fund. The Bank (or its agent) shall transfer Portfolio Securities sold or loaned for the account of the Fund upon
(i) receipt of advice from the Book-Entry System that payment for Portfolio Securities sold or payment of the initial cash collateral against the delivery of Portfolio Securities loaned by the Fund has been transferred to the Account, and
(ii) the making of an entry on the records of the Bank (or its agent) to reflect such transfer and payment for the account of the Fund. Copies of all advices from the Book-Entry System of transfers of Portfolio Securities for the account of the Fund shall identify the Fund, be maintained for the Fund by the Bank and shall be provided to the Fund at its request. The Bank shall send the Fund a confirmation, as defined by Rule 17f-4 of the Act, of any transfers to or from the account of the Fund.
(d) The Bank will promptly provide the Fund with any report obtained by the Bank or its agent on the Book-Entry System's accounting system, internal accounting control and procedures for safeguarding Portfolio Securities deposited in the Book-Entry System.
(e) The Bank shall be liable to the Fund for any loss or damage to the Fund resulting from use of the Book-Entry System by reason of any gross negligence, willful misfeasance or bad faith of the Bank or any of its agents or of any of its or their employees or from any reckless disregard by the Bank or any such agent of its duty to use its best efforts to enforce such rights as it may have against the Book-Entry System; at the election of the Fund, it shall be entitled to be subrogated for the Bank in any claim against the Book-Entry System or any other person which the Bank or its agent may have as a consequence of any such loss or damage if and to the extent that the Fund has not been made whole for any loss or damage.
6.4. Use of a Depository. Provided the Bank has received a certified copy of a resolution o the Board specifically approving deposits in a Depository and the Bank has not received an Officer's Certificate indicating that the Board has withdrawn its approval:
(a) The Bank may use a Depository to hold, receive, exchange, release, lend, deliver and otherwise deal with Portfolio Securities including stock dividends, rights and other items of like nature, and to receive and remit to the Bank on behalf of the Fund all income and other payments thereon and to take all steps necessary and proper in connection with the collection thereof.
(b) Registration of Portfolio Securities may be made in the name of any nominee or nominees used by such Depository.
(c) Payment for Portfolio Securities purchased and sold may be made through the clearing medium employed by such Depository for transactions of participants acting through it. Upon any purchase of Portfolio Securities, payment will be made only upon delivery of the Portfolio Securities to or for the account of the Fund and the Fund shall pay cash collateral against the return of Portfolio Securities loaned by the Fund only upon delivery of the Securities to or for the account of the Fund; and upon any sale of Portfolio Securities, delivery of the Securities will be made only against payment thereof or, in the event Portfolio Securities are loaned, delivery of Securities will be made only against receipt of the initial cash collateral to or for the account of the Fund.
(d) The Bank shall be liable to the Fund for any loss or damage to the Fund resulting from use of a Depository by reason of any gross negligence, wilful misfeasance or bad faith of the Bank or its employees or from any reckless disregard by the Bank of its duty to use its best efforts to enforce such rights as it may have against a Depository. In this connection, the Bank shall use its best efforts to ensure that:
(i) The Depository obtains replacement of any certificated Portfolio Security deposited with it in the event such Security is lost, destroyed, wrongfully taken or otherwise not available to be returned to the Bank upon its request;
(ii) Any proxy materials received by a Depository with respect to Portfolio Securities deposited with such Depository are forwarded immediately to the Bank for prompt transmittal to the Fund;
(iii) Such Depository immediately forwards to the Bank confirmation of any purchase or sale of Portfolio Securities and of the appropriate book entry made by such Depository to the Fund's account;
(iv) Such Depository prepares and delivers to the Bank such records with respect to the performance of the Bank's obligations and duties hereunder as may be necessary for the Fund to comply with the recordkeeping requirements of Section 31(a) of the Act and Rule 31a thereunder; and
(v) Such Depository delivers to the Bank and the Fund all internal accounting control reports, whether or not audited by an independent public accountant, as well as such other reports as the Fund may reasonably request in order to verify the Portfolio Securities held by such Depository.
6.5. Use of Book-Entry System for Commercial Paper. Provided the Bank has received a certified copy of a resolution of the Board specifically approving participation in a system maintained by the Bank for the holding of commercial paper in book-entry form ("Book Entry Paper") and the Bank has not received an Officer's Certificate withdrawing such approval, upon receipt of Proper Instructions and upon receipt of confirmation from an Issuer (as defined below) that the Fund has purchased such Issuer's Book Entry Paper, the Bank shall issue and hold in book-entry form, on behalf of the Fund, commercial paper issued by issuers with whom the Bank has entered into a book-entry agreement (the "Issuers"). In maintaining its Book Entry Paper System, the Bank agrees that:
(a) the Bank will maintain all Book Entry Paper held by the Fund in an account of the Bank that includes only assets held by it for customers;
(b) the records of the Bank with respect to the Fund's purchase of Book Entry Paper through the Bank will identify, by book entry, Commercial Paper belonging to the Fund which is included in the Book Entry Paper System and shall at all times during the regular business hours of the Bank be open for inspection by duly authorized officers, employees or agents of the Fund.
(c) The Bank shall pay for Book Entry Paper purchased for the account of the Fund upon contemporaneous (i) receipt of advice from the Issuer that such sale of Book Entry Paper has been effected, and (ii) the making of an entry on the records of the Bank to reflect such payment and transfer for the account of the Fund.
(d) The Bank shall cancel such Book Entry Paper obligation upon the maturity thereof upon contemporaneous (i) receipt of advice that payment for such Book Entry Paper has been transferred to the Fund, and (ii) the making of an entry on the records of the Bank to reflect such payment for the account of the Fund.
(e) the Bank shall transmit to the Fund a transaction journal confirming each transaction in Book Entry Paper for the account of the Fund on the next business day following the transaction; and
(f) the Bank will send to the Fund such reports on its system of internal accounting control with respect to the Book Entry Paper System as the Fund may reasonably request from time to time.
6.6. Use of Immobilization Programs. Provided the Bank has received a certified copy of a resolution of the Board specifically approving the maintenance of Portfolio Securities in an immobilization program operated by a bank which meets the requirements of Section 26(a)(1) of the Act, and the Bank has not received an Officer's Certificate indicating that the Board has withdrawn its approval, the Bank shall enter into such immobilization program with such bank acting as a subcustodian hereunder.
6.7. Eurodollar CDs. Any Portfolio Securities which are Eurodollar CDs may be physically held by the European branch of the U.S. banking institution that is the issuer of such Eurodollar CD (a "European Branch"), provided that such Securities are identified on the books of the Bank as belonging to the Fund and that the books of the Bank identify the European Branch holding such Securities. Notwithstanding any other provision of this Agreement to the contrary, except as stated in the first sentence of this subsection 6.7, the Bank shall be under no other duty with respect to such Eurodollar CDs belonging to the Fund, and shall have no liability to the Fund or its shareholders with respect to the actions, inactions, whether negligent or otherwise of such European Branch in connection with such Eurodollar CDs, except for any loss or damage to the Fund resulting from the Bank's own gross negligence, wilful misfeasance or bad faith in the performance of its duties hereunder.
6.8. Options and Futures Transactions.
(a) Puts and Calls Traded on Securities Exchanges, NASDAQ or Over-the-Counter.
1. The Bank shall take action as to put options ("puts") and call options ("calls") purchased or sold (written) by the Fund regarding escrow or other arrangements in accordance with the provisions of any agreement entered into upon receipt of Proper Instructions between the Bank, any broker-dealer registered under
the Securities Exchange Act of 1934 and a member of the National Association of Securities Dealers, Inc. (the "NASD"), and, if necessary, the Fund relating to the compliance with the rules of the Options Clearing Corporation and of any registered national securities exchange, or of any similar organization or organizations.
2. Unless another agreement requires it to do so, the Bank shall be under no duty or obligation to see that the Fund has deposited or is maintaining adequate margin, if required, with any broker in connection with any option, nor shall the Bank be under duty or obligation to present such option to the broker for exercise unless it receives Proper Instructions from the Fund. The Bank shall have no responsibility for the legality of any put or call purchased or sold on behalf of the Fund, the propriety of any such purchase or sale, or the adequacy of any collateral delivered to a broker in connection with an option or deposited to or withdrawn from a Segregated Account (as defined in subsection 6.9 below). The Bank specifically, but not by way of limitation, shall not be under any duty or obligation to: (i) periodically check or notify the Fund that the amount of such collateral held by a broker or held in a Segregated Account is sufficient to protect such broker of the Fund against any loss; (ii) effect the return of any collateral delivered to a broker; or (iii) advise the Fund that any option it holds, has or is about to expire. Such duties or obligations shall be the sole responsibility of the Fund.
(b) Puts, Calls and Futures Traded on Commodities Exchanges.
1. The Bank shall take action as to puts, calls and futures contracts ("Futures") purchased or sold by the Fund in accordance with the provisions of any agreement among the Fund, the Bank and a Futures Commission Merchant registered under the Commodity Exchange Act, relating to compliance with the rules of the Commodity Futures Trading Commission and/or any Contract Market, or any similar organization or organizations, regarding account deposits in connection with transactions by the Fund.
2. The responsibilities and liabilities of the Bank as to Futures, puts and calls traded on commodities exchanges, any Futures Commission Merchant account and the Segregated Account shall be limited as set forth in subparagraph (a)(2) of this Section 6.8 as if such subparagraph referred to Futures Commission Merchants rather than brokers, and Futures and puts and calls thereon instead of options.
6.9. Segregated Account. The Bank shall upon receipt of Proper Instructions establish and maintain a Segregated Account or Accounts for and on behalf of the Fund, into which Account or Accounts may be transferred upon receipt of Proper Instructions cash and/or Portfolio Securities:
(a) in accordance with the provisions of any agreement among the Fund, the Bank and a broker-dealer registered under the Exchange Act and a member of the NASD or any Futures Commission Merchant registered under the Commodity Exchange Act, relating to compliance with the rules of the Options Clearing Corporation and of any
registered national securities exchange or the Commodity Futures Trading Commission or any registered Contract Market, or of any similar organization or organizations regarding escrow or other arrangements in connection with transactions by the Fund;
(b) for the purpose of segregating cash or Portfolio Securities in connection with options purchased, or written by the Fund or commodity futures purchased or written by the Fund;
(c) for the deposit of liquid assets, such as cash, U.S. Government securities or other high grade debt obligations, having a market value (marked to the market on a daily basis) at all times equal to not less than the aggregate purchase price due on the settlement dates of all the Fund's then outstanding forward commitment or "when-issued" agreements relating to the purchase of Portfolio Securities and all the Fund's then outstanding commitments under reverse repurchase agreements entered into with broker-dealer firms;
(d) for the deposit of any Portfolio Securities which the Fund has agreed to sell on a forward commitment basis, all in accordance with Investment Company Act Release No. 10666;
(e) for the purposes of compliance by the Fund with the procedures required by Investment Company Act Release No. 10666, or any subsequent release or releases of the Securities and Exchange Commission relating to the maintenance of Segregated Accounts by registered investment companies;
(f) for other proper corporate purposes, but only, in the case of the clause (f), upon receipt of, in addition to Proper Instructions, a certified copy of a resolution of the Board, or of the Executive Committee signed by an officer of the Fund and certified by the Secretary or an Assistant Secretary, setting forth the purpose or purposes of such Segregated Account and declaring such purposes to be proper corporate purposes.
(g) Assets may be withdrawn from the Segregated Account pursuant to Proper Instructions only
(i) in accordance with the provisions of any agreements referenced in (a) or (b) above;
(ii) for sale or delivery to meet the Fund's obligations under outstanding firm commitment or when-issued agreements for the purchase of Portfolio Securities and under reverse repurchase agreements;
(iii) for exchange for other liquid assets of equal or greater value deposited in the Segregated Account;
(iv) to the extent that the Fund's outstanding forward commitment or when-issued agreements for the purchase of portfolio securities or reverse repurchase agreements are sold to other parties or the Fund's obligations thereunder are met from assets of the Fund other than those in the Segregated Account; or
(v) for delivery upon settlement of a forward commitment agreement for the sale of Portfolio Securities.
6.10. Interest Bearing Call or Time Deposits. The Bank shall, upon receipt of Proper Instructions relating to the purchase by the Fund of interest bearing fixed term and call deposits, transfer cash, by wire or otherwise, in such amounts and to such bank or banks as shall be indicated in such Proper Instructions. The Bank shall include in its records with respect to the assets of the Fund appropriate notation as to the amount of each such deposit, the banking institution with which such deposit is made (the "Deposit Bank"), and shall retain such forms of advice or receipt evidencing the deposit, if any, as may be forwarded to the Bank by the Deposit Bank. Such deposits shall be deemed Portfolio Securities of the Fund and the responsibility of the Bank therefore shall be the same as and no greater than the Bank's responsibility in respect of other Portfolio Securities of the Fund.
6.11. Transfer of Securities. The Bank will transfer, exchange, deliver or release Portfolio Securities held by it hereunder, insofar as such Securities are available for such purpose, provided that before making any transfer, exchange, delivery or release under this Section the Bank will receive Proper Instructions requesting such transfer, exchange or delivery stating that it is for a purpose permitted under the terms of this Section 6.11, specifying the applicable subsection, or describing the purpose of the transaction with sufficient particularity to permit the Bank to ascertain the applicable subsection, only
(a) upon sales of Portfolio Securities for the account of the Fund, against contemporaneous receipt by the Bank of payment therefor in full, each such payment to be in the amount of the sale price shown in Proper Instructions received by the Bank before such payment is made;
(b) in exchange for or upon conversion into other securities alone or other securities and cash pursuant to any plan of merger, consolidation, reorganization, share split-up, change in par value, recapitalization or readjustment or otherwise, upon exercise of subscription, purchase or sale or other similar rights represented by such Portfolio Securities, or for the purpose of tendering shares in the event of a tender offer therefor, provided however that in the event of an offer of exchange, tender offer, or other exercise of rights requiring the physical tender or delivery of Portfolio Securities, the Bank shall have no liability for failure to so tender in a timely manner unless such Proper Instructions are received by the Bank at least two business days prior to the date required for tender, and unless the Bank (or its agent or subcustodian hereunder) has actual possession of such Portfolio Security at least two business days prior to the date of tender;
(c) upon conversion of Portfolio Securities pursuant to their terms into other securities;
(d) in the case of option contracts owned by the Fund, for presentation to the endorsing broker;
(e) when such Portfolio Securities are called, redeemed or retired or otherwise become payable;
(f) for the purpose of effectuating the pledge of Portfolio Securities held by the Bank in order to collateralize loans made to the Fund by any bank, including the Bank; provided, however, that such Portfolio Securities will be released only upon payment to the Bank for the account of the Fund of the moneys borrowed, except that in cases where additional collateral is required to secure a borrowing already made, and such fact is made to appear in the Proper instructions, further Portfolio Securities may be released for that purpose without any such payment. In the event that any such pledged Portfolio Securities are held by the Bank, they will be so held for the account of the lender, and after notice to the Fund from the lender in accordance with the normal procedures of the lender, that an event of deficiency or default on the loan has occurred, the Bank may deliver such pledged Portfolio Securities to or for the account of the lender;
(g) for the purpose of releasing certificates representing Portfolio Securities, against contemporaneous receipt by the Bank of the fair market value of such security, as set forth in Proper Instructions received by the Bank before such payment is made;
(h) for the purpose of delivering Portfolio Securities lent by the Fund to a bank or broker dealer, but only against receipt in accordance with street delivery custom except as otherwise provided herein, of adequate collateral as agreed upon from time to time by the Fund and the Bank, and upon receipt of payment in connection with any repurchase agreement relating to such Portfolio Securities entered into by the Fund;
(i) for other authorized transactions of the Fund or for other proper corporate purposes; provided that before making such transfer, the Bank will also receive a certified copy of resolutions of the Board, signed by an authorized officer of the Fund (other than the officer certifying such resolution) and certified by its Secretary or Assistant Secretary, specifying the Portfolio Securities to be delivered, setting forth the transaction in or purpose for which such delivery is to be made, declaring such transaction to be an authorized transaction of the Fund or such purpose to be a proper corporate purpose, and naming the person or persons to whom delivery of such Portfolio Securities shall be made; and
(j) upon termination of this Agreement as hereinafter set forth pursuant to Section 7 and Section 13 of this Agreement.
As to any deliveries made by the Bank pursuant to subsections (a), (b),
(c), (d), (e), (f), (g) and (h) Portfolio Securities or cash receivable in
exchange therefor shall be delivered to the Bank.
7. Merger, Dissolution, etc. of Fund. In the case of the following transactions, not in the ordinary course of business, namely, the merger of the Fund into or the consolidation of the Fund with another investment company, the sale by the Fund of all, or substantially all, of its assets to another investment company, or the liquidation or dissolution of the Fund and distribution of its assets, the Bank will deliver the Portfolio Securities held by it under this Agreement and disburse cash only upon the order of the Fund set forth in an Officers' Certificate, accompanied by a certified copy of a resolution of the Board authorizing any of the foregoing transactions. Upon completion of such delivery and disbursement and the payment of the fees, disbursements and expenses of the Bank, this Agreement will terminate.
8. Actions of Bank Without Prior Authorization. Notwithstanding anything herein to the contrary, unless and until the Bank receives an Officers' Certificate to the contrary, it will without prior authorization or instruction of the Fund or the transfer agent:
8.1. Endorse for collection and collect on behalf of and in the name of the Fund all checks, drafts, or other negotiable or transferable instruments or other orders for the payment of money received by it for the account of the Fund and hold for the account of the Fund all income, dividends, interest and other payments or distribution of cash with respect to the Portfolio Securities held thereunder;
8.2. Present for payment all coupons and other income items held by it for the account of the Fund which call for payment upon presentation and hold the cash received by it upon such payment for the account of the Fund;
8.3. Receive and hold for the account of the Fund all Securities received as a distribution on Portfolio Securities as a result of a stock dividend, share split-up, reorganization, recapitalization, merger, consolidation, readjustment, distribution of rights and similar Securities issued with respect to any Portfolio Securities held by it hereunder.
8.4. Execute as agent on behalf of the Fund all necessary ownership and other certificates and affidavits required by the Internal Revenue Code or the regulations of the Treasury Department issued thereunder, or by the laws of any state, now or hereafter in effect, inserting the Fund's name on such certificates as the owner of the Portfolio Securities covered thereby, to the extent it may lawfully do so and as may be required to obtain payment in respect thereof. The Bank will execute and deliver such certificates in connection with Portfolio Securities delivered to it or by it under this Agreement as may be required under the provisions of the Internal Revenue Code and any Regulations of the Treasury Department issued thereunder, or under the laws of any State;
8.5. Present for payment all Portfolio Securities which are called, redeemed, retired or otherwise become payable, and hold cash received by it upon payment for the account of the Fund; and
8.6. Exchange interim receipts or temporary Portfolio Securities for definitive Portfolio Securities.
9. Collection; Defaults. The Bank will use all reasonable effort to collect any funds which may to its knowledge become collectible arising from Portfolio Securities, including dividends, interest and other income, and to transmit to the Fund notice actually received by it of any call for redemption, offer of exchange, right of subscription, reorganization or other proceedings affecting such Securities.
If Portfolio Securities upon which such income is payable are in default or payment is refused after due demand or presentation, the Bank will notify the Fund in writing of any default or refusal to pay within two business days from the day on which it receives knowledge of such default or refusal. In addition, the Bank will send the Fund a written report once each, month showing any income on any Portfolio Security held by it which is more than ten days overdue on the date of such report and which has not previously been reported.
10. Maintenance of Records: Accounting Services. The Bank will maintain records with respect to transactions for which the Bank is responsible pursuant to the terms and conditions of this Agreement, and in compliance with the applicable rules and regulations of the Act and will furnish the Fund daily with a statement of condition of the Fund. The Bank will furnish to the Fund at the end of every month, and at the close of each quarter of the Fund's fiscal year, a list of the Portfolio Securities and the aggregate amount of cash held by it for the Fund. The books and records of the Bank pertaining to its actions under this Agreement and reports by the Bank or its independent accountants concerning its accounting system, procedures for safeguarding Portfolio Securities and internal accounting controls will be open to inspection and audit at reasonable times by officers of or auditors employed by the Fund and will be preserved by the Bank in the manner and in accordance with the applicable rules and regulations under the Act.
The Bank shall keep the books of account and render statements or copies from time to time as reasonably requested by the Treasurer or any executive officer of the Fund.
The Bank shall assist generally in the preparation of reports to shareholders and others, audits of accounts, and other ministerial matters of like nature.
11. Fund Evaluation. The Bank shall compute and, unless otherwise directed by the Board, determine as of the close of business on the New York Stock Exchange ("NYSE") on the last day of each week on which said Exchange is open for unrestricted trading and as of such other days and hours, if any, as may be authorized by the Board, the net asset value of a share of capital stock of the Fund, such determination to be made in accordance with the provisions of the Articles and By-laws of the Fund and Prospectus and Statement of Additional Information relating to the Fund, as they may from time to time be amended, and any applicable resolutions of the Board at the time in force and applicable; and promptly to notify the Fund, the NYSE, and the National Association of Securities Dealers ("NASD") or such other persons as the Fund may request of the results of such computation and determination. In computing the net asset value hereunder, the Bank may rely in good faith upon information furnished to it by any Authorized Person in respect of (i) the manner of accrual of the liabilities of the Fund and in respect of liabilities of the Fund not appearing on its books of account kept by the Bank, (ii) reserves, if any, authorized by the Board or that no such reserves have been authorized, (iii) the source of the
quotations to be used in computing the net asset value, and (iv) the value to be
assigned to any security for which no price quotations are available, and the
Bank shall not be responsible for any loss occasioned by such reliance or for
any good faith reliance on any quotations received from a source pursuant to
(iii) above.
12. Concerning the Bank.
12.1. Performance of Duties; Standard of Care. In performing its duties hereunder and any other duties listed on any Schedule hereto, if any, the Bank will be entitled to receive and act upon the advice of independent counsel of its own selection, which may be counsel for the Fund, and will he without liability for any action taken or thing done or omitted to be done in accordance with this Agreement in good faith in conformity with such advice. In the performance of its duties hereunder, the Bank will be protected and not be liable, and will be indemnified and saved harmless for any action taken or omitted to be taken by it in good faith reliance upon the terms of this Agreement, any Officers' Certificate, Proper Instructions, resolution of the Board, telegram, notice, request, certificate or other instrument reasonably believed by the flank to be genuine and for any other loss to the Fund except in the case of its gross negligence, wilful misfeasance or bad faith in the performance of its duties or reckless disregard of its obligations and duties hereunder.
The Bank will be under no duty or obligation to inquire into and will not be liable for:
(a) the validity of the issue of any Portfolio Securities purchased by or for the Fund, the legality of the purchases thereof or the propriety of the price incurred therefor;
(b) the legality of any sale of any Portfolio Securities by or for the Fund or the propriety of the amount for which the same are sold;
(c) the legality of an issue or sale of any common shares of the Fund or the sufficiency of the amount to be received therefor;
(d) the legality of the repurchase of any common shares of the Fund or the propriety of the amount to be paid therefor;
(e) the legality of the declaration of any dividend by the Fund or the legality of the distribution of any Portfolio Securities as payment in kind of such dividend; or
(f) any property or moneys of the Fund unless and until received by it, and any such property or moneys delivered or paid by it pursuant to the terms hereof.
Moreover, the Bank will not be under any duty or obligation to ascertain whether any Portfolio Securities at any time delivered to or held by it for the account of the Fund are such as may properly be held by the Fund under the provisions of its Articles, By-laws, any federal or state statutes or any rule or regulation of any governmental agency.
Notwithstanding anything in this Agreement to the contrary, in no event shall the Bank be liable hereunder or to any third party:
(a) for any losses or damages of any kind resulting from acts of God, earthquakes, fires, floods, storms or other disturbances of nature, epidemics, strikes, riots, nationalization, expropriation, currency restrictions, acts of war, civil war or terrorism, insurrection, nuclear fusion, fission or radiation, the interruption, loss or malfunction of utilities, transportation, or computers (hardware or software). and computer facilities, the unavailability of energy sources and other similar happenings or events except as results from the Bank's own gross negligence; or
(b) for special, punitive or consequential damages arising from the provision of services hereunder, even if the Bank has been advised of the possibility of such damages.
12.2. Agents and Subcustodians. The Bank may employ agents in the performance of its duties hereunder and shall be responsible for the acts and omissions of such agents as if performed by the Bank hereunder.
Upon receipt of Proper Instructions, the Bank may employ subcustodians with respect to domestic Portfolio Securities, provided that any such subcustodian meets at least the minimum qualifications required by Section 17(f)(1) of the Act to act as a custodian of the Fund's assets. Provided the Bank has received a certified copy of a resolution of the Board specifically approving the appointment of an Eligible Foreign Custodian and the depositing of Portfolio Securities which are Foreign Securities therewith and the Bank has not received an Officer's Certificate indicating that such approval has been withdrawn, the Bank may deposit such Foreign Securities and cash with such Eligible Foreign Custodian, as a subcustodian hereunder, in accordance with Schedule A hereto. The Bank shall have the same liability to the Fund on account of any actions or omissions of any sub-custodian so employed as any such sub-custodian has to the Bank. The Fund shall indemnify the Bank and hold it harmless from and against any and all actions, suits and claims, arising directly or indirectly out of the performance of any subcustodian. Upon request of the Bank, the Fund shall assume the entire defense of any action, suit, or claim subject to the foregoing indemnity. The Fund shall pay all fees and expenses of any subcustodian.
The Bank shall use its best efforts to provide the Fund with information described in the "NOTES" to Rule 17f-5 and such other similar information as the Fund may reasonably request to assist its Board of Directors to satisfy their obligation under such Rule. In addition, the Bank shall use its best efforts to provide the Fund with prompt notice of any material change in information previously provided to the Fund pursuant to this Section 12-2 or any material changes in the facts or circumstances upon which such information is based.
12.3. Insurance. The Bank shall use the same care with respect to the safekeeping of Portfolio Securities and cash of the Fund held by it as it uses in respect of its own similar property but it need not maintain any special insurance for the benefit of the Fund.
12.4. Fees and Expenses of Bank. The Fund will pay or reimburse the Bank from time to time for any transfer taxes payable upon transfer of Portfolio Securities made hereunder, and for all necessary proper disbursements, expenses and charges made or incurred by the Bank in the performance of this Agreement (including any duties listed on any Schedule hereto, if any) including any indemnities for any loss, liabilities or expense to the Bank as provided above. For the services rendered by the Bank hereunder, the Fund will pay to the Bank such compensation or fees at such rate and at such times as shall be agreed upon in writing by the parties from time to time. The Bank will also be entitled to reimbursement by the Fund for all reasonable expenses incurred in conjunction with termination of this Agreement by the Fund.
12.5. Advances by Bank. The Bank may, in its sole discretion, advance funds on behalf of the Fund to make any payment permitted by this Agreement upon receipt of any proper authorization required by this Agreement for such payments by the Fund. Should such a payment or payments, with advanced funds, result in an overdraft (due to insufficiencies of the Fund's account with the Bank, or for any other reason) this Agreement deems any such overdraft or related indebtedness, a loan made by the Bank to the Fund payable on demand and bearing interest at the current rate charged by the Bank for such loans unless the Fund shall provide the Bank with agreed upon compensating balances. The Fund agrees that the Bank shall have a continuing lien and security interest to the extent of any overdraft or indebtedness, in and to any property at any time held by it for the Fund's benefit or in which the Fund has an interest and which is then in the Bank's possession or control (or in the possession or control of any third party acting on the Bank's behalf). The Fund authorizes the Bank, in its sole discretion, at any time to charge any overdraft or indebtedness, together with interest due thereon against any balance of account standing to the credit of the Fund on the Bank's books.
13. Termination.
13.1. This Agreement may be terminated at any time without penalty upon sixty days written notice delivered by either party to the other by means of registered mail, and upon the expiration of such sixty days this Agreement will terminate; provided, however, that the effective date of such termination may be postponed to a date not more than ninety days from the date of delivery of such notice (i) by the Bank in order to prepare for the transfer by the Bank of all of the assets of the Fund held hereunder, and (ii) by the Fund in order to give the Fund an opportunity to make suitable arrangements for a successor custodian. At any time after the termination of this Agreement, the Fund will, at its request, have access to the records of the Bank relating to the performance of its duties as custodian.
13.2. In the event of the termination of this Agreement, the Bank will immediately upon receipt or transmittal, as the case may be, of notice of termination, commence and prosecute diligently to completion the transfer of all cash and the delivery of all Portfolio Securities duly endorsed and all records maintained under Section 11 to the successor custodian when appointed by the Fund. The obligation of the Bank to deliver and transfer over the assets of the Fund held by it directly to such successor custodian will commence as soon as such successor is appointed and will continue until completed as aforesaid. If the Fund does not select a successor custodian within ninety (90) days from the date of delivery of notice of termination the Bank may, subject to the provisions of subsection (13.3), deliver the Portfolio Securities and cash of the Fund held by
the Bank to a bank or trust company of its own selection which meets the requirements of Section 17(f)(1) of the Act and has a reported capital, surplus and undivided profits aggregating not less than $2,000,000, to be held as the property of the Fund under terms similar to those on which they were held by the Bank, whereupon such bank or trust company so selected by the Bank will become the successor custodian of such assets of the Fund with the same effect as though selected by the Board.
13.3. Prior to the expiration of ninety (90) days after notice of termination has been given, the Fund may furnish the Bank with an order of the Fund advising that a successor custodian cannot be found willing and able to act upon reasonable and customary terms and that there has been submitted to the shareholders of the Fund the question of whether the Fund will be liquidated or will function without a custodian for the assets of the Fund held by the Bank. In that event the Bank will deliver the Portfolio Securities and cash of the Fund held by it, subject as aforesaid, in accordance with one of such alternatives which may be approved by the requisite vote of shareholders, upon receipt by the Bank of a copy of the minutes of the meeting of shareholders at which action was taken, certified by the Fund's Secretary and an opinion of counsel to the Fund in form and content satisfactory to the Bank.
14. Notices. Any notice or other instrument in writing authorized or required by this Agreement to be given to either party hereto will be sufficiently given if addressed to such party and mailed or delivered to it at its office at the address set forth below; namely:
(a) In the case of notices sent to the Fund to:
The Herzfeld Caribbean Basin Fund, Inc.
Thomas J. Herzfeld & Co., Inc.
10750 Southwest 98 Court
Miami, Florida 33176
Attention: Cecelia Gondor
(b) In the case of notices sent to the Bank to:
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
Attention: James Keenan
or at such other place as such party may from time to time designate in writing.
15. Amendments. This Agreement may not be altered or amended, except by an instrument in writing, executed by both parties, and in the case of the Fund, such alteration or amendment will be authorized and approved by its Board.
16. Parties. This Agreement will be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that this Agreement will not be assignable by the Fund without the written consent of the Bank or by the Bank without the written consent of the Fund, authorized and approved by its Board; and provided further that termination proceedings pursuant to Section 14 hereof will not be deemed to be an assignment within the meaning of this provision.
17. Governing Law. This Agreement and all performance hereunder will be governed by the laws of the Commonwealth of Massachusetts.
18. Use of Name. The Fund shall not use the name of the Bank or any of its affiliates in any prospectus, sales literature or other material relating to the Fund in a manner not approved by the Bank prior thereto in writing; provided, however, that the approval of the Bank shall not be required for any use of its name which merely refers in accurate and factual terms to its appointment hereunder or which is required by the Securities and Exchange Commission or any state securities authority or any other appropriate regulatory, governmental or judicial authority; provided, further, that in no event shall such approval be unreasonably withheld or delayed.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate and their respective corporate seals to be affixed hereto as of the date first above written by their respective officers thereunto duly authorized.
THE HERZFELD CARIBBEAN BASIN FUND, INC.
By: /s/ Thomas J. Herzfeld
------------------------------------
ATTEST:
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INVESTORS BANK & TRUST COMPANY
By: /s/ Andrew M. Nesvet
------------------------------------
ATTEST:
J M Keenan
DATED:_______
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SCHEDULE A
INVESTORS BANK AND TRUST
SUBCUSTODIAN RELATIONSHIPS
AUGUST, 1994
Meet Equity Debt Physical
Country 171-5 Subcustodian Subcustodian Subcustodian Depository
-------------------- ----- ------------------ ------------------ ----------------------- ---------------------------------
Argentina Yes Citibank Citibank Citibank Branch CA
Australia Yes NAB Euroclear NAB AUSTRACLEAR/RITS
Austria Yes Euroclear Euroclear Citibank Subsidiary CESTERECHSCHE
Bangladesh Yes Standard Chartered Standard Chartered Standard Chartered
Belgium Yes Euroclear Euroclear General de Banque CIK, BNB
Brazil Yes Bank of Boston Bank of Boston Bank of Boston Branch BOVESPA-CALISPA
Canada* Yes Euroclear Euroclear Royal Trust COS
Chile Yes Bank of Boston Bank of Boston Bank of Boston Branch
China-Shanghai Yes Standard Chartered Standard Chartered Standard Chartered SECCRC
China-Shanzen Yes Standard Chartered Standard Chartered Standard Chartered HONG KONG SHANGHAI BANK,
CITIBANK, STD. CHARTERED BANK
Colombia Yes Citibank Citibank Citibank Subsidiary BANCE DE LA REPUBLICA
Czech Republic Yes Chase Chase CSCB SCP
Denmark Yes Euroclear Euroclear Den Danske Bank VASERDIPAPIRCENTRALEN
Finland Yes Euroclear Euroclear Kansailis-Osake-Pankki CSR
France Yes Euroclear Euroclear Citibank Subsidiary SICOVAM, BANQUE DE FRANCE
Germany Yes Euroclear Euroclear Citibank subsidiary DKV
Greece Yes Citibank Citibank Citibank Branch CSD
Hong Kong Yes Standard Chartered Standard Chartered Standard Chartered CCASS
Hungary Yes Citibank Citibank Citibank Subsidiary STOCK EXCHANGE
India Yes Std. Chartered/SBI Std. Chartered/SBI Std. Chartered/SBI
Indonesia Yes Standard Chartered Standard Chartered Standard Chartered
Ireland Yes Citibank Citibank Citibank Branch GSO
Israel Yes Chase Chase Bank Leumi STOCK EXCHANGE CLEARING HOUSE
LTD.
Italy Yes Euroclear Euroclear Citibank Branch MONTI TITOLI, BANK OF ITALY
Japan Yes Euroclear Standard Chartered Standard Chartered JASDEC/BANK OF JAPAN
Jordan Yes Chase Chase Arab Bank
Korea Yes Standard Chartered Standard Chartered Standard Chartered KSSC
Luxembourg Yes Euroclear Euroclear Cedel CEDEL
Malaysia Yes Euroclear Standard Chartered Standard Chartered MALAYSIAN CENT DEP
Mexico Yes Citibank Citibank Citibank Branch INDEVAL
Netherlands Yes Euroclear Euroclear Citibank Branch NEGIGEF, DUTCH CENTRAL BANK
New Zealand Yes NAB Euroclear National Nominee Ltd. AUSTRACLEAR
Norway Yes Euroclear Euroclear Christiania Bank VPS
Pakistan Yes Standard Chartered Standard Chartered Standard Chartered
Papua New Guinea Yes NAB Euroclear NAB AUSTRACLEAR
Peru Yes Citibank Citibank Citibank Branch CAVAL
Philippines Yes Standard Chartered Standard Chartered Standard Chartered
Poland Yes Citibank Citibank Citibank Subsidiary NATL DEP OF SEC, BK OF POLAND
Portugal Yes Euroclear Citibank Citibank Subsidiary CENTRAL DE REGISTOE VALORES
Singapore Yes Euroclear Standard Chartered Standard Chartered CENTRAL DEPOSITORY PTE
South Africa Yes Chase Chase Standard Bank of South
Africa
Spain Yes Euroclear Euroclear Citibank Branch SCLV
Sri Lanka Yes Standard Chartered Standard Chartered Standard Chartered CENTRAL DEPOSITORY SYS
Sweden Yes Euroclear Euroclear Skandinaviska VARDEPAPPERCENTRALEN
Switzerland Yes Euroclear Euroclear Citibank Subsidiary SCHETZERSCHEFFECTEN
Taiwan Yes Standard Chartered Standard Chartered Standard Chartered TAIWAN SEC DEPOSITORY
Thailand Yes Standard Chartered Standard Chartered Standard Chartered SDC
Turkey Yes Chase/Citibank Chase/Citibank Chase/Citibank Branches VAKIBANK
United Kingdom Yes Royal Trust Royal Trust Royal Trust CGOCMO
United Kingdom (ST)* Yes n/a First Chicago CGOCMO CGOCMO
Uruguay Yes Citibank Citibank Citibank Branch
Venezuela Yes Citibank Citibank Citibank Branch
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Notes: * Preferred custodian is euroclear it asset is eligible.
* Eurobonds of any country settle at Euroclear if eligible.
* Physical location used only for an ineligible Euroclear asset
when the asset type is Euroclear eligible.
* All 17F-5 Eligible Standard Chartered operations are Branches
Thomas J. Herzfe1d & Co., Inc. The Herzfeld Caribbean Basin Fund Fee Schedule December 30, 1993
FUND ACCOUNTING (including Calculation of N.A.V.), DOMESTIC CUSTODY,
GLOBAL CUSTODY, and TRANSFER AGENCY
A. Fund Accounting (includes Calculation of N.A.V.) and Domestic Custody
The funds will be charged either Basis Point Fees or Minimum Fees.
o The Basis Points are exclusive of transaction costs and out-of-pocket expenses.
Annual Fee
-----------------
First $50 MM of net assets 10.0 Basis Points
Next $50 MM of net assets 2.0 Basis Points
Net assets in excess of $100 MM 1.0 Basis Point
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o There will be a monthly minimum fee for The Herzfeld Caribbean Basin Fund according to the following schedule:
Monthly Fee
-----------
Month 1-6 2,000
Months 6-12 4,000
Every month thereafter 4,500
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o Custody Transaction Costs
o DT~/Fed Book Entry 12
o Non-DTC, Boston Settlement 20*
o Non-DTC, New York Settlement 35
o Non-DTC, New York Maturities 10
o Government Paydown $ 5
o GNMA Securities 35
o Options 25
o Futures 18
o Incoming/Outgoing Wires 7
*There is no charge for maturities of these items.
* This fee schedule will be reviewed after an escrow period plus the first six months of the fund's operation.
B. Global Custody
Country Annual Fee Transaction Costs Per Trade ---------------------- -------------- --------------------------- U.S. 2 Basis Points Standard Trans. Costs (B) Euroclear 4 Basis Points $20; 50 (Cross Border) Argentina 26 80 Brazil* 28 125 Chile* 26 80 Colombia* 29 125 Mexico Equities 20 55 Venezuela* 23 55 Barbados** Belize** Costa Rica** Guatemala** Guyana** Honduras** Jamaica** Netherlands Antilles** Panama** Tabago** Trinidad** |
* Local Exchange and Administration costs are passed through.
** To our knowledge, none of these countries have a bank meeting 17f-5 approval. As soon as a bank in these countries meets 17f-5 approval, we will have a subcustodial agreement in place with that bank.
C. Institutional and Retail Transfer Agency (Full Service)
This fee schedule was developed based on the following assumptions:
o Transfer Agency Services are offered when combined with Custody and Fund Accounting Services.
The annual fee for the first 300 retail shareholders will be $17,500. For every retail shareholder in excess of 300, the annual fee is the following:
Service Annual Fee.
---------------------- -----------
Annual Per Account Fee $14.00
D. Out of Pocket Expenses
o These charges consist of:
o Micro Rental o Telephone
o Pricing & Verification Services o Forms& Supplies
o Printing, Delivery & Postage o Support Equipment Rental
o Travel and Legal fees are o Initial Offering Certificates
billed by mutual agreement
o Third Party Audit
o Legal fees for substantial
changes to Investors Bank's
Contracts
E. Balance Credit
|
We allow balance credit against fees (excluding out-of-pocket charges) for collected fund balances arising out of the custody and transfer agency relationships. The monthly earnings allowance is equal to 75% of the 90-day T-bill rate.
[COLBENT LOGO]
The Colbent Corporation
-General Proposal-
A. Fees for Services*
--------------------------------------------------------------------------------
Fee Service Provided
--- ----------------
--------------------------------------------------------------------------------
$5000.00 Project Management Fee
================================================================================
$1.00 Per subscription form generated
================================================================================
$1.00 Per replacement forms/fulfillment
================================================================================
$0.25 and up Mailing of Subscription forms (depending on the number of
enclosures)
================================================================================
$6.00 Per subscription form processed (registered and beneficial)
================================================================================
$6.50 Per defective subscription form received
================================================================================
$3.00 Per notice of guaranteed delivery received via fax
================================================================================
$1.50 Per sale of right (if applicable)
================================================================================
$2.00 Per invoice mailed (if applicable)
================================================================================
$0.75 Per refund check issued and mailed (if applicable)
================================================================================
$3.00 Per solicitation check processed and mailed (if applicable)
================================================================================
$750.00 Per Pro-ration (if applicable)
================================================================================
$1500.00 Per offer extension
================================================================================
$5000.00 Minimum charge should the project be cancelled for any reason
prior to the mailing of the subscription form
================================================================================
$500.00/month DTCC connectivity fee
================================================================================
================================================================================
|
B. Services Covered
o Designate an operational team to carry out Subscription Agent
duties, including document review and execution of legal agreement,
review of subscription forms and communication materials, project
management and on-going project updates and reporting.
o Calculating Rights to be distributed to each shareholder and
printing shareholder information on the subscription form.
o Issuing subscription forms, and causing forms to be mailed to
registered shareholders.
o Tracking and reporting the number of exercises made, as required.
o Processing Rights received and exercised.
o Deposit participant checks daily and forward all participant funds
to Fund at the end of the offering period.
o Providing receipt summation of checks received.
o Run a pro-ration against the file if the rights offering is
oversubscribed.
o Interface with the Depository Trust Company (DTC).
o Issuing/ Printing (if applicable,) and mailing stock certificates
and/or checks.
o Interfacing with the Information Agent.
o Calculating, issuing and mailing of proration and/or
over-subscription checks if applicable.
o Calculating, issuing and mailing of solicitation checks if
applicable.
o Interface with Transfer Agent - produce a create tape for all shares
being issued.
o Produce and Report to IRS 1099B's (for the sale of rights) to
registered shareholders at year end.
C. Items Not Covered
o Items not specified in the "Services Covered" section set forth in
this Agreement, including any services associated with new duties,
legislation or regulatory fiat which become effective after the date
of this Agreement (these will be provided on an appraisal basis)
o All out-of-pocket expenses such as telephone line charges,
certificates, checks, postage, stationary, wire transfers and excess
material disposal (these will be billed as incurred)
o Reasonable legal review fees if referred to outside counsel.
o Overtime charges assessed in the event of late delivery of material
for mailings unless the target mail date is rescheduled.
o Additional programming to accommodate project specific requirements.
D. Assumptions
o Proposal based upon document review and information known at this
time about the transaction.
o Significant changes made in the term or requirements of this
transaction could require modifications to this proposal.
o Proposal must be executed prior to the initial mailing.
o Company responsible for printing of materials (Rights Card,
Prospectus and ancillary documents).
o Material to be mailed to shareholders must be received no less than
five (5) business days prior to the start of the mailing project.
o Accrued interest in Deposit account will be used to offset bank
fees. All remaining account interest will go back to the company.
E. Payment for Services
o The Project Management Fee will be rendered and payable upon the effective date of the transaction. An invoice for any out-of-pocket and per items fees realized will be rendered and payable on a monthly basis, except for postage expenses in excess of $5,000.00. Funds for such mailing expenses must be received one (1) business day prior to the scheduled mail date.
The Colbent Corporation
By: By:
------------------------------ -----------------------------
Carmine C. Chirichiello
Title: President, The Colbent Corporation Title:
----------------------------------- --------------------------
Date: Date:
------------------------------ ---------------------------
|
CODE OF ETHICS
OF
THE HERZFELD CARIBBEAN BASIN FUND, INC.
&
THOMAS J. HERZFELD ADVISORS, INC.
PREAMBLE
This Code of Ethics is being adopted in compliance with the requirements of Rule 17j-1 under the Investment Company Act of 1940 (the "Act") and Rule 204A-1 under the Investment Advisers Act of 1940 (the "Advisers Act") adopted by the United States Securities and Exchange Commission to effectuate the purposes and objectives of the rules.
Rule 17j-1 makes it unlawful for certain persons, in connection with purchase or sale by such person of a security held or to be acquired by The Herzfeld Caribbean Basin Fund, Inc. (the "Fund"):
(1) To employ a device, scheme or artifice to defraud the Fund;
(2) To make to the Fund any untrue statement of a material fact or omit to state to the Fund a material fact necessary in order to make the statements made, in light of the circumstances in which they are made, not misleading;
(3) To engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon the Fund; or
(4) To engage in a manipulative practice with respect to the Fund.
Section 206 of the Advisers Act makes it unlawful for certain persons including Thomas J. Herzfeld Advisors, Inc. (the "Adviser"):
(1) To employ any device, scheme or artifice to defraud any client or prospective client;
(2) To engage in any transaction, practice or course of business which operates as a fraud or deceit upon any client or prospective client;
(3) Acting as principal for his own account, knowingly to sell any security to or purchase any security from a client; or acting as broker for a person other than such client, knowingly to effect any sale or purchase of any security for the account of such client, without disclosing to such client in writing before the completion of such transaction, the capacity in which he is acting and obtaining the consent of the client to such transaction. The prohibitions of this paragraph (3) shall not apply to any transaction with a customer of a broker or dealer if such broker or dealer is not acting as an investment adviser in relation to such transaction; or
(4) To engage in any act, practice, or course of business which is fraudulent, deceptive or manipulative.
Rule 17j-1 and/or Rule 204A-1 require the Fund and its investment adviser to adopt a written Code of Ethics containing provisions reasonably necessary to prevent persons from engaging in acts in violation of the above standard and to use reasonable diligence, and institute procedures reasonably necessary to prevent violations of the Code.
Set forth below is the Code of Ethics adopted by the Board of Directors of the Fund (the "Fund Board") and by the Adviser in compliance with the Rule. This Code is based upon the principle that the directors and officers of the Fund, and certain affiliated persons of the Fund and Adviser, owe a fiduciary duty to, among others, the shareholders of the Fund to conduct their affairs, including their personal securities transactions, in such manner to avoid (i) serving their own personal interests ahead of shareholders; (ii) taking inappropriate advantage of their position with the Fund; and (iii) any actual or potential conflicts of interest or any abuse of their position of Fund and responsibility.
1. DEFINITIONS
(a) "Access Person" means any Advisory Person of the Fund or the Fund's Adviser.
(b) "Advisory Person" means
(i) any director, trustee, officer, general partner or employee of the Fund or its Adviser (or any company in a control relationship to the Fund or investment adviser) 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 Fund, or whose functions relate to the making of any recommendations with respect to such purchase or sales; and
(ii) any natural person in a control relationship to the Fund or the Adviser who obtains information concerning recommendations made to the Fund with regard to the purchase or sale of a Covered Security by the Fund.
(c) A security is "being considered for purchase or sale" or is "being purchased or sold" when a recommendation to purchase or sell the security has been made and communicated to the trading desk, which includes when the Fund has a pending "buy" or "sell" order with respect to a security, and, with respect to the person making the recommendation, when such person seriously considers making such a recommendation.
(d) "Beneficial ownership" shall be as defined in, and interpreted in the same manner as it would be in determining whether a person is subject to the provisions of, Section 16 of the Securities Exchange Act of 1934 and the rules and regulations thereunder which, generally speaking, encompasses those situations where the beneficial owner has the right to enjoy some economic benefit from the ownership of the security regardless of who is the registered owner. This would include:
2-
(i) securities which a person holds for his or her own benefit either in bearer form, registered in his or her own name or otherwise regardless of whether the securities are owned individually or jointly;
(ii) securities held in the name of a member of his or her immediate family (spouse or child) sharing the same household;
(iii) securities held by a trustee, executor, administrator, custodian or broker;
(iv) securities owned by a general partnership of which the person is a member or a limited partnership of which such person is a general partner;
(v) securities held by a corporation which can be regarded as a personal holding company of a person; and
(vi) securities recently purchased by a person and awaiting transfer into his or her name.
(e) "Control" shall have the same meaning as that set forth in Section 2(a)(9) of the Act.
(f) "Chief Compliance Officer" means Cecilia Gondor or her successor(s) appointed by the Board, on the one hand, and by the board of directors of the Adviser, on the other hand.
(g) "Covered Security" means a security, except that it shall not include
(i) direct obligations of the Government of the United States;
(ii) bankers' acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements; and
(iii) shares issued by registered, open-end investment companies, including the Fund.
(h) "Independent Director" means a Director of the Fund who is not an "interested person" of the Fund within the meaning of Section 2(a)(19) of the Act.
(i) "Initial Public Offering" ("IPO") means an offering of securities registered under the Securities Act of 1933 ("Securities Act"), the issuer of which, immediately before the registration, was not subject to the reporting requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934.
3-
(j) "Investment Personnel" means:
(i) Any Advisory Person who, in connection with his regular functions or duties, makes or participates in making recommendations regarding the purchase or sale of securities by the Fund.
(ii) Any natural person who controls the Fund or Adviser and who obtains current information concerning recommendations made to the Fund regarding the purchase or sale of securities by the Fund.
(k) "Limited Offering" means an offering that is exempt from
registration under the Securities Act pursuant to Section 4(2) or
Section 4(6) or pursuant to rule 504, rule 505 or rule 506 under the
Securities Act.
(l) "Purchase or Sale of a Covered Security" includes the writing of an option to purchase or sell a Covered Security.
(m) "Security Held or to be Acquired" by the Fund means:
(i) any Covered Security which, within the most recent fifteen
(15) days:
(A) is or has been held by the Fund; or
(B) is being or has been considered by the Fund or the Adviser for purchase by the Fund; and
(ii) any option to purchase or sell, and any security convertible into or exchangeable for, a Covered Security described in paragraph (m)(i) of this section.
(n) "security" as defined in Section 2(a)(36) of the Act means any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into in a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a "security," or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.
2. PROHIBITED TRANSACTIONS
(a) No Access Person shall engage in any act, practice or course of conduct, which would violate the provisions of Rule 17j-1 under the Act, Section 206 of the Adviser Act or Rule 204A-1 under the Advisers Act.
4-
(b) No Access Person shall:
(i) purchase or sell, directly or indirectly, any security in which he has or by reason of such transaction acquires, any direct or indirect beneficial ownership and which to his or her actual knowledge at the time of such purchase or sale:
(A) is being considered for purchase or sale by the Fund, or
(B) is being purchased or sold by the Fund;
(ii) disclose to other persons the securities activities engaged in or contemplated for the various series of the Fund;
(iii) seek or accept anything of value, either directly or indirectly, from broker-dealers or other persons providing services to the Fund because of such person's association with the Fund. For the purposes of this provision, the following gifts from broker-dealers or other persons providing services to the Fund will not be considered to be in violation of this section:
(A) an occasional meal;
(B) an occasional ticket to a sporting event, the theater or comparable entertainment;
(C) a holiday gift of fruit or other foods, or other comparable gift.
(c) No Investment Personnel shall:
(i) Acquire directly or indirectly any beneficial ownership in any securities in an IPO if such security is being considered for purchase or sale by the Fund or is being purchased or sold by the Fund.
(ii) Acquire directly or indirectly any beneficial ownership in any securities in a Limited Offering without prior approval of the Chief Compliance Officer or other person designated by the Fund Board. Any person authorized to purchase securities in a Limited Offering shall disclose such investment when they play a part in any subsequent consideration of an investment by the Fund in the issuer. In such circumstances, the Fund's decision to purchase securities of the issuer shall be subject to independent review by the Fund's officers with no personal interest in the issuer.
(iii) Applicable only to Fund managers identified on Schedule A from time to time, buy or sell a Covered Security within at least seven (7) calendar days before and after any series of the Fund that he or she manages trades in that security. Any profits realized on trades within the proscribed period are required to be disgorged. Schedule A will be amended as necessary by the Fund Board to reflect changes in Adviser personnel.
5-
(iv) Profit in the purchase and sale, or sale and purchase, of the same (or equivalent) securities within 60 calendar days. Any profits realized on such short-term trades must be disgorged.
(v) Serve on the board of directors of any publicly traded company without prior authorization of the Chairman and/or President of the Fund. Any such authorization shall be based upon a determination that the board service would be consistent with the interests of the Fund and its shareholders.
3. EXEMPTED TRANSACTIONS
The prohibitions of Sections 2(b) and 2(c) 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 which are non-volitional on the part of either the Access Person or the Fund;
(c) purchases which are part of an automatic dividend reinvestment plan;
(d) purchases effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of its securities, to the extent such rights were acquired from such issuer, and sales of such rights so acquired; and
(e) purchases or sales other than those exempted in (a) through (d) of this Section 3 that have been authorized in advance and in writing by the Chief Compliance Officer following a specific determination that the transaction is consistent with the provisions of the Preamble.
4. COMPLIANCE PROCEDURES
(a) Pre-clearance
With the exception of the Independent Directors, all Access Persons shall receive prior approval from the Chief Compliance Officer or other officer designated by the Fund Board or Adviser's board, as the case may be, before purchasing or selling securities. Any approval is valid only for one day after authorization is received. If an Access Person is unable to effect the securities transaction during such period, he or she must re-obtain approval prior to effecting the securities transaction.
(b) Reporting Requirements
Initial & Annual Reports All Access Persons, except Independent Directors, shall disclose to the Chief Compliance Officer within 10 days of becoming an Access Person, and thereafter on an annual basis as of December 31(i) the name, number of shares and principal amount of each Covered Security in which the Access Person has any direct or indirect beneficial ownership and (ii) the name of any broker, dealer or bank with whom the Access Person maintains a securities account. The initial holdings report shall be made on the form attached as Exhibit A, and the annual holdings report shall be made on the form attached as Exhibit B. The information on the initial holdings and annual reports must be current as of a date no more than 45 days before the date the person becomes an Access Person.
6-
Quarterly Reports Every Access Person shall report to the Chief Compliance Officer the information described below with respect to transactions in any Covered Security in which such person has, or by reason of such transaction acquires, any direct or indirect beneficial ownership in the security; provided, however, that an Access Person shall not be required to make a report with respect to transactions effected for any account over which such person has no direct or indirect influence or control.
(i) Each Independent Director need only report a transaction in a Covered Security if such Director, at the time of that transaction, knew, or, in the ordinary course of fulfilling his official duties as a trustee, should have known that during the 15-day period immediately before or after the date of the Director's transaction, such Covered Security was purchased or sold by the Fund or was being considered for purchase or sale by the Fund or Adviser.
(ii) Reports required to be made under this Paragraph (b) shall be made not later than 30 days after the end of the calendar quarter. Every Access Person shall be required to submit a report for all periods, including those periods in which no securities transactions were effected. A report shall be made on the form attached hereto as Exhibit C or on any other form containing the following information:
With respect to any transaction during the quarter in a Covered Security in which the Access Person had any direct or indirect beneficial ownership:
(A) the date of the transaction, the name, the interest rate and maturity date (if applicable), the number of shares, and the principal amount of each Covered Security involved;
(B) the nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition);
(C) the price of the Covered Security at which the transaction was effected;
(D) the name of the broker, dealer or bank with or through which the transaction was effected; and
7-
(E) the date that the report is submitted by the Access Person.
With respect to any securities account established at a broker, dealer, or bank during the quarter for the direct or indirect benefit of the Access Person:
(A) the name of the broker, dealer or bank with whom the Access Person established the account;
(B) the date the account was established; and
(C) the date that the report is submitted by the Access Person.
Any report may contain a statement that the report shall not be construed as an admission by the person making such report that he or she has any direct or indirect beneficial ownership in the security to which the report relates.
(c) Provision of Brokers' Statements
With the exception of the Independent Directors, every Access Person shall direct their brokers to supply to the Chief Compliance Officer, on a timely basis, duplicate copies of the confirmation of all personal securities transactions and copies of all periodic statements for all securities accounts.
(d) Notification of Reporting Obligations
The Chief Compliance Officer shall notify each Access Person that he or she is subject to these reporting requirements, and shall deliver a copy of this Code of Ethics to each such person upon request.
(e) Certification of Compliance with Code of Ethics
With the exception of the Independent Directors, every Access Person shall certify in an annual report that:
(i) they have read and understand the Code of Ethics and recognize that they are subject thereto;
(ii) they have complied with the requirements of the Code of Ethics; and
(iii) they have reported all personal securities transactions required to be reported pursuant to the requirements of the Code of Ethics.
(f) Conflict of Interest
Every Access Person shall notify the Chief Compliance Officer of any personal conflict of interest relationship which may involve the Fund, such as the existence of any economic relationship between their transactions and securities held or to be acquired by any series of the Fund. Such notification shall occur in the pre-clearance process.
8-
(g) Review of Reports
The Chief Compliance Officer or her designate immediately shall
review all personal holdings reports, submitted by each Access
Person, including confirmations of personal securities transactions,
to ensure no trading has taken place in violation of Rule 17j-1,
Rule 204A-1 or the Code of Ethics. Any violations of the Code of
Ethics shall be reported to the Fund Board in accordance with
Section 5 of the Code. The Chief Compliance Officer shall maintain a
list of the personnel responsible for reviewing the transactions and
personal holdings reports.
5. REPORTING OF VIOLATIONS
(a) All apparent violations of this Code of Ethics shall be promptly reported to the Chief Compliance Officer.
(b) The Chief Compliance Officer shall promptly report to the Fund Board:
(i) all apparent violations of this Code of Ethics and the reporting requirements thereunder; and
(ii) any reported transaction in a Covered Security which was purchased or sold by the Fund within fifteen (15) days before or after the date of the reported transactions.
(c) When the Chief Compliance Officer finds that a transaction otherwise reportable to the Fund Board under Paragraph (b) of this Section could not reasonably be found to have resulted in a fraud, deceit or manipulative practice in violation of Rule 17j-1(a), it may, in its discretion, lodge a written memorandum of such finding and the reasons therefor with the reports made pursuant to this Code of Ethics, in lieu of reporting the transaction to the Fund Board.
(d) The Fund Board, or a committee of directors thereof created by the Fund Board for that purpose, shall consider reports made to the Fund Board hereunder and shall determine whether or not this Code of Ethics has been violated and what sanctions, if any, should be imposed in respect of transactions related to the Fund, and the board of the Adviser shall take such similar action in respect of transactions unrelated to the Fund.
6. ANNUAL REPORTING TO THE FUND BOARD
(a) The Chief Compliance Officer and Adviser shall furnish to the Fund Board, and the Fund Board must consider, an annual report relating to this Code of Ethics. Such annual report shall:
(i) describe any issues arising under the Code of Ethics or procedures during the past year;
9-
(ii) identify any material violations of this Code or procedures, including sanctions imposed in response to such violations during the past year;
(iii) identify any recommended changes in the existing restrictions or procedures based upon the Fund's experience under its Code of Ethics, evolving industry practices or developments in applicable laws or regulations; and
(iv) certify that the Fund, Adviser and principal underwriter have adopted procedures reasonably necessary to prevent Access Persons from violating the Code of Ethics.
7. SANCTIONS
Upon discovering a violation of this Code, the Fund Board or the board of the Adviser, as the case may be, may impose such sanctions as they deem appropriate, including, among other things, a letter of censure or suspension or termination of the employment of the violator.
8. RETENTION OF RECORDS
This Code of Ethics, a list of all persons required to make reports hereunder from time to time, a copy of each report made by an Access Person hereunder, a list of all persons responsible for reviewing the reports required hereunder, a record of any decision and the reasons supporting the decision to approve the acquisition by Investment Personnel of securities in a Limited Offering, each memorandum made by the Chief Compliance Officer hereunder and a record of any violation hereof and any action taken as a result of such violation, shall be maintained by the Fund as required under Rule 17j-1 and by the Adviser as required under Rule 204-2.
9. ADOPTION AND APPROVAL
The Fund Board, including a majority of Independent Directors, shall approve this Code of Ethics and any material changes to the Code.
Before approving this Code or any amendment to this Code, the Fund Board shall have received a certification from the Fund and the Adviser that it has adopted procedures reasonably necessary to prevent Access Persons from violating the Code.
Dated: ____________________
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SCHEDULE A
Portfolio Manager
Thomas J. Herzfeld
11-
THOMAS J. HERZFELD ADVISORS, INC.
POLICY STATEMENT ON INSIDER TRADING
SECTION I. POLICY STATEMENT ON INSIDER TRADING
A. Policy Statement on Insider Trading
Thomas J. Herzfeld Advisors, Inc. (the "Adviser") forbids any director, officer or employee from trading, either personally or on behalf of a Client Account, on material nonpublic information, or communicating material nonpublic information to other persons in violation of the law. This conduct is frequently referred to as "insider trading". The Adviser's policy applies to every director, officer and employee and extends to activities within and outside their duties for the Adviser. Every officer and employee must read and retain a copy of this policy statement. Any questions regarding the Adviser's policy and procedures should be referred to the Chief Compliance Officer.
The term "insider trading" is not defined in the federal securities laws, but generally is used to refer to the use of material nonpublic information to trade in securities (whether or not one is an "insider") or to communications of material nonpublic information to others.
While the law concerning insider trading is not static, it is generally understood that the law prohibits:
i) trading by an insider, while in possession of material nonpublic information, or
ii) trading by a non-insider, while in possession of material nonpublic information, where the information either was disclosed to the non-insider in violation of an insider's duty to keep it confidential or was misappropriated, or
iii) communicating material nonpublic information to others.
The elements of insider trading and the penalties for such unlawful conduct are discussed below. If, after reviewing this policy statement, you have any questions, you should consult the Adviser's Chief Compliance Officer, Cecilia Gondor, or her successor.
2. Who is an Insider?
The concept of "insider" is broad. It includes partners and employees of a company. In addition, a person can be a "temporary insider" if he or she enters into a special confidential relationship in the conduct of a company's affairs and as a result is given access to information solely for the company's purposes. A temporary insider can include, among others, a company's attorneys, accountants, consultants, bank lending officers, and the employees of such organizations. In addition, the Adviser may become a temporary insider of a company it advises or for which it performs other services. According to the U.S. Supreme Court, the company must expect the outsider to keep the disclosed nonpublic information confidential and the relationship must at least imply such a duty before the outsider will be considered an insider.
3. What is Material Information?
Trading on inside information is not a basis for liability unless the information is material. "Material information" generally is defined as information for which there is a substantial likelihood that a reasonable investor would consider it important in making his or her investment decisions, or information that is reasonably certain to have a substantial effect on the price of a company's securities. Information that managing members and employees should consider material includes, but is not limited to: dividend changes, earnings estimates, changes in previously released earnings estimates, significant merger or acquisition proposals or agreements, major litigation, liquidation problems, and extraordinary management developments.
Material information does not have to relate to a company's business. For example, in Carpenter v. U.S., 108 U.S. 316 (1987), the Supreme Court considered material certain information about the contents of a forthcoming newspaper column that was expected to affect the market price of a security. In that case, a Wall Street Journal reporter was found criminally liable for disclosing to others the dates that reports on various companies would appear in the Journal and whether those reports would be favorable or not.
4. What is Nonpublic Information?
Information is nonpublic until it has been effectively communicated to the market place. One must be able to point to some fact to show that the information is generally public. For example, information found in a report filed with the SEC, or appearing in Dow Jones, Reuters Economic Services, The Wall Street Journal or other publications of general circulation would be considered public.
5. Basis for Liability.
i) fiduciary duty theory
In 1980, the Supreme Court found that there is no
general duty to disclose before trading on material
nonpublic information, but that such a duty arises only
where there is a fiduciary relationship. That is, there
must be a relationship between the parties to the
transaction such that one party has a right to expect
that the other party will disclose any material
nonpublic information or refrain from trading. Chiarella
v. U.S., 445 U.S. 22 (1980).
In Dirks v. SEC, 463 U.S. 646 (1983), the Supreme Court stated alternate theories under which non-insiders can acquire the fiduciary duties of insiders: they can enter into a confidential relationship with the company through which they gain information (i.e., attorneys, accountants), or they can acquire a fiduciary duty to the company's shareholders as "tippees" if they are aware or should have been aware that they have been given confidential information by an insider who has violated his fiduciary duty to the company's shareholders.
However, in the "tippee" situation, a breach of duty occurs only if the insider personally benefits, directly or indirectly from the disclosure. The benefit does not have to be pecuniary, but can be a gift, a reputational benefit that will translate into future earnings, or even evidence of a relationship that suggests a quid pro quo.
ii) misappropriation theory
Another basis for insider trading liability is the "misappropriation" theory, where liability is established when trading occurs on material nonpublic information that was stolen or misappropriated from any other person. In U.S. v. Carpenter, supra, the Court found, in 1987, a columnist defrauded The Wall Street Journal when he stole information from the Journal and used it for trading in the securities markets. It should be noted that the misappropriation theory can be used to reach a variety of individuals not previously thought to be encompassed under the fiduciary duty theory.
6. Penalties for Insider Trading
Penalties for trading on or communicating material nonpublic information are severe, both for individuals involved in such unlawful conduct and their employers. A person can be subject to some or all of the penalties below even if he or she does not personally benefit from the violation. Penalties include:
i) civil injunctions
ii) treble damages
iii) disgorgement of profits
iv) jail sentences
v) fines for the person who committed the violation of up to three times the profit gained or loss avoided, whether or not the person actually benefitted, and
vi) fines for the employer or other controlling person of up to the greater of $1,000,00 or three times the amount of the profit gained or loss avoided.
In addition, any violation of this policy statement can be expected to result in serious sanctions by the Adviser, including dismissal of the persons involved.
SECTION II. PROCEDURES TO IMPLEMENT INSIDER TRADING POLICY
The following procedures have been established to aid the officers and employees of Thomas J. Herzfeld Advisors, Inc. to avoid insider trading, and to aid the Adviser in preventing, detecting and imposing sanctions against insider trading. Every officer and employee of the Adviser must follow these procedures or risk serious sanctions, including dismissal, substantial personal liability and criminal penalties. If you have any questions about these procedures, you should consult the Adviser's Chief Compliance Officer.
1. Identifying Inside Information
Before trading for yourself or others, including Client Accounts, in the securities of a company about which you may have potential inside information, ask yourself the following questions:
i) Is the information material? Is this information that an investor would consider important in making his or her investment decisions? Is this information that would substantially effect the market price of the securities if generally disclosed?
ii) Is the information nonpublic? To whom has this information been provided? Has the information been effectively communicated to the marketplace by being published in Reuters, The Wall Street Journal, or other publications of general circulation?
If, after consideration of the above, you believe that the information is material and nonpublic, or if you have questions as to whether the information is material and nonpublic, you should take the following steps.
iii) Report the matter immediately to the Chief Compliance Officer.
iv) Do not purchase or sell the securities on behalf of yourself or others, including Client Accounts.
v) Do not communicate the information inside or outside the Adviser, other than to the Chief Compliance Office.
vi) After the Chief Compliance Officer has reviewed the issue, you will be instructed to continue the prohibitions against trading and communication, or you will be allowed to trade and communicate the information.
2. Personal Security Trading. All officers and employees of the Adviser (other than managing members and employees who are required to report their securities transactions to a registered investment company in accordance with a Code of Ethics) shall submit to the compliance officer, on a quarterly basis, a report of every securities transaction in which they, their families (including the spouse, minor children and adults living in the same household as the managing member or employee), and Funds of which they are trustees or in which they have a beneficial interest have participated, or at such lesser intervals as may be required from time to time. The report shall include the name of the security, date of the transaction, quantity, price, and broker-dealer through which the transaction was effected. All managing members and employees must also instruct their broker(s) to supply the Chief Compliance Officer, on a timely basis, with duplicate copies of confirmations of all personal securities transactions and copies of all periodic statements for all securities accounts.
3. Restricting Access to Material Non-public Information. Any information in your possession that you identify as material and non-public may not be communicated other than in the course of performing your duties to anyone, including persons within your company, except as provided in paragraph 1 above. In addition, care should be taken so that such information is secure. For example, files containing material non-public information should be sealed and access to computer files containing material non-public information should be restricted.
4. Resolving Issues Concerning Insider Trading. If, after consideration of the items set forth in paragraph 1, doubt remains as to whether information is material or non-public, or if there is any unresolved question as to the applicability or interpretation of the foregoing procedures, or as to the propriety of any action, it must be discussed with the Chief Compliance Officer before trading or communicating the information to anyone.
SECTION III. SUPERVISION
The role of the Chief Compliance Officer is critical to the implementation and maintenance of this Statement on Insider Trading. These supervisory procedures can be divided into two classifications, (1) the prevention of insider trading, and (2) the detection of insider trading.
1. Prevention of Insider Trading:
To prevent insider trading the Chief Compliance Officer should:
(a) answer promptly any questions regarding the Statement on Insider Trading;
(b) resolve issues of whether information received by an officer or employee is material and non-public;
(c) review and ensure that officers and employees review, at least annually, and update as necessary, the Statement on Insider Trading; and
(d) when it has been determined that an officer or employee has material non-public information,
(i) implement measures to prevent dissemination of such information, and
(ii) if necessary, restrict officers, directors, and employees from trading the securities. 2. Detection of Insider Trading:
To detect insider trading, the Chief Compliance Officer should:
(a) review the trading activity reports filed by each officer and employee, to ensure no trading took place in securities in which the Adviser has material non-public information;
(b) review the trading activity of the mutual funds managed by the Adviser;
(c) coordinate, if necessary, the review of such reports with other appropriate officers, members, trustees or employees of the Adviser and any mutual funds managed by the Adviser.
3. Special Reports to Management:
Promptly, upon learning of a potential violation of the Statement on Insider Trading, the Chief Compliance Officer must prepare a written report to management of the Adviser, and provide a copy of such report to the board of directors of the any mutual funds managed by the Adviser, providing full details and recommendations for further action.
4. Annual Reports:
On an annual basis, the Chief Compliance Officer of the Adviser will prepare a written report to the management of the Adviser, and provide a copy of such report to the board of directors of the any mutual funds managed by the Adviser, setting forth the following:
(a) a summary of the existing procedures to detect and prevent insider trading;
(b) full details of any investigation, either internal or by a regulatory agency, of any suspected insider trading and the results of such investigation;
(c) an evaluation of the current procedures and any recommendations for improvement.
The Undersigned has read, understands and agrees to abide by the foregoing Insider Trading Policy and has retained a copy of the said document.
EXHIBIT A
CODE OF ETHICS
INITIAL HOLDINGS REPORT
To the Chief Compliance Officer of The Herzfeld Caribbean Basin Fund, Inc. and Thomas J. Herzfeld Advisors, Inc.
1. I hereby acknowledge receipt of a copy of the Code of Ethics and Insider Trading Policy for The Herzfeld Caribbean Basin Fund, Inc.(the "Fund") and Thomas J. Herzfeld Advisors, Inc. (the "Adviser").
2. I have read and understand the Code and recognize that I am subject thereto in the capacity of an "Access Person."
3. Except as noted below, I hereby certify that I have no knowledge of the existence of any personal conflict of interest relationship which may involve the Fund, such as any economic relationship between my transactions and securities held or to be acquired by the Fund or any of its series.
4. As of the date below I had a direct or indirect beneficial ownership interest in the following securities:
Type of Interest
Name of Securities Number of Shares (Direct or Indirect)
------------------ ---------------- --------------------
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5. As of the date below, the following is a list of all brokers, dealers or banks with whom I maintain an account in which securities are held for my direct or indirect benefit:
Type of Interest
Firm Account (Direct or Indirect)
---- ------- --------------------
Date: Signature:
------------------ -------------------------------------
Print Name:
------------------------------------
Title:
-----------------------------------------
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EXHIBIT B
CODE OF ETHICS
ANNUAL HOLDINGS REPORT
To the Chief Compliance Officer of The Herzfeld Caribbean Basin Fund, Inc. and Thomas J. Herzfeld Advisors, Inc.
1. I have read and understand the Code of Ethics and recognize that I am subject thereto in the capacity of an "Access Person."
2. I hereby certify that, during the year ended December 31, ____, I have complied with the requirements of the Code and I have reported all securities transactions required to be reported pursuant to the Code.
3. Except as noted below, I hereby certify that I have no knowledge of the existence of any personal conflict of interest relationship which may involve the Fund, such as any economic relationship between my transactions and securities held or to be acquired by the Fund or any of its Series.
4. As of December 31, ____, I had a direct or indirect beneficial ownership interest in the following securities:
Type of Interest
Name of Securities Number of Shares (Direct or Indirect)
------------------ ---------------- --------------------
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5. As of the December 31, ____ the following is a list of all brokers, dealers or banks with whom I maintain an account in which securities are held for my direct or indirect benefit:
Type of Interest
Firm Account (Direct or Indirect)
---- ------- ---------------------
Date: Signature:
------------------ -------------------------------------
Print Name:
------------------------------------
Title:
-----------------------------------------
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EXHIBIT C
SECURITIES TRANSACTIONS REPORT
FOR THE CALENDAR QUARTER ENDED: _____________
To the Chief Compliance Officer of The Herzfeld Caribbean Basin Fund, Inc. and Thomas J. Herzfeld Advisors, Inc.
During the quarter referred to above, the following transactions were effected in securities of which I had, or by reason of such transaction acquired, direct or indirect beneficial ownership, and which are required to be reported pursuant to the Code of Ethics adopted by the Fund.
SECURITY (including BROKER/ interest rate NATURE OF DEALER and maturity DOLLAR TRANSACTION OR BANK date, if DATE OF NO. OF AMOUNT OF (Purchase, Sale, THROUGH applicable) TRANSACTION SHARES TRANSACTION Other) PRICE WHOM EFFECTED ------------- ----------- ------ ----------- ---------------- ----- ------------- |
During the quarter referred to above, the following accounts were established by me in which securities were held for my direct or indirect benefit:
FIRM NAME DATE THE ACCOUNT WAS
(of broker, dealer or bank) ESTABLISHED ACCOUNT NUMBER
--------------------------- -------------------- --------------
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This report (i) excludes transactions with respect to which I had no direct or indirect influence or control, (ii) other transactions not required to be reported, and (iii) is not an admission that I have or had any direct or indirect beneficial ownership in the securities listed above.
Except as noted on the reverse side of this report, I hereby certify that I have no knowledge of the existence of any personal conflict of interest relationship which may involve the Fund, such as the existence of any economic relationship between my transactions and securities held or to be acquired by the Fund or any of its series.
Date: Signature:
------------------ -------------------------------------
Print Name:
------------------------------------
Title:
-----------------------------------------
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