As filed with the Securities and Exchange Commission on May 27, 2020
Securities Act File No. 333-236891
Investment Company Act File No. 811-07642
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
Registration Statement | ||||
under |
the Securities Act of 1933 | ☒ | |||
Pre-Effective Amendment No. 1 | ☒ |
Post-Effective Amendment No. | ☐ | |||
and/or | ||||
Registration Statement | ||||
Under |
the Investment Company Act of 1940 | ☒ | |||
Amendment No. 4 | ☒ |
BlackRock MuniAssets Fund, Inc.
(Exact Name of Registrant as Specified In Charter)
100 Bellevue Parkway
Wilmington, Delaware 19809
(Address of Principal Executive Offices)
Registrants Telephone Number, including Area Code: (800) 882-0052
John M. Perlowski, President
BlackRock MuniAssets Fund, Inc.
55 East 52nd Street
New York, New York 10055
(Name and Address of Agent For Service)
Copies of information to:
Margery K. Neale, Esq.
Elliot J. Gluck, Esq.
Willkie Farr & Gallagher LLP
787 Seventh Avenue
New York, New York 10019
Approximate Date of Proposed Public Offering: From time to time 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, other than securities offered in connection with a dividend reinvestment plan, check the following box. ☒
It is proposed that this filing will become effective (check appropriate box)
☒ |
when declared effective pursuant to section 8(c). |
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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Title of Securities Being Registered |
Amount Being Registered |
Proposed Maximum Offering Price Per Unit |
Proposed Maximum Aggregate Offering Price(1) |
Amount of Registration Fee |
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Shares of Common Stock, $0.10 par value |
5,500,000 | $16.15 | $88,825,000 | $11,529.49 | ||||
Rights to Purchase Shares of Common Stock(2) |
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Total |
$88,825,000 | $11,529.49(3) | ||||||
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(1) |
Estimated solely for the purpose of determining the registration fee in accordance with Rule 457(c) under the Securities Act of 1933 based on the average of the high and low sales prices of the shares of common stock on February 27, 2020, as reported on the New York Stock Exchange. The proposed maximum offering price per security will be determined, from time to time, by the Registrant in connection with the sale by the Registrant of the securities registered under this Registration Statement. |
(2) |
No separate consideration will be received by the Registrant. Any shares issued pursuant to an offering of rights to purchase shares of common stock, including any shares issued pursuant to an over-subscription privilege or a secondary over-subscription privilege, will be shares registered under this Registration Statement. |
(3) |
Previously paid. |
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
The information in this Preliminary Prospectus is not complete and may be changed. BlackRock MuniAssets Fund, Inc. may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Preliminary Prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED MAY 27, 2020
PRELIMINARY BASE PROSPECTUS
$88,825,000
BlackRock MuniAssets Fund, Inc.
Shares of Common Stock
Rights to Purchase Shares of Common Stock
BlackRock MuniAssets Fund, Inc. (the Fund, we, us or our) is a diversified, closed-end management investment company. The Funds investment objective is to provide high current income exempt from Federal income taxes by investing primarily in a portfolio of medium to lower grade or unrated municipal obligations the interest on which, in the opinion of bond counsel to the issuer, is exempt from Federal income taxes.
We may offer, from time to time, in one or more offerings, shares of our common stock, par value $0.10 per share (common shares), or subscription rights to purchase our common shares. Common shares may be offered at prices and on terms to be set forth in one or more supplements to this Prospectus (each, a Prospectus Supplement). You should read this Prospectus and the applicable Prospectus Supplement carefully before you invest in our common shares.
Our common shares may be offered directly to one or more purchasers, including existing shareholders in a rights offering, through agents designated from time to time by us, or to or through underwriters or dealers. The Prospectus Supplement relating to the offering will identify any agents or underwriters involved in the sale of our common shares, and will set forth any applicable purchase price, fee, commission or discount arrangement between us and our agents or underwriters, or among our underwriters, or the basis upon which such amount may be calculated. The Prospectus Supplement relating to any offering of rights will set forth the number of common shares issuable upon the exercise of each right (or number of rights) and the other terms of such rights offering. We may not sell any of our common shares through agents, underwriters or dealers without delivery of a Prospectus Supplement describing the method and terms of the particular offering of our common shares.
Our common shares are listed on the New York Stock Exchange (NYSE) under the symbol MUA. The last reported sale price of our common shares, as reported by the NYSE on May 26, 2020 was $13.26 per common share. The net asset value of our common shares at the close of business on May 26, 2020 was $13.26 per common share. Rights issued by the Fund may also be listed on a securities exchange.
Investing in the Funds common shares involves certain risks that are described in the Risks section beginning on page 49 of this Prospectus. Certain of these risks are summarized in Prospectus SummarySpecial Risk Considerations beginning on page 5.
Shares of closed-end management investment companies frequently trade at a discount to their net asset value. The Funds common shares have traded at a discount to net asset value, including during recent periods. If the Funds common shares trade at a discount to its net asset value, the risk of loss may increase for purchasers in a public offering.
Neither the Securities and Exchange Commission (SEC) nor any state securities commission has approved or disapproved these securities or passed upon the adequacy of this Prospectus. Any representation to the contrary is a criminal offense.
This Prospectus, together with any Prospectus Supplement, sets forth concisely the information about the Fund that a prospective investor should know before investing. You should read this Prospectus and applicable Prospectus Supplement, which contain important information, before deciding whether to invest in the common shares. You should retain the Prospectus and Prospectus Supplement for future reference. A Statement of Additional Information (SAI), dated [], 2020, containing additional information about the Fund, has been filed with the SEC and, as amended from time to time, is incorporated by reference in its entirety into this Prospectus. You can review the table of contents for the SAI on page 115 of this Prospectus. You may call (800) 882-0052, visit the Funds website (http://www.blackrock.com) or write to the Fund to obtain, free of charge, copies of the SAI and the Funds semi-annual and annual reports, as well as to obtain other information about the Fund or to make shareholder inquiries. The SAI, as well as the Funds semi-annual and annual reports, are also available for free on the SECs website (http://www.sec.gov). You may also e-mail requests for these documents to publicinfo@sec.gov. Information contained in, or that can be accessed through, the Funds website is not part of this Prospectus.
You should not construe the contents of this Prospectus as legal, tax or financial advice. You should consult with your own professional advisors as to the legal, tax, financial or other matters relevant to the suitability of an investment in the Fund.
The Funds common shares do not represent a deposit or an obligation of, and are not guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.
Prospectus dated [], 2020
Beginning on January 1, 2021, as permitted by regulations adopted by the SEC, paper copies of the Funds shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the reports from BlackRock or from your financial intermediary, such as a broker-dealer or bank. Instead, the reports will be made available on a website, and you will be notified by mail each time a report is posted and provided with a website link to access the report.
You may elect to receive all future reports in paper free of charge. If you hold accounts directly with BlackRock, you can call Computershare at 1-800-699-1236 to request that you continue receiving paper copies of your shareholder reports. If you hold accounts through a financial intermediary, you can follow the instructions included with this disclosure, if applicable, or contact your financial intermediary to request that you continue to receive paper copies of your shareholder reports. Please note that not all financial intermediaries may offer this service. Your election to receive reports in paper will apply to all funds advised by BlackRock Advisors, LLC or its affiliates, or all funds held with your financial intermediary, as applicable.
If you already elected to receive shareholder reports electronically, you will not be affected by this change and you need not take any action. You may elect to receive electronic delivery of shareholder reports and other communications by contacting your financial intermediary, if you hold accounts through a financial intermediary. Please note that not all financial intermediaries may offer this service.
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You should rely only on the information contained in, or incorporated by reference into, this Prospectus and any related Prospectus Supplement in making your investment decisions. The Fund has not authorized any person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. The Fund is not making an offer to sell the common shares in any jurisdiction where the offer or sale is not permitted. You should assume that the information in this Prospectus and any Prospectus Supplement is accurate only as of the dates on their covers. The Funds business, financial condition and prospects may have changed since the date of its description in this Prospectus or the date of its description in any Prospectus Supplement.
This is only a summary of certain information relating to BlackRock MuniAssets Fund, Inc. This summary may not contain all of the information that you should consider before investing in our common shares. You should consider the more detailed information contained in the Prospectus and in any related Prospectus Supplement and in the Statement of Additional Information (SAI) before purchasing common shares.
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Investment Objective and Policies |
The Funds investment objective is to provide high current income exempt from U.S. federal income taxes by investing primarily in a portfolio of medium to lower grade or unrated municipal obligations the interest on which, in the opinion of bond counsel to the issuer, is exempt from U.S. federal income taxes. The Fund seeks to achieve its investment objective by investing at least 80% of its assets, except during temporary defensive periods, in a portfolio of obligations issued by or on behalf of states, territories and possessions of the United States and their political subdivisions, agencies or instrumentalities paying interest which, in the opinion of bond counsel to the issuer, is exempt from Federal income taxes (Municipal Bonds). The Fund at all times, except during temporary defensive periods, will maintain at least 65% of its assets in Municipal Bonds which are rated in any one of the medium and lower rating categories of a nationally recognized statistical rating organization or are unrated. These ratings are currently Baa (Moodys Investor Service Inc. (Moodys)) or BBB (S&P Global Ratings (S&P) and Fitch Ratings, Inc. (Fitch)) or lower. These are fundamental policies of the Fund and, therefore, may not be changed without the approval of a majority of the Funds outstanding voting shares as defined in the 1940 Act. The Fund may invest directly in such securities or synthetically through the use of derivatives. The Fund is not intended as, and you should not construe it to be, a complete investment program. There can be no assurance that the Funds investment objective will be achieved or that the Funds investment program will be successful. See The Funds InvestmentsInvestment Objective and Policies. |
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The Fund has the authority to invest as much as 35% of its total assets in Municipal Bonds in the higher rating categories of nationally recognized statistical rating organizations (ratings of A or higher by Moodys, S&P or Fitch or comparable unrated securities). In addition, the Fund reserves the right to temporarily invest more than 20% of its total assets in short-term municipal securities, or short-term taxable money market securities (including commercial paper, certificates of deposit and repurchase agreements) (such shorter-term obligations being referred to herein as Temporary Investments) for defensive purposes when, in the opinion of BlackRock Advisors, LLC (the Advisor), prevailing market or financial conditions warrant. The Fund does not invest more than 25% of its total assets (taken at market value) in Municipal Bonds whose issuers are located in the same state. As used throughout this Prospectus and the Statement of Additional Information, total assets of the Fund means the Funds net assets plus the amount of any borrowings for investment purposes. |
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Ordinarily, the Fund does not intend to realize significant interest income that is subject to Federal income taxes. However, the Fund may invest all or a portion of its assets in certain tax-exempt securities classified as private activity bonds (PABs) (in general, bonds that benefit non-governmental entities) that may subject certain investors in the Fund to a Federal alternative minimum tax. |
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The Fund may invest in securities not issued by or on behalf of a state or territory or by an agency or instrumentality thereof, if the Fund receives an opinion of counsel to the issuer that such securities pay interest that is excludable from gross income for federal income tax purposes (Non-Municipal Tax-Exempt Securities). Non-Municipal Tax-Exempt Securities could include trust certificates, partnership interests or other instruments evidencing interest in one or more long-term Municipal Bonds. Non-Municipal Tax-Exempt Securities also may include securities issued by other investment companies that invest in Municipal Bonds, to the extent such investments are permitted by the Funds investment restrictions and applicable law. |
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The Fund ordinarily does not intend to realize significant investment income not exempt from federal income taxes. From time to time, the Fund may realize taxable capital gains. |
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Investments in lower rated Municipal Bonds generally provide a higher yield and are less affected by interest rate fluctuations than higher rated tax-exempt securities of similar maturity but are subject to greater overall market risk and are also subject to a greater degree of risk with respect to the ability of the issuer to meet its principal and interest obligations. See Appendix ARatings of Investments in the Statement of Additional Information. |
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The Fund seeks to reduce risk through investing in multiple issuers, credit analysis and monitoring of current developments regarding the obligor and trends in both the economy and financial markets. The Advisor will use various means to research the stability and/or potential for improvement of various municipal issuers in connection with the proposed purchase of their securities by the Fund. Evaluation of each Municipal Bond may include the analysis of financial performance, debt structure, economic factors and the administrative structure of the issuer. Additionally, the priority of liens and the overall structure of the particular issue may be factors that will determine suitability for purchase. Further investigation may be performed and may include, among other things, discussions with project management, corporate officers and industry experts as well as site inspections, area analysis, and project and financial projection analysis. All purchases and sales also may be subject to the review of market data, economic projections and the performance of the financial markets. Certain economic indicators also may be monitored. Additionally, the Advisor will vary the average maturity of the Funds portfolio securities based upon its assessment of economic and market conditions. |
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The Fund may engage in various derivative transactions or portfolio strategies (Strategic Transactions) for duration management and other risk management purposes, subject to the Funds investment restrictions. The Fund may purchase and sell futures contracts, enter into various interest rate transactions and swap contracts (including, but not limited to, credit default swaps) and may purchase and sell exchange-listed and OTC put and call options on securities and swap contracts, financial indices and futures contracts and use other derivative instruments or management techniques. The Fund is not required to use derivatives or other portfolio strategies to seek to increase return or to seek to hedge its portfolio and may choose not to do so. The Fund cannot guarantee that any Strategic Transaction it uses will work. See The Funds InvestmentsStrategic Transactions. |
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Unless otherwise stated herein or in the SAI, the Funds investment policies are non-fundamental policies and may be changed by the Board without prior shareholder approval. |
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For a discussion of risk factors that may affect the Funds ability to achieve its investment objective, see Risks. |
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Leverage |
The Fund currently does not intend to borrow money or issue debt securities or shares of preferred stock (preferred shares). The Fund is, however, permitted to borrow money or issue debt securities in an amount up to 33 1/3% of its Managed Assets (50% of its net assets), and issue preferred shares in an amount up to 50% of its Managed Assets (100% of its net assets). Managed Assets means the total assets of the Fund (including any assets attributable to money borrowed for investment purposes) minus the sum of the Funds accrued liabilities (other than money borrowed for investment purposes). Although it has no present intention to do so, the Fund reserves the right to borrow money from banks or other financial institutions, or issue debt securities or preferred shares, in the future if it believes that market conditions would be conducive to the successful implementation of a leveraging strategy through borrowing money or issuing debt securities or preferred shares. See Leverage. |
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As part of its leverage strategy, the Fund may invest in leveraged residual certificates issued by tender option bonds (TOBs). The residual interest municipal tender option bonds (TOB Residuals) in which the Fund invests pay interest or income that, in the opinion of counsel to the issuer, is exempt from regular federal income tax. The Advisor will not conduct its own analysis of the tax status of the interest or income paid by TOB Residuals held by the Fund, but will rely on the opinion of counsel to the issuer. Although volatile, TOB Residuals typically offer the potential for yields exceeding the yields available on fixed rate municipal bonds with comparable credit quality, coupon, call provisions and maturity. The Fund may invest in TOB Residuals for the purpose of using economic leverage as a more flexible alternative to the issuance of preferred shares. See LeverageTender Option Bond Transactions. |
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The use of leverage is subject to numerous risks. When leverage is employed, the Funds NAV, the market price of the common shares and the yield to holders of common shares will be more volatile than if leverage were not used. For example, a rise in short-term interest rates, which currently are near historically low levels, generally will cause the Funds NAV to decline more than if the Fund had not used leverage. A reduction in the Funds NAV may cause a reduction in the market price of the Funds common shares. |
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The Fund cannot assure you that the use of leverage will result in a higher yield on the Funds common shares. Any leveraging strategy the Fund employs may not be successful. See RisksLeverage Risk. |
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Investment Advisor |
BlackRock Advisors, LLC is the Funds investment adviser. The Advisor receives an annual fee, payable monthly, in an amount equal to 0.55% of the average daily value of the Funds Net Assets. Net Assets means the total assets of the Fund minus the sum of its accrued liabilities. See Management of the FundInvestment Advisor. |
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Distributions |
The Fund intends to make regular monthly cash distributions of all or a portion of its net investment income to holders of the Funds common shares. Net capital gains, if any, will be distributed at least annually to holders of the Funds common shares. The Funds net investment income consists of all interest income accrued on portfolio assets less all expenses of the Fund. The Fund is required to allocate net capital gains and other taxable income, if any, received by the Fund among its shareholders on a pro rata basis in the year for which such capital gains and other income is realized. |
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Interest Rate Risk. The market value of bonds and other fixed-income securities changes in response to interest rate changes and other factors. Interest rate risk is the risk that prices of bonds and other fixed-income securities will increase as interest rates fall and decrease as interest rates rise. The Fund may be subject to a greater risk of rising interest rates due to the current period of historically low interest rates, including the Federal Reserves recent lowering of the target for the federal funds rate to a range of 0%-0.25% as part of its efforts to ease the economic effects of the coronavirus pandemic. There is a risk that interest rates will rise, which will likely drive down prices of bonds and other fixed-income securities. The magnitude of these fluctuations in the market price of bonds and other fixed-income securities is generally greater for those securities with longer maturities. Fluctuations in the market price of the Funds investments will not affect interest income derived from instruments already owned by the Fund, but will be reflected in the Funds NAV. The Fund may lose money if short-term or long-term interest rates rise sharply in a manner not anticipated by the Advisor. To the extent the Fund invests in debt securities that may be prepaid at the option of the obligor (such as mortgage-related securities), the sensitivity of such securities to changes in interest rates may increase (to the detriment of the Fund) when interest rates rise. Moreover, because rates on certain floating rate debt securities typically reset only periodically, changes in prevailing interest rates (and particularly sudden and significant changes) can be expected to cause some fluctuations in the NAV of the Fund to the extent that it invests in floating rate debt securities. These basic principles of bond prices also apply to U.S. Government securities. A security backed by the full faith and credit of the U.S. Government is guaranteed only as to its stated interest rate and face value at maturity, not its current market price. Just like other fixed-income securities, government-guaranteed securities will fluctuate in value when interest rates change. |
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The Funds use of leverage, as described below under Leverage, will tend to increase the Funds interest rate risk. The Fund may utilize certain strategies, including taking positions in futures or interest rate swaps, for the purpose of reducing the interest rate sensitivity of fixed-income securities held by the Fund and decreasing the Funds exposure to interest rate risk. The Fund is not required to hedge its exposure to interest rate risk and may choose not to do so. In addition, there is no assurance that any attempts by the Fund to reduce interest rate risk will be successful or that any hedges that the Fund may establish will perfectly correlate with movements in interest rates. |
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Issuer Risk. The value of fixed-income securities may decline for a number of reasons which directly relate to the issuer, such as management performance, financial leverage, reduced demand for the issuers goods and services, historical and prospective earnings of the issuer and the value of the assets of the issuer. |
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Credit Risk. Credit risk is the risk that one or more fixed-income securities in the Funds portfolio will decline in price or fail to pay interest or principal when due because the issuer of the security experiences a decline in its financial status. Credit risk is increased when a portfolio security is downgraded or the perceived creditworthiness of the issuer deteriorates. To the extent the Fund invests in below investment grade securities, it will be exposed to a greater amount of credit risk than a fund that only invests in investment grade securities. See RisksBelow Investment Grade Securities Risk. In addition, to the extent the Fund uses credit derivatives, such use will expose it to additional risk in the event that the bonds underlying the derivatives default. The degree of credit risk depends on the issuers financial condition and on the terms of the securities. |
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Prepayment Risk. During periods of declining interest rates, borrowers may exercise their option to prepay principal earlier than scheduled. For fixed rate securities, such payments often occur during periods of declining interest rates, forcing the Fund to reinvest in lower yielding securities, resulting in a possible decline in the Funds income and distributions to shareholders. This is known as prepayment or call risk. For premium bonds (bonds acquired at prices that exceed their par or principal value) purchased by the Fund, prepayment risk may be enhanced. Below investment grade securities frequently have call features that allow the issuer to redeem the security at dates prior to its stated maturity at a specified price (typically greater than par) only if certain prescribed conditions are met (i.e., call protection). For premium bonds (bonds acquired at prices that exceed their par or principal value) purchased by the Fund, prepayment risk may be enhanced. |
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Reinvestment Risk. Reinvestment risk is the risk that income from the Funds portfolio will decline if the Fund invests the proceeds from matured, traded or called fixed-income securities at market interest rates that are below the Fund portfolios current earnings rate. |
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Duration and Maturity Risk. The Fund has no set policy regarding portfolio maturity or duration of the fixed-income securities it may hold. The Advisor may seek to adjust the portfolios duration or maturity based on its assessment of current and projected market conditions and all other factors that the Advisor deems relevant. |
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Any decisions as to the targeted duration or maturity of any particular category of investments or of the Funds portfolio generally will be made based on all pertinent market factors at any given time. The Fund may incur costs in seeking to adjust the portfolios average duration or maturity. There can be no assurance that the Advisors assessment of current and projected market conditions will be correct or that any strategy to adjust the portfolios duration or maturity will be successful at any given time. In general, the longer the duration of any fixed-income securities in the Funds portfolio, the more exposure the Fund will have to the interest rate risks described above. See RisksFixed-Income Securities RiskDuration and Maturity Risk. |
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Nonpayment Risk. Municipal Bonds, like other debt obligations, are subject to the risk of nonpayment. The ability of issuers of municipal securities to make timely payments of interest and principal may be adversely impacted in general economic downturns and as relative governmental cost burdens are allocated and reallocated among federal, state and local governmental units. Such nonpayment would result in a reduction of income to the Fund and could result in a reduction in the value of the municipal security experiencing nonpayment and a potential decrease in the NAV of the Fund. |
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Spread Risk. Wider credit spreads and decreasing market values typically represent a deterioration of a debt securitys credit soundness and a perceived greater likelihood or risk of default by the issuer. See RisksFixed-Income Securities RiskSpread Risk. |
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Municipal Bond Market Risk. Economic exposure to the municipal securities market involves certain risks. The Funds economic exposure to municipal securities includes municipal securities in the Funds portfolio and municipal securities to which the Fund is exposed through the ownership of TOB Residuals. The municipal market is one in which dealer firms make markets in bonds on a principal basis using their proprietary capital, and during the financial crisis of 2007-2009 these firms capital was severely constrained. As a result, some firms were unwilling to commit their capital to purchase and to serve as a dealer for municipal securities. Certain municipal securities may not be registered with the SEC or any state securities commission and will not be listed on any national securities exchange. The amount of public information available about the municipal securities to which the Fund is economically exposed is generally less than that for corporate equities or bonds, and the investment performance of the Fund may therefore be more dependent on the analytical abilities of the Advisor than would be a fund investing solely in stocks or taxable bonds. The secondary market for municipal securities, particularly the below investment grade securities to which the Fund may be economically exposed, also tends to be less well-developed or liquid than many other securities markets, which may adversely affect the Funds ability to sell such securities at attractive prices or at prices approximating those at which the Fund currently values them. |
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In addition, many state and municipal governments that issue securities are under significant economic and financial stress and may not be able to satisfy their obligations. The ability of municipal issuers to make timely payments of interest and principal may be diminished during general economic downturns and as governmental cost burdens are reallocated among federal, state and local governments. The taxing power of any governmental entity may be limited by provisions of state constitutions or laws and an entitys credit will depend on many factors, including the entitys tax base, the extent to which the entity relies on federal or state aid, and other factors which are beyond the entitys control. In addition, laws enacted in the future by Congress or state legislatures or referenda could extend the time for payment of principal and/or interest, or impose other constraints on enforcement of such obligations or on the ability of municipalities to levy taxes. Issuers of municipal securities might seek protection under the bankruptcy laws. In the event of bankruptcy of such an issuer, holders of municipal securities could experience delays in collecting principal and interest and such holders may not, in all circumstances, be able to collect all principal and interest to which they are entitled. To enforce its rights in the event of a default in the payment of interest or repayment of principal, or both, the Fund may take possession of and manage the assets securing the issuers obligations on such securities, which may increase the Funds operating expenses. Any income derived from the Funds ownership or operation of such assets may not be tax-exempt or may fail to generate qualifying income for purposes of the income tests applicable to regulated investment companies. |
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Risk Factors and Special Considerations Relating to Municipal Bonds. The risks and special considerations involved in investment in Municipal Bonds vary with the types of instruments being acquired. Investments in Non-Municipal Tax-Exempt Securities may present similar risks, depending on the particular product. Certain instruments in which the Fund may invest may be characterized as derivative instruments. See The Funds InvestmentsDescription of Municipal Bonds and The Funds InvestmentsStrategic TransactionsFinancial Futures Transactions and Options. |
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The value of Municipal Bonds generally may be affected by uncertainties in the municipal markets as a result of legislation or litigation, including legislation or litigation that changes the taxation of Municipal Bonds or the rights of Municipal Bond holders in the event of a bankruptcy. Municipal bankruptcies are rare, and certain provisions of the U.S. Bankruptcy Code governing such bankruptcies are unclear. Further, the application of state law to Municipal Bond issuers could produce varying results among the states or among Municipal Bond issuers within a state. These uncertainties could have a significant impact on the prices of the Municipal Bonds in which the Fund invests. |
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Tax-Exempt Status Risk. In making investments, the Fund and the Advisor will rely on the opinion of issuers bond counsel and, in the case of derivative securities, sponsors counsel, on the tax-exempt status of interest on municipal obligations and payments under tax-exempt derivative securities. Neither the Fund nor the Advisor will independently review the bases for those tax opinions. If any of those tax opinions are ultimately determined to be incorrect or if events occur after the security is acquired that impact the securitys tax-exempt status, the Fund and its shareholders could be subject to substantial tax liabilities. An assertion by the Internal Revenue Service that a portfolio security is not exempt from U.S. federal income tax (contrary to indications from the issuer) could affect the Funds and its shareholders income tax liability for the current or past years and could create liability for information reporting penalties. In addition, an IRS assertion of taxability may cause the Fund to be ineligible to pay exempt-interest dividends or may impair the liquidity and the fair market value of the securities. |
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Taxability Risk. The Fund intends to minimize the payment of taxable income to shareholders by investing in tax-exempt or municipal securities in reliance at the time of purchase on an opinion of bond counsel to the issuer that the interest paid on those securities will be excludable from gross income for U.S. federal income tax purposes. Such securities, however, may be determined to pay, or have paid, taxable income subsequent to the Funds acquisition of the securities. In that event, the Internal Revenue Service may demand that the Fund pay U.S. federal income taxes on the affected interest income, and, if the Fund agrees to do so, the Funds yield could be adversely affected. In addition, the treatment of dividends previously paid or to be paid by the Fund as exempt interest dividends could be adversely affected, subjecting the Funds shareholders to increased U.S. federal income tax liabilities. Federal tax legislation may limit the types and volume of bonds the interest on which qualifies for a federal income tax-exemption. As a result, current legislation and legislation that may be enacted in the future may affect the availability of Municipal Bonds for investment by the Fund. In addition, future laws, regulations, rulings or court decisions may cause interest on municipal securities to be subject, directly or indirectly, to U.S. federal income taxation or interest on state municipal securities to be subject to state or local income taxation, or the value of state municipal securities to be subject to state or local intangible personal property tax, or may otherwise prevent the Fund from realizing the full current benefit of the tax-exempt status of such securities. Any such change could also affect the market price of such securities, and thus the value of an investment in the Fund. |
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Alternative Minimum Tax Risk. The Fund expects that a portion of the interest or income it produces will be includable in alternative minimum taxable income. Exempt interest dividends also are likely to be subject to state and local income taxes. Distributions of any capital gain or other taxable income will be taxable to shareholders. The Funds common shares may not be a suitable investment for investors who are subject to the federal alternative minimum tax or who would become subject to such tax by purchasing common shares. The suitability of an investment in common shares will depend upon a comparison of the after-tax yield likely to be provided from the Fund with that from comparable tax-exempt investments not subject to the alternative minimum tax, and from comparable fully taxable investments, in light of each such investors tax position. Special considerations apply to corporate investors. |
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Insurance Risk. Insurance guarantees that interest payments on a municipal security will be made on time and that the principal will be repaid when the security matures. Insurance is expected to protect the Fund against losses caused by a municipal security issuers failure to make interest and principal payments. However, insurance does not protect the Fund or its shareholders against losses caused by declines in a municipal securitys value. Also, the Fund cannot be certain that any insurance company will make the payments it guarantees. Certain significant providers of insurance for municipal securities incurred significant losses as a result of exposure to sub-prime mortgages and other lower credit quality investments that experienced defaults or otherwise suffered extreme credit deterioration during the financial crisis of 2007-2009. These losses have reduced the insurers capital and called into question their continued ability to perform their obligations under such insurance if they are called upon to do so in the future. While an insured municipal security will typically be deemed to have the rating of its insurer, if the insurer of a municipal security suffers a downgrade in its credit rating or the market discounts the value of the insurance provided by the insurer, the rating of the underlying municipal security will be more relevant and the value of the municipal security would more closely, if not entirely, reflect such rating. The Fund may lose money on its investment if the insurance company does not make payments it guarantees. If a municipal securitys insurer fails to fulfill its obligations or loses its credit rating, the value of the security could drop. |
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Yield and Ratings Risk. The yields on debt obligations are dependent on a variety of factors, including general market conditions, conditions in the particular market for the obligation, the financial condition of the issuer, the size of the offering, the maturity of the obligation and the ratings of the issue. The ratings of Moodys, S&P and Fitch, which are described in Appendix A to the SAI, represent their respective opinions as to the quality of the obligations they undertake to rate. Ratings, however, are general and are not absolute standards of quality. Consequently, obligations with the same rating, maturity and interest rate may have different market prices. Subsequent to its purchase by the Fund, a rated security may cease to be rated. The Advisor will consider such an event in determining whether the Fund should continue to hold the security. See RisksYield and Ratings Risk. |
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Below Investment Grade Securities Risk. The Fund may invest in securities that are rated, at the time of investment, below investment grade quality (rated Ba/BB or below, or judged to be of comparable quality by the Advisor), which are commonly referred to as high yield or junk bonds and are regarded as predominantly speculative with respect to the issuers capacity to pay interest and repay principal when due. The value of high yield, lower quality bonds is affected by the creditworthiness of the issuers of |
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the securities and by general economic and specific industry conditions. Issuers of high yield bonds are not perceived to be as strong financially as those with higher credit ratings. These issuers are more vulnerable to financial setbacks and recession than more creditworthy issuers, which may impair their ability to make interest and principal payments. Lower grade securities may be particularly susceptible to economic downturns. It is likely that an economic recession could severely disrupt the market for such securities and may have an adverse impact on the value of such securities. In addition, it is likely that any such economic downturn could adversely affect the ability of the issuers of such securities to repay principal and pay interest thereon and increase the incidence of default for such securities. The secondary market for lower grade securities may be less liquid than that for higher rated securities. Adverse conditions could make it difficult at times for the Fund to sell certain securities or could result in lower prices than those used in calculating the Funds NAV. Because of the substantial risks associated with investments in lower grade securities, you could lose money on your investment in common shares of the Fund, both in the short-term and the long-term. To the extent that the Fund invests in lower grade securities that have not been rated by a rating agency, the Funds ability to achieve its investment objective will be more dependent on the Advisors credit analysis than would be the case when the Fund invests in rated securities. See RisksBelow Investment Grade Securities Risk. |
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Unrated Securities Risk. Because the Fund may purchase securities that are not rated by any rating organization, the Advisor may, after assessing their credit quality, internally assign ratings to certain of those securities in categories similar to those of rating organizations. Some unrated securities may not have an active trading market or may be difficult to value, which means the Fund might have difficulty selling them promptly at an acceptable price. To the extent that the Fund invests in unrated securities, the Funds ability to achieve its investment objective will be more dependent on the Advisors credit analysis than would be the case when the Fund invests in rated securities. |
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Zero-Coupon Securities Risk. Zero-coupon securities are securities that are sold at a discount to par value and do not pay interest during the life of the security. The discount approximates the total amount of interest the security will accrue and compound over the period until maturity at a rate of interest reflecting the market rate of the security at the time of issuance. Upon maturity, the holder of a zero-coupon security is entitled to receive the par value of the security. |
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The Fund accrues income with respect to these securities for U.S. federal income tax and accounting purposes prior to the receipt of cash payments. Zero-coupon securities may be subject to greater fluctuation in value and less liquidity in the event of adverse market conditions than comparably rated securities that pay cash interest at regular intervals. |
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Further, to maintain its qualification for pass-through treatment under the federal tax laws, the Fund is required to distribute income to its shareholders and, consequently, may have to dispose of other, more liquid portfolio securities under disadvantageous circumstances or may have to leverage itself by borrowing in order to generate the cash to satisfy these distributions. The required distributions may result in an increase in the Funds exposure to zero-coupon securities. |
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In addition to the above-described risks, there are certain other risks related to investing in zero-coupon securities. During a period of severe market conditions, the market for such securities may become even less liquid. In addition, as these securities do not pay cash interest, the Funds investment exposure to these securities and their risks, including credit risk, will increase during the time these securities are held in the Funds portfolio. |
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Variable Rate Demand Obligations Risk. Variable rate demand obligations (VRDOs) are floating rate securities that combine an interest in a long-term municipal bond with a right to demand payment before maturity from a bank or other financial institution. If the bank or financial institution is unable to pay, the Fund may lose money. |
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Indexed and Inverse Floating Rate Securities Risk. Investments in inverse floaters, TOB Residuals and similar instruments expose the Fund to the same risks as investments in fixed-income securities and derivatives, as well as other risks, including those associated with leverage and increased volatility. An investment in these securities typically will involve greater risk than an investment in a fixed rate security. Distributions on inverse floaters, TOB Residuals and similar instruments will typically bear an inverse relationship to short-term interest rates and typically will be reduced or, potentially, eliminated as interest rates rise. Inverse floaters, TOB Residuals and similar instruments will underperform the market for fixed rate securities in a rising interest rate environment. Inverse floaters may be considered to be leveraged to the extent that their interest rates vary by a magnitude that exceeds the magnitude of the change in a reference rate of interest (typically a short-term interest rate). The leverage inherent in inverse floaters is associated with greater volatility in their market values. Investments in inverse floaters, TOB Residuals and similar instruments that have fixed-income securities underlying them will expose the Fund to the risks associated with those fixed-income securities and the values of those investments may be especially sensitive to changes in prepayment rates on the underlying fixed-income securities. |
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Investment and Market Discount Risk. An investment in the Funds common shares is subject to investment risk, including the possible loss of the entire amount that you invest. As with any stock, the price of the Funds common shares will fluctuate with market conditions and other factors. If shares are sold, the price received may be more or less than the original investment. Common shares are designed for long-term investors and the Fund should not be treated as a trading vehicle. Shares of closed-end management investment companies frequently trade at a discount from their NAV. This risk is separate and distinct from the risk that the Funds NAV could decrease as a result of its investment activities. At any point in time an investment in the Funds common shares may be worth less than the original amount invested, even after taking into account distributions paid by the Fund. During periods in which the Fund may use leverage, the Funds investment, market discount and certain other risks will be magnified. |
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Restricted and Illiquid Investments Risk. The Fund may invest without limitation in illiquid or less liquid investments or investments in which no secondary market is readily available or which are otherwise illiquid, including private placement securities. The Fund may not be able to readily dispose of such investments at prices that approximate those at which the Fund could sell such investments if they were more widely traded and, as a result of such illiquidity, the Fund may have to sell other |
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investments or engage in borrowing transactions if necessary to raise cash to meet its obligations. Limited liquidity can also affect the market price of investments, thereby adversely affecting the Funds NAV and ability to make dividend distributions. The financial markets in general, and certain segments of the mortgage-related securities markets in particular, have in recent years experienced periods of extreme secondary market supply and demand imbalance, resulting in a loss of liquidity during which market prices were suddenly and substantially below traditional measures of intrinsic value. During such periods, some investments could be sold only at arbitrary prices and with substantial losses. Periods of such market dislocation may occur again at any time. Privately issued debt securities are often of below investment grade quality, frequently are unrated and present many of the same risks as investing in below investment grade public debt securities. See RisksRestricted and Illiquid Investments Risk. |
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Investment Companies and ETFs Risk. Subject to the limitations set forth in the Investment Company Act and the Funds governing documents or as otherwise permitted by the SEC, the Fund may acquire shares in other investment companies, including exchange-traded funds (ETFs) or business development companies (BDCs), some of which may be affiliated investment companies. The market value of the shares of other investment companies may differ from their NAV. As an investor in investment companies, including ETFs or BDCs, the Fund would bear its ratable share of that entitys expenses, including its investment advisory and administration fees, while continuing to pay its own advisory and administration fees and other expenses (to the extent not offset by the Advisor through waivers). As a result, shareholders will be absorbing duplicate levels of fees with respect to investments in other investment companies, including ETFs or BDCs (to the extent not offset by the Advisor through waivers). |
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The securities of other investment companies, including ETFs or BDCs, in which the Fund may invest may be leveraged. As a result, the Fund may be indirectly exposed to leverage through an investment in such securities. An investment in securities of other investment companies, including ETFs or BDCs, that use leverage may expose the Fund to higher volatility in the market value of such securities and the possibility that the Funds long-term returns on such securities (and, indirectly, the long-term returns of the Funds common shares) will be diminished. |
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ETFs are generally not actively managed and may be affected by a general decline in market segments relating to its index. An ETF typically invests in securities included in, or representative of, its index regardless of their investment merits and does not attempt to take defensive positions in declining markets. |
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U.S. Government Securities Risk. U.S. Government debt securities generally involve lower levels of credit risk than other types of fixed-income securities of similar maturities, although, as a result, the yields available from U.S. Government debt securities are generally lower than the yields available from such other securities. Like other fixed-income securities, the values of U.S. Government securities change as interest rates fluctuate. |
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Leverage Risk. The Board has authorized the Fund to use economic leverage up to 25% of its total assets. The Fund currently intends to use economic leverage approximately equal to 15% of its total assets at the time the leverage is implemented, but may use economic leverage up to 25% of its total assets under the leverage policy set by the Board without further Board or shareholder approval. The Board could in the future authorize the Fund to use additional leverage up to the maximum amount permitted under the 1940 Act or change the 25% threshold at which Board approval is required to increase leverage, in each case without further shareholder approval. |
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The use of leverage creates an opportunity for increased common share net investment income dividends, but also creates risks for the holders of common shares. The Fund currently leverages assets through tender option bonds transactions. See RisksTender Option Bond Risk for details about the risks associated with the Funds use of TOB Residuals. The Fund cannot assure you that the use of leverage will result in a higher yield on the common shares. Any leveraging strategy the Fund employs may not be successful. |
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Leverage involves risks and special considerations for common shareholders, including: |
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the likelihood of greater volatility of NAV, market price and dividend rate of the common shares than a comparable portfolio without leverage;
the risk that fluctuations in interest rates or dividend rates on any leverage that the Fund must pay will reduce the return to the common shareholders;
the effect of leverage in a declining market, which is likely to cause a greater decline in the NAV of the common shares than if the Fund were not leveraged, which may result in a greater decline in the market price of the common shares;
leverage may increase operating costs, which may reduce total return. |
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The Fund currently does not intend to borrow money or issue debt securities or preferred shares, but may in the future borrow funds from banks or other financial institutions, or issue debt securities or preferred shares, as described in this Prospectus. Certain types of leverage the Fund may use may result in the Fund being subject to covenants relating to asset coverage and portfolio composition requirements. The Fund may be subject to certain restrictions on investments imposed by guidelines of one or more rating agencies, which may issue ratings for any debt securities or preferred shares issued by the Fund. The terms of any borrowings or these rating agency guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed by the Investment Company Act. The Advisor does not believe that these covenants or guidelines will impede it from managing the Funds portfolio in accordance with the Funds investment objective and policies. See RisksLeverage Risk. |
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Tender Option Bond Risk. The Fund currently leverages its assets through the use of TOB Residuals, which are derivative interests in municipal bonds. The TOB Residuals in which the Fund may invest pay interest or income that, in the opinion of counsel to the issuer of such TOB Residuals, is exempt from regular U.S. federal income tax. No independent investigation will be made to confirm the tax-exempt status of the interest or income paid by TOB Residuals held by the Fund. There is no assurance that the Funds strategy of using TOB Residuals to leverage its assets will be successful. |
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TOB Residuals represent beneficial interests in a special purpose trust formed for the purpose of holding municipal bonds contributed by one or more funds (a TOB Trust). A TOB Trust typically issues two classes of beneficial interests: short-term floating rate interests (TOB Floaters), which are sold to third party investors, and TOB Residuals, which are generally issued to the fund(s) that transferred municipal bonds to the TOB Trust. TOB Floaters may have first priority on the cash flow from the municipal bonds held by the TOB Trust and are enhanced with a liquidity support arrangement provided by a third party bank or other financial institution (the TOBs Liquidity Provider) which allows holders to tender their position at par (plus accrued interest). The Fund, as a holder of TOB Residuals, is paid the residual cash flow from the TOB Trust. As result, distributions on TOB Residuals will bear an inverse relationship to short-term municipal bond interest rates. Distributions on the TOB Residuals paid to the Fund will be reduced or, in the extreme, eliminated as short-term municipal interest rates rise and will increase when short-term municipal interest rates fall. The amount of such reduction or increase is a function, in part, of the amount of TOB Floaters sold by the TOB Trust relative to the amount of the TOB Residuals that it sells. The greater the amount of TOB Floaters sold relative to the TOB Residuals, the more volatile the distributions on the TOB Residuals will be. Short-term interest rates are at historic lows and may be more likely to rise in the current market environment.
The municipal bonds transferred to a TOB Trust typically are high grade municipal bonds. In certain cases, when municipal bonds transferred are lower grade municipal bonds, the TOB Trust transaction includes a credit enhancement feature that provides for the timely payment of principal and interest on the bonds to the TOB Trust by a credit enhancement provider. The TOB Trust would be responsible for the payment of the credit enhancement fee and the Fund, as a TOB Residual holder, would be responsible for reimbursement of any payments of principal and interest made by the credit enhancement provider.
Any economic leverage achieved through the Funds investment in TOB Residuals will increase the possibility that common share long-term returns will be diminished if the cost of the TOB Floaters issued by a TOB Trust exceeds the return on the securities in the TOB Trust. If the income and gains earned on municipal securities owned by a TOB Trust that issues TOB Residuals to the Fund are greater than the payments due on the TOB Floaters issued by the TOB Trust, the Funds returns will be greater than if it had not invested in the TOB Residuals.
Although the Fund generally would unwind a TOB transaction rather than try to sell a TOB Residual, if it did try to sell a TOB Residual, its ability to do so would depend on the liquidity of the TOB Residual. TOB Residuals have varying degrees of liquidity based, among other things, upon the liquidity of the underlying securities deposited in the TOB Trust. The market price of TOB Residuals is more volatile than the underlying municipal bonds due to leverage. |
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The leverage attributable to the Funds use of TOB Residuals may be called away on relatively short notice and therefore may be less permanent than more traditional forms of leverage. The TOB Trust may be collapsed without the consent of the Fund upon the occurrence of termination events, as defined in the TOB Trust agreements. Upon the occurrence of a termination event, a TOB Trust would be liquidated with the proceeds applied first to any accrued fees owed to the trustee of the TOB Trust, the remarketing agent of the TOB Floaters and the TOBs Liquidity Provider. Upon certain termination events, the holders of the TOB Floaters would be paid before the TOB Residual holders (i.e., the Fund) whereas in other termination events, the holders of TOB Floaters and the TOB Residual holders would be paid pro rata.
The Fund may invest in a TOB Trust on either a non-recourse or recourse basis. If the Fund invests in a TOB Trust on a recourse basis, it will typically enter into a reimbursement agreement with the TOBs Liquidity Provider pursuant to which the Fund is required to reimburse the TOBs Liquidity Provider the balance, if any, of the amount owed under the liquidity facility over the liquidation proceeds (the Liquidation Shortfall). As a result, if the Fund invests in a recourse TOB Trust, the Fund will bear the risk of loss with respect to any Liquidation Shortfall.
The use of TOB Residuals will require the Fund to earmark or segregate liquid assets in an amount equal to any TOB Floaters, plus any accrued but unpaid interest due on the TOB Floaters, issued by TOB Trusts sponsored by, or on behalf of, the Fund that are not owned by the Fund. The use of TOB Residuals may also require the Fund to earmark or segregate liquid assets in an amount equal to loans provided by the TOBs Liquidity Provider to the TOB Trust to purchase tendered TOB Floaters. While the segregated assets may be invested in liquid securities, they may not be used for other operational purposes. Consequently, the use of leverage through TOB Residuals may limit the Funds flexibility and may require that the Fund sell other portfolio investments to pay Fund expenses, to maintain assets in an amount sufficient to cover the Funds leveraged exposure or to meet other obligations at a time when it may be disadvantageous to sell such assets. Future regulatory requirements or SEC guidance may necessitate more onerous contractual or regulatory requirements, which may increase the costs or reduce the degree of potential economic benefits of TOB Trust transactions or limit the Funds ability to enter into or manage TOB Trust transactions.
The Fund structures and sponsors the TOB Trusts in which it holds TOB Residuals and has certain duties and responsibilities, which may give rise to certain additional risks including, but not limited to, compliance, securities law and operational risks.
The SEC and various federal banking and housing agencies recently adopted credit risk retention rules for securitizations (the Risk Retention Rules). The Risk Retention Rules would require the sponsor of a TOB Trust to retain at least 5% of the credit risk of the underlying assets supporting the TOB Trusts municipal bonds. The Risk Retention Rules may adversely affect the Funds ability to engage in TOB Trust transactions or increase the costs of such transactions in certain circumstances.
TOB Trusts constitute an important component of the municipal bond market. Any modifications or changes to the rules governing TOB Trusts may adversely impact the municipal market and the Fund, including through reduced demand for and liquidity of municipal bonds and increased financing costs for municipal issuers. The ultimate impact of any potential modifications on the TOB market and the overall municipal market is not yet certain. |
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Please see The Funds InvestmentsLeverageTender Option Bond Transactions for additional information. |
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Strategic Transactions and Derivatives Risk. The Fund may engage in various Strategic Transactions for duration management and other risk management purposes, including to attempt to protect against possible changes in the market value of the Funds portfolio resulting from trends in the securities markets and changes in interest rates or to protect the Funds unrealized gains in the value of its portfolio securities, to facilitate the sale of portfolio securities for investment purposes or to establish a position in the securities markets as a temporary substitute for purchasing particular securities or to enhance income or gain. Derivatives are financial contracts or instruments whose value depends on, or is derived from, the value of an underlying asset, reference rate or index (or relationship between two indices). The Fund also may use derivatives to add leverage to the portfolio and/or to hedge against increases in the Funds costs associated with any leverage strategy that it may employ. The use of Strategic Transactions to enhance current income may be particularly speculative. |
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Strategic Transactions involve risks. The risks associated with Strategic Transactions include (i) the imperfect correlation between the value of such instruments and the underlying assets, (ii) the possible default of the counterparty to the transaction, (iii) illiquidity of the derivative instruments, and (iv) high volatility losses caused by unanticipated market movements, which are potentially unlimited. Although both OTC and exchange-traded derivatives markets may experience a lack of liquidity, OTC non-standardized derivative transactions are generally less liquid than exchange-traded instruments. The illiquidity of the derivatives markets may be due to various factors, including congestion, disorderly markets, limitations on deliverable supplies, the participation of speculators, government regulation and intervention, and technical and operational or system failures. In addition, daily limits on price fluctuations and speculative position limits on exchanges on which the Fund may conduct its transactions in derivative instruments may prevent prompt liquidation of positions, subjecting the Fund to the potential of greater losses. Furthermore, the Funds ability to successfully use Strategic Transactions depends on the Advisors ability to predict pertinent securities prices, interest rates, currency exchange rates and other economic factors, which cannot be assured. The use of Strategic Transactions may result in losses greater than if they had not been used, may require the Fund to sell or purchase portfolio securities at inopportune times or for prices other than current market values, may limit the amount of appreciation the Fund can realize on an investment or may cause the Fund to hold a security that it might otherwise sell. Additionally, segregated or earmarked liquid assets, amounts paid by the Fund as premiums and cash or other assets held in margin accounts with respect to Strategic Transactions are not otherwise available to the Fund for investment purposes. |
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Exchange-traded derivatives and OTC derivative transactions submitted for clearing through a central counterparty are also subject to minimum initial and variation margin requirements set by the relevant clearinghouse, as well as possible margin requirements mandated by the SEC or the Commodity Futures Trading Commission (the CFTC). The CFTC and federal banking regulators also have imposed margin requirements on non-cleared OTC derivatives, and the SEC has proposed (but not yet finalized) such non-cleared margin requirements. As applicable, margin requirements may increase the overall costs for the Fund. |
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Many OTC derivatives are valued on the basis of dealers pricing of these instruments. However, the price at which dealers value a particular derivative and the price that the same dealers would actually be willing to pay for such derivative should the Fund wish or be forced to sell such position may be materially different. Such differences can result in an overstatement of the Funds NAV and may materially adversely affect the Fund in situations in which the Fund is required to sell derivative instruments. See RisksStrategic Transactions and Derivatives Risk. |
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Counterparty Risk. The Fund will be subject to credit risk with respect to the counterparties to the derivative contracts purchased by the Fund. Because derivative transactions in which the Fund may engage may involve instruments that are not traded on an exchange or cleared through a central counterparty but are instead traded between counterparties based on contractual relationships, the Fund is subject to the risk that a counterparty will not perform its obligations under the related contracts. If a counterparty becomes bankrupt or otherwise fails to perform its obligations due to financial difficulties, the Fund may experience significant delays in obtaining any recovery in bankruptcy or other reorganization proceedings. The Fund may obtain only a limited recovery, or may obtain no recovery, in such circumstances. Although the Fund intends to enter into transactions only with counterparties that the Advisor believes to be creditworthy, there can be no assurance that, as a result, a counterparty will not default and that the Fund will not sustain a loss on a transaction. In the event of the counterpartys bankruptcy or insolvency, the Funds collateral may be subject to the conflicting claims of the counterpartys creditors, and the Fund may be exposed to the risk of a court treating the Fund as a general unsecured creditor of the counterparty, rather than as the owner of the collateral. See RisksCounterparty Risk. |
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Risk Associated with Recent Market Events. Stresses associated with the 2008 financial crisis in the United States and global economies peaked approximately a decade ago, but periods of unusually high volatility in the financial markets and restrictive credit conditions, sometimes limited to a particular sector or a geography, continue to recur. Some countries, including the United States, have adopted and/or are considering the adoption of more protectionist trade policies, a move away from the tighter financial industry regulations that followed the financial crisis, and/or substantially reducing corporate taxes. The exact shape of these policies is still being considered, but the equity and debt markets may react strongly to expectations of change, which could increase volatility, especially if the markets expectations are not borne out. A rise in protectionist trade policies, and the possibility of changes to some international trade agreements, could affect the economies of many nations in ways that cannot necessarily be foreseen at the present time. In addition, geopolitical and other risks, including environmental and public health, may add to instability in world economies and markets generally. Economies and financial markets throughout the world are becoming increasingly interconnected. As a result, whether or not the Fund invests in securities of issuers located in or with significant exposure to countries experiencing economic, political and/or financial difficulties, the value and liquidity of the Funds investments may be negatively affected by such events. |
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An outbreak of respiratory disease caused by a novel coronavirus was first detected in China in December 2019 and has now developed into a global pandemic. The pandemic has resulted in closing borders, enhanced health screenings, healthcare service preparation and delivery, quarantines, cancellations, disruptions to supply chains and customer activity, as well as general concern and uncertainty. The impact of this pandemic, and other pandemics and epidemics that may arise in the future, could affect the economies of many nations, individual companies and the market in general in ways that cannot necessarily be foreseen at the present time. In addition, the impact of infectious diseases in developing or emerging market countries may be greater due to less established health care systems. Health crises caused by the novel coronavirus pandemic may exacerbate other pre-existing political, social and economic risks in certain countries. The impact of the pandemic may last for an extended period of time. |
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Market Disruption and Geopolitical Risk. The occurrence of events similar to those in recent years, such as the aftermath of the war in Iraq, instability in Afghanistan, Pakistan, Egypt, Libya, Syria, Russia, Ukraine and the Middle East, new and ongoing epidemics and pandemics of infectious diseases and other global health events, natural/environmental disasters, terrorist attacks in the United States and around the world, social and political discord, debt crises (such as the Greek crisis), sovereign debt downgrades, increasingly strained relations between the United States and a number of foreign countries, including traditional allies, such as certain European countries, and historical adversaries, such as North Korea, Iran, China and Russia, and the international community generally, new and continued political unrest in various countries, such as Venezuela and Spain, the exit or potential exit of one or more countries from the European Union (the EU) or the European Monetary Union (the EMU), and continued changes in the balance of political power among and within the branches of the U.S. government, among others, may result in market volatility, may have long term effects on the U.S. and worldwide financial markets, and may cause further economic uncertainties in the United States and worldwide. The coronavirus pandemic has led to illiquidity and volatility in the municipal bond markets and may lead to downgrades in the credit quality of certain municipal issuers.
China and the United States have each recently imposed tariffs on the other countrys products. These actions may trigger a significant reduction in international trade, the oversupply of certain manufactured goods, substantial price reductions of goods and possible failure of individual companies and/or large segments of Chinas export industry, which could have a negative impact on the Funds performance. U.S. companies that source material and goods from China and those that make large amounts of sales in China would be particularly vulnerable to an escalation of trade tensions. Uncertainty regarding the outcome of the trade tensions and the potential for a trade war could cause the U.S. dollar to decline against safe haven currencies, such as the Japanese yen and the Euro. Events such as these and their consequences are difficult to predict and it is unclear whether further tariffs may be imposed or other escalating actions may be taken in the future. |
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The decision made in the British referendum of June 23, 2016 to leave the EU, an event widely referred to as Brexit, has led to volatility in the financial markets of the United Kingdom and more broadly across Europe and may also lead to weakening in consumer, corporate and financial confidence in such markets. The formal notification to the European Council required under Article 50 of the Treaty on EU was made on March 29, 2017, following which the terms of exit were negotiated. Pursuant to an agreement between the United Kingdom and the EU, the United Kingdom left the EU on January 31, 2020 subject to a transitional period ending December 31, 2020. The longer-term economic, legal, political and social framework to be put in place between the United Kingdom and the EU are unclear at this stage and are likely to lead to ongoing political and economic uncertainty and periods of exacerbated volatility in both the United Kingdom and in wider European markets for some time. In particular, the decision made in Brexit may lead to a call for similar referendums in other European jurisdictions which may cause increased economic volatility in the European and global markets. This mid- to long-term uncertainty may have an adverse effect on the economy generally and on the ability of the Fund to execute its strategies and to receive attractive returns. In particular, currency volatility may mean that the returns of the Fund and its investments are adversely affected by market movements and may make it more difficult, or more expensive, for the Fund to execute prudent currency hedging policies. Potential decline in the value of the British Pound and/or the Euro against other currencies, along with the potential downgrading of the United Kingdoms sovereign credit rating, may also have an impact on the performance of portfolio companies or investments located in the United Kingdom or Europe. In light of the above, no definitive assessment can currently be made regarding the impact that Brexit will have on the Fund, its investments or its organization more generally.
The occurrence of any of these above events could have a significant adverse impact on the value and risk profile of the Funds portfolio. The Fund does not know how long the securities markets may be affected by similar events and cannot predict the effects of similar events in the future on the U.S. economy and securities markets. There can be no assurance that similar events and other market disruptions will not have other material and adverse implications. See RisksMarket Disruption and Geopolitical Risk. |
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Regulation and Government Intervention Risk. The U.S. Government and the Federal Reserve, as well as certain foreign governments, recently have taken unprecedented actions designed to support certain financial institutions and segments of the financial markets that experienced extreme volatility, such as implementing stimulus packages, providing liquidity in fixed income, commercial paper and other markets and providing tax breaks, among other actions. The reduction or withdrawal of Federal Reserve or other U.S. or non-U.S. governmental support could negatively affect financial markets generally and reduce the value and liquidity of certain securities. Additionally, with the cessation of certain market support activities, the Fund may face a heightened level of interest rate risk as a result of a rise or increased volatility in interest rates.
Federal, state, and other governments, their regulatory agencies or self-regulatory organizations may take actions that affect the regulation of the issuers in which the Fund invests. Legislation or regulation may also change the way in which the Fund is regulated. Such legislation or regulation could limit or preclude the Funds ability to achieve its investment objective. See RisksRegulation and Government Intervention Risk. |
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Legal, Tax and Regulatory Risks. Legal, tax and regulatory changes could occur that may have material adverse effects on the Fund. For example, the regulatory and tax environment for derivative instruments in which the Fund may participate is evolving, and such changes in the regulation or taxation of derivative instruments may have material adverse effects on the value of derivative instruments held by the Fund and the ability of the Fund to pursue its investment strategies. |
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To qualify for the favorable U.S. federal income tax treatment generally accorded to regulated investment companies (RICs), the Fund must, among other things, derive in each taxable year at least 90% of its gross income from certain prescribed sources and distribute for each taxable year at least 90% of its investment company taxable income (generally, ordinary income plus the excess, if any, of net short-term capital gain over net long-term capital loss) and at least 90% of its net tax-exempt interest income, if any. If for any taxable year the Fund does not qualify as a RIC, all of its taxable income for that year (including its net capital gain) would be subject to tax at regular corporate rates without any deduction for distributions to shareholders, and such distributions would be taxable as ordinary dividends to the extent of the Funds current and accumulated earnings and profits. |
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The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the Internal Revenue Service and the U.S. Treasury Department. See RisksLegal, Tax and Regulatory Risks. |
||
Potential Conflicts of Interest of the Advisor and Others. The investment activities of BlackRock, Inc. (BlackRock), the ultimate parent company of the Advisor, and its affiliates (including BlackRock and its subsidiaries (collectively, the Affiliates)), The PNC Financial Services Group, Inc. (which, through a subsidiary, has a significant economic interest in BlackRock) and its subsidiaries (each with The PNC Financial Services Group, Inc., an Entity and collectively, the Entities), and their respective directors, officers or employees, in the management of, or their interest in, their own accounts and other accounts they manage, may present conflicts of interest that could disadvantage the Fund and its shareholders. BlackRock, its Affiliates and the Entities provide investment management services to other funds and discretionary managed accounts that may follow investment programs similar to that of the Fund. Subject to the requirements of the Investment Company Act, BlackRock, its Affiliates and the Entities intend to engage in such activities and may receive compensation from third parties for their services. None of BlackRock, its Affiliates or the Entities are under any obligation to share any investment opportunity, idea or strategy with the Fund. As a result, BlackRock, its Affiliates and the Entities may compete with the Fund for appropriate investment opportunities. The results of the Funds investment activities, therefore, may differ from those of an Affiliate, and Entity or another account managed by an Affiliate or an Entity and it is possible that the Fund could sustain losses during periods in which one or more Affiliates, Entities and other accounts achieve profits on their trading for proprietary or other accounts. BlackRock has adopted policies and procedures designed to address potential conflicts of interests. For additional information about potential conflicts of interest and the way in which BlackRock addresses such conflicts, please see Conflicts of Interest and Management of the FundPortfolio ManagementPotential Material Conflicts of Interest in the SAI. |
- 21 -
Anti-Takeover Provisions Risk. The Funds Articles of Incorporation (the Charter) and Bylaws include provisions that could limit the ability of other entities or persons to acquire control of the Fund or convert the Fund to open-end status or to change the composition of the Board. Such provisions could limit the ability of shareholders 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 Certain Provisions in the Charter and Bylaws. |
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Additional Risks. For additional risks relating to investments in the Fund, including Repurchase Agreements Risk, When-Issued, Forward Commitment and Delayed Delivery Transactions Risk, Swaps Risk, Short Sales Risk, Inflation Risk, Deflation Risk, Market and Selection Risk, LIBOR and Other Reference Rates Risk, Regulation as a Commodity Pool, Failures of Futures Commission Merchants and Clearing Organizations Risk, Investment Company Act Regulations, Legislation Risk, Defensive Investing Risk, Decision-Making Authority Risk, Management Risk, Valuation Risk, Reliance on the Advisor Risk, Reliance on Service Providers Risk, Information Technology Systems Risk, Cyber Security Risk, Misconduct of Employees and of Service Providers Risk, Special Risks for Holders of Rights, and Portfolio Turnover Risk, please see Risks beginning on page 61 of this Prospectus. |
- 22 -
Shareholder Transaction Expenses |
||||
Sales load paid by you (as a percentage of offering price)(1) |
1.00 | % | ||
Offering expenses borne by the Fund (as a percentage of offering price)(1) |
0.03 | % | ||
Dividend reinvestment plan fees |
$
|
0.02 per share for open-market
purchases of common shares |
(2) |
|
Estimated Annual Expenses (as a percentage of net assets attributable to common shares) |
||||
Management fees |
0.63 | % | ||
Other expenses(3) |
0.38 | % | ||
Miscellaneous other expenses |
0.07 | % | ||
Interest expense(4) |
0.31 | % | ||
Total annual expenses |
1.01 | % | ||
Fee waiver(5) |
| |||
|
|
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Total annual Fund operating expenses after fee waiver(5) |
1.01 | % | ||
|
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(1) |
If the common shares are sold to or through underwriters, the Prospectus Supplement will set forth any applicable sales load and the estimated offering expenses. Fund shareholders will pay all offering expenses involved with an offering. |
(2) |
The Reinvestment Plan Agents (as defined below under Dividend Reinvestment Plan) fees for the handling of the reinvestment of dividends will be paid by the Fund. However, you will pay a $0.02 per share fee incurred in connection with open-market purchases, which will be deducted from the value of the dividend. You will also be charged a $0.02 per share fee if you direct the Reinvestment Plan Agent to sell your common shares held in a dividend reinvestment account. Per share fees include any applicable brokerage commissions the Reinvestment Plan Agent is required to pay. |
(3) |
Other expenses are based on actual amounts for the current fiscal year. |
(4) |
Assumes the use of leverage in the form of tender option bond transactions representing 12% of Managed Assets (as defined below) at an annual interest expense to the Fund of 2.19%, which is based on current market conditions. The actual amount of interest expense borne by the Fund will vary over time in accordance with the level of the Funds use of tender option bond transactions and variations in market interest rates. Interest expense is required to be treated as an expense of the Fund for accounting purposes. |
(5) |
The Fund and the Advisor have entered into a fee waiver agreement (the Fee Waiver Agreement), pursuant to which the Advisor has contractually agreed to waive the management fee with respect to any portion of the Funds assets attributable to investments in any equity and fixed-income mutual funds and ETFs managed by the Advisor or its affiliates that have a contractual fee, through June 30, 2021. In addition, pursuant to the Fee Waiver Agreement, the Advisor has contractually agreed to waive its management fees by the amount of investment advisory fees the Fund pays to the Advisor indirectly through its investment in money market funds managed by the Advisor or its affiliates, through June 30, 2021. The Fee Waiver Agreement may be terminated at any time, without the payment of any penalty, only by the Fund (upon the vote of a majority of the Directors who are not interested persons (as defined in the Investment Company Act) of the Fund (the Independent Directors) or a majority of the outstanding voting securities of the Fund), upon 90 days written notice by the Fund to the Advisor. |
The following example illustrates the expenses that you would pay on a $1,000 investment in common shares, assuming (i) total net annual expenses of 1.01% of net assets attributable to common shares, and (ii) a 5% annual return:
One Year | Three Years | Five Years | Ten Years | |||||||||||||||||
Total expenses incurred |
$ | 20 | $ | 42 | $ | 66 | $ | 133 |
The example should not be considered a representation of future expenses. The example assumes that the estimated Other expenses set forth in the Estimated Annual Expenses table are accurate and that all dividends and distributions are reinvested at NAV. Actual expenses may be greater or less than those assumed. Moreover, the Funds actual rate of return may be greater or less than the hypothetical 5% return shown in the example.
- 23 -
The financial highlights table is intended to help you understand the Funds financial performance for the periods presented. Certain information reflects financial results for a single Fund Share. The information for the fiscal years ended April 30, 2019, 2018, 2017, 2016 and 2015 has been audited by Deloitte & Touche LLP, independent registered public accounting firm for the Fund. The information for the fiscal period ended October 31, 2019 is unaudited. The report of Deloitte & Touche LLP is included in the Funds April 30, 2019 Annual Report, and is incorporated by reference into the SAI. The Funds financial statements are included in the Funds Annual Report and Semi-Annual Report and are incorporated by reference into the SAI.
(For a share outstanding throughout each period)
Year Ended April 30, | ||||||||||||||||||||||||
Six-Months
Ended October 31, 2019 |
2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||||||
Net asset value, beginning of year |
$ | 14.14 | $ | 14.01 | $ | 14.07 | $ | 14.45 | $ | 14.12 | $ | 13.56 | ||||||||||||
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Net investment income(a) |
0.32 | 0.67 | 0.68 | 0.70 | 0.72 | 0.73 | ||||||||||||||||||
Net realized and unrealized gain (loss) |
0.24 | 0.12 | (0.06 | ) | (0.38 | ) | 0.35 | 0.59 | ||||||||||||||||
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Net increase (decrease) from investment operations |
0.56 | 0.79 | 0.62 | 0.32 | 1.07 | 1.32 | ||||||||||||||||||
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Distributions to Common Shareholders from net investment income(b) |
(0.32 | ) | (0.66 | ) | (0.68 | ) | (0.70 | ) | (0.74 | ) | (0.76 | ) | ||||||||||||
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Net asset value, end of year |
$ | 14.38 | $ | 14.14 | $ | 14.01 | $ | 14.07 | $ | 14.45 | $ | 14.12 | ||||||||||||
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Market price, end of year |
$ | 15.49 | $ | 14.98 | $ | 13.21 | $ | 14.82 | $ | 14.74 | $ | 14.22 | ||||||||||||
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Total Return Applicable to Common Shareholders(c) |
||||||||||||||||||||||||
Based on net asset value |
3.91 | %(e) | 5.97 | % | 4.47 | % | 2.23 | % | 7.90 | % | 10.11 | % | ||||||||||||
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|
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Based on market price |
5.65 | %(e) | 19.07 | % | (6.48 | )% | 5.56 | % | 9.30 | % | 17.02 | % | ||||||||||||
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Ratios to Average Net Assets Applicable to Common Shareholders Total expenses |
0.99 | %(f) | 1.01 | % | 0.93 | % | 0.87 | % | 0.81 | % | 0.82 | % | ||||||||||||
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Total expenses after fees waived and paid indirectly |
0.99 | %(f) | 1.01 | % | 0.93 | % | 0.87 | % | 0.81 | % | 0.82 | % | ||||||||||||
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Total expenses after fees waived and/or reimbursed and paid indirectly and excluding interest expense, fees, and amortization of offering costs(d) |
0.70 | %(f) | 0.70 | % | 0.69 | % | 0.69 | % | 0.70 | % | 0.71 | % | ||||||||||||
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Net investment income to Common Shareholders |
4.49 | %(f) | 4.77 | % | 4.83 | % | 4.93 | % | 5.09 | % | 5.24 | % | ||||||||||||
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- 24 -
Year Ended April 30, | ||||||||||||||||||||||||
Six-Months
Ended October 31, 2019 |
2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||||||
Supplemental Data |
||||||||||||||||||||||||
Net assets applicable to Common Shareholders, end of year (000) |
$ | 518,735 | $ | 509,645 | $ | 504,470 | $ | 505,306 | $ | 517,697 | $ | 505,341 | ||||||||||||
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Borrowings outstanding, end of year (000) |
$ | 71,659 | $ | 71,659 | $ | 71,925 | $ | 67,507 | $ | 66,087 | $ | 61,066 | ||||||||||||
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Portfolio turnover rate |
8 | % | 19 | % | 15 | % | 11 | % | 18 | % | 22 | % | ||||||||||||
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|
|
|
(a) |
Based on average Common Shares outstanding. |
(b) |
Distributions for annual periods determined in accordance with U.S. federal income tax regulations. |
(c) |
Total returns based on market price, which can be significantly greater or less than the net asset value, may result in substantially different returns. Where applicable, excludes the effects of any sales charges and assumes the reinvestment of distributions at actual reinvestment prices. |
(d) |
Interest expense and fees relate to TOB Trusts. See Note 4 of the Notes to Financial Statements for details. |
(e) |
Aggregate total return. |
(f) |
Annualized. |
Year Ended April 30, | ||||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
Per Share Operating Performance |
||||||||||||||||||||
Net asset value, beginning of year |
$ | 14.36 | $ | 13.47 | $ | 12.14 | $ | 12.63 | $ | 10.59 | ||||||||||
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|
|
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Net investment income1 |
0.77 | 0.77 | 0.76 | 0.73 | 0.80 | |||||||||||||||
Net realized and unrealized gain (loss) |
(0.82 | ) | 0.90 | 1.32 | (0.46 | ) | 2.06 | |||||||||||||
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Net increase (decrease) from investment operations |
(0.05 | ) | 1.67 | 2.08 | 0.27 | 2.86 | ||||||||||||||
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|
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Dividends from net investment income2 |
(0.75 | ) | (0.78 | ) | (0.75 | ) | (0.76 | ) | (0.82 | ) | ||||||||||
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Net asset value, end of year |
$ | 13.56 | $ | 14.36 | $ | 13.47 | $ | 12.14 | $ | 12.63 | ||||||||||
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|
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Market price, end of year |
$ | 12.85 | $ | 13.96 | $ | 13.15 | $ | 11.27 | $ | 12.65 | ||||||||||
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Total Investment Return3 |
||||||||||||||||||||
Based on net asset value |
0.47 | % | 12.70 | % | 17.90 | % | 2.31 | % | 27.72 | % | ||||||||||
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|
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Based on market price |
(2.06 | )% | 12.22 | % | 23.99 | % | (5.17 | )% | 24.17 | % | ||||||||||
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Ratios to Average Net Assets |
||||||||||||||||||||
Total expenses |
0.82 | % | 0.83 | % | 0.77 | % | 0.78 | % | 0.72 | % | ||||||||||
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Total expenses after fees waived and paid indirectly |
0.82 | % | 0.83 | % | 0.77 | % | 0.78 | % | 0.72 | % | ||||||||||
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Total expenses after fees waived and paid indirectly and excluding interest expense and fees4 |
0.70 | % | 0.71 | % | 0.70 | % | 0.74 | % | 0.67 | % | ||||||||||
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Net investment income |
5.84 | % | 5.52 | % | 6.00 | % | 6.07 | % | 6.72 | % | ||||||||||
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Supplemental Data |
||||||||||||||||||||
Net assets, end of year (000) |
$ | 485,319 | $ | 513,923 | $ | 481,598 | $ | 433,891 | $ | 266,831 | ||||||||||
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Portfolio turnover |
19 | % | 19 | % | 28 | % | 24 | % | 44 | % | ||||||||||
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- 25 -
1 |
Based on average shares outstanding. |
2 |
Determined in accordance with federal income tax regulations. |
3 |
Total investment returns based on market price, which can be significantly greater or less than the net asset value, may result in substantially different returns. Where applicable, excludes the effects of any sales charges and assumes the reinvestment of dividends and distributions. |
4 |
Interest expense and fees relate to TOBs. See Note 3 of the Notes to Financial Statements for details of municipal bonds transferred to TOBs. |
- 26 -
The net proceeds from the issuance of common shares hereunder will be invested in accordance with the Funds investment objective and policies as stated below. We currently anticipate that we will be able to invest all of the net proceeds in accordance with our investment objective and policies within approximately three months from the date on which the proceeds from an offering are received by the Fund. Pending such investment, it is anticipated that the proceeds will be invested in short-term investment grade securities or in high quality, short-term money market instruments.
The Fund is a diversified, closed-end management investment company registered under the Investment Company Act. The Fund is incorporated as a Maryland corporation pursuant to its Charter governed by the laws of the State of Maryland. The Fund was incorporated under the laws of the State of Maryland on April 15, 1993 and commenced operations on June 25, 1993. The Fund was known as MuniAssets Fund, Inc. prior to September 14, 2006. The Funds principal office is located at 100 Bellevue Parkway, Wilmington, Delaware 19809, and its telephone number is (800) 882-0052. The Funds common shares are traded on the NYSE under the symbol MUA.
The Fund is authorized to issue 200,000,000 shares of capital stock, par value $.10 per share, all of which shares initially are classified as common shares. The Board of Directors is authorized, however, to classify and reclassify any unissued shares of capital stock into one or more additional or other classes or series as may be established from time to time by setting or changing in any one or more respects the designations, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption of such shares of stock and pursuant to such classification or reclassification to increase or decrease the number of authorized shares of any existing class or series. The Fund may reclassify an amount of unissued common shares as preferred shares and at that time offer preferred shares. See LeveragePreferred Shares.
Common Shares
Common shares, when issued and outstanding, will be fully paid and non-assessable. Stockholders are entitled to share pro rata in the net assets of the Fund available for distribution to stockholders upon liquidation of the Fund. Stockholders are entitled to one vote for each share held.
In the event that the Fund issues preferred shares and so long as any of the Funds preferred shares are outstanding, holders of common shares will not be entitled to receive any net income of or other distributions from the Fund unless all accumulated dividends on preferred shares have been paid, and unless asset coverage (as defined in the 1940 Act) with respect to preferred shares would be at least 200% after giving effect to such distributions. See LeveragePreferred Shares.
The Fund will send unaudited reports at least semi-annually and audited annual financial statements to all of its stockholders.
Unlike open-end funds, closed-end funds like the Fund do not continuously offer shares and do not provide daily redemptions. Rather, if a shareholder determines to buy additional common shares or sell shares already held, the shareholder may do so by trading through a broker on the NYSE or otherwise. Shares of closed-end investment companies frequently trade on an exchange at prices lower than NAV. Shares of closed-end investment companies like the Fund have during some periods traded at prices higher than NAV and during other periods have traded at prices lower than NAV. Because the market value of the common shares may be influenced by such factors as dividend levels (which are in turn affected by expenses), call protection on its portfolio securities, dividend stability, portfolio credit quality, the Funds NAV, relative demand for and supply of such shares in the market, general market and economic conditions and other factors beyond the control of the Fund, the Fund cannot assure you that common shares will trade at a price equal to or higher than NAV in the future. The common shares are designed primarily for long-term investors and you should not purchase the common shares if you intend to sell them soon after purchase. See Repurchase of Common Shares below and Repurchase of Common Shares in the SAI.
- 27 -
The Funds outstanding common shares are, and when issued, the common shares offered by this Prospectus will be, publicly held and listed and traded on the NYSE under the symbol MUA. The Fund determines its NAV on a daily basis. The following table sets forth, for the quarters indicated, the highest and lowest daily closing prices on the NYSE per common share, and the NAV per common share and the premium to or discount from NAV, on the date of each of the high and low market prices. The table also sets forth the number of common shares traded on the NYSE during the respective quarters.
NYSE Market Price
Per Common Share |
NAV per Common
Share on Date of Market Price |
Premium/
(Discount) on Date of Market Price |
Trading | |||||||||||||||||||||||||
During Quarter Ended |
High | Low | High | Low | High | Low | Volume | |||||||||||||||||||||
|
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|
|
|||||||||||||||||||||
April 30, 2020 |
$ | 16.18 | $ | 10.25 | $ | 14.62 | $ | 12.70 | 9.50 | % | (19.29 | )% | 5,916,252 | |||||||||||||||
January 31, 2020 |
$ | 15.98 | $ | 14.73 | $ | 14.35 | $ | 14.39 | 11.36 | % | 2.36 | % | 2,978,847 | |||||||||||||||
October 31, 2019 |
$ | 15.88 | $ | 14.83 | $ | 14.48 | $ | 14.34 | 9.67 | % | 3.42 | % | 2,431,672 | |||||||||||||||
July 31, 2019 |
$ | 16.05 | $ | 14.89 | $ | 14.27 | $ | 14.24 | 12.47 | % | 4.56 | % | 2,499,201 | |||||||||||||||
April 30, 2019 |
$ | 15.14 | $ | 13.89 | $ | 14.08 | $ | 13.91 | 7.53 | % | (0.14 | )% | 2,847,552 | |||||||||||||||
January 31, 2019 |
$ | 13.98 | $ | 12.60 | $ | 13.87 | $ | 13.74 | 0.79 | % | (8.30 | )% | 5,227,549 | |||||||||||||||
October 31, 2018 |
$ | 13.47 | $ | 12.55 | $ | 14.08 | $ | 13.84 | (4.33 | )% | (9.32 | )% | 4,208,913 | |||||||||||||||
July 31, 2018 |
$ | 13.28 | $ | 13.07 | $ | 14.09 | $ | 14.00 | (5.75 | )% | (6.64 | )% | 3,555,946 | |||||||||||||||
April 30, 2018 |
$ | 14.11 | $ | 13.15 | $ | 14.11 | $ | 13.98 | 0.00 | % | (5.94 | )% | 3,837,257 | |||||||||||||||
January 31, 2018 |
$ | 15.29 | $ | 14.06 | $ | 14.22 | $ | 14.11 | 7.52 | % | (0.35 | )% | 2,754,503 | |||||||||||||||
As of May 26, 2020, the NAV per common share of the Fund was $13.26 and the market price per common share was $13.26, representing a premium to NAV of 0.00%. Common shares of the Fund have historically traded at both a premium and discount to NAV.
As of May 18, 2020, the Fund has outstanding 36,110,788 common shares.
Preferred Shares
In the event the Fund issues preferred shares, it is anticipated that such preferred shares will be issued in one or more series, with rights as determined by the Board of Directors, by action of the Board of Directors without the approval of the holders of common shares. Under the 1940 Act, the Fund is permitted to have outstanding more than one series of preferred shares so long as no single series has a priority over another series as to the distribution of assets of the Fund or the payment of dividends. Holders of common shares will have no preemptive right to purchase any shares of preferred shares that might be issued. It is anticipated that the NAV per share of any preferred shares to be issued by the Fund will equal its original purchase price per share plus accumulated dividends per share. The Fund does not currently intend to issue preferred shares.
Under the Investment Company Act, the Fund is not permitted to issue preferred shares unless immediately after such issuance the value of the Funds total assets is at least 200% of the liquidation value of the outstanding preferred shares (i.e., the liquidation value may not exceed 50% of the Funds total assets). In addition, the Fund is not permitted to declare any cash dividend or other distribution on its common shares unless, at the time of such declaration, the value of the Funds total assets is at least 200% of such liquidation value. If the Fund issues preferred shares, it may be subject to restrictions imposed by the guidelines of one or more rating agencies that may issue ratings for preferred shares issued by the Fund. These guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed on the Fund by the Investment Company Act. It is not anticipated that these covenants or guidelines would impede the Advisor from managing the Funds portfolio in accordance with the Funds investment objective and policies. Please see Description of Capital Stock in the SAI for more information.
- 28 -
Authorized Shares
The following table provides the Funds authorized shares and common shares outstanding as of May 20, 2020.
Title of Class |
Amount
Authorized |
Amount Held
by Fund or for its Account |
Amount
Outstanding Exclusive of Amount held by Fund |
|||||||||
Common Shares |
200,000,000 | 0 | 36,110,788 |
Investment Objective and Policies
The Funds investment objective is to provide high current income exempt from Federal income taxes by investing primarily in a portfolio of medium to lower grade or unrated municipal obligations the interest on which, in the opinion of bond counsel to the issuer, is exempt from Federal income taxes. The Fund seeks to achieve its investment objective by investing at least 80% of its assets, except during temporary defensive periods, in Municipal Bonds. The Fund at all times, except during temporary defensive periods, will maintain at least 65% of its assets in Municipal Bonds which are rated in any one of the medium and lower rating categories of a nationally recognized statistical rating organization or are unrated. These ratings are currently Baa (Moodys) or BBB (S&P or Fitch) or lower. These are fundamental policies of the Fund and, therefore, may not be changed without the approval of a majority of the Funds outstanding voting shares as defined in the 1940 Act. The Fund may invest directly in such securities or synthetically through the use of derivatives. The Fund is not intended as, and you should not construe it to be, a complete investment program. There can be no assurance that the Funds investment objective will be achieved or that the Funds investment program will be successful.
The Fund has the authority to invest as much as 35% of its total assets in Municipal Bonds in the higher rating categories of nationally recognized statistical rating organizations (ratings of A or higher by Moodys, S&P or Fitch or comparable unrated securities). In addition, the Fund reserves the right to temporarily invest more than 20% of its total assets in Temporary Investments for defensive purposes when, in the opinion of the Advisor, prevailing market or financial conditions warrant. The Fund does not invest more than 25% of its total assets (taken at market value) in Municipal Bonds whose issuers are located in the same state. As used throughout this Prospectus and the Statement of Additional Information, total assets of the Fund means the Funds net assets plus the amount of any borrowings for investment purposes.
Ordinarily, the Fund does not intend to realize significant interest income that is subject to Federal income taxes. However, the Fund may invest all or a portion of its assets in certain tax-exempt securities classified as private activity bonds (previously defined as PABs) (in general, bonds that benefit non-governmental entities) that may subject certain investors in the Fund to a Federal alternative minimum tax.
The Fund may invest in Non-Municipal Tax-Exempt Securities, which could include trust certificates, partnership interests or other instruments evidencing interest in one or more long-term Municipal Bonds. Non-Municipal Tax-Exempt Securities also may include securities issued by other investment companies that invest in Municipal Bonds, to the extent such investments are permitted by the Funds investment restrictions and applicable law.
The Fund ordinarily does not intend to realize significant investment income not exempt from federal income taxes. From time to time, the Fund may realize taxable capital gains.
Investments in lower rated Municipal Bonds generally provide a higher yield and are less affected by interest rate fluctuations than higher rated tax-exempt securities of similar maturity but are subject to greater overall market risk and are also subject to a greater degree of risk with respect to the ability of the issuer to meet its principal and interest obligations. See Appendix ARatings of Investments in the Statement of Additional Information.
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The Fund seeks to reduce risk through investing in multiple issuers, credit analysis and monitoring of current developments regarding the obligor and trends in both the economy and financial markets. The Advisor will use various means to research the stability and/or potential for improvement of various municipal issuers in connection with the proposed purchase of their securities by the Fund. Evaluation of each Municipal Bond may include the analysis of financial performance, debt structure, economic factors and the administrative structure of the issuer. Additionally, the priority of liens and the overall structure of the particular issue may be factors that will determine suitability for purchase. Further investigation may be performed and may include, among other things, discussions with project management, corporate officers and industry experts as well as site inspections, area analysis, and project and financial projection analysis. All purchases and sales also may be subject to the review of market data, economic projections and the performance of the financial markets. Certain economic indicators also may be monitored. Additionally, the Advisor will vary the average maturity of the Funds portfolio securities based upon its assessment of economic and market conditions.
Description of Municipal Bonds
Set forth below is a detailed description of the Municipal Bonds in which the Fund invests. Information with respect to ratings assigned to tax-exempt obligations that the Fund may purchase is set forth in Appendix ARatings of Investments in the Statement of Additional Information. Obligations are included within the term Municipal Bonds if the interest paid thereon is excluded from gross income for federal income tax purposes in the opinion of bond counsel to the issuer.
Municipal Bonds include debt obligations issued to obtain funds for various public purposes, including the construction of a wide range of public facilities, refunding of outstanding obligations and obtaining funds for general operating expenses and loans to other public institutions and facilities. In addition, certain types of PABs are issued by or on behalf of public authorities to finance various privately owned or operated facilities, including among other things, airports, public ports, mass commuting facilities, multi-family housing projects, as well as facilities for water supply, gas, electricity, sewage or solid waste disposal and other specialized facilities. Other types of PABs, the proceeds of which are used for the construction, equipment or improvement of privately operated industrial or commercial facilities, may constitute Municipal Bonds. The interest on Municipal Bonds may bear a fixed rate or be payable at a variable or floating rate. The two principal classifications of Municipal Bonds are general obligation bonds and revenue bonds, which latter category includes PABs and, for bonds issued on or before August 15, 1986, industrial development bonds. Municipal Bonds typically are issued to finance public projects, such as roads or public buildings, to pay general operating expenses or to refinance outstanding debt. Municipal Bonds may also be issued for private activities, such as housing, medical and educational facility construction, or for privately owned industrial development and pollution control projects. General obligation bonds are backed by the full faith and credit, or taxing authority, of the issuer and may be repaid from any revenue source. Revenue bonds may be repaid only from the revenues of a specific facility or source. Municipal Bonds may be issued on a long-term basis to provide permanent financing. The repayment of such debt may be secured generally by a pledge of the full faith and credit taxing power of the issuer, a limited or special tax, or any other revenue source, including project revenues, which may include tolls, fees and other user charges, lease payments and mortgage payments. Municipal Bonds may also be issued to finance projects on a short-term interim basis, anticipating repayment with the proceeds of the later issuance of long-term debt.
The Municipal Bonds in which the Fund invests pay interest or income that, in the opinion of bond counsel to the issuer, is exempt from regular Federal income tax. The Advisor does not conduct its own analysis of the tax status of the interest paid by Municipal Bonds held by the Fund, but will rely on the opinion of counsel to the issuer of each such instrument. The Fund may also invest in Municipal Bonds issued by United States Territories (such as Puerto Rico or Guam) that are exempt from regular Federal income tax. In addition to the types of Municipal Bonds described in this Prospectus, the Fund may invest in other securities that pay interest or income that is, or make other distributions that are, exempt from regular Federal income tax and/or state and local personal taxes, regardless of the technical structure of the issuer of the instrument. The Fund treats all of such tax-exempt securities as Municipal Bonds.
The yields on Municipal Bonds are dependent on a variety of factors, including prevailing interest rates and the condition of the general money market and the Municipal Bond market, the size of a particular offering, the maturity of the obligation and the rating of the issue. The market value of Municipal Bonds will vary with changes in interest rate levels and as a result of changing evaluations of the ability of bond issuers to meet interest and principal payments.
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The Fund has not established any limit on the percentage of its portfolio that may be invested in PABs. The Fund may not be a suitable investment for investors who are already subject to the federal alternative minimum tax or who would become subject to the federal alternative minimum tax as a result of an investment in the Funds common shares.
General Obligation Bonds. General obligation bonds are typically secured by the issuers pledge of its faith, credit and taxing power for the repayment of principal and the payment of interest. The taxing power of any governmental entity may be limited, however, by provisions of its state constitution or laws, and an entitys creditworthiness will depend on many factors, including potential erosion of its tax base due to population declines, natural disasters, declines in the states industrial base or inability to attract new industries, economic limits on the ability to tax without eroding the tax base, state legislative proposals or voter initiatives to limit ad valorem real property taxes and the extent to which the entity relies on federal or state aid, access to capital markets or other factors beyond the states or entitys control. Accordingly, the capacity of the issuer of a general obligation bond as to the timely payment of interest and the repayment of principal when due is affected by the issuers maintenance of its tax base.
Revenue Bonds. Revenue or special obligation bonds are typically payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise tax or other specific revenue sources such as payments from the user of the facility being financed. Accordingly, the timely payment of interest and the repayment of principal in accordance with the terms of the revenue or special obligation bond is a function of the economic viability of such facility or such revenue source. Revenue bonds issued by state or local agencies to finance the development of low-income, multi-family housing involve special risks in addition to those associated with municipal securities generally, including that the underlying properties may not generate sufficient income to pay expenses and interest costs. Such bonds are generally non-recourse against the property owner, may be junior to the rights of others with an interest in the properties, may pay interest that changes based in part on the financial performance of the property, may be prepayable without penalty and may be used to finance the construction of housing developments which, until completed and rented, do not generate income to pay interest. Increases in interest rates payable on senior obligations may make it more difficult for issuers to meet payment obligations on subordinated bonds.
Municipal Notes. Municipal notes are shorter term municipal debt obligations. They may provide interim financing in anticipation of tax collection, bond sales or revenue receipts. If there is a shortfall in the anticipated proceeds, repayment on the note may be delayed or the note may not be fully repaid, and the Fund may lose money.
Municipal Commercial Paper. Municipal commercial paper is generally unsecured and issued to meet short-term financing needs. The lack of security presents some risk of loss to the Fund since, in the event of an issuers bankruptcy, unsecured creditors are repaid only after the secured creditors out of the assets, if any, that remain.
PABs. The Fund may purchase Municipal Bonds classified as PABs. Interest received on certain PABs is treated as an item of tax preference for purposes of the federal alternative minimum tax and may impact the overall tax liability of certain investors in the Fund. PABs, formerly referred to as industrial development bonds, are issued by, or on behalf of, states, municipalities or public authorities to obtain funds to provide privately operated housing facilities, airport, mass transit or port facilities, sewage disposal, solid waste disposal or hazardous waste treatment or disposal facilities and certain local facilities for water supply, gas or electricity. Other types of PABs, the proceeds of which are used for the construction, equipment, repair or improvement of privately operated industrial or commercial facilities, may constitute Municipal Bonds, although the federal tax laws may place substantial limitations on the size of such issues. Such bonds are secured primarily by revenues derived from loan repayments or lease payments due from the entity which may or may not be guaranteed by a parent company or otherwise secured. PABs generally are not secured by a pledge of the taxing power of the issuer of such bonds. Therefore, an investor should be aware that repayment of such bonds generally depends on the revenues of a private entity and be aware of the risks that such an investment may entail. The continued ability of an entity to generate sufficient revenues for the payment of principal and interest on such bonds will be affected by many factors including the size of the entity, capital structure, demand for its products or services, competition, general economic conditions, government regulation and the entitys dependence on revenues for the operation of the particular facility being financed.
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Moral Obligation Bonds. Municipal Bonds may also include moral obligation bonds, which are normally issued by special purpose public authorities. If an issuer of moral obligation bonds is unable to meet its obligations, the repayment of such bonds becomes a moral commitment but not a legal obligation of the state or municipality in question.
Municipal Lease Obligations. Also included within the general category of Municipal Bonds are certificates of participation (COPs) issued by government authorities or entities to finance the acquisition or construction of equipment, land and/or facilities. COPs represent participations in a lease, an installment purchase contract or a conditional sales contract (hereinafter collectively called lease obligations) relating to such equipment, land or facilities. Municipal leases, like other municipal debt obligations, are subject to the risk of non-payment. Although lease obligations do not constitute general obligations of the issuer for which the issuers unlimited taxing power is pledged, a lease obligation is frequently backed by the issuers covenant to budget for, appropriate and make the payments due under the lease obligation. However, certain lease obligations contain non-appropriation clauses which provide that the issuer has no obligation to make lease or installment purchase payments in future years unless money is appropriated for such purpose on a yearly basis. Although non-appropriation lease obligations are secured by the leased property, disposition of the property in the event of foreclosure might prove difficult and the value of the property may be insufficient to issue lease obligations. Certain investments in lease obligations may be illiquid.
The ability of issuers of municipal leases to make timely lease payments may be adversely impacted in general economic downturns and as relative governmental cost burdens are allocated and reallocated among federal, state and local governmental units. Such non-payment would result in a reduction of income to the Fund, and could result in a reduction in the value of the municipal lease experiencing non-payment and a potential decrease in the NAV of the Fund. Issuers of municipal lease obligations might seek protection under the bankruptcy laws. In the event of bankruptcy of such an issuer, the Fund could experience delays and limitations with respect to the collection of principal and interest on such municipal leases and the Fund may not, in all circumstances, be able to collect all principal and interest to which it is entitled. To enforce its rights in the event of a default in lease payments, the Fund might take possession of and manage the assets securing the issuers obligations on such securities, which may increase the Funds operating expenses and adversely affect the NAV of the Fund. When the lease contains a non-appropriation clause, however, the failure to pay would not be a default and the Fund would not have the right to take possession of the assets. Any income derived from the Funds ownership or operation of such assets may not be tax-exempt or may fail to generate qualifying income for purposes of the income tests applicable to regulated investment companies. In addition, the Funds intention to qualify as a regulated investment company under the Internal Revenue Code of 1986, may limit the extent to which the Fund may exercise its rights by taking possession of such assets, because as a regulated investment company the Fund is subject to certain limitations on its investments and on the nature of its income.
Zero-Coupon Bonds. Municipal Bonds may include zero-coupon bonds. Zero-coupon bonds are securities that are sold at a discount to par value and do not pay interest during the life of the security. The discount approximates the total amount of interest the security will accrue and compound over the period until maturity at a rate of interest reflecting the market rate of the security at the time of issuance. Upon maturity, the holder of a zero-coupon bond is entitled to receive the par value of the security.
While interest payments are not made on such securities, holders of such securities are deemed to have received income (phantom income) annually, notwithstanding that cash may not be received currently. The effect of owning instruments that do not make current interest payments is that a fixed yield is earned not only on the original investment but also, in effect, on all discount accretion during the life of the obligations. This implicit reinvestment of earnings at a fixed rate eliminates the risk of being unable to invest distributions at a rate as high as the implicit yield on the zero-coupon bond, but at the same time eliminates the holders ability to reinvest at higher rates in the future. For this reason, some of these securities may be subject to substantially greater price fluctuations during periods of changing market interest rates than are comparable securities that pay interest currently. Longer term zero-coupon bonds are more exposed to interest rate risk than shorter term zero-coupon bonds. These investments benefit the issuer by mitigating its need for cash to meet debt service, but also require a higher rate of return to attract investors who are willing to defer receipt of cash.
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The Fund accrues income with respect to these securities for U.S. federal income tax and accounting purposes prior to the receipt of cash payments. Zero-coupon bonds may be subject to greater fluctuation in value and less liquidity in the event of adverse market conditions than comparably rated securities that pay cash interest at regular intervals.
Further, to maintain its qualification for pass-through treatment under the federal tax laws, the Fund is required to distribute income to its shareholders and, consequently, may have to dispose of other, more liquid portfolio securities under disadvantageous circumstances or may have to leverage itself by borrowing in order to generate the cash to satisfy these distributions. The required distributions may result in an increase in the Funds exposure to zero-coupon bonds.
In addition to the above-described risks, there are certain other risks related to investing in zero-coupon bonds. During a period of severe market conditions, the market for such securities may become even less liquid. In addition, as these securities do not pay cash interest, the Funds investment exposure to these securities and their risks, including credit risk, will increase during the time these securities are held in the Funds portfolio.
Pre-Refunded Municipal Securities. The principal of, and interest on, pre-refunded municipal securities are no longer paid from the original revenue source for the securities. Instead, the source of such payments is typically an escrow fund consisting of U.S. Government securities. The assets in the escrow fund are derived from the proceeds of refunding bonds issued by the same issuer as the pre-refunded municipal securities. Issuers of municipal securities use this advance refunding technique to obtain more favorable terms with respect to securities that are not yet subject to call or redemption by the issuer. For example, advance refunding enables an issuer to refinance debt at lower market interest rates, restructure debt to improve cash flow or eliminate restrictive covenants in the indenture or other governing instrument for the pre-refunded municipal securities.
However, except for a change in the revenue source from which principal and interest payments are made, the pre-refunded municipal securities remain outstanding on their original terms until they mature or are redeemed by the issuer.
Special Taxing Districts. Special taxing districts are organized to plan and finance infrastructure developments to induce residential, commercial and industrial growth and redevelopment. The bond financing methods such as tax increment finance, tax assessment, special services district and Mello-Roos bonds (a type of municipal security established by the Mello-Roos Community Facilities Act of 1982), are generally payable solely from taxes or other revenues attributable to the specific projects financed by the bonds without recourse to the credit or taxing power of related or overlapping municipalities. They often are exposed to real estate development-related risks and can have more taxpayer concentration risk than general tax-supported bonds, such as general obligation bonds. Further, the fees, special taxes, or tax allocations and other revenues that are established to secure such financings are generally limited as to the rate or amount that may be levied or assessed and are not subject to increase pursuant to rate covenants or municipal or corporate guarantees. The bonds could default if development failed to progress as anticipated or if larger taxpayers failed to pay the assessments, fees and taxes as provided in the financing plans of the districts.
Indexed and Inverse Floating Rate Securities. The Fund may invest in Municipal Bonds (and Non-Municipal Tax-Exempt Securities) that yield a return based on a particular index of value or interest rates. For example, the Fund may invest in Municipal Bonds that pay interest based on an index of Municipal Bond interest rates. The principal amount payable upon maturity of certain Municipal Bonds also may be based on the value of the index. To the extent the Fund invests in these types of Municipal Bonds, the Funds return on such Municipal Bonds will be subject to risk with respect to the value of the particular index. Interest and principal payable on the Municipal Bonds may also be based on relative changes among particular indices. Also, the Fund may invest in so-called inverse floating rate bonds or residual interest bonds on which the interest rates vary inversely with a short-term floating rate (which may be reset periodically by a Dutch auction, a remarketing agent, or by reference to a short-term tax-exempt interest rate index). The Fund may purchase synthetically created inverse floating rate bonds evidenced by custodial or trust receipts. Generally, income on inverse floating rate bonds will decrease when short-term interest rates increase, and will increase when short-term interest rates decrease. Such securities have the effect
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of providing a degree of investment leverage, since they may increase or decrease in value in response to changes, as an illustration, in market interest rates at a rate which is a multiple (typically two) of the rate at which fixed rate long-term tax-exempt securities increase or decrease in response to such changes. As a result, the market values of such securities will generally be more volatile than the market values of fixed rate tax-exempt securities. To seek to limit the volatility of these securities, the Fund may purchase inverse floating rate bonds with shorter-term maturities or limitations on the extent to which the interest rate may vary. Certain investments in such obligations may be illiquid. See The Funds InvestmentsLeverageTender Option Bond Transactions.
When-Issued Securities, Delayed Delivery Securities and Forward Commitments. The Fund may purchase or sell securities that it is entitled to receive on a when-issued basis. The Fund may also purchase or sell securities on a delayed delivery basis. The Fund may also purchase or sell securities through a forward commitment. These transactions involve the purchase or sale of securities by the Fund at an established price with payment and delivery taking place in the future. The purchase will be recorded on the date the Fund enters into the commitment and the value of the securities will thereafter be reflected in the Funds NAV. The Fund has not established any limit on the percentage of its assets that may be committed in connection with these transactions. At the time the Fund enters into a transaction on a when-issued basis, it will segregate or designate on its books and records cash or liquid assets with a value not less than the value of the when-issued securities.
There can be no assurance that a security purchased on a when-issued basis will be issued or that a security purchased or sold through a forward commitment will be delivered. A default by a counterparty may result in the Fund missing the opportunity of obtaining a price considered to be advantageous. The value of securities in these transactions on the delivery date may be more or less than the Funds purchase price. The Fund may bear the risk of a decline in the value of the security in these transactions and may not benefit from an appreciation in the value of the security during the commitment period.
If deemed advisable as a matter of investment strategy, the Fund may dispose of or renegotiate a commitment after it has been entered into, and may sell securities it has committed to purchase before those securities are delivered to the Fund on the settlement date. In these cases the Fund may realize a taxable capital gain or loss.
When the Fund engages in when-issued, delayed delivery or forward commitment transactions, it relies on the other party to consummate the trade. Failure of such party to do so may result in the Funds incurring a loss or missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a commitment to purchase securities, and any subsequent fluctuations in their market value, is taken into account when determining the market value of the Fund starting on the day the Fund agrees to purchase the securities. The Fund does not earn interest on the securities it has committed to purchase until they are paid for and delivered on the settlement date.
Yields. Yields on Municipal Bonds are dependent on a variety of factors, including the general condition of the money market and of the Municipal Bond market, the size of a particular offering, the financial condition of the issuer, the maturity of the obligation and the rating of the issue. The ability of the Fund to achieve its investment objective is also dependent on the continuing ability of the issuers of the securities in which the Fund invests to meet their obligations for the payment of interest and principal when due. There are variations in the risks involved in holding Municipal Bonds, both within a particular classification and between classifications, depending on numerous factors. Furthermore, the rights of owners of Municipal Bonds and the obligations of the issuer of such Municipal Bonds may be subject to applicable bankruptcy, insolvency and similar laws and court decisions affecting the rights of creditors generally and to general equitable principles, which may limit the enforcement of certain remedies.
High Yield or Junk Bonds. The Fund is required to invest at least 65% of its assets in Municipal Bonds which are rated in any one of the medium and lower rating categories of a nationally recognized statistical rating organization or are unrated. These ratings are currently Baa (Moodys) or BBB (S&P or Fitch) or lower. Information with respect to ratings assigned to tax-exempt obligations that the Fund may purchase is set forth in Appendix ARatings of Investments in the Statement of Additional Information. Municipal Bonds of below investment grade quality (Ba/BB or below) are commonly known as junk bonds. Securities rated below investment grade are judged to have speculative characteristics with respect to their interest and principal payments. Such securities may face major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments.
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Strategic Transactions
The Fund may purchase and sell futures contracts, enter into various interest rate transactions and swap contracts (including, but not limited to, credit default swaps) and may purchase and sell exchange-listed and OTC put and call options on securities and swap contracts, financial indices and futures contracts and use other derivative instruments or management techniques. These Strategic Transactions may be used for duration management and other risk management purposes, subject to the Funds investment restrictions. While the Funds use of Strategic Transactions is intended to reduce the volatility of the NAV of the Funds common shares, the NAV of the Funds common shares will fluctuate. No assurance can be given that the Funds Strategic Transactions will be effective.
There is no particular strategy that requires use of one technique rather than another as the decision to use any particular strategy or instrument is a function of market conditions and the composition of the portfolio. The ability of the Fund to use Strategic Transactions successfully will depend on the Advisors ability to predict pertinent market movements as well as sufficient correlation among the instruments, which cannot be assured. Strategic Transactions subject the Fund to the risk that, if the Advisor incorrectly forecasts market values, interest rates or other applicable factors, the Funds performance could suffer. Certain of these Strategic Transactions, such as investments in inverse floating rate securities and credit default swaps, may provide investment leverage to the Funds portfolio. The Fund is not required to use derivatives or other portfolio strategies to seek to hedge its portfolio and may choose not to do so.
The use of Strategic Transactions may result in losses greater than if they had not been used, may require the Fund to sell or purchase portfolio securities at inopportune times or for prices other than current market values, may limit the amount of appreciation the Fund can realize on an investment or may cause the Fund to hold a security that it might otherwise sell. Furthermore, the Fund may only engage in Strategic Transactions from time to time and may not necessarily be engaging in hedging activities when movements in interest rates occur.
Inasmuch as any obligations of the Fund that arise from the use of Strategic Transactions will be covered by segregated or earmarked liquid assets or offsetting transactions, the Fund and the Advisor believe such obligations do not constitute senior securities and, accordingly, will not treat such transactions as being subject to its borrowing restrictions. Additionally, segregated or earmarked liquid assets, amounts paid by the Fund as premiums and cash or other assets held in margin accounts with respect to Strategic Transactions are not otherwise available to the Fund for investment purposes.
Certain federal income tax requirements may restrict or affect the ability of the Fund to engage in Strategic Transactions. In addition, the use of certain Strategic Transactions may give rise to taxable income and have certain other consequences.
Put and Call Options on Securities and Indices. The Fund may purchase and sell put and call options on securities and indices. A put option gives the purchaser of the option the right to sell and the writer the obligation to buy the underlying security at the exercise price during the option period. The Fund may also purchase and sell options on bond indices (index options). Index options are similar to options on securities except that, rather than taking or making delivery of securities underlying the option at a specified price upon exercise, an index option gives the holder the right to receive cash upon exercise of the option if the level of the bond index upon which the option is based is greater, in the case of a call, or less, in the case of a put, than the exercise price of the option. The purchase of a put option on a debt security could protect the Funds holdings in a security or a number of securities against a substantial decline in the market value. A call option gives the purchaser of the option the right to buy and the seller the obligation to sell the underlying security or index at the exercise price during the option period or for a specified period prior to a fixed date. The purchase of a call option on a security could protect the Fund against an increase in the price of a security that it intended to purchase in the future.
Writing Covered Call Options. The Fund is authorized to write (i.e., sell) covered call options with respect to Municipal Bonds it owns, thereby giving the holder of the option the right to buy the underlying security covered by the option from the Fund at the stated exercise price until the option expires. The Fund writes only covered call options, which means that so long as the Fund is obligated as the writer of a call option, it will own the underlying securities subject to the option.
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The Fund receives a premium from writing a call option, which increases the Funds return on the underlying security in the event the option expires unexercised or is closed out at a profit. By writing a call, the Fund limits its opportunity to profit from an increase in the market value of the underlying security above the exercise price of the option for as long as the Funds obligation as a writer continues. Covered call options serve as a partial hedge against a decline in the price of the underlying security. The Fund may engage in closing transactions in order to terminate outstanding options that it has written.
Additional Information About Options. The Funds ability to close out its position as a purchaser or seller of an exchange-listed put or call option is dependent upon the existence of a liquid secondary market on option exchanges. Among the possible reasons for the absence of a liquid secondary market on an exchange are: (i) insufficient trading interest in certain options; (ii) restrictions on transactions imposed by an exchange; (iii) trading halts, suspensions or other restrictions imposed with respect to particular classes or series of options or underlying securities; (iv) interruption of the normal operations on an exchange; (v) inadequacy of the facilities of an exchange or OCC to handle current trading volume; or (vi) a decision by one or more exchanges to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that exchange (or in that class or series of options) would cease to exist, although outstanding options on that exchange that had been listed by the OCC as a result of trades on that exchange would generally continue to be exercisable in accordance with their terms. OTC options are purchased from or sold to dealers, financial institutions or other counterparties which have entered into direct agreements with the Fund. With OTC options, such variables as expiration date, exercise price and premium will be agreed upon between the Fund and the counterparty, without the intermediation of a third party such as the OCC. If the counterparty fails to make or take delivery of the securities underlying an option it has written, or otherwise settle the transaction in accordance with the terms of that option as written, the Fund would lose the premium paid for the option as well as any anticipated benefit of the transaction. OTC options and assets used to cover OTC options written by the Fund are considered by the staff of the SEC to be illiquid. The illiquidity of such options or assets may prevent a successful sale of such options or assets, result in a delay of sale, or reduce the amount of proceeds that might otherwise be realized.
The Fund may engage in options and futures transactions on exchanges and options in the over-the-counter markets. The Fund will only enter into OTC options with counterparties the Advisor believes to be creditworthy at the time they enter into such transactions.
The hours of trading for options on debt securities may not conform to the hours during which the underlying securities are traded. To the extent that the option markets close before the markets for the underlying securities, significant price and rate movements can take place in the underlying markets that cannot be reflected in the option markets.
Financial Futures Transactions and Options. The Fund is authorized to purchase and sell certain exchange traded financial futures contracts (financial futures contracts) in order to hedge its investments against declines in value, and to hedge against increases in the cost of securities it intends to purchase or to seek to enhance the Funds return. However, any transactions involving financial futures or options (including puts and calls associated therewith) will be in accordance with the Funds investment policies and limitations. A financial futures contract obligates the seller of a contract to deliver and the purchaser of a contract to take delivery of the type of financial instrument covered by the contract, or in the case of index-based futures contracts to make and accept a cash settlement, at a specific future time for a specified price. To hedge its portfolio, the Fund may take an investment position in a futures contract which will move in the opposite direction from the portfolio position being hedged. A sale of financial futures contracts may provide a hedge against a decline in the value of portfolio securities because such depreciation may be offset, in whole or in part, by an increase in the value of the position in the financial futures contracts. A purchase of financial futures contracts may provide a hedge against an increase in the cost of securities intended to be purchased because such appreciation may be offset, in whole or in part, by an increase in the value of the position in the futures contracts.
Distributions, if any, of net long-term capital gains from certain transactions in futures or options are taxable at long-term capital gains rates for U.S. federal income tax purposes.
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Futures Contracts. A futures contract is an agreement between two parties to buy and sell a security or, in the case of an index-based futures contract, to make and accept a cash settlement for a set price on a future date. A majority of transactions in futures contracts, however, do not result in the actual delivery of the underlying instrument or cash settlement, but are settled through liquidation, i.e., by entering into an offsetting transaction. Futures contracts have been designed by boards of trade which have been designated contracts markets by the CFTC.
The purchase or sale of a futures contract differs from the purchase or sale of a security in that no price or premium is paid or received. Instead, an amount of cash or securities acceptable to the broker and the relevant contract market, which varies, but is generally about 5% of the contract amount, must be deposited with the broker. This amount is known as initial margin and represents a good faith deposit assuring the performance of both the purchaser and seller under the futures contract. Subsequent payments to and from the broker, called variation margin, are required to be made on a daily basis as the price of the futures contract fluctuates making the long and short positions in the futures contract more or less valuable, a process known as marking to the market. At any time prior to the settlement date of the futures contract, the position may be closed out by taking an opposite position that will operate to terminate the position in the futures contract. A final determination of variation margin is then made, additional cash is required to be paid to or released by the broker and the purchaser realizes a loss or gain. In addition, a nominal commission is paid on each completed sale transaction.
The Fund may also purchase and sell financial futures contracts on U.S. Government securities as a hedge against adverse changes in interest rates as described below. With respect to U.S. Government securities, currently there are financial futures contracts based on long-term U.S. Treasury bonds, U.S. Treasury notes, Government National Mortgage Association (GNMA) Certificates and three-month U.S. Treasury bills. The Fund may purchase and write call and put options on futures contracts on U.S. Government securities and purchase and sell Municipal Bond Index futures contracts in connection with its hedging strategies.
The Fund also may engage in other futures contracts transactions such as futures contracts on other municipal bond indices that may become available if the Advisor should determine that there is normally a sufficient correlation between the prices of such futures contracts and the Municipal Bonds in which the Fund invests to make such hedging appropriate.
Futures Strategies. The Fund may sell a financial futures contract (i.e., assume a short position) in anticipation of a decline in the value of its investments resulting from an increase in interest rates or otherwise. The risk of decline could be reduced without employing futures as a hedge by selling investments and either reinvesting the proceeds in securities with shorter maturities or by holding assets in cash. This strategy, however, entails increased transaction costs in the form of dealer spreads and typically would reduce the average yield of the Funds portfolio securities as a result of the shortening of maturities. The sale of futures contracts provides an alternative means of hedging against declines in the value of its investments. As such values decline, the value of the Funds positions in the futures contracts will tend to increase, thus offsetting all or a portion of the depreciation in the market value of the Funds investments that are being hedged. While the Fund will incur commission expenses in selling and closing out futures positions, commissions on futures transactions are typically lower than transaction costs incurred in the purchase and sale of the Funds investments being hedged. In addition, the ability of the Fund to trade in the standardized contracts available in the futures markets may offer a more effective defensive position than a program to reduce the average maturity of the portfolio securities due to the unique and varied credit and technical characteristics of the instruments available to the Fund. Employing futures as a hedge also may permit the Fund to assume a defensive posture without reducing the yield on its investments beyond any amounts required to engage in futures trading.
When the Fund intends to purchase a security, the Fund may purchase futures contracts as a hedge against any increase in the cost of such security resulting from a decrease in interest rates or otherwise, that may occur before such purchase can be effected. Subject to the degree of correlation between such securities and the futures contracts, subsequent increases in the cost of such securities should be reflected in the value of the futures held by the Fund. As such purchases are made, an equivalent amount of futures contracts will be closed out. Due to changing market conditions and interest rate forecasts, however, a futures position may be terminated without a corresponding purchase of portfolio securities.
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Call Options on Futures Contracts. The Fund may also purchase and sell exchange traded call and put options on financial futures contracts. The purchase of a call option on a futures contract is analogous to the purchase of a call option on an individual security. Depending on the pricing of the option compared to either the futures contract upon which it is based or the price of the underlying securities, it may or may not be less risky than ownership of the futures contract or underlying securities. Like the purchase of a futures contract, the Fund may purchase a call option on a futures contract to hedge against a market advance when the Fund is not fully invested.
The writing of a call option on a futures contract constitutes a partial hedge against declining prices of the securities which are deliverable upon exercise of the futures contract. If the futures price at expiration is below the exercise price, the Fund will retain the full amount of the option premium, which provides a partial hedge against any decline that may have occurred in the Funds portfolio holdings.
Put Options on Futures Contracts. The purchase of a put option on a futures contract is analogous to the purchase of a protective put option on portfolio securities. The Fund may purchase a put option on a futures contract to hedge the Funds portfolio against the risk of rising interest rates.
The writing of a put option on a futures contract constitutes a partial hedge against increasing prices of the securities which are deliverable upon exercise of the futures contract. If the futures price at expiration is higher than the exercise price, the Fund will retain the full amount of the option premium, which provides a partial hedge against any increase in the price of securities which the Fund intends to purchase.
The writer of an option on a futures contract is required to deposit initial and variation margin pursuant to requirements similar to those applicable to futures contracts. Premiums received from the writing of an option will be included in initial margin. The writing of an option on a futures contract involves risks similar to those relating to futures contracts.
The CFTC subjects advisers to registered investment companies to regulation by the CFTC if a fund that is advised by the investment adviser either (i) invests, directly or indirectly, more than a prescribed level of its liquidation value in CFTC-regulated futures, options and swaps (CFTC Derivatives), or (ii) markets itself as providing investment exposure to such instruments. To the extent the Fund uses CFTC Derivatives, it intends to do so below such prescribed levels and will not market itself as a commodity pool or a vehicle for trading such instruments. Accordingly, the Advisor has claimed an exclusion from the definition of the term commodity pool operator under the Commodity Exchange Act (CEA) pursuant to Rule 4.5 under the CEA. The Advisor is not, therefore, subject to registration or regulation as a commodity pool operator under the CEA in respect of the Fund.
Counterparty Credit Standards. To the extent that the Fund engages in principal transactions, including, but not limited to, OTC options, forward currency transactions, swap transactions, repurchase and reverse repurchase agreements and the purchase and sale of bonds and other fixed-income securities, it must rely on the creditworthiness of its counterparties under such transactions. In certain instances, the credit risk of a counterparty is increased by the lack of a central clearing house for certain transactions, including certain swap contracts. In the event of the insolvency of a counterparty, the Fund may not be able to recover its assets, in full or at all, during the insolvency process. Counterparties to investments may have no obligation to make markets in such investments and may have the ability to apply essentially discretionary margin and credit requirements. Similarly, the Fund will be subject to the risk of bankruptcy of, or the inability or refusal to perform with respect to such investments by, the counterparties with which it deals. The Advisor will seek to minimize the Funds exposure to counterparty risk by entering into such transactions with counterparties the Advisor believes to be creditworthy at the time it enters into the transaction. Certain option transactions and Strategic Transactions may require the Fund to provide collateral to secure its performance obligations under a contract, which would also entail counterparty credit risk.
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Other Investment Policies
The Fund has adopted certain other policies as set forth below.
Temporary Investments
The Fund may invest in short-term tax-exempt and taxable securities subject to the limitations set forth above. The tax-exempt money market securities may include municipal notes, municipal commercial paper, Municipal Bonds with a remaining maturity of less than one year, variable rate demand notes and participations therein. Municipal notes include tax anticipation notes, bond anticipation notes, revenue anticipation notes and grant anticipation notes. Anticipation notes are sold as interim financing in anticipation of tax collection, bond sales, government grants or revenue receipts. Municipal commercial paper refers to short-term unsecured promissory notes generally issued to finance short-term credit needs. The taxable money market securities in which the Fund may invest as Temporary Investments consist of U.S. Government securities, U.S. Government agency securities, domestic bank or savings institution certificates of deposit and bankers acceptances, short-term corporate debt securities such as commercial paper and repurchase agreements. These Temporary Investments must have a stated maturity not in excess of one year from the date of purchase. The Fund may not invest in any security issued by a commercial bank or a savings institution unless the bank or institution is organized and operating in the United States, has total assets of at least one billion dollars and is a member of the Federal Deposit Insurance Corporation (FDIC), except that up to 10% of total assets may be invested in certificates of deposit of smaller institutions if such certificates are fully insured by the FDIC.
Short-term taxable fixed-income investments include, without limitation, the following:
(1) U.S. Government securities, including bills, notes and bonds differing as to maturity and rates of interest that are either issued or guaranteed by the U.S. Treasury or by U.S. Government agencies or instrumentalities. U.S. Government securities include securities issued by (a) the Federal Housing Administration, Farmers Home Administration, Export-Import Bank of the United States, Small Business Administration, and the Government National Mortgage Association, whose securities are supported by the full faith and credit of the United States; (b) the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the Tennessee Valley Authority, whose securities are supported by the right of the agency to borrow from the U.S. Treasury; (c) the Federal National Mortgage Association, whose securities are supported by the discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and (d) the Student Loan Marketing Association, whose securities are supported only by its credit. While the U.S. Government provides financial support to such U.S. Government-sponsored agencies or instrumentalities, no assurance can be given that it always will do so since it is not so obligated by law. The U.S. Government, its agencies and instrumentalities do not guarantee the market value of their securities. Consequently, the value of such securities may fluctuate.
(2) Certificates of deposit issued against funds deposited in a bank or a savings and loan association. Such certificates are for a definite period of time, earn a specified rate of return, and are normally negotiable. The issuer of a certificate of deposit agrees to pay the amount deposited plus interest to the bearer of the certificate on the date specified thereon. Certificates of deposit purchased by the Fund may not be fully insured by the FDIC.
(3) Repurchase agreements, which involve purchases of debt securities. At the time the Fund purchases securities pursuant to a repurchase agreement, it simultaneously agrees to resell and redeliver such securities to the seller, who also simultaneously agrees to buy back the securities at a fixed price and time. This assures a predetermined yield for the Fund during its holding period, since the resale price is always greater than the purchase price and reflects an agreed-upon market rate. Such actions afford an opportunity for the Fund to invest temporarily available cash. The Fund may enter into repurchase agreements only with respect to obligations of the U.S. Government, its agencies or instrumentalities; certificates of deposit; or bankers acceptances in which the Fund may invest. Repurchase agreements may be considered loans to the seller, collateralized by the underlying securities. The risk to the Fund is limited to the ability of the seller to pay the agreed-upon sum on the repurchase date; in the event of default, the repurchase agreement provides that the Fund is entitled to sell the underlying collateral. If the value of the collateral declines after the agreement is entered into, and if the seller defaults under a repurchase agreement when the value of the underlying collateral is less than the repurchase price, the Fund could incur a loss of both principal and interest. The Advisor monitors the value of the collateral at the time the action is entered into and at all times during the term of the repurchase agreement. The Advisor does so in an effort to determine that the value of the collateral always equals or exceeds the agreed-upon repurchase price to be paid to the Fund. If the seller were to be subject to a federal bankruptcy proceeding, the ability of the Fund to liquidate the collateral could be delayed or impaired because of certain provisions of the bankruptcy laws.
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(4) Commercial paper, which consists of short-term unsecured promissory notes, including variable rate master demand notes issued by corporations to finance their current operations. Master demand notes are direct lending arrangements between the Fund and a corporation. There is no secondary market for such notes. However, they are redeemable by the Fund at any time. The Advisor will consider the financial condition of the corporation (e.g., earning power, cash flow and other liquidity ratios) and will continuously monitor the corporations ability to meet all of its financial obligations, because the Funds liquidity might be impaired if the corporation were unable to pay principal and interest on demand. Investments in commercial paper will be limited to commercial paper rated in the highest categories by a major rating agency and which mature within one year of the date of purchase or carry a variable or floating rate of interest.
Short-term tax-exempt fixed-income securities are securities that are exempt from regular federal income tax and mature within three years or less from the date of issuance. Short-term tax-exempt fixed-income securities include, without limitation, the following:
Bond Anticipation Notes (BANs) are usually general obligations of state and local governmental issuers which are sold to obtain interim financing for projects that will eventually be funded through the sale of long-term debt obligations or bonds. The ability of an issuer to meet its obligations on its BANs is primarily dependent on the issuers access to the long-term municipal bond market and the likelihood that the proceeds of such bond sales will be used to pay the principal and interest on the BANs.
Tax Anticipation Notes (TANs) are issued by state and local governments to finance the current operations of such governments. Repayment is generally to be derived from specific future tax revenues. TANs are usually general obligations of the issuer. A weakness in an issuers capacity to raise taxes due to, among other things, a decline in its tax base or a rise in delinquencies could adversely affect the issuers ability to meet its obligations on outstanding TANs.
Revenue Anticipation Notes (RANs) are issued by governments or governmental bodies with the expectation that future revenues from a designated source will be used to repay the notes. In general, they also constitute general obligations of the issuer. A decline in the receipt of projected revenues, such as anticipated revenues from another level of government, could adversely affect an issuers ability to meet its obligations on outstanding RANs. In addition, the possibility that the revenues would, when received, be used to meet other obligations could affect the ability of the issuer to pay the principal and interest on RANs.
Construction Loan Notes are issued to provide construction financing for specific projects. Frequently, these notes are redeemed with funds obtained from the Federal Housing Administration.
Bank Notes are notes issued by local government bodies and agencies to commercial banks as evidence of borrowings. The purposes for which the notes are issued are varied but they are frequently issued to meet short-term working capital or capital-project needs. These notes may have risks similar to the risks associated with TANs and RANs.
Tax-Exempt Commercial Paper (municipal paper) represents very short-term unsecured, negotiable promissory notes, issued by states, municipalities and their agencies. Payment of principal and interest on issues of municipal paper may be made from various sources, to the extent the funds are available therefrom. Maturities on municipal paper generally will be shorter than the maturities of TANs, BANs or RANs. There is a limited secondary market for issues of municipal paper.
Certain municipal bonds may carry variable or floating rates of interest whereby the rate of interest is not fixed but varies with changes in specified market rates or indices, such as a bank prime rate or tax-exempt money market indices.
While the various types of notes described above as a group represent the major portion of the tax-exempt note market, other types of notes are available in the marketplace and the Fund may invest in such other types of notes to the extent permitted under its investment objective, policies and limitations. Such notes may be issued for different purposes and may be secured differently from those mentioned above.
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Interest Rate Swap Transactions
In order to seek to hedge the value of the Fund against interest rate fluctuations or to seek to increase the Funds return, the Fund may enter into interest rate swap transactions such as Municipal Market Data AAA Cash Curve swaps (MMD Swaps) or Securities Industry and Financial Markets Association Municipal Swap Index swaps (SIFMA Swaps). To the extent that the Fund enters into these transactions, the Fund expects to do so primarily to preserve a return or spread on a particular investment or portion of its portfolio as a duration management technique or to protect against any increase in the price of securities the Fund anticipates purchasing at a later date. The Fund may enter into these transactions primarily as a hedge or for duration or risk management rather than as a speculative investment. However, the Fund also may invest in MMD Swaps and SIFMA Swaps to seek to enhance return or gain or to increase the Funds yield, for example, during periods of steep interest rate yield curves (i.e., wide differences between short-term and long-term interest rates).
The Fund may purchase and sell SIFMA Swaps in the SIFMA swap market. In a SIFMA Swap, the Fund exchanges with another party their respective commitments to pay or receive interest (e.g., an exchange of fixed rate payments for floating rate payments linked to the SIFMA Municipal Swap Index). Because the underlying index is a tax-exempt index, SIFMA Swaps may reduce cross-market risks incurred by the Fund and increase the Funds ability to hedge effectively. SIFMA Swaps are typically quoted for the entire yield curve, beginning with a seven day floating rate index out to 30 years. The duration of a SIFMA Swap is approximately equal to the duration of a fixed-rate Municipal Bond with the same attributes as the swap (e.g., coupon, maturity, call feature).
The Fund may also purchase and sell MMD Swaps, also known as MMD rate locks. An MMD Swap permits the Fund to lock in a specified municipal interest rate for a portion of its portfolio to preserve a return on a particular investment or a portion of its portfolio as a duration management technique or to protect against any increase in the price of securities to be purchased at a later date. By using an MMD Swap, the Fund can create a synthetic long or short position, allowing the Fund to select the most attractive part of the yield curve. An MMD Swap is a contract between the Fund and an MMD Swap provider pursuant to which the parties agree to make payments to each other on a notional amount, contingent upon whether the Municipal Market Data AAA General Obligation Scale is above or below a specified level on the expiration date of the contract. For example, if the Fund buys an MMD Swap and the Municipal Market Data AAA General Obligation Scale is below the specified level on the expiration date, the counterparty to the contract will make a payment to the Fund equal to the specified level minus the actual level, multiplied by the notional amount of the contract. If the Municipal Market Data AAA General Obligation Scale is above the specified level on the expiration date, the Fund will make a payment to the counterparty equal to the actual level minus the specified level, multiplied by the notional amount of the contract.
In connection with investments in SIFMA and MMD Swaps, there is a risk that municipal yields will move in the opposite direction than anticipated by the Fund, which would cause the Fund to make payments to its counterparty in the transaction that could adversely affect the Funds performance.
The Fund has no obligation to enter into SIFMA Swaps or MMD Swaps and may elect not to do so. The net amount of the excess, if any, of the Funds obligations over its entitlements with respect to each interest rate swap will be accrued on a daily basis, and the Fund will segregate or designate on its books and records liquid assets having an aggregate NAV at least equal to the accrued excess.
If there is a default by the other party to an uncleared interest rate swap transaction, generally the Fund will have contractual remedies pursuant to the agreements related to the transaction. With respect to interest rate swap transactions cleared through a central clearing counterparty, a clearing organization will be substituted for the counterparty and will guarantee the parties performance under the swap agreement. However, there can be no assurances that the clearing organization will satisfy its obligation to the Fund or that the Fund would be able to recover the full amount of assets deposited on its behalf with the clearing organization in the event of the default by the clearing organization or the Funds clearing broker. Certain U.S. federal income tax requirements may limit the Funds ability to engage in interest rate swaps. Distributions attributable to transactions in interest rate swaps generally will be taxable as ordinary income to shareholders.
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Call Rights
The Fund may purchase a Municipal Bond issuers right to call all or a portion of such Municipal Bond for mandatory tender for purchase (a Call Right). A holder of a Call Right may exercise such right to require a mandatory tender for the purchase of related Municipal Bonds, subject to certain conditions. A Call Right that is not exercised prior to maturity of the related Municipal Bond will expire without value. The economic effect of holding both the Call Right and the related Municipal Bond is identical to holding a Municipal Bond as a non-callable security. Certain investments in such obligations may be illiquid.
Credit Default Swap Agreements
The Fund may enter into credit default swap agreements for hedging purposes or to seek to increase its return. The credit default swap agreement may have as reference obligations one or more securities that are not currently held by the Fund. The protection buyer in a credit default contract may be obligated to pay the protection seller an upfront or a periodic stream of payments over the term of the contract, provided that no credit event on a reference obligation has occurred. If a credit event occurs, the seller generally must pay the buyer the par value (full notional value) of the swap in exchange for an equal face amount of deliverable obligations of the reference entity described in the swap, or the seller may be required to deliver the related net cash amount (the difference between the market value of the reference obligation and its par value), if the swap is cash settled. The Fund may be either the buyer or seller in the transaction. If the Fund is a buyer and no credit event occurs, the Fund may recover nothing if the swap is held through its termination date. However, if a credit event occurs, the buyer generally may elect to receive the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have significantly decreased. As a seller, the Fund generally receives an upfront payment or a fixed rate of income throughout the term of the swap, which typically is between six (6) months and three years, provided that there is no credit event. If a credit event occurs, generally the seller must pay the buyer the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have significantly decreased. As the seller, the Fund would effectively add leverage to its portfolio because, in addition to its total net assets, the Fund would be subject to investment exposure on the notional amount of the swap.
Credit default swap agreements involve greater risks than if the Fund had invested in the reference obligation directly since, in addition to general market risks, credit default swaps are subject to illiquidity risk, counterparty risk and credit risks. The Fund will enter into credit default swap agreements only with counterparties the Advisor believes to be creditworthy at the time they enter into such transactions. A buyer generally also will lose its investment and recover nothing should no credit event occur and the swap is held to its termination date. If a credit event were to occur, the value of any deliverable obligation received by the seller, coupled with the upfront or periodic payments previously received, may be less than the full notional value it pays to the buyer, resulting in a loss of value to the seller. The Funds obligations under a credit default swap agreement will be accrued daily (offset against any amounts owing to the Fund).
The Fund will at all times segregate or designate on its books and records in connection with each such transaction liquid assets or cash with a value at least equal to the Funds exposure (any accrued but unpaid net amounts owed by the Fund to any counterparty) on a marked-to-market basis (as calculated pursuant to requirements of the SEC). If the Fund is a seller of protection in a credit default swap transaction, it will segregate or designate on its books and records in connection with such transaction liquid assets or cash with a value at least equal to the full notional amount of the contract. Such segregation or designation will ensure that the Fund has assets available to satisfy its obligations with respect to the transaction and will avoid any potential leveraging of the Funds portfolio. Such segregation or designation will not limit the Funds exposure to loss.
VRDOs and Participating VRDOs
VRDOs are tax-exempt obligations that contain a floating or variable interest rate adjustment formula and right of demand on the part of the holder thereof to receive payment of the unpaid principal balance plus accrued interest upon a short notice period not to exceed seven (7) days. There is, however, the possibility that because of default or insolvency the demand feature of VRDOs and Participating VRDOs may not be honored. The interest rates are adjustable at intervals (ranging from daily to up to one year) to some prevailing market rate for similar investments, such adjustment formula being calculated to maintain the market value of the VRDOs, at approximately the par value of the VRDOs on the adjustment date. The adjustments typically are based upon the SIFMA Municipal Swap Index or some other appropriate interest rate adjustment index. The Fund may invest in all types of tax-exempt instruments currently outstanding or to be issued in the future which satisfy its short-term maturity and quality standards.
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Participating VRDOs provide the Fund with a specified undivided interest (up to 100%) of the underlying obligation and the right to demand payment of the unpaid principal balance plus accrued interest on the Participating VRDOs from the financial institution upon a specified number of days notice, not to exceed seven (7) days. In addition, the Participating VRDO is backed by an irrevocable letter of credit or guaranty of the financial institution. The Fund would have an undivided interest in the underlying obligation and thus participate on the same basis as the financial institution in such obligation except that the financial institution typically retains fees out of the interest paid on the obligation for servicing the obligation, providing the letter of credit and issuing the repurchase commitment. The Fund has been advised by its counsel that the Fund should be entitled to treat the income received on Participating VRDOs as interest from tax-exempt obligations as long as the Fund does not invest more than 20% of its total assets in such investments and certain other conditions are met. It is contemplated that the Fund will not invest more than 20% of its assets in Participating VRDOs.
The Temporary Investments, VRDOs and Participating VRDOs in which the Fund may invest will be in the following rating categories at the time of purchase: MIG-1/VMIG-1 through MIG-3/VMIG-3 for notes and VRDOs and Prime-1 through Prime-3 for commercial paper (as determined by Moodys), SP-1 through SP-2 for notes and A-1 through A-3 for VRDOs and commercial paper (as determined by S&P), or F1 through F3 for notes, VRDOs and commercial paper (as determined by Fitch). Temporary Investments, if not rated, must be of comparable quality in the opinion of the Advisor. In addition, the Fund reserves the right to invest temporarily a greater portion of its assets in Temporary Investments for defensive purposes, when, in the judgment of the Advisor, market conditions warrant.
Repurchase Agreements
The Fund may invest in securities pursuant to repurchase agreements. Repurchase agreements may be entered into only with a member bank of the Federal Reserve System or a primary dealer or an affiliate thereof, in U.S. Government securities. A repurchase agreement is a contractual agreement whereby the seller of securities agrees to repurchase the same security at a specified price on a future date agreed upon by the parties. The agreed-upon repurchase price determines the yield during the Funds holding period. Repurchase agreements are considered to be loans collateralized by the underlying security that is the subject of the repurchase contract. The risk to the Fund is limited to the ability of the issuer to pay the agreed-upon repurchase price on the delivery date; however, although the value of the underlying collateral at the time the transaction is entered into always equals or exceeds the agreed-upon repurchase price, if the value of the collateral declines there is a risk of loss of both principal and interest. In the event of default, the collateral may be sold but the Fund might incur a loss if the value of the collateral declines, and might incur disposition costs or experience delays in connection with liquidating the collateral. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, realization upon the collateral by the Fund may be delayed or limited. The Advisor will monitor the value of the collateral at the time the transaction is entered into and throughout the term of the repurchase agreement in an effort to determine that such value always equals or exceeds the agreed-upon repurchase price. In the event the value of the collateral declines below the repurchase price, the Advisor will demand additional collateral from the issuer to increase the value of the collateral to at least that of the repurchase price, including interest.
In general, for federal income tax purposes, repurchase agreements are treated as collateralized loans secured by the securities sold. Therefore, amounts earned under such agreements will not be considered tax exempt interest. The treatment of purchase and sales contracts is less certain.
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The Fund currently does not intend to borrow money or issue debt securities or preferred shares. The Fund is, however, permitted to borrow money or issue debt securities in an amount up to 33 1/3% of its Managed Assets (50% of its net assets), and issue preferred shares in an amount up to 50% of its Managed Assets (100% of its net assets). Managed Assets means the total assets of the Fund (including any assets attributable to money borrowed for investment purposes) minus the sum of the Funds accrued liabilities (other than money borrowed for investment purposes). Although it has no present intention to do so, the Fund reserves the right to borrow money from banks or other financial institutions, or issue debt securities or preferred shares, in the future if it believes that market conditions would be conducive to the successful implementation of a leveraging strategy through borrowing money or issuing debt securities or preferred shares. Any such leveraging will not be fully achieved until the proceeds resulting from the use of leverage have been invested in accordance with the Funds investment objective and policies.
The Board has authorized the Fund to use economic leverage up to 25% of its total assets. The Fund currently intends to use economic leverage approximately equal to 15% of its total assets at the time the leverage is implemented, but may use economic leverage up to 25% of its total assets under the leverage policy set by the Board without further Board or shareholder approval. The Board could in the future authorize the Fund to use additional leverage up to the maximum amount permitted under the 1940 Act or change the 25% threshold at which Board approval is required to increase leverage, in each case without further shareholder approval.
The use of leverage can create risks. When leverage is employed, the NAV and market price of the common shares and the yield to holders of common shares will be more volatile than if leverage were not used. Changes in the value of the Funds portfolio, including securities bought with the proceeds of leverage, will be borne entirely by the holders of common shares. If there is a net decrease or increase in the value of the Funds investment portfolio, leverage will decrease or increase, as the case may be, the NAV per common share to a greater extent than if the Fund did not utilize leverage. A reduction in the Funds NAV may cause a reduction in the market price of its shares. During periods in which the Fund is using leverage, the fee paid to the Advisor for advisory services will be higher than if the Fund did not use leverage, because the fees paid will be calculated on the basis of the Funds Managed Assets, which includes the proceeds from leverage. Any leveraging strategy the Fund employs may not be successful. See RisksLeverage Risk. The Fund currently leverages assets through tender option bonds transactions. See RisksTender Option Bond Risk for details about the risks associated with the Funds use of TOB Residuals.
Certain types of leverage the Fund may use may result in the Fund being subject to covenants relating to asset coverage and portfolio composition requirements. The Fund may be subject to certain restrictions on investments imposed by one or more lenders or by guidelines of one or more rating agencies, which may issue ratings for any short-term debt securities or preferred shares issued by the Fund. The terms of any borrowings or rating agency guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed by the Investment Company Act. The Advisor does not believe that these covenants or guidelines will impede it from managing the Funds portfolio in accordance with its investment objective and policies if the Fund were to utilize leverage.
Under the Investment Company Act, the Fund is not permitted to issue senior securities if, immediately after the issuance of such senior securities, the Fund would have an asset coverage ratio (as defined in the Investment Company Act) of less than 300% with respect to senior securities representing indebtedness (i.e., for every dollar of indebtedness outstanding, the Fund is required to have at least three dollars of assets) or less than 200% with respect to senior securities representing preferred shares (i.e., for every dollar of preferred shares outstanding, the Fund is required to have at least two dollars of assets). The Investment Company Act also provides that the Fund may not declare distributions or purchase its stock (including through tender offers) if, immediately after doing so, it will have an asset coverage ratio of less than 300% or 200%, as applicable. Under the Investment Company Act, certain short-term borrowings (such as for cash management purposes) are not subject to these limitations if (i) repaid within 60 days, (ii) not extended or renewed and (iii) not in excess of 5% of the total assets of the Fund.
Effects of Leverage
Assuming that leverage will represent approximately 12% of the Funds Managed Assets and that the Fund will bear expenses relating to that leverage at an average annual rate of 2.19%, the income generated by the Funds portfolio (net of estimated expenses) must exceed 0.27% in order to cover the expenses specifically related to the Funds use of leverage. Of course, these numbers are merely estimates used for illustration. Actual leverage expenses will vary frequently and may be significantly higher or lower than the rate estimated above.
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The following table is furnished in response to requirements of the SEC. It is designed to illustrate the effect of leverage on common share total return, assuming investment portfolio total returns (comprised of income and changes in the value of securities held in the Funds portfolio) of (10)%, (5)%, 0%, 5% and 10%. These assumed investment portfolio returns are hypothetical figures and are not necessarily indicative of the investment portfolio returns experienced or expected to be experienced by the Fund. See Risks. The table further reflects the use of leverage representing 12% of the Funds Managed Assets and the Funds currently projected annual leverage expense of 2.19%.
Assumed Portfolio Total Return (Net of Expenses) |
(10.00 | )% | (5.00 | )% | 0.00 | % | 5.00 | % | 10.00 | % | ||||||||||||||||||||||
Common Share Total Return |
(11.71 | )% | (6.01 | )% | (0.31 | ) | % | 5.40 | % | 11.10 | % |
Common share total return is composed of two elements: the common share dividends paid by the Fund (the amount of which is largely determined by the net investment income of the Fund) and gains or losses on the value of the securities the Fund owns. As required by SEC rules, the table assumes that the Fund is more likely to suffer capital losses than to enjoy capital appreciation. For example, to assume a total return of 0% the Fund must assume that the interest it receives on its investments is entirely offset by losses in the value of those securities.
Tender Option Bond Transactions
The Fund currently leverages its assets through the use of TOB Residuals, which are derivative interests in municipal bonds. The TOB Residuals in which the Fund will invest pay interest or income that, in the opinion of counsel to the issuer of such TOB Residuals, is exempt from regular U.S. federal income tax. No independent investigation will be made to confirm the tax-exempt status of the interest or income paid by TOB Residuals held by the Fund. Although volatile, TOB Residuals typically offer the potential for yields exceeding the yields available on fixed rate municipal bonds with comparable credit quality.
TOB Residuals represent beneficial interests in a TOB Trust formed for the purpose of holding municipal bonds contributed by one or more funds. A TOB Trust typically issues two classes of beneficial interests: TOB Floaters, which are sold to third party investors, and TOB Residuals, which are generally issued to the fund(s) that transferred municipal bonds to the TOB Trust. The Fund may invest in both TOB Floaters and TOB Residuals. TOB Floaters may have first priority on the cash flow from the municipal bonds held by the TOB Trust and are enhanced with a liquidity support arrangement from a third party TOBs Liquidity Provider (defined below) which allows holders to tender their position at par (plus accrued interest). The Fund, as a holder of TOB Residuals, is paid the residual cash flow from the TOB Trust. The Fund contributes municipal bonds to the TOB Trust and is paid the cash received by the TOB Trust from the sale of the TOB Floaters, less certain transaction costs, and typically will invest the cash to purchase additional municipal bonds or other investments permitted by its investment policies. If the Fund ever purchases all or a portion of the TOB Floaters sold by the TOB Trust, it may surrender those TOB Floaters together with a proportionate amount of TOB Residuals to the TOB Trust in exchange for a proportionate amount of the municipal bonds owned by the TOB Trust.
Other BlackRock-advised Funds (as defined below) may contribute municipal bonds to a TOB Trust into which the Fund has contributed municipal bonds. If multiple BlackRock-advised Funds participate in the same TOB Trust, the economic rights and obligations under the TOB Residual will generally be shared among the funds ratably in proportion to their participation in the TOB Trust.
The municipal bonds transferred to a TOB Trust typically are high grade municipal bonds. In certain cases, when municipal bonds transferred are lower grade municipal bonds, the TOB Trust transaction includes a credit enhancement feature that provides for the timely payment of principal and interest on the bonds to the TOB Trust by a credit enhancement provider. The TOB Trust would be responsible for the payment of the credit enhancement fee and the Fund, as a TOB Residual holder, would be responsible for reimbursement of any payments of principal and interest made by the credit enhancement provider.
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The TOB Residuals held by the Fund generally provide the Fund with the right to cause the holders of a proportional share of the TOB Floaters to tender their notes to the TOB Trust at par plus accrued interest. Thereafter, the Fund may withdraw a corresponding share of the municipal bonds from the TOB Trust. As a result, a tender option bond transaction, in effect, creates exposure for the Fund to the entire return of the municipal bonds in the TOB Trust, with a net cash investment by the Fund that is less than the value of the municipal bonds in the TOB Trust. This multiplies the positive or negative impact of the municipal bonds return within the Fund (thereby creating leverage). The leverage within a TOB Trust depends on the value of the municipal bonds deposited in the TOB Trust relative to the value of the TOB Floaters it issues.
The Fund may invest in highly leveraged TOB Residuals. A TOB Residual generally is considered highly leveraged if the principal amount of the TOB Floaters issued by the related TOB Trust exceeds 75% of the principal amount of the municipal bonds owned by the TOB Trust.
The leverage attributable to the Funds use of TOB Residuals may be called away on relatively short notice and therefore may be less permanent than more traditional forms of leverage. The TOB Trust may be collapsed without the consent of the Fund upon the occurrence of termination events, as defined in the TOB Trust agreements. Upon the occurrence of a termination event, a TOB Trust would be liquidated with the proceeds applied first to any accrued fees owed to the trustee of the TOB Trust, the remarketing agent of the TOB Floaters and the TOBs Liquidity Provider. Upon certain termination events, the holders of the TOB Floaters would be paid before the TOB Residual holders (i.e., the Fund) whereas in other termination events, the holders of TOB Floaters and the TOB Residual holders would be paid pro rata.
TOB Trusts are typically supported by a liquidity facility provided by a TOBs Liquidity Provider that allows the holders of the TOB Floaters to tender their TOB Floaters in exchange for payment of par plus accrued interest on any business day (subject to the non-occurrence of a termination event). The tendered TOB Floaters are remarketed by a remarketing agent. In the event of a failed remarketing, the TOB Trust may draw upon a loan from the TOBs Liquidity Provider to purchase the tendered TOB Floaters. Any loans made by the TOBs Liquidity Provider will be secured by the purchased TOB Floaters held by the TOB Trust and will be subject to an increased interest rate based on number of days the loan is outstanding.
The Fund may invest in a TOB Trust on either a non-recourse or recourse basis. When the Fund invests in TOB Trusts on a non-recourse basis, and the TOBs Liquidity Provider is required to make a payment under the liquidity facility, the TOBs Liquidity Provider will typically liquidate all or a portion of the municipal bonds held in the TOB Trust and then fund the balance, if any, of the Liquidation Shortfall. If the Fund invests in a TOB Trust on a recourse basis, it will typically enter into a reimbursement agreement with the TOBs Liquidity Provider pursuant to which the Fund is required to reimburse the TOBs Liquidity Provider the amount of any Liquidation Shortfall. As a result, if the Fund invests in a recourse TOB Trust, the Fund will bear the risk of loss with respect to any Liquidation Shortfall. If multiple BlackRock-advised Funds participate in any such TOB Trust, these losses will be shared ratably, in proportion to their participation in the TOB Trust.
Under accounting rules, Municipal Bonds of the Fund that are deposited into a TOB Trust are investments of the Fund and are presented on the Funds Schedule of Investments and outstanding TOB Floaters issued by a TOB Trust are presented as liabilities in the Funds Statement of Assets and Liabilities. Interest income from the underlying Municipal Bonds is recorded by the Fund on an accrual basis. Interest expense incurred on the TOB Floaters and other expenses related to remarketing, administration, trustee and other services to a TOB Trust are reported as expenses of the Fund. In addition, under accounting rules, loans made to a TOB Trust sponsored by the Fund may be presented as loans of the Fund in the Funds financial statements even if there is no recourse to the Funds assets.
For TOB Floaters, generally, the interest rate earned will be based upon the market rates for municipal bonds with maturities or remarketing provisions that are comparable in duration to the periodic interval of the tender option. Since the tender option feature has a shorter term than the final maturity or first call date of the underlying municipal bonds deposited in the TOB Trust, the holder of the TOB Floaters relies upon the terms of the agreement with the financial institution furnishing the liquidity facility as well as the credit strength of that institution. The perceived reliability and creditworthiness, of many major financial institutions, some of which sponsor and/or provide liquidity support to TOB Trusts increases the risk associated with TOB Floaters. This in turn may reduce the desirability of TOB Floaters as investments, which could impair the viability or availability of TOB Trusts.
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The use of TOB Residuals will require the Fund to earmark or segregate liquid assets in an amount equal to any TOB Floaters, plus any accrued but unpaid interest due on the TOB Floaters, issued by TOB Trusts sponsored by, or on behalf of, the Fund that are not owned by the Fund. The use of TOB Residuals may also require the Fund to earmark or segregate liquid assets in an amount equal to loans provided by the TOBs Liquidity Provider to the TOB Trust to purchase tendered TOB Floaters. The Fund reserves the right to modify its asset segregation policies in the future to the extent that such changes are in accordance with applicable regulations or interpretations. Future regulatory requirements or SEC guidance may necessitate more onerous contractual or regulatory requirements, which may increase the costs or reduce the degree of potential economic benefits of TOB Trust transactions or limit the Funds ability to enter into or manage TOB Trust transactions.
See Risk FactorsGeneral Risks of Investing in the FundTender Option Bond Risk for a description of the risks involved with a TOB issuer.
Credit Facility
The Fund is permitted to leverage its portfolio by entering into one or more credit facilities. If the Fund enters into a credit facility, the Fund may be required to prepay outstanding amounts or incur a penalty rate of interest upon the occurrence of certain events of default. The Fund would also likely have to indemnify the lenders under the credit facility against liabilities they may incur in connection therewith. In addition, the Fund expects that any credit facility would contain covenants that, among other things, likely would limit the Funds ability to pay distributions in certain circumstances, incur additional debt, change certain of its investment policies and engage in certain transactions, including mergers and consolidations, and require asset coverage ratios in addition to those required by the Investment Company Act. The Fund may be required to pledge its assets and to maintain a portion of its assets in cash or high-grade securities as a reserve against interest or principal payments and expenses. The Fund expects that any credit facility would have customary covenant, negative covenant and default provisions. There can be no assurance that the Fund will enter into an agreement for a credit facility, or one on terms and conditions representative of the foregoing, or that additional material terms will not apply. In addition, if entered into, a credit facility may in the future be replaced or refinanced by one or more credit facilities having substantially different terms or by the issuance of preferred shares.
Preferred Shares
The Fund is permitted to leverage its portfolio by issuing preferred shares. Under the Investment Company Act, the Fund is not permitted to issue preferred shares if, immediately after such issuance, the liquidation value of the Funds outstanding preferred shares exceeds 50% of its assets (including the proceeds from the issuance) less liabilities other than borrowings (i.e., the value of the Funds assets must be at least 200% of the liquidation value of its outstanding preferred shares). In addition, the Fund would not be permitted to declare any cash dividend or other distribution on its common shares unless, at the time of such declaration, the value of the Funds assets less liabilities other than borrowings is at least 200% of such liquidation value.
The Fund expects that preferred shares, if issued, will pay adjustable rate dividends based on shorter-term interest rates, which would be redetermined periodically by a fixed spread or remarketing process, subject to a maximum rate which would increase over time in the event of an extended period of unsuccessful remarketing. The adjustment period for preferred share dividends could be as short as one day or as long as a year or more. Preferred shares, if issued, could include a liquidity feature that allows holders of preferred shares to have their shares purchased by a liquidity provider in the event that sell orders have not been matched with purchase orders and successfully settled in a remarketing. The Fund expects that it would pay a fee to the provider of this liquidity feature, which would be borne by common shareholders of the Fund. The terms of such liquidity feature could require the Fund to redeem preferred shares still owned by the liquidity provider following a certain period of continuous, unsuccessful remarketing, which may adversely impact the Fund.
If preferred shares are issued, the Fund may, to the extent possible, purchase or redeem preferred shares from time to time to the extent necessary in order to maintain asset coverage of any preferred shares of at least 200%. In addition, as a condition to obtaining ratings on the preferred shares, the terms of any preferred shares issued are expected to include asset coverage maintenance provisions which will require the redemption of the preferred shares in the event of non-compliance by the Fund and may also prohibit dividends and other distributions on the common shares in such
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circumstances. In order to meet redemption requirements, the Fund may have to liquidate portfolio securities. Such liquidations and redemptions would cause the Fund to incur related transaction costs and could result in capital losses to the Fund. Prohibitions on dividends and other distributions on the common shares could impair the Funds ability to qualify as a RIC under the Code. If the Fund has preferred shares outstanding, two of the Directors will be elected by the holders of preferred shares voting separately as a class. The remaining Directors will be elected by holders of common shares and preferred shares voting together as a single class. In the event the Fund failed to pay dividends on preferred shares for two years, holders of preferred shares would be entitled to elect a majority of the Directors.
If the Fund issues preferred shares, the Fund expects that it will be subject to certain restrictions imposed by guidelines of one or more rating agencies that may issue ratings for preferred shares issued by the Fund. These guidelines are expected to impose asset coverage or portfolio composition requirements that are more stringent than those imposed on the Fund by the Investment Company Act. It is not anticipated that these covenants or guidelines would impede the Advisor from managing the Funds portfolio in accordance with the Funds investment objective and policies.
Derivatives
The Fund may enter into derivative transactions that have economic leverage embedded in them. Derivative transactions that the Fund may enter into and the risks associated with them are described elsewhere in this Prospectus and are also referred to as Strategic Transactions. The Fund cannot assure you that investments in derivative transactions that have economic leverage embedded in them will result in a higher return on its common shares.
To the extent the terms of such transactions obligate the Fund to make payments, the Fund may earmark or segregate cash or liquid assets in an amount at least equal to the current value of the amount then payable by the Fund under the terms of such transactions or otherwise cover such transactions in accordance with applicable interpretations of the staff of the SEC. If the current value of the amount then payable by the Fund under the terms of such transactions is represented by the notional amounts of such investments, the Fund would segregate or earmark cash or liquid assets having a market value at least equal to such notional amounts, and if the current value of the amount then payable by the Fund under the terms of such transactions is represented by the market value of the Funds current obligations, the Fund would segregate or earmark cash or liquid assets having a market value at least equal to such current obligations. To the extent the terms of such transactions obligate the Fund to deliver particular securities to extinguish the Funds obligations under such transactions the Fund may cover its obligations under such transactions by either (i) owning the securities or collateral underlying such transactions or (ii) having an absolute and immediate right to acquire such securities or collateral without additional cash consideration (or, if additional cash consideration is required, having earmarked or segregated an appropriate amount of cash or liquid assets). Such earmarking, segregation or cover is intended to provide the Fund with available assets to satisfy its obligations under such transactions. As a result of such earmarking, segregation or cover, the Funds obligations under such transactions will not be considered senior securities representing indebtedness for purposes of the Investment Company Act, or considered borrowings subject to the Funds limitations on borrowings discussed above, but may create leverage for the Fund. To the extent that the Funds obligations under such transactions are not so earmarked, segregated or covered, such obligations may be considered senior securities representing indebtedness under the Investment Company Act and therefore subject to the 300% asset coverage requirement.
These earmarking, segregation or cover requirements can result in the Fund maintaining securities positions it would otherwise liquidate, segregating or earmarking assets at a time when it might be disadvantageous to do so or otherwise restrict portfolio management.
Temporary Borrowings
The Fund may also borrow money as a temporary measure for extraordinary or emergency purposes, including the payment of dividends and the settlement of securities transactions which otherwise might require untimely dispositions of Fund securities.
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The NAV and market price of, and dividends paid on, the common shares will fluctuate with and be affected by, among other things, the risks more fully described below.
Fixed-Income Securities Risks
Fixed-income securities in which the Fund may invest are generally subject to the following risks:
Interest Rate Risk. The market value of bonds and other fixed-income securities changes in response to interest rate changes and other factors. Interest rate risk is the risk that prices of bonds and other fixed-income securities will increase as interest rates fall and decrease as interest rates rise. The Fund may be subject to a greater risk of rising interest rates due to the current period of historically low interest rates, including the Federal Reserves recent lowering of the target for the federal funds rate to a range of 0%-0.25% as part of its efforts to ease the economic effects of the coronavirus pandemic. There is a risk that interest rates will rise, which will likely drive down prices of bonds and other fixed-income securities. The magnitude of these fluctuations in the market price of bonds and other fixed-income securities is generally greater for those securities with longer maturities. Fluctuations in the market price of the Funds investments will not affect interest income derived from instruments already owned by the Fund, but will be reflected in the Funds NAV. The Fund may lose money if short-term or long-term interest rates rise sharply in a manner not anticipated by the Advisor. To the extent the Fund invests in debt securities that may be prepaid at the option of the obligor (such as mortgage-related securities), the sensitivity of such securities to changes in interest rates may increase (to the detriment of the Fund) when interest rates rise. Moreover, because rates on certain floating rate debt securities typically reset only periodically, changes in prevailing interest rates (and particularly sudden and significant changes) can be expected to cause some fluctuations in the NAV of the Fund to the extent that it invests in floating rate debt securities. These basic principles of bond prices also apply to U.S. Government securities. A security backed by the full faith and credit of the U.S. Government is guaranteed only as to its stated interest rate and face value at maturity, not its current market price. Just like other fixed-income securities, government-guaranteed securities will fluctuate in value when interest rates change.
The Funds use of leverage, as described above under Leverage, will tend to increase the Funds interest rate risk. The Fund may utilize certain strategies, including taking positions in futures or interest rate swaps, for the purpose of reducing the interest rate sensitivity of fixed-income securities held by the Fund and decreasing the Funds exposure to interest rate risk. The Fund is not required to hedge its exposure to interest rate risk and may choose not to do so. In addition, there is no assurance that any attempts by the Fund to reduce interest rate risk will be successful or that any hedges that the Fund may establish will perfectly correlate with movements in interest rates.
Issuer Risk. The value of fixed-income securities may decline for a number of reasons which directly relate to the issuer, such as management performance, financial leverage, reduced demand for the issuers goods and services, historical and prospective earnings of the issuer and the value of the assets of the issuer.
Credit Risk. Credit risk is the risk that one or more fixed-income securities in the Funds portfolio will decline in price or fail to pay interest or principal when due because the issuer of the security experiences a decline in its financial status. Credit risk is increased when a portfolio security is downgraded or the perceived creditworthiness of the issuer deteriorates. To the extent the Fund invests in below investment grade securities, it will be exposed to a greater amount of credit risk than a fund that only invests in investment grade securities. See Below Investment Grade Securities Risk. In addition, to the extent the Fund uses credit derivatives, such use will expose it to additional risk in the event that the bonds underlying the derivatives default. The degree of credit risk depends on the issuers financial condition and on the terms of the securities.
Prepayment Risk. During periods of declining interest rates, borrowers may exercise their option to prepay principal earlier than scheduled. For fixed rate securities, such payments often occur during periods of declining interest rates, forcing the Fund to reinvest in lower yielding securities, resulting in a possible decline in the Funds income and distributions to shareholders. This is known as prepayment or call risk. For premium bonds (bonds acquired at prices that exceed their par or principal value) purchased by the Fund, prepayment risk may be enhanced. Below investment grade securities frequently have call features that allow the issuer to redeem the security at dates prior to its stated maturity at a specified price (typically greater than par) only if certain prescribed conditions are met (i.e., call protection). For premium bonds (bonds acquired at prices that exceed their par or principal value) purchased by the Fund, prepayment risk may be enhanced.
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Reinvestment Risk. Reinvestment risk is the risk that income from the Funds portfolio will decline if the Fund invests the proceeds from matured, traded or called fixed-income securities at market interest rates that are below the Fund portfolios current earnings rate.
Duration and Maturity Risk. The Advisor may seek to adjust the portfolios duration or maturity based on its assessment of current and projected market conditions and all factors that the Advisor deems relevant. In comparison to maturity (which is the date on which the issuer of a debt instrument is obligated to repay the principal amount), duration is a measure of the price volatility of a debt instrument as a result in changes in market rates of interest, based on the weighted average timing of the instruments expected principal and interest payments. Specifically, duration measures the anticipated percentage change in NAV that is expected for every percentage point change in interest rates. The two have an inverse relationship. Duration can be a useful tool to estimate anticipated price changes to a fixed pool of income securities associated with changes in interest rates. For example, a duration of five years means that a 1% decrease in interest rates will increase the NAV of the portfolio by approximately 5%; if interest rates increase by 1%, the NAV will decrease by 5%. However, in a managed portfolio of fixed-income securities having differing interest or dividend rates or payment schedules, maturities, redemption provisions, call or prepayment provisions and credit qualities, actual price changes in response to changes in interest rates may differ significantly from a duration-based estimate at any given time. Actual price movements experienced by a portfolio of fixed-income securities will be affected by how interest rates move (i.e., changes in the relationship of long-term interest rates to short-term interest rates and in the relationship of interest rates for highly rated securities and rates for below investment grade securities), the magnitude of any move in interest rates, actual and anticipated prepayments of principal through call or redemption features, the extension of maturities through restructuring, the sale of securities for portfolio management purposes, the reinvestment of proceeds from prepayments on and from sales of securities, and credit quality-related considerations whether associated with financing costs to lower credit quality borrowers or otherwise, as well as other factors. Accordingly, while duration maybe a useful tool to estimate potential price movements in relation to changes in interest rates, investors are cautioned that duration alone will not predict actual changes in the net asset or market value of the Funds shares and that actual price movements in the Funds portfolio may differ significantly from duration-based estimates. Duration differs from maturity in that it takes into account a securitys yield, coupon payments and its principal payments in addition to the amount of time until the security finally matures. As the value of a security changes over time, so will its duration. Prices of securities with longer durations tend to be more sensitive to interest rate changes than securities with shorter durations. In general, a portfolio of securities with a longer duration can be expected to be more sensitive to interest rate changes than a portfolio with a shorter duration. Any decisions as to the targeted duration or maturity of any particular category of investments or of the Funds portfolio generally will be made based on all pertinent market factors at any given time. The Fund may incur costs in seeking to adjust the portfolios average duration or maturity. There can be no assurance that the Advisors assessment of current and projected market conditions will be correct or that any strategy to adjust the portfolios duration or maturity will be successful at any given time.
Nonpayment Risk. Municipal Bonds, like other debt obligations, are subject to the risk of nonpayment. The ability of issuers of municipal securities to make timely payments of interest and principal may be adversely impacted in general economic downturns and as relative governmental cost burdens are allocated and reallocated among federal, state and local governmental units. Such nonpayment would result in a reduction of income to the Fund and could result in a reduction in the value of the municipal security experiencing nonpayment and a potential decrease in the NAV of the Fund.
Spread Risk. Wider credit spreads and decreasing market values typically represent a deterioration of a debt securitys credit soundness and a perceived greater likelihood or risk of default by the issuer.
Any decisions as to the targeted duration or maturity of any particular category of investments or of the Funds portfolio generally will be made based on all pertinent market factors at any given time. The Fund may incur costs in seeking to adjust the portfolios average duration or maturity. There can be no assurance that the Advisors assessment of current and projected market conditions will be correct or that any strategy to adjust the portfolios duration or maturity will be successful at any given time. In general, the longer the duration of any fixed-income securities in the Funds portfolio, the more exposure the Fund will have to the interest rate risks described above.
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Municipal Bond Market Risk
Economic exposure to the municipal securities market involves certain risks. The Funds economic exposure to municipal securities includes municipal securities in the Funds portfolio and municipal securities to which the Fund is exposed through the ownership of TOB Residuals. The municipal market is one in which dealer firms make markets in bonds on a principal basis using their proprietary capital, and during the financial crisis of 2007-2009 these firms capital was severely constrained. As a result, some firms were unwilling to commit their capital to purchase and to serve as a dealer for municipal securities. Certain municipal securities may not be registered with the SEC or any state securities commission and will not be listed on any national securities exchange. The amount of public information available about the municipal securities to which the Fund is economically exposed is generally less than that for corporate equities or bonds, and the investment performance of the Fund may therefore be more dependent on the analytical abilities of the Advisor than would be a fund investing solely in stocks or taxable bonds. The secondary market for municipal securities, particularly the below investment grade securities to which the Fund may be economically exposed, also tends to be less well-developed or liquid than many other securities markets, which may adversely affect the Funds ability to sell such securities at attractive prices or at prices approximating those at which the Fund currently values them.
In addition, many state and municipal governments that issue securities are under significant economic and financial stress and may not be able to satisfy their obligations. The ability of municipal issuers to make timely payments of interest and principal may be diminished during general economic downturns and as governmental cost burdens are reallocated among federal, state and local governments. The taxing power of any governmental entity may be limited by provisions of state constitutions or laws and an entitys credit will depend on many factors, including the entitys tax base, the extent to which the entity relies on federal or state aid, and other factors which are beyond the entitys control. In addition, laws enacted in the future by Congress or state legislatures or referenda could extend the time for payment of principal and/or interest, or impose other constraints on enforcement of such obligations or on the ability of municipalities to levy taxes. Issuers of municipal securities might seek protection under the bankruptcy laws. In the event of bankruptcy of such an issuer, holders of municipal securities could experience delays in collecting principal and interest and such holders may not, in all circumstances, be able to collect all principal and interest to which they are entitled. To enforce its rights in the event of a default in the payment of interest or repayment of principal, or both, the Fund may take possession of and manage the assets securing the issuers obligations on such securities, which may increase the Funds operating expenses. Any income derived from the Funds ownership or operation of such assets may not be tax-exempt or may fail to generate qualifying income for purposes of the income tests applicable to regulated investment companies.
Risk Factors and Special Considerations Relating to Municipal Bonds
The risks and special considerations involved in investment in Municipal Bonds vary with the types of instruments being acquired. Investments in Non-Municipal Tax-Exempt Securities may present similar risks, depending on the particular product. Certain instruments in which the Fund may invest may be characterized as derivative instruments. See The Funds InvestmentsDescription of Municipal Bonds and The Funds InvestmentsStrategic TransactionsFinancial Futures Transactions and Options.
The value of Municipal Bonds generally may be affected by uncertainties in the municipal markets as a result of legislation or litigation, including legislation or litigation that changes the taxation of Municipal Bonds or the rights of Municipal Bond holders in the event of a bankruptcy. Municipal bankruptcies are rare, and certain provisions of the U.S. Bankruptcy Code governing such bankruptcies are unclear. Further, the application of state law to Municipal Bond issuers could produce varying results among the states or among Municipal Bond issuers within a state. These uncertainties could have a significant impact on the prices of the Municipal Bonds in which the Fund invests.
Tax-Exempt Status Risk
In making investments, the Fund and the Advisor will rely on the opinion of issuers bond counsel and, in the case of derivative securities, sponsors counsel, on the tax-exempt status of interest on municipal obligations and payments under tax-exempt derivative securities. Neither the Fund nor the Advisor will independently review the bases for those tax opinions. If any of those tax opinions are ultimately determined to be incorrect or if events occur
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after the security is acquired that impact the securitys tax-exempt status, the Fund and its shareholders could be subject to substantial tax liabilities. An assertion by the Internal Revenue Service that a portfolio security is not exempt from U.S. federal income tax (contrary to indications from the issuer) could affect the Funds and its shareholders income tax liability for the current or past years and could create liability for information reporting penalties. In addition, an IRS assertion of taxability may cause the Fund to be ineligible to pay exempt-interest dividends or may impair the liquidity and the fair market value of the securities.
Taxability Risk
The Fund intends to minimize the payment of taxable income to shareholders by investing in tax-exempt or municipal securities in reliance at the time of purchase on an opinion of bond counsel to the issuer that the interest paid on those securities will be excludable from gross income for U.S. federal income tax purposes. Such securities, however, may be determined to pay, or have paid, taxable income subsequent to the Funds acquisition of the securities. In that event, the Internal Revenue Service may demand that the Fund pay U.S. federal income taxes on the affected interest income, and, if the Fund agrees to do so, the Funds yield could be adversely affected. In addition, the treatment of dividends previously paid or to be paid by the Fund as exempt interest dividends could be adversely affected, subjecting the Funds shareholders to increased U.S. federal income tax liabilities. Federal tax legislation may limit the types and volume of bonds the interest on which qualifies for a federal income tax-exemption. As a result, current legislation and legislation that may be enacted in the future may affect the availability of Municipal Bonds for investment by the Fund. In addition, future laws, regulations, rulings or court decisions may cause interest on municipal securities to be subject, directly or indirectly, to U.S. federal income taxation or interest on state municipal securities to be subject to state or local income taxation, or the value of state municipal securities to be subject to state or local intangible personal property tax, or may otherwise prevent the Fund from realizing the full current benefit of the tax-exempt status of such securities. Any such change could also affect the market price of such securities, and thus the value of an investment in the Fund.
Alternative Minimum Tax Risk
The Fund expects that a portion of the interest or income it produces will be includable in alternative minimum taxable income. Exempt interest dividends also are likely to be subject to state and local income taxes. Distributions of any capital gain or other taxable income will be taxable to shareholders. The Funds common shares may not be a suitable investment for investors who are subject to the federal alternative minimum tax or who would become subject to such tax by purchasing common shares. The suitability of an investment in common shares will depend upon a comparison of the after-tax yield likely to be provided from the Fund with that from comparable tax-exempt investments not subject to the alternative minimum tax, and from comparable fully taxable investments, in light of each such investors tax position. Special considerations apply to corporate investors.
Insurance Risk
Insurance guarantees that interest payments on a municipal security will be made on time and that the principal will be repaid when the security matures. Insurance is expected to protect the Fund against losses caused by a municipal security issuers failure to make interest and principal payments. However, insurance does not protect the Fund or its shareholders against losses caused by declines in a municipal securitys value. Also, the Fund cannot be certain that any insurance company will make the payments it guarantees. Certain significant providers of insurance for municipal securities incurred significant losses as a result of exposure to sub-prime mortgages and other lower credit quality investments that experienced defaults or otherwise suffered extreme credit deterioration during the financial crisis of 2007-2009. These losses have reduced the insurers capital and called into question their continued ability to perform their obligations under such insurance if they are called upon to do so in the future. While an insured municipal security will typically be deemed to have the rating of its insurer, if the insurer of a municipal security suffers a downgrade in its credit rating or the market discounts the value of the insurance provided by the insurer, the rating of the underlying municipal security will be more relevant and the value of the municipal security would more closely, if not entirely, reflect such rating. The Fund may lose money on its investment if the insurance company does not make payments it guarantees. If a municipal securitys insurer fails to fulfill its obligations or loses its credit rating, the value of the security could drop.
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Yield and Ratings Risk
The yields on debt obligations are dependent on a variety of factors, including general market conditions, conditions in the particular market for the obligation, the financial condition of the issuer, the size of the offering, the maturity of the obligation and the ratings of the issue. The ratings of Moodys, S&P and Fitch, which are described in Appendix A to the SAI, represent their respective opinions as to the quality of the obligations which they undertake to rate. Ratings, however, are general and are not absolute standards of quality. Consequently, obligations with the same rating, maturity and interest rate may have different market prices. Subsequent to its purchase by the Fund, a rated security may cease to be rated. The Advisor will consider such an event in determining whether the Fund should continue to hold the security.
Ratings are relative and subjective and, although ratings may be useful in evaluating the safety of interest and principal payments, they do not evaluate the market value risk of such obligations. Although these ratings may be an initial criterion for selection of portfolio investments, the Advisor also will independently evaluate these securities and the ability of the issuers of such securities to pay interest and principal. To the extent that the Fund invests in lower grade securities that have not been rated by a rating agency, the Funds ability to achieve its investment objective will be more dependent on the Advisors credit analysis than would be the case when the Fund invests in rated securities.
Below Investment Grade Securities Risk
The Fund may invest in securities that are rated, at the time of investment, below investment grade quality (rated Ba/BB or below, or judged to be of comparable quality by the Advisor), which are commonly referred to as high yield or junk bonds and are regarded as predominantly speculative with respect to the issuers capacity to pay interest and repay principal when due. The value of high yield, lower quality bonds is affected by the creditworthiness of the issuers of the securities and by general economic and specific industry conditions. Issuers of high yield bonds are not perceived to be as strong financially as those with higher credit ratings. These issuers are more vulnerable to financial setbacks and recession than more creditworthy issuers, which may impair their ability to make interest and principal payments. Lower grade securities may be particularly susceptible to economic downturns. It is likely that an economic recession could severely disrupt the market for such securities and may have an adverse impact on the value of such securities. In addition, it is likely that any such economic downturn could adversely affect the ability of the issuers of such securities to repay principal and pay interest thereon and increase the incidence of default for such securities.
Lower grade securities, though high yielding, are characterized by high risk. They may be subject to certain risks with respect to the issuing entity and to greater market fluctuations than certain lower yielding, higher rated securities. The secondary market for lower grade securities may be less liquid than that for higher rated securities. Adverse conditions could make it difficult at times for the Fund to sell certain securities or could result in lower prices than those used in calculating the Funds NAV.
The prices of fixed-income securities generally are inversely related to interest rate changes; however, below investment grade securities historically have been somewhat less sensitive to interest rate changes than higher quality securities of comparable maturity because credit quality is also a significant factor in the valuation of lower grade securities. On the other hand, an increased rate environment results in increased borrowing costs generally, which may impair the credit quality of low-grade issuers and thus have a more significant effect on the value of some lower grade securities. In addition, the current extraordinary low rate environment has expanded the historic universe of buyers of lower grade securities as traditional investment grade oriented investors have been forced to accept more risk in order to maintain income. As rates rise, these recent entrants to the low-grade securities market may exit the market and reduce demand for lower grade securities, potentially resulting in greater price volatility.
The ratings of Moodys, S&P, Fitch and other rating agencies represent their opinions as to the quality of the obligations which they undertake to rate. Ratings are relative and subjective and, although ratings may be useful in evaluating the safety of interest and principal payments, they do not evaluate the market value risk of such obligations. Although these ratings may be an initial criterion for selection of portfolio investments, the Advisor also will independently evaluate these securities and the ability of the issuers of such securities to pay interest and principal. To the extent that the Fund invests in lower grade securities that have not been rated by a rating agency, the Funds ability to achieve its investment objective will be more dependent on the Advisors credit analysis than would be the case when the Fund invests in rated securities.
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Unrated Securities Risk
Because the Fund may purchase securities that are not rated by any rating organization, the Advisor may, after assessing their credit quality, internally assign ratings to certain of those securities in categories similar to those of rating organizations. Some unrated securities may not have an active trading market or may be difficult to value, which means the Fund might have difficulty selling them promptly at an acceptable price. To the extent that the Fund invests in unrated securities, the Funds ability to achieve its investment objective will be more dependent on the Advisors credit analysis than would be the case when the Fund invests in rated securities.
Zero-Coupon Securities Risk
Zero-coupon securities are securities that are sold at a discount to par value and do not pay interest during the life of the security. The discount approximates the total amount of interest the security will accrue and compound over the period until maturity at a rate of interest reflecting the market rate of the security at the time of issuance. Upon maturity, the holder of a zero-coupon security is entitled to receive the par value of the security.
The Fund accrues income with respect to these securities for U.S. federal income tax and accounting purposes prior to the receipt of cash payments. Zero-coupon securities may be subject to greater fluctuation in value and less liquidity in the event of adverse market conditions than comparably rated securities that pay cash interest at regular intervals.
Further, to maintain its qualification for pass-through treatment under the federal tax laws, the Fund is required to distribute income to its shareholders and, consequently, may have to dispose of other, more liquid portfolio securities under disadvantageous circumstances or may have to leverage itself by borrowing in order to generate the cash to satisfy these distributions. The required distributions may result in an increase in the Funds exposure to zero-coupon securities.
In addition to the above-described risks, there are certain other risks related to investing in zero-coupon securities. During a period of severe market conditions, the market for such securities may become even less liquid. In addition, as these securities do not pay cash interest, the Funds investment exposure to these securities and their risks, including credit risk, will increase during the time these securities are held in the Funds portfolio.
Variable Rate Demand Obligations Risk
VRDOs are floating rate securities that combine an interest in a long-term municipal bond with a right to demand payment before maturity from a bank or other financial institution. If the bank or financial institution is unable to pay, the Fund may lose money.
Indexed and Inverse Floating Rate Securities Risk
Investments in inverse floaters, TOB Residuals and similar instruments expose the Fund to the same risks as investments in fixed-income securities and derivatives, as well as other risks, including those associated with leverage and increased volatility. An investment in these securities typically will involve greater risk than an investment in a fixed rate security. Distributions on inverse floaters, TOB Residuals and similar instruments will typically bear an inverse relationship to short-term interest rates and typically will be reduced or, potentially, eliminated as interest rates rise. Inverse floaters, TOB Residuals and similar instruments will underperform the market for fixed rate securities in a rising interest rate environment. Inverse floaters may be considered to be leveraged to the extent that their interest rates vary by a magnitude that exceeds the magnitude of the change in a reference rate of interest (typically a short-term interest rate). The leverage inherent in inverse floaters is associated with greater volatility in their market values. Investments in inverse floaters, TOB Residuals and similar instruments that have fixed-income securities underlying them will expose the Fund to the risks associated with those fixed-income securities and the values of those investments may be especially sensitive to changes in prepayment rates on the underlying fixed-income securities.
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Investment and Market Discount Risk
An investment in the Funds common shares is subject to investment risk, including the possible loss of the entire amount that you invest. As with any stock, the price of the Funds common shares will fluctuate with market conditions and other factors. If shares are sold, the price received may be more or less than the original investment. Common shares are designed for long-term investors and the Fund should not be treated as a trading vehicle. Shares of closed-end management investment companies frequently trade at a discount from their NAV. This risk is separate and distinct from the risk that the Funds NAV could decrease as a result of its investment activities. At any point in time an investment in the Funds common shares may be worth less than the original amount invested, even after taking into account distributions paid by the Fund. During periods in which the Fund may use leverage, the Funds investment, market discount and certain other risks will be magnified.
Restricted and Illiquid Investments Risk
The Fund may invest without limitation in illiquid or less liquid investments or investments in which no secondary market is readily available or which are otherwise illiquid, including private placement securities. The Fund may not be able to readily dispose of such investments at prices that approximate those at which the Fund could sell such investments if they were more widely traded and, as a result of such illiquidity, the Fund may have to sell other investments or engage in borrowing transactions if necessary to raise cash to meet its obligations. Limited liquidity can also affect the market price of investments, thereby adversely affecting the Funds NAV and ability to make dividend distributions. The financial markets in general, and certain segments of the mortgage-related securities markets in particular, have in recent years experienced periods of extreme secondary market supply and demand imbalance, resulting in a loss of liquidity during which market prices were suddenly and substantially below traditional measures of intrinsic value. During such periods, some investments could be sold only at arbitrary prices and with substantial losses. Periods of such market dislocation may occur again at any time. Privately issued debt securities are often of below investment grade quality, frequently are unrated and present many of the same risks as investing in below investment grade public debt securities.
Restricted securities are securities that may not be sold to the public without an effective registration statement under the Securities Act, or that may be sold only in a privately negotiated transaction or pursuant to an exemption from registration. For example, Rule 144A under the Securities Act provides an exemption from the registration requirements of the Securities Act for the resale of certain restricted securities to qualified institutional buyers, such as the Fund. However, an insufficient number of qualified institutional buyers interested in purchasing the Rule 144A-eligible securities that the Fund holds could affect adversely the marketability of certain Rule 144A securities, and the Fund might be unable to dispose of such securities promptly or at reasonable prices. When registration is required to sell a security, the Fund may be obligated to pay all or part of the registration expenses and considerable time may pass before the Fund is permitted to sell a security under an effective registration statement. If adverse market conditions develop during this period, the Fund might obtain a less favorable price than the price that prevailed when the Fund decided to sell. The Fund may be unable to sell restricted and other illiquid securities at opportune times or prices.
Investment Companies and ETFs Risk
Subject to the limitations set forth in the Investment Company Act and the Funds governing documents or as otherwise permitted by the SEC, the Fund may acquire shares in other investment companies, including ETFs or BDCs, some of which may be affiliated investment companies. The market value of the shares of other investment companies may differ from their NAV. As an investor in investment companies, including ETFs or BDCs, the Fund would bear its ratable share of that entitys expenses, including its investment advisory and administration fees, while continuing to pay its own advisory and administration fees and other expenses (to the extent not offset by the Advisor through waivers). As a result, shareholders will be absorbing duplicate levels of fees with respect to investments in other investment companies, including ETFs or BDCs (to the extent not offset by the Advisor through waivers).
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The securities of other investment companies, including ETFs or BDCs, in which the Fund may invest may be leveraged. As a result, the Fund may be indirectly exposed to leverage through an investment in such securities. An investment in securities of other investment companies, including ETFs or BDCs, that use leverage may expose the Fund to higher volatility in the market value of such securities and the possibility that the Funds long-term returns on such securities (and, indirectly, the long-term returns of the Funds common shares) will be diminished.
ETFs are generally not actively managed and may be affected by a general decline in market segments relating to its index. An ETF typically invests in securities included in, or representative of, its index regardless of their investment merits and does not attempt to take defensive positions in declining markets.
U.S. Government Securities Risk
U.S. Government debt securities generally involve lower levels of credit risk than other types of fixed-income securities of similar maturities, although, as a result, the yields available from U.S. Government debt securities are generally lower than the yields available from such other securities. Like other fixed-income securities, the values of U.S. Government securities change as interest rates fluctuate.
Leverage Risk
The Board has authorized the Fund to use economic leverage up to 25% of its total assets. The Fund currently intends to use economic leverage approximately equal to 15% of its total assets at the time the leverage is implemented, but may use economic leverage up to 25% of its total assets under the leverage policy set by the Board without further Board or shareholder approval. The Board could in the future authorize the Fund to use additional leverage up to the maximum amount permitted under the 1940 Act or change the 25% threshold at which Board approval is required to increase leverage, in each case without further shareholder approval.
The use of leverage creates an opportunity for increased common share net investment income dividends, but also creates risks for the holders of common shares. The Fund currently leverages its assets through tender option bond transactions. See Tender Option Bond Risk for details about the risks associated with the Funds use of TOB Residuals. The Fund cannot assure you that the use of leverage will result in a higher yield on the common shares. Any leveraging strategy the Fund employs may not be successful.
Leverage involves risks and special considerations for common shareholders, including:
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the likelihood of greater volatility of NAV, market price and dividend rate of the common shares than a comparable portfolio without leverage; |
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the risk that fluctuations in interest rates or dividend rates on any leverage that the Fund must pay will reduce the return to the common shareholders; |
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the effect of leverage in a declining market, which is likely to cause a greater decline in the NAV of the common shares than if the Fund were not leveraged, which may result in a greater decline in the market price of the common shares; |
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leverage may increase operating costs, which may reduce total return. |
Any decline in the NAV of the Funds investments will be borne entirely by the holders of common shares. Therefore, if the market value of the Funds portfolio declines, leverage will result in a greater decrease in NAV to the holders of common shares than if the Fund were not leveraged. This greater NAV decrease will also tend to cause a greater decline in the market price for the common shares. While the Fund may from time to time consider reducing any outstanding leverage in response to actual or anticipated changes in interest rates in an effort to mitigate the increased volatility of current income and NAV associated with leverage, there can be no assurance that the Fund will actually reduce any outstanding leverage in the future or that any reduction, if undertaken, will benefit the holders of common shares. Changes in the future direction of interest rates are very difficult to predict accurately. If the Fund were to reduce any outstanding leverage based on a prediction about future changes to
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interest rates, and that prediction turned out to be incorrect, the reduction in any outstanding leverage would likely operate to reduce the income and/or total returns to holders of common shares relative to the circumstance where the Fund had not reduced any of its outstanding leverage. The Fund may decide that this risk outweighs the likelihood of achieving the desired reduction to volatility in income and share price if the prediction were to turn out to be correct, and determine not to reduce any of its outstanding leverage as described above.
The Fund currently does not intend to borrow money or issue debt securities or preferred shares, but may in the future borrow funds from banks or other financial institutions, or issue debt securities or preferred shares, as described in this Prospectus. Certain types of leverage the Fund may use may result in the Fund being subject to covenants relating to asset coverage and portfolio composition requirements. The Fund may be subject to certain restrictions on investments imposed by guidelines of one or more rating agencies, which may issue ratings for any debt securities or preferred shares issued by the Fund. The terms of any borrowings or these rating agency guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed by the Investment Company Act. The Advisor does not believe that these covenants or guidelines will impede it from managing the Funds portfolio in accordance with the Funds investment objective and policies.
The Fund may invest in the securities of other investment companies. Such investment companies may also be leveraged, and will therefore be subject to the leverage risks described above. This additional leverage may in certain market conditions reduce the NAV of the Funds common shares and the returns to the holders of common shares.
Tender Option Bond Risk
The Fund currently leverages its assets through the use of TOB Residuals, which are derivative interests in municipal bonds. The TOB Residuals in which the Fund may invest pay interest or income that, in the opinion of counsel to the issuer of such TOB Residuals, is exempt from regular U.S. federal income tax. No independent investigation will be made to confirm the tax-exempt status of the interest or income paid by TOB Residuals held by the Fund. There is no assurance that the Funds strategy of using TOB Residuals to leverage its assets will be successful.
TOB Residuals represent beneficial interests in a special purpose trust formed for the purpose of holding municipal bonds contributed by one or more funds (a TOB Trust). A TOB Trust typically issues two classes of beneficial interests: short-term floating rate interests (TOB Floaters), which are sold to third party investors, and TOB Residuals, which are generally issued to the fund(s) that transferred municipal bonds to the TOB Trust. TOB Floaters may have first priority on the cash flow from the municipal bonds held by the TOB Trust and are enhanced with a liquidity support arrangement provided by a third party bank or other financial institution (the TOBs Liquidity Provider) which allows holders to tender their position at par (plus accrued interest). The Fund, as a holder of TOB Residuals, is paid the residual cash flow from the TOB Trust. As result, distributions on TOB Residuals will bear an inverse relationship to short-term municipal bond interest rates. Distributions on the TOB Residuals paid to the Fund will be reduced or, in the extreme, eliminated as short-term municipal interest rates rise and will increase when short-term municipal interest rates fall. The amount of such reduction or increase is a function, in part, of the amount of TOB Floaters sold by the TOB Trust relative to the amount of the TOB Residuals that it sells. The greater the amount of TOB Floaters sold relative to the TOB Residuals, the more volatile the distributions on the TOB Residuals will be. Short-term interest rates are at historic lows and may be more likely to rise in the current market environment.
The municipal bonds transferred to a TOB Trust typically are high grade municipal bonds. In certain cases, when municipal bonds transferred are lower grade municipal bonds, the TOB Trust transaction includes a credit enhancement feature that provides for the timely payment of principal and interest on the bonds to the TOB Trust by a credit enhancement provider. The TOB Trust would be responsible for the payment of the credit enhancement fee and the Fund, as a TOB Residual holder, would be responsible for reimbursement of any payments of principal and interest made by the credit enhancement provider.
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Any economic leverage achieved through the Funds investment in TOB Residuals will increase the possibility that common share long-term returns will be diminished if the cost of the TOB Floaters issued by a TOB Trust exceeds the return on the securities in the TOB Trust. If the income and gains earned on municipal securities owned by a TOB Trust that issues TOB Residuals to the Fund are greater than the payments due on the TOB Floaters issued by the TOB Trust, the Funds returns will be greater than if it had not invested in the TOB Residuals.
Although the Fund generally would unwind a TOB transaction rather than try to sell a TOB Residual, if it did try to sell a TOB Residual, its ability to do so would depend on the liquidity of the TOB Residual. TOB Residuals have varying degrees of liquidity based, among other things, upon the liquidity of the underlying securities deposited in the TOB Trust. The market price of TOB Residuals is more volatile than the underlying municipal bonds due to leverage.
The leverage attributable to the Funds use of TOB Residuals may be called away on relatively short notice and therefore may be less permanent than more traditional forms of leverage. The TOB Trust may be collapsed without the consent of the Fund upon the occurrence of termination events, as defined in the TOB Trust agreements. Upon the occurrence of a termination event, a TOB Trust would be liquidated with the proceeds applied first to any accrued fees owed to the trustee of the TOB Trust, the remarketing agent of the TOB Floaters and the TOBs Liquidity Provider. Upon certain termination events, the holders of the TOB Floaters would be paid before the TOB Residual holders (i.e., the Fund) whereas in other termination events, the holders of TOB Floaters and the TOB Residual holders would be paid pro rata.
The Fund may invest in a TOB Trust on either a non-recourse or recourse basis. If the Fund invests in a TOB Trust on a recourse basis, it will typically enter into a reimbursement agreement with the TOBs Liquidity Provider pursuant to which the Fund is required to reimburse the TOBs Liquidity Provider the balance, if any, of the amount owed under the liquidity facility over the liquidation proceeds (the Liquidation Shortfall). As a result, if the Fund invests in a recourse TOB Trust, the Fund will bear the risk of loss with respect to any Liquidation Shortfall.
The use of TOB Residuals will require the Fund to earmark or segregate liquid assets in an amount equal to any TOB Floaters, plus any accrued but unpaid interest due on the TOB Floaters, issued by TOB Trusts sponsored by, or on behalf of, the Fund that are not owned by the Fund. The use of TOB Residuals may also require the Fund to earmark or segregate liquid assets in an amount equal to loans provided by the TOBs Liquidity Provider to the TOB Trust to purchase tendered TOB Floaters. While the segregated assets may be invested in liquid securities, they may not be used for other operational purposes. Consequently, the use of leverage through TOB Residuals may limit the Funds flexibility and may require that the Fund sell other portfolio investments to pay Fund expenses, to maintain assets in an amount sufficient to cover the Funds leveraged exposure or to meet other obligations at a time when it may be disadvantageous to sell such assets. Future regulatory requirements or SEC guidance may necessitate more onerous contractual or regulatory requirements, which may increase the costs or reduce the degree of potential economic benefits of TOB Trust transactions or limit the Funds ability to enter into or manage TOB Trust transactions.
The Fund structures and sponsors the TOB Trusts in which it holds TOB Residuals and has certain duties and responsibilities, which may give rise to certain additional risks including, but not limited to, compliance, securities law and operational risks.
The SEC and various federal banking and housing agencies recently adopted credit risk retention rules for securitizations (the Risk Retention Rules). The Risk Retention Rules would require the sponsor of a TOB Trust to retain at least 5% of the credit risk of the underlying assets supporting the TOB Trusts municipal bonds. The Risk Retention Rules may adversely affect the Funds ability to engage in TOB Trust transactions or increase the costs of such transactions in certain circumstances.
TOB Trusts constitute an important component of the municipal bond market. Any modifications or changes to the rules governing TOB Trusts may adversely impact the municipal market and the Fund, including through reduced demand for and liquidity of municipal bonds and increased financing costs for municipal issuers. The ultimate impact of any potential modifications on the TOB market and the overall municipal market is not yet certain.
Please see The Funds InvestmentsLeverageTender Option Bond Transactions for additional information.
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Repurchase Agreements Risk
Subject to its investment objective and policies, the Fund may invest in repurchase agreements. Repurchase agreements typically involve the acquisition by the Fund of fixed-income securities from a selling financial institution such as a bank, savings and loan association or broker-dealer. The agreement provides that the Fund will sell the securities back to the institution at a fixed time in the future. The Fund does not bear the risk of a decline in the value of the underlying security unless the seller defaults under its repurchase obligation. In the event of the bankruptcy or other default of a seller of a repurchase agreement, the Fund could experience both delays in liquidating the underlying securities and losses, including possible decline in the value of the underlying security during the period in which the Fund seeks to enforce its rights thereto; possible lack of access to income on the underlying security during this period; and expenses of enforcing its rights. While repurchase agreements involve certain risks not associated with direct investments in fixed-income securities, the Fund follows procedures approved by the Board that are designed to minimize such risks. In addition, the value of the collateral underlying the repurchase agreement will be at least equal to the repurchase price, including any accrued interest earned on the repurchase agreement. In the event of a default or bankruptcy by a selling financial institution, the Fund generally will seek to liquidate such collateral. However, the exercise of the Funds right to liquidate such collateral could involve certain costs or delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, the Fund could suffer a loss.
When-Issued, Forward Commitment and Delayed Delivery Transactions Risk
The Fund may purchase securities on a when-issued basis (including on a forward commitment or TBA (to be announced) basis) and may purchase or sell securities for delayed delivery. When-issued and delayed delivery transactions occur when securities are purchased or sold by the Fund with payment and delivery taking place in the future to secure an advantageous yield or price. Securities purchased on a when-issued or delayed delivery basis may expose the Fund to counterparty risk of default as well as the risk that securities may experience fluctuations in value prior to their actual delivery. The Fund will not accrue income with respect to a when-issued or delayed delivery security prior to its stated delivery date. Purchasing securities on a when-issued or delayed delivery basis can involve the additional risk that the price or yield available in the market when the delivery takes place may not be as favorable as that obtained in the transaction itself.
Strategic Transactions and Derivatives Risk
The Fund may engage in various Strategic Transactions for duration management and other risk management purposes, including to attempt to protect against possible changes in the market value of the Funds portfolio resulting from trends in the securities markets and changes in interest rates or to protect the Funds unrealized gains in the value of its portfolio securities, to facilitate the sale of portfolio securities for investment purposes or to establish a position in the securities markets as a temporary substitute for purchasing particular securities or to enhance income or gain. Derivatives are financial contracts or instruments whose value depends on, or is derived from, the value of an underlying asset, reference rate or index (or relationship between two indices). The Fund also may use derivatives to add leverage to the portfolio and/or to hedge against increases in the Funds costs associated with any leverage strategy that it may employ. The use of Strategic Transactions to enhance current income may be particularly speculative.
Strategic Transactions involve risks. The risks associated with Strategic Transactions include (i) the imperfect correlation between the value of such instruments and the underlying assets, (ii) the possible default of the counterparty to the transaction, (iii) illiquidity of the derivative instruments, and (iv) high volatility losses caused by unanticipated market movements, which are potentially unlimited. Although both OTC and exchange-traded derivatives markets may experience a lack of liquidity, OTC non-standardized derivative transactions are generally less liquid than exchange-traded instruments. The illiquidity of the derivatives markets may be due to various factors, including congestion, disorderly markets, limitations on deliverable supplies, the participation of speculators, government regulation and intervention, and technical and operational or system failures. In addition, daily limits on price fluctuations and speculative position limits on exchanges on which the Fund may conduct its transactions in derivative instruments may prevent prompt liquidation of positions, subjecting the Fund to the potential of greater losses. Furthermore, the Funds ability to successfully use Strategic Transactions depends on the Advisors ability to predict pertinent securities prices, interest rates, currency exchange rates and other economic
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factors, which cannot be assured. The use of Strategic Transactions may result in losses greater than if they had not been used, may require the Fund to sell or purchase portfolio securities at inopportune times or for prices other than current market values, may limit the amount of appreciation the Fund can realize on an investment or may cause the Fund to hold a security that it might otherwise sell. Additionally, segregated or earmarked liquid assets, amounts paid by the Fund as premiums and cash or other assets held in margin accounts with respect to Strategic Transactions are not otherwise available to the Fund for investment purposes. Please see the Funds SAI for a more detailed description of Strategic Transactions and the various derivative instruments the Fund may use and the various risks associated with them.
Exchange-traded derivatives and OTC derivative transactions submitted for clearing through a central counterparty are also subject to minimum initial and variation margin requirements set by the relevant clearinghouse, as well as possible SEC- or CFTC- mandated margin requirements. The CFTC and federal banking regulators also have imposed margin requirements on non-cleared OTC derivatives, and the SEC has proposed (but not yet finalized) such non-cleared margin requirements. As applicable, margin requirements may increase the overall costs for the Fund.
Many OTC derivatives are valued on the basis of dealers pricing of these instruments. However, the price at which dealers value a particular derivative and the price that the same dealers would actually be willing to pay for such derivative should the Fund wish or be forced to sell such position may be materially different. Such differences can result in an overstatement of the Funds NAV and may materially adversely affect the Fund in situations in which the Fund is required to sell derivative instruments.
While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. Hedges are sometimes subject to imperfect matching between the derivative and the underlying security, and there can be no assurance that the Funds hedging transactions will be effective.
Derivatives may give rise to a form of leverage and may expose the Fund to greater risk and increase its costs. Recent legislation calls for new regulation of the derivatives markets. The extent and impact of the regulation is not yet known and may not be known for some time. New regulation may make derivatives more costly, may limit the availability of derivatives, or may otherwise adversely affect the value or performance of derivatives.
In November 2019, the SEC proposed new regulations governing the use of derivatives by registered investment companies. If adopted as proposed, new Rule 18f-4 would impose limits on the amount of derivatives a fund could enter into, eliminate the asset segregation framework currently used by funds to comply with Section 18 of the Investment Company Act, treat derivatives as senior securities so that a failure to comply with the proposed limits would result in a statutory violation and require funds whose use of derivatives is more than a limited specified exposure amount to establish and maintain a comprehensive derivatives risk management program and appoint a derivatives risk manager.
Counterparty Risk
The Fund will be subject to credit risk with respect to the counterparties to the derivative contracts purchased by the Fund. Because derivative transactions in which the Fund may engage may involve instruments that are not traded on an exchange or cleared through a central counterparty but are instead traded between counterparties based on contractual relationships, the Fund is subject to the risk that a counterparty will not perform its obligations under the related contracts. If a counterparty becomes bankrupt or otherwise fails to perform its obligations due to financial difficulties, the Fund may experience significant delays in obtaining any recovery in bankruptcy or other reorganization proceedings. The Fund may obtain only a limited recovery, or may obtain no recovery, in such circumstances. Although the Fund intends to enter into transactions only with counterparties that the Advisor believes to be creditworthy, there can be no assurance that, as a result, a counterparty will not default and that the Fund will not sustain a loss on a transaction. In the event of the counterpartys bankruptcy or insolvency, the Funds collateral may be subject to the conflicting claims of the counterpartys creditors, and the Fund may be exposed to the risk of a court treating the Fund as a general unsecured creditor of the counterparty, rather than as the owner of the collateral.
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The counterparty risk for cleared derivatives is generally lower than for uncleared OTC derivative transactions since generally a clearing organization becomes substituted for each counterparty to a cleared derivative contract and, in effect, guarantees the parties performance under the contract as each party to a trade looks only to the clearing organization for performance of financial obligations under the derivative contract. However, there can be no assurance that a clearing organization, or its members, will satisfy its obligations to the Fund, or that the Fund would be able to recover the full amount of assets deposited on its behalf with the clearing organization in the event of the default by the clearing organization or the Funds clearing broker. In addition, cleared derivative transactions benefit from daily marking-to-market and settlement, and segregation and minimum capital requirements applicable to intermediaries. Uncleared OTC derivative transactions generally do not benefit from such protections. This exposes the Fund to the risk that a counterparty will not settle a transaction in accordance with its terms and conditions because of a dispute over the terms of the contract (whether or not bona fide) or because of a credit or liquidity problem, thus causing the Fund to suffer a loss. Such counterparty risk is accentuated for contracts with longer maturities where events may intervene to prevent settlement, or where the Fund has concentrated its transactions with a single or small group of counterparties.
In addition, the Fund is subject to the risk that issuers of the instruments in which it invests and trades may default on their obligations under those instruments, and that certain events may occur that have an immediate and significant adverse effect on the value of those instruments. There can be no assurance that an issuer of an instrument in which the Fund invests will not default, or that an event that has an immediate and significant adverse effect on the value of an instrument will not occur, and that the Fund will not sustain a loss on a transaction as a result.
Swaps Risk
Swaps are a type of derivative. Swap agreements involve the risk that the party with which the Fund has entered into the swap will default on its obligation to pay the Fund and the risk that the Fund will not be able to meet its obligations to pay the other party to the agreement. In order to seek to hedge the value of the Funds portfolio, to hedge against increases in the Funds cost associated with interest payments on any outstanding borrowings or to seek to increase the Funds return, the Fund may enter into swaps, including interest rate swap and/or credit default swap transactions. In interest rate swap transactions, there is a risk that yields will move in the direction opposite of the direction anticipated by the Fund, which would cause the Fund to make payments to its counterparty in the transaction that could adversely affect Fund performance. In addition to the risks applicable to swaps generally (including counterparty risk, high volatility, liquidity risk and credit risk), credit default swap transactions involve special risks because they are difficult to value, are highly susceptible to liquidity and credit risk, and generally pay a return to the party that has paid the premium only in the event of an actual default by the issuer of the underlying obligation (as opposed to a credit downgrade or other indication of financial difficulty).
Historically, swap transactions have been individually negotiated non-standardized transactions entered into in OTC markets and have not been subject to the same type of government regulation as exchange-traded instruments. However, since the global financial crisis, the OTC derivatives markets have recently become subject to comprehensive statutes and regulations. In particular, in the United States, the Dodd-Frank Act requires that certain derivatives with U.S. persons must be executed on a regulated market and a substantial portion of OTC derivatives must be submitted for clearing to regulated clearinghouses. As a result, swap transactions entered into by the Fund may become subject to various requirements applicable to swaps under the Dodd-Frank Act, including clearing, exchange-execution, reporting and recordkeeping requirements, which may make it more difficult and costly for the Fund to enter into swap transactions and may also render certain strategies in which the Fund might otherwise engage impossible or so costly that they will no longer be economical to implement. Furthermore, the number of counterparties that may be willing to enter into swap transactions with the Fund may also be limited if the swap transactions with the Fund are subject to the swap regulation under the Dodd-Frank Act.
Credit default swap agreements may effectively add leverage to the Funds portfolio because, in addition to its managed assets, the Fund would be subject to investment exposure on the notional amount of the swap. The Fund is not required to enter into swap transactions for hedging purposes or to enhance income or gain and may choose not to do so. In addition, the swaps market is subject to a changing regulatory environment. It is possible that regulatory or other developments in the swaps market could adversely affect the Funds ability to successfully use swaps.
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Short Sales Risk
Short-selling involves selling securities which may or may not be owned and borrowing the same securities for delivery to the purchaser, with an obligation to replace the borrowed securities at a later date. If the price of the security sold short increases between the time of the short sale and the time the Fund replaces the borrowed security, the Fund will incur a loss; conversely, if the price declines, the Fund will realize a capital gain. Any gain will be decreased, and any loss will be increased, by the transaction costs incurred by the Fund, including the costs associated with providing collateral to the broker-dealer (usually cash and liquid securities) and the maintenance of collateral with its custodian. Although the Funds gain is limited to the price at which it sold the security short, its potential loss is theoretically unlimited.
Short-selling necessarily involves certain additional risks. However, if the short seller does not own the securities sold short (an uncovered short sale), the borrowed securities must be replaced by securities purchased at market prices in order to close out the short position, and any appreciation in the price of the borrowed securities would result in a loss. Uncovered short sales expose the Fund to the risk of uncapped losses until a position can be closed out due to the lack of an upper limit on the price to which a security may rise. Purchasing securities to close out the short position can itself cause the price of the securities to rise further, thereby exacerbating the loss. There is the risk that the securities borrowed by the Fund in connection with a short-sale must be returned to the securities lender on short notice. If a request for return of borrowed securities occurs at a time when other short-sellers of the security are receiving similar requests, a short squeeze can occur, and the Fund may be compelled to replace borrowed securities previously sold short with purchases on the open market at the most disadvantageous time, possibly at prices significantly in excess of the proceeds received at the time the securities were originally sold short.
Inflation Risk
Inflation risk is the risk that the value of assets or income from investment will be worth less in the future, as inflation decreases the value of money. As inflation increases, the real value of the common shares and distributions on those shares can decline. In addition, during any periods of rising inflation, interest rates on any borrowings by the Fund would likely increase, which would tend to further reduce returns to the holders of common shares.
Deflation Risk
Deflation risk is the risk that prices throughout the economy decline over time, which may have an adverse effect on the market valuation of companies, their assets and their revenues. In addition, deflation may have an adverse effect on the creditworthiness of issuers and may make issuer default more likely, which may result in a decline in the value of the Funds portfolio.
Market Risk and Selection Risk
Market risk is the possibility that the market values of securities owned by the Fund will decline. There is a risk that bond markets will go down in value, including the possibility that such markets will go down sharply and unpredictably.
The prices of fixed-income securities tend to fall as interest rates rise, and such declines tend to be greater among fixed-income securities with longer maturities. Market risk is often greater among certain types of fixed-income securities, such as zero-coupon bonds that do not make regular interest payments but are instead bought at a discount to their face values and paid in full upon maturity. As interest rates change, these securities often fluctuate more in price than securities that make regular interest payments and therefore subject the Fund to greater market risk than a fund that does not own these types of securities.
When-issued and delayed delivery transactions are subject to changes in market conditions from the time of the commitment until settlement, which may adversely affect the prices or yields of the securities being purchased. The greater the Funds outstanding commitments for these securities, the greater the Funds exposure to market price fluctuations.
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Selection risk is the risk that the securities that the Funds management selects will underperform the bond market, the market relevant indices or other funds with similar investment objective and investment strategies.
Risk Associated with Recent Market Events
Stresses associated with the 2008 financial crisis in the United States and global economies peaked approximately a decade ago, but periods of unusually high volatility in the financial markets and restrictive credit conditions, sometimes limited to a particular sector or a geography, continue to recur. Some countries, including the United States, have adopted and/or are considering the adoption of more protectionist trade policies, a move away from the tighter financial industry regulations that followed the financial crisis, and/or substantially reducing corporate taxes. The exact shape of these policies is still being considered, but the equity and debt markets may react strongly to expectations of change, which could increase volatility, especially if the markets expectations are not borne out. A rise in protectionist trade policies, and the possibility of changes to some international trade agreements, could affect the economies of many nations in ways that cannot necessarily be foreseen at the present time. In addition, geopolitical and other risks, including environmental and public health, may add to instability in world economies and markets generally. Economies and financial markets throughout the world are becoming increasingly interconnected. As a result, whether or not the Fund invests in securities of issuers located in or with significant exposure to countries experiencing economic, political and/or financial difficulties, the value and liquidity of the Funds investments may be negatively affected by such events.
An outbreak of respiratory disease caused by a novel coronavirus was first detected in China in December 2019 and has now developed into a global pandemic. The pandemic has resulted in closing borders, enhanced health screenings, healthcare service preparation and delivery, quarantines, cancellations, disruptions to supply chains and customer activity, as well as general concern and uncertainty. The impact of this pandemic, and other pandemics and epidemics that may arise in the future, could affect the economies of many nations, individual companies and the market in general in ways that cannot necessarily be foreseen at the present time. In addition, the impact of infectious diseases in developing or emerging market countries may be greater due to less established health care systems. Health crises caused by the novel coronavirus pandemic may exacerbate other pre-existing political, social and economic risks in certain countries. The impact of the pandemic may last for an extended period of time.
LIBOR and Other Reference Rates Risk
The Funds investments and payment obligations may be based on floating rates, such as London Interbank Offered Rate (LIBOR), European Interbank Offer Rate (EURIBOR), Sterling Overnight Interbank Average Rate (SONIA), and other similar types of reference rates (Reference Rates). The elimination of a Reference Rate or any other changes or reforms to the determination or supervision of Reference Rates could have an adverse impact on the market for, or value of, any securities or payments linked to those Reference Rates. In addition, any substitute Reference Rate and any pricing adjustments imposed by a regulator or by counterparties or otherwise may adversely affect the Funds performance and/or NAV.
In 2017, the Alternative Reference Rates Committee, a group of large U.S. banks working with the Federal Reserve, announced its selection of the Secured Overnight Financing Rate (SOFR), which is intended to be a broad measure of secured overnight U.S. Treasury repo rates, as an appropriate replacement for LIBOR. The Federal Reserve Bank of New York began publishing the SOFR in 2018, with the expectation that it could be used on a voluntary basis in new instruments and transactions. Bank working groups and regulators in other countries have suggested other alternatives for their markets, including the SONIA in England.
In 2017, the head of the United Kingdoms Financial Conduct Authority announced a desire to phase out the use of LIBOR by the end of 2021. There remains uncertainty regarding the future utilization of LIBOR and the nature of any replacement Reference Rate. As such, the potential effect of a transition away from LIBOR on the Fund or the financial instruments in which the Fund invests cannot yet be determined.
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Market Disruption and Geopolitical Risk
The occurrence of events similar to those in recent years, such as the aftermath of the war in Iraq, instability in Afghanistan, Pakistan, Egypt, Libya, Syria, Russia, Ukraine and the Middle East, new and ongoing epidemics and pandemics of infectious diseases and other global health events, natural/environmental disasters, terrorist attacks in the United States and around the world, social and political discord, debt crises (such as the Greek crisis), sovereign debt downgrades, increasingly strained relations between the United States and a number of foreign countries, including traditional allies, such as certain European countries, and historical adversaries, such as North Korea, Iran, China and Russia, and the international community generally, new and continued political unrest in various countries, such as Venezuela and Spain, the exit or potential exit of one or more countries from the EU or the EMU, and continued changes in the balance of political power among and within the branches of the U.S. government, among others, may result in market volatility, may have long term effects on the U.S. and worldwide financial markets, and may cause further economic uncertainties in the United States and worldwide. The coronavirus pandemic has led to illiquidity and volatility in the municipal bond markets and may lead to downgrades in the credit quality of certain municipal issuers.
China and the United States have each recently imposed tariffs on the other countrys products. These actions may trigger a significant reduction in international trade, the oversupply of certain manufactured goods, substantial price reductions of goods and possible failure of individual companies and/or large segments of Chinas export industry, which could have a negative impact on the Funds performance. U.S. companies that source material and goods from China and those that make large amounts of sales in China would be particularly vulnerable to an escalation of trade tensions. Uncertainty regarding the outcome of the trade tensions and the potential for a trade war could cause the U.S. dollar to decline against safe haven currencies, such as the Japanese yen and the Euro. Events such as these and their consequences are difficult to predict and it is unclear whether further tariffs may be imposed or other escalating actions may be taken in the future.
The decision made in the British referendum of June 23, 2016 to leave the EU, an event widely referred to as Brexit, has led to volatility in the financial markets of the United Kingdom and more broadly across Europe and may also lead to weakening in consumer, corporate and financial confidence in such markets. The formal notification to the European Council required under Article 50 of the Treaty on EU was made on March 29, 2017, following which the terms of exit were negotiated. Pursuant to an agreement between the United Kingdom and the EU, the United Kingdom left the EU on January 31, 2020 subject to a transitional period ending December 31, 2020. The longer-term economic, legal, political and social framework to be put in place between the United Kingdom and the EU are unclear at this stage and are likely to lead to ongoing political and economic uncertainty and periods of exacerbated volatility in both the United Kingdom and in wider European markets for some time. In particular, the decision made in Brexit may lead to a call for similar referendums in other European jurisdictions which may cause increased economic volatility in the European and global markets. This mid- to long-term uncertainty may have an adverse effect on the economy generally and on the ability of the Fund to execute its strategies and to receive attractive returns. In particular, currency volatility may mean that the returns of the Fund and its investments are adversely affected by market movements and may make it more difficult, or more expensive, for the Fund to execute prudent currency hedging policies. Potential decline in the value of the British Pound and/or the Euro against other currencies, along with the potential downgrading of the United Kingdoms sovereign credit rating, may also have an impact on the performance of portfolio companies or investments located in the United Kingdom or
Europe. In light of the above, no definitive assessment can currently be made regarding the impact that Brexit will have on the Fund, its investments or its organization more generally.
The occurrence of any of these above events could have a significant adverse impact on the value and risk profile of the Funds portfolio. The Fund does not know how long the securities markets may be affected by similar events and cannot predict the effects of similar events in the future on the U.S. economy and securities markets. There can be no assurance that similar events and other market disruptions will not have other material and adverse implications.
Regulation and Government Intervention Risk
The U.S. Government and the Federal Reserve, as well as certain foreign governments, recently have taken unprecedented actions designed to support certain financial institutions and segments of the financial markets that experienced extreme volatility, such as implementing stimulus packages, providing liquidity in fixed income,
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commercial paper and other markets and providing tax breaks, among other actions. The reduction or withdrawal of Federal Reserve or other U.S. or non-U.S. governmental support could negatively affect financial markets generally and reduce the value and liquidity of certain securities. Additionally, with the cessation of certain market support activities, the Fund may face a heightened level of interest rate risk as a result of a rise or increased volatility in interest rates.
Federal, state, and other governments, their regulatory agencies or self-regulatory organizations may take actions that affect the regulation of the issuers in which the Fund invests. Legislation or regulation may also change the way in which the Fund is regulated. Such legislation or regulation could limit or preclude the Funds ability to achieve its investment objective.
In the aftermath of the global financial crisis, there appears to be a renewed popular, political and judicial focus on finance related consumer protection. Financial institution practices are also subject to greater scrutiny and criticism generally. In the case of transactions between financial institutions and the general public, there may be a greater tendency toward strict interpretation of terms and legal rights in favor of the consuming public, particularly where there is a real or perceived disparity in risk allocation and/or where consumers are perceived as not having had an opportunity to exercise informed consent to the transaction. In the event of conflicting interests between retail investors holding common shares of a closed-end investment company such as the Fund and a large financial institution, a court may similarly seek to strictly interpret terms and legal rights in favor of retail investors.
The Fund may be affected by governmental action in ways that are not foreseeable, and there is a possibility that such actions could have a significant adverse effect on the Fund and its ability to achieve its investment objective.
Regulation as a Commodity Pool
The CFTC subjects advisers to registered investment companies to regulation by the CFTC if a fund that is advised by the investment adviser either (i) invests, directly or indirectly, more than a prescribed level of its liquidation value in CFTC-regulated futures, options and swaps (CFTC Derivatives), or (ii) markets itself as providing investment exposure to such instruments. To the extent the Fund uses CFTC Derivatives, it intends to do so below such prescribed levels and will not market itself as a commodity pool or a vehicle for trading such instruments. Accordingly, the Advisor has claimed an exclusion from the definition of the term commodity pool operator under the Commodity Exchange Act (CEA) pursuant to Rule 4.5 under the CEA. The Advisor is not, therefore, subject to registration or regulation as a commodity pool operator under the CEA in respect of the Fund.
Failures of Futures Commission Merchants and Clearing Organizations Risk
The Fund is required to deposit funds to margin open positions in cleared derivative instruments (both futures and swaps) with a clearing broker registered as a futures commission merchant (FCM). The CEA requires an FCM to segregate all funds received from customers with respect to any orders for the purchase or sale of U.S. domestic futures contracts and cleared swaps from the FCMs proprietary assets. Similarly, the CEA requires each FCM to hold in a separate secure account all funds received from customers with respect to any orders for the purchase or sale of foreign futures contracts and segregate any such funds from the funds received with respect to domestic futures contracts. However, all funds and other property received by an FCM from its customers are held by an FCM on a commingled basis in an omnibus account and amounts in excess of assets posted to the clearing organization may be invested by an FCM in certain instruments permitted under the applicable regulation. There is a risk that assets deposited by the Fund with any FCM as margin for futures contracts or commodity options may, in certain circumstances, be used to satisfy losses of other clients of the Funds FCM. In addition, the assets of the Fund posted as margin against both swaps and futures contracts may not be fully protected in the event of the FCMs bankruptcy.
Legal, Tax and Regulatory Risks
Legal, tax and regulatory changes could occur that may have material adverse effects on the Fund. For example, the regulatory and tax environment for derivative instruments in which the Fund may participate is evolving, and such changes in the regulation or taxation of derivative instruments may have material adverse effects on the value of derivative instruments held by the Fund and the ability of the Fund to pursue its investment strategies.
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To qualify for the favorable U.S. federal income tax treatment generally accorded to RICs, the Fund must, among other things, derive in each taxable year at least 90% of its gross income from certain prescribed sources and distribute for each taxable year at least 90% of its investment company taxable income (generally, ordinary income plus the excess, if any, of net short-term capital gain over net long-term capital loss) and at least 90% of its net tax-exempt interest income, if any. If for any taxable year the Fund does not qualify as a RIC, all of its taxable income for that year (including its net capital gain) would be subject to tax at regular corporate rates without any deduction for distributions to shareholders, and such distributions would be taxable as ordinary dividends to the extent of the Funds current and accumulated earnings and profits.
The current presidential administration has called for, and in certain instances has begun to implement, significant changes to U.S. fiscal, tax, trade, healthcare, immigration, foreign, and government regulatory policy. In this regard, there is significant uncertainty with respect to legislation, regulation and government policy at the federal level, as well as the state and local levels. Recent events have created a climate of heightened uncertainty and introduced new and difficult-to-quantify macroeconomic and political risks with potentially far-reaching implications. There has been a corresponding meaningful increase in the uncertainty surrounding interest rates, inflation, foreign exchange rates, trade volumes and fiscal and monetary policy. To the extent the U.S. Congress or the current presidential administration implements changes to U.S. policy, those changes may impact, among other things, the U.S. and global economy, international trade and relations, unemployment, immigration, corporate taxes, healthcare, the U.S. regulatory environment, inflation and other areas. Some particular areas identified as subject to potential change, amendment or repeal include the Dodd-Frank Act, including the Volcker Rule and various swaps and derivatives regulations, credit risk retention requirements and the authorities of the Federal Reserve, the Financial Stability Oversight Council and the SEC. Although the Fund cannot predict the impact, if any, of these changes to the Funds business, they could adversely affect the Funds business, financial condition, operating results and cash flows. Until the Fund knows what policy changes are made and how those changes impact the Funds business and the business of the Funds competitors over the long term, the Fund will not know if, overall, the Fund will benefit from them or be negatively affected by them.
The risks and uncertainties associated with these policy proposals are heightened by the 2018 U.S. federal election, which has resulted in different political parties controlling the U.S. House of Representatives, on the one hand, and the U.S. Senate and the Executive Branch, on the other hand. Additional risks arising from the differences in expressed policy preferences among the various constituencies in these branches of the U.S. government has led in the past, and may lead in the future, to short term or prolonged policy impasses, which could, and has, resulted in shutdowns of the U.S. federal government. U.S. federal government shutdowns, especially prolonged shutdowns, could have a significant adverse impact on the economy in general and could impair the ability of issuers to raise capital in the securities markets. Any of these effects could have an adverse impact on companies in the Funds portfolio and consequently on the value of their securities and the Funds NAV.
The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the Internal Revenue Service and the U.S. Treasury Department. Revisions in U.S. federal tax laws and interpretations of these laws could adversely affect the tax consequences of your investment.
Investment Company Act Regulations
The Fund is a registered closed-end management investment company and as such is subject to regulations under the Investment Company Act. Generally speaking, any contract or provision thereof that is made, or where performance involves a violation of the Investment Company Act or any rule or regulation thereunder is unenforceable by either party unless a court finds otherwise.
Legislation Risk
At any time after the date of this Prospectus, legislation may be enacted that could negatively affect the assets of the Fund. Legislation or regulation may change the way in which the Fund itself is regulated. The Advisor cannot predict the effects of any new governmental regulation that may be implemented and there can be no assurance that any new governmental regulation will not adversely affect the Funds ability to achieve its investment objective.
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Potential Conflicts of Interest of the Advisor and Others
The investment activities of BlackRock, Inc. (BlackRock), the ultimate parent company of the Advisor, and its Affiliates, The PNC Financial Services Group, Inc. (which, through a subsidiary, has a significant economic interest in BlackRock) and its subsidiaries (each with The PNC Financial Services Group, Inc., an Entity and collectively, the Entities), and their respective directors, officers or employees, in the management of, or their interest in, their own accounts and other accounts they manage, may present conflicts of interest that could disadvantage the Fund and its shareholders. BlackRock, its Affiliates and the Entities provide investment management services to other funds and discretionary managed accounts that may follow investment programs similar to that of the Fund. Subject to the requirements of the Investment Company Act, BlackRock, its Affiliates and the Entities intend to engage in such activities and may receive compensation from third parties for their services. None of BlackRock, its Affiliates or the Entities are under any obligation to share any investment opportunity, idea or strategy with the Fund. As a result, BlackRock, its Affiliates and the Entities may compete with the Fund for appropriate investment opportunities. The results of the Funds investment activities, therefore, may differ from those of an Affiliate, and Entity or another account managed by an Affiliate or an Entity and it is possible that the Fund could sustain losses during periods in which one or more Affiliates, Entities and other accounts achieve profits on their trading for proprietary or other accounts. BlackRock has adopted policies and procedures designed to address potential conflicts of interests. For additional information about potential conflicts of interest and the way in which BlackRock addresses such conflicts, please see Conflicts of Interest and Management of the FundPortfolio ManagementPotential Material Conflicts of Interest in the SAI.
Defensive Investing Risk
For defensive purposes, the Fund may allocate assets into cash or short-term fixed-income securities without limitation. In doing so, the Fund may succeed in avoiding losses but may otherwise fail to achieve its investment objective. Further, the value of short-term fixed-income securities may be affected by changing interest rates and by changes in credit ratings of the investments. If the Fund holds cash uninvested it will be subject to the credit risk of the depository institution holding the cash.
Decision-Making Authority Risk
Investors have no authority to make decisions or to exercise business discretion on behalf of the Fund, except as set forth in the Funds governing documents. The authority for all such decisions is generally delegated to the Board, which in turn, has delegated the day-to-day management of the Funds investment activities to the Advisor, subject to oversight by the Board.
Management Risk
The Fund is subject to management risk because it is an actively managed investment portfolio. The Advisor and the individual portfolio managers will apply investment techniques and risk analyses in making investment decisions for the Fund, but there can be no guarantee that these will produce the desired results. The Fund may be subject to a relatively high level of management risk because the Fund may invest in derivative instruments, which may be highly specialized instruments that require investment techniques and risk analyses different from those associated with equities and bonds.
Valuation Risk
The Fund is subject to valuation risk, which is the risk that one or more of the securities in which the Fund invests are valued at prices that the Fund is unable to obtain upon sale due to factors such as incomplete data, market instability or human error. The Advisor may use an independent pricing service or prices provided by dealers to value securities at their market value. Because the secondary markets for certain investments may be limited, such investments may be difficult to value. See Net Asset Value. When market quotations are not available, the Advisor may price such investments pursuant to a number of methodologies, such as computer-based analytical modeling or individual security evaluations. These methodologies generate approximations of market values, and there may be significant professional disagreement about the best methodology for a particular type of financial instrument or different methodologies that might be used under different circumstances. In the absence of an actual market transaction, reliance on such methodologies is essential, but may introduce significant variances in the ultimate valuation of the Funds investments. Technological issues and/or errors by pricing services or other third-party service providers may also impact the Funds ability to value it investments and the calculation of the Funds NAV.
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When market quotations are not readily available or are deemed to be inaccurate or unreliable, the Fund values its investments at fair value as determined in good faith pursuant to policies and procedures approved by the Board. Fair value is defined as the amount for which assets could be sold in an orderly disposition over a reasonable period of time, taking into account the nature of the asset. Fair value pricing may require determinations that are inherently subjective and inexact about the value of a security or other asset. As a result, there can be no assurance that fair value priced assets will not result in future adjustments to the prices of securities or other assets, or that fair value pricing will reflect a price that the Fund is able to obtain upon sale, and it is possible that the fair value determined for a security or other asset will be materially different from quoted or published prices, from the prices used by others for the same security or other asset and/or from the value that actually could be or is realized upon the sale of that security or other asset. For example, the Funds NAV could be adversely affected if the Funds determinations regarding the fair value of the Funds investments were materially higher than the values that the Fund ultimately realizes upon the disposal of such investments. Where market quotations are not readily available, valuation may require more research than for more liquid investments. In addition, elements of judgment may play a greater role in valuation in such cases than for investments with a more active secondary market because there is less reliable objective data available.
Because of overall size, duration and maturities of positions held by the Fund, the value at which its investments can be liquidated may differ, sometimes significantly, from the interim valuations obtained by the Fund. In addition, the timing of liquidations may also affect the values obtained on liquidation. Securities held by the Fund may routinely trade with bid-offer spreads that may be significant. There can be no guarantee that the Funds investments could ultimately be realized at the Funds valuation of such investments. In addition, the Funds compliance with the asset diversification tests applicable to regulated investment companies depends on the fair market values of the Funds assets, and, accordingly, a challenge to the valuations ascribed by the Fund could affect its ability to comply with those tests or require it to pay penalty taxes in order to cure a violation thereof.
The Funds NAV per share is a critical component in several operational matters including computation of advisory and services fees and determination of the price at which a tender offer will be made. Consequently, variance in the valuation of the Funds investments will impact, positively or negatively, the fees and expenses shareholders will pay.
Reliance on the Advisor Risk
The Fund is dependent upon services and resources provided by the Advisor, and therefore the Advisors parent, BlackRock. The Advisor is not required to devote its full time to the business of the Fund and there is no guarantee or requirement that any investment professional or other employee of the Advisor will allocate a substantial portion of his or her time to the Fund. The loss of one or more individuals involved with the Advisor could have a material adverse effect on the performance or the continued operation of the Fund. For additional information on the Advisor and BlackRock, see Management of the FundInvestment Advisor.
Reliance on Service Providers Risk
The Fund must rely upon the performance of service providers to perform certain functions, which may include functions that are integral to the Funds operations and financial performance. Failure by any service provider to carry out its obligations to the Fund in accordance with the terms of its appointment, to exercise due care and skill or to perform its obligations to the Fund at all as a result of insolvency, bankruptcy or other causes could have a material adverse effect on the Funds performance and returns to shareholders. The termination of the Funds relationship with any service provider, or any delay in appointing a replacement for such service provider, could materially disrupt the business of the Fund and could have a material adverse effect on the Funds performance and returns to shareholders.
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Information Technology Systems Risk
The Fund is dependent on the Advisor for certain management services as well as back-office functions. The Advisor depends on information technology systems in order to assess investment opportunities, strategies and markets and to monitor and control risks for the Fund. It is possible that a failure of some kind which causes disruptions to these information technology systems could materially limit the Advisors ability to adequately assess and adjust investments, formulate strategies and provide adequate risk control. Any such information technology-related difficulty could harm the performance of the Fund. Further, failure of the back-office functions of the Advisor to process trades in a timely fashion could prejudice the investment performance of the Fund.
Cyber Security Risk
With the increased use of technologies such as the Internet to conduct business, the Fund is susceptible to operational, information security and related risks. In general, cyber incidents can result from deliberate attacks or unintentional events. Cyber-attacks include, but are not limited to, gaining unauthorized access to digital systems (e.g., through hacking or malicious software coding) for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. Cyber-attacks may also be carried out in a manner that does not require gaining unauthorized access, such as causing denial-of-service attacks on websites (i.e., efforts to make network services unavailable to intended users). Cyber security failures by or breaches of the Advisor and other service providers (including, but not limited to, fund accountants, custodians, transfer agents and administrators), and the issuers of securities in which the Fund invests, have the ability to cause disruptions and impact business operations, potentially resulting in financial losses, interference with the Funds ability to calculate its NAV, impediments to trading, the inability of shareholders to transact business, violations of applicable privacy and other laws, regulatory fines, penalties, reputational damage, reimbursement or other compensation costs, or additional compliance costs. In addition, substantial costs may be incurred in order to prevent any cyber incidents in the future. While the Fund has established business continuity plans in the event of, and risk management systems to prevent, such cyber-attacks, there are inherent limitations in such plans and systems including the possibility that certain risks have not been identified. Furthermore, the Fund cannot control the cyber security plans and systems put in place by service providers to the Fund and issuers in which the Fund invests. As a result, the Fund or its shareholders could be negatively impacted.
Misconduct of Employees and of Service Providers Risk
Misconduct or misrepresentations by employees of the Advisor or the Funds service providers could cause significant losses to the Fund. Employee misconduct may include binding the Fund to transactions that exceed authorized limits or present unacceptable risks and unauthorized trading activities, concealing unsuccessful trading activities (which, in any case, may result in unknown and unmanaged risks or losses) or making misrepresentations regarding any of the foregoing. Losses could also result from actions by the Funds service providers, including, without limitation, failing to recognize trades and misappropriating assets. In addition, employees and service providers may improperly use or disclose confidential information, which could result in litigation or serious financial harm, including limiting the Funds business prospects or future marketing activities. Despite the Advisors due diligence efforts, misconduct and intentional misrepresentations may be undetected or not fully comprehended, thereby potentially undermining the Advisors due diligence efforts. As a result, no assurances can be given that the due diligence performed by the Advisor will identify or prevent any such misconduct.
Special Risks for Holders of Rights
There is a risk that performance of the Fund may result in the common shares purchasable upon exercise of the rights being less attractive to investors at the conclusion of the subscription period. This may reduce or eliminate the value of the rights. Investors who receive rights may find that there is no market to sell rights they do not wish to exercise. If investors exercise only a portion of the rights, common shares may trade at less favorable prices than larger offerings for similar securities.
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Portfolio Turnover Risk
The Funds annual portfolio turnover rate may vary greatly from year to year, as well as within a given year. Portfolio turnover rate is not considered a limiting factor in the execution of investment decisions for the Fund. A higher portfolio turnover rate results in correspondingly greater brokerage commissions and other transactional expenses that are borne by the Fund. High portfolio turnover may result in an increased realization of net short-term capital gains by the Fund which, when distributed to common shareholders, will be taxable as ordinary income. Additionally, in a declining market, portfolio turnover may create realized capital losses.
Anti-Takeover Provisions Risk
The Funds Charter and Bylaws include provisions that could limit the ability of other entities or persons to acquire control of the Fund or convert the Fund to open-end status or to change the composition of the Board. Such provisions could limit the ability of shareholders 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 Certain Provisions in the Charter and Bylaws.
Investment Limitations
The Fund has adopted certain investment limitations designed to limit investment risk. Some of these limitations are fundamental and thus may not be changed without the approval of the holders of a majority of the outstanding common shares. See Investment Objective and PoliciesInvestment Restrictions in the SAI.
The restrictions and other limitations set forth throughout this Prospectus and in the SAI apply only at the time of purchase of securities and will not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of the acquisition of securities.
Management of Investment Portfolio and Capital Structure to Limit Leverage Risk
The Fund may take certain actions if short-term interest rates increase or market conditions otherwise change (or the Fund anticipates such an increase or change) and any leverage the Fund may have outstanding begins (or is expected) to adversely affect common shareholders. In order to attempt to offset such a negative impact of any outstanding leverage on common shareholders, the Fund may shorten the average maturity of its investment portfolio (by investing in short-term securities) or may reduce any indebtedness that it may have incurred. As explained above under RisksLeverage Risk, the success of any such attempt to limit leverage risk depends on the Advisors ability to accurately predict interest rate or other market changes. Because of the difficulty of making such predictions, the Fund may never attempt to manage its capital structure in the manner described in this paragraph.
If market conditions suggest that employing leverage, or employing additional leverage if the Fund already has outstanding leverage, would be beneficial, the Fund may enter into one or more credit facilities, increase any existing credit facilities, sell preferred shares or engage in additional leverage transactions, subject to the restrictions of the Investment Company Act.
Strategic Transactions
The Fund may use certain Strategic Transactions designed to limit the risk of price fluctuations of securities and to preserve capital. These Strategic Transactions include using swaps, financial futures contracts, options on financial futures or options based on either an index of long-term securities, or on securities whose prices, in the opinion of the Advisor, correlate with the prices of the Funds investments. There can be no assurance that Strategic Transactions will be used or used effectively to limit risk, and Strategic Transactions may be subject to their own risks.
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Directors and Officers
The Board is responsible for the overall management of the Fund, including supervision of the duties performed by the Advisor. There are eleven Directors. A majority of the Directors are Independent Directors of the Fund. The name and business address of the Directors and officers of the Fund and their principal occupations and other affiliations during the past five years are set forth under Management of the Fund in the SAI.
Investment Advisor
The Advisor is responsible for the management of the Funds portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operation of the Fund. The Advisor, located at 100 Bellevue Parkway, Wilmington, Delaware 19809, is a wholly-owned subsidiary of BlackRock.
BlackRock is one of the worlds largest publicly-traded investment management firms. As of March 31, 2020, BlackRocks assets under management were approximately 6.466 trillion. BlackRock has over 30 years of experience managing closed-end products and, as of March 31, 2020, advised a registered closed-end family of 70 exchange-listed active funds with approximately $45.473 billion in assets.
BlackRock is independent in ownership and governance, with no single majority shareholder and a majority of independent directors.
Investment Philosophy
BlackRocks investment decision-making process for the municipal security sector is subject to the same discipline, oversight and investment philosophy that the firm applies to other sectors of the fixed-income market.
BlackRock uses a relative value strategy that evaluates the trade-off between risk and return to seek to achieve the Funds investment objective. This strategy is combined with disciplined risk control techniques and applied in sector, sub-sector and individual security selection decisions. BlackRocks extensive personnel and technology resources are the key drivers of the investment philosophy.
Portfolio Managers
The members of the portfolio management team who are primarily responsible for the day-to-day management of the Funds portfolio are as follows:
Theodore R. Jaeckel, Jr., Managing Director of BlackRock, Inc., is a member of Americas Fixed-income within Alpha Strategies. He is head portfolio manager on the Municipal Mutual Fund Desk. He is also a member of BlackRocks Municipal Bond Operating Committee, which oversees all municipal bond portfolio management, research and trading activities. Mr. Jaeckels service with BlackRock, Inc. dates back to 1991, including his years with Merrill Lynch Investment Managers (MLIM), which merged with BlackRock in 2006. At MLIM, he was a portfolio manager for municipal bond alternative and high yield strategies. Prior to joining MLIM, Mr. Jaeckel was a municipal bond trader with Chemical Bank. Mr. Jaeckel earned a BA degree in history from Hamilton College in 1981.
Walter OConnor, CFA, Managing Director of BlackRock, Inc., is a member of Americas Fixed-income within Alpha Strategies. He is head Portfolio Manager on the Municipal Mutual Fund Desk. He is also a member of the Municipal Bond Operating Committee, which oversees all municipal bond portfolio management, research and trading activities Mr. OConnors service with BlackRock, Inc. dates back to 1991, including his years with MLIM. At MLIM, he was a portfolio manager for municipal bond retail mutual funds. Prior to joining MLIM, Mr. OConnor was with Prudential Securities, where he was involved in trading, underwriting, and arbitrage for municipal securities and financial futures. Mr. OConnor earned a BA degree in finance and philosophy from the University of Notre Dame in 1984.
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The SAI provides additional information about other accounts managed by the portfolio management team and the ownership of the Funds securities by each portfolio manager.
Investment Management Agreement
Pursuant to an investment management agreement between the Advisor and the Fund (the Investment Management Agreement), the Fund has agreed to pay the Advisor a monthly management fee at an annual rate equal to 0.55% of the average daily value of the Funds Net Assets. Net Assets means the total assets of the Fund minus the sum of its accrued liabilities.
A discussion regarding the basis for the approval of the Investment Management Agreement by the Board is available in the Funds Semi-Annual Report to shareholders for the period ended October 31, 2019.
Except as otherwise described in this Prospectus, the Fund pays, in addition to the fees paid to the Advisor, all other costs and expenses of its operations, including compensation of its Directors (other than those affiliated with the Advisor), custodian, leveraging expenses, transfer and dividend disbursing agent expenses, legal fees, rating agency fees, listing fees and expenses, expenses of independent auditors, expenses of repurchasing shares, expenses of preparing, printing and distributing shareholder reports, notices, proxy statements and reports to governmental agencies and taxes, if any.
The Fund and the Advisor have entered into the Fee Waiver Agreement, pursuant to which the Advisor has contractually agreed to waive the management fee with respect to any portion of the Funds assets attributable to investments in any equity and fixed-income mutual funds and ETFs managed by the Advisor or its affiliates that have a contractual fee, through June 30, 2021. In addition, effective December 1, 2019, pursuant to the Fee Waiver Agreement, the Advisor has contractually agreed to waive its management fees by the amount of investment advisory fees the Fund pays to the Advisor indirectly through its investment in money market funds advised by the Advisor or its affiliates, through June 30, 2021. The Fee Waiver Agreement may be continued from year to year thereafter, provided that such continuance is specifically approved by the Advisor and the Fund (including by a majority of the Funds Independent Directors). Neither the Advisor nor the Fund is obligated to extend the Fee Waiver Agreement. The Fee Waiver Agreement may be terminated at any time, without the payment of any penalty, only by the Fund (upon the vote of a majority of the Independent Directors or a majority of the outstanding voting securities of the Fund), upon 90 days written notice by the Fund to the Advisor.
Administration and Accounting Services
State Street Bank and Fund Company provides certain administration and accounting services to the Fund pursuant to an Administration and Fund Accounting Services Agreement (the Administration Agreement). Pursuant to the Administration Agreement, State Street Bank and Fund Company provides the Fund with, among other things, customary fund accounting services, including computing the Funds NAV and maintaining books, records and other documents relating to the Funds financial and portfolio transactions, and customary fund administration services, including assisting the Fund with regulatory filings, tax compliance and other oversight activities. For these and other services it provides to the Fund, State Street Bank and Fund Company is paid a monthly fee from the Fund at an annual rate ranging from 0.0075% to 0.015% of the Funds Managed Assets, along with an annual fixed fee ranging from $3,000 to $10,000 for the services it provides to the Fund.
Custodian and Transfer Agent
The custodian of the assets of the Fund is State Street Bank and Fund Company, whose principal business address is One Lincoln Street, Boston, Massachusetts 02111. The custodian is responsible for, among other things, receipt of and disbursement of funds from the Funds accounts, establishment of segregated accounts as necessary, and transfer, exchange and delivery of Fund portfolio securities.
Computershare Fund Company, N.A., whose principal business address is 250 Royall Street, Canton, Massachusetts 02021, serves as the Funds transfer agent with respect to the common shares.
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Independent Registered Public Accounting Firm
Deloitte & Touche LLP, whose principal business address is 200 Berkeley Street, Boston, MA 02116, is the independent registered public accounting firm of the Fund and is expected to render an opinion annually on the financial statements of the Fund.
The NAV of the Funds common shares will be computed based upon the value of the Funds portfolio securities and other assets. NAV per common share will be determined as of the close of the regular trading session on the NYSE on each business day on which the NYSE is open for trading. The Fund calculates NAV per common share by subtracting the Funds liabilities (including accrued expenses, dividends payable and any borrowings of the Fund), and the liquidation value of any outstanding preferred shares of the Fund from the Funds total assets (the value of the securities the Fund holds plus cash or other assets, including interest accrued but not yet received) and dividing the result by the total number of common shares of the Fund outstanding.
Valuation of securities held by the Fund is as follows:
Fixed-Income Investments. Fixed-income securities for which market quotations are readily available are generally valued using such securities current market value. The Fund values fixed-income portfolio securities and non-exchange traded derivatives using the last available bid prices or current market quotations provided by dealers or prices (including evaluated prices) supplied by the Funds approved independent third-party pricing services, each in accordance with valuation procedures approved by the Board. The pricing services may use matrix pricing or valuation models that utilize certain inputs and assumptions to derive values, including transaction data (e.g., recent representative bids and offers), credit quality information, perceived market movements, news, and other relevant information and by other methods, which may include consideration of: yields or prices of securities of comparable quality, coupon, maturity and type; indications as to values from dealers; general market conditions; and other factors and assumptions. Pricing services generally value fixed-income securities assuming orderly transactions of an institutional round lot size, but the Fund may hold or transact in such securities in smaller, odd lot sizes. Odd lots often trade at lower prices than institutional round lots. The amortized cost method of valuation may be used with respect to debt obligations with sixty days or less remaining to maturity unless the Advisor determines such method does not represent fair value. Loan participation notes are generally valued at the mean of the last available bid prices from one or more brokers or dealers as obtained from independent third-party pricing services. Certain fixed-income investments including asset-backed and mortgage-related securities may be valued based on valuation models that consider the estimated cash flows of each tranche of the entity, establish a benchmark yield and develop an estimated tranche specific spread to the benchmark yield based on the unique attributes of the tranche.
Options, Futures, Swaps and Other Derivatives. Exchange-traded equity options for which market quotations are readily available are valued at the mean of the last bid and ask prices as quoted on the Exchange or the board of trade on which such options are traded. In the event that there is no mean price available for an exchange traded equity option held by the Fund on a day on which the Fund values such option, the last bid (long positions) or ask (short positions) price, if available, will be used as the value of such option. If no bid or ask price is available on a day on which the Fund values such option, the prior days price will be used, unless the Advisor determines that such prior days price no longer reflects the fair value of the option in which case such option will be treated as a fair value asset. OTC derivatives may be valued using a mathematical model which may incorporate a number of market data factors. Financial futures contracts and options thereon, which are traded on exchanges, are valued at their last sale price or settle price as of the close of such exchanges. Swap agreements and other derivatives are generally valued daily based upon quotations from market makers or by a pricing service in accordance with the valuation procedures approved by the Board.
Equity Investments. Equity securities traded on a recognized securities exchange (e.g., NYSE), separate trading boards of a securities exchange or through a market system that provides contemporaneous transaction pricing information (an Exchange) are valued via independent pricing services generally at the Exchange closing price or if an Exchange closing price is not available, the last traded price on that Exchange prior to the time as of which the assets or liabilities are valued; however, under certain circumstances other means of determining current market value may be used. If an equity security is traded on more than one Exchange, the current market value of the
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security where it is primarily traded generally will be used. In the event that there are no sales involving an equity security held by the Fund on a day on which the Fund values such security, the last bid (long positions) or ask (short positions) price, if available, will be used as the value of such security. If the Fund holds both long and short positions in the same security, the last bid price will be applied to securities held long and the last ask price will be applied to securities sold short. If no bid or ask price is available on a day on which the Fund values such security, the prior days price will be used, unless the Advisor determines that such prior days price no longer reflects the fair value of the security, in which case such asset would be treated as a fair value asset.
Underlying Funds. Shares of underlying open-end funds are valued at NAV. Shares of underlying exchange-traded closed-end funds or other exchange-traded funds will be valued at their most recent closing price.
General Valuation Information. In determining the market value of portfolio investments, the Fund may employ independent third party pricing services, which may use, without limitation, a matrix or formula method that takes into consideration market indexes, matrices, yield curves and other specific adjustments. This may result in the securities being valued at a price different from the price that would have been determined had the matrix or formula method not been used. All cash, receivables and current payables are carried on the Funds books at their face value. The price the Fund could receive upon the sale of any particular portfolio investment may differ from the Funds valuation of the investment, particularly for securities that trade in thin or volatile markets or that are valued using a fair valuation methodology or a price provided by an independent pricing service. As a result, the price received upon the sale of an investment may be less than the value ascribed by the Fund, and the Fund could realize a greater than expected loss or lesser than expected gain upon the sale of the investment. The Funds ability to value its investment may also be impacted by technological issues and/or errors by pricing services or other third party service providers.
Prices obtained from independent third party pricing services, broker-dealers or market makers to value the Funds securities and other assets and liabilities are based on information available at the time the Fund values its assets and liabilities. In the event that a pricing service quotation is revised or updated subsequent to the day on which the Fund valued such security, the revised pricing service quotation generally will be applied prospectively. Such determination shall be made considering pertinent facts and circumstances surrounding such revision.
In the event that application of the methods of valuation discussed above result in a price for a security which is deemed not to be representative of the fair market value of such security, the security will be valued by, under the direction of or in accordance with a method specified by the Board as reflecting fair value. All other assets and liabilities (including securities for which market quotations are not readily available) held by the Fund (including restricted securities) are valued at fair value as determined in good faith by the Board or by the Advisor (its delegate). Any assets and liabilities which are denominated in a foreign currency are translated into U.S. dollars at the prevailing rates of exchange.
Certain of the securities acquired by the Fund may be traded on foreign exchanges or OTC markets on days on which the Funds NAV is not calculated and common shares are not traded. In such cases, the NAV of the Funds common shares may be significantly affected on days when investors can neither purchase nor sell shares of the Fund.
Fair Value. When market quotations are not readily available or are believed by the Advisor to be unreliable, the Funds investments are valued at fair value (Fair Value Assets). Fair Value Assets are valued by the Advisor in accordance with procedures approved by the Board. The Advisor may conclude that a market quotation is not readily available or is unreliable if a security or other asset or liability does not have a price source due to its complete lack of trading, if the Advisor believes a market quotation from a broker-dealer or other source is unreliable (e.g., where it varies significantly from a recent trade, or no longer reflects the fair value of the security or other asset or liability subsequent to the most recent market quotation), where the security or other asset or liability is only thinly traded or due to the occurrence of a significant event subsequent to the most recent market quotation. For this purpose, a significant event is deemed to occur if the Advisor determines, in its business judgment prior to or at the time of pricing the Funds assets or liabilities, that it is likely that the event will cause a material change to the last exchange closing price or closing market price of one or more assets or liabilities held by the Fund. On any date the NYSE is open and the primary exchange on which a foreign asset or liability is traded is closed, such asset or liability will be valued using the prior days price, provided that the Advisor is not aware of any significant event
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or other information that would cause such price to no longer reflect the fair value of the asset or liability, in which case such asset or liability would be treated as a Fair Value Asset. For certain foreign securities, a third-party vendor supplies evaluated, systematic fair value pricing based upon the movement of a proprietary multi-factor model after the relevant foreign markets have closed. This systematic fair value pricing methodology is designed to correlate the prices of foreign securities following the close of the local markets to the price that might have prevailed as of the Funds pricing time.
The Advisor, with input from the BlackRock Portfolio Management Group, will submit its recommendations regarding the valuation and/or valuation methodologies for Fair Value Assets to BlackRocks Valuation Committee. The BlackRock Valuation Committee may accept, modify or reject any recommendations. In addition, the Funds accounting agent periodically endeavors to confirm the prices it receives from all third party pricing services, index providers and broker-dealers, and, with the assistance of the Advisor, to regularly evaluate the values assigned to the securities and other assets and liabilities of the Fund. The pricing of all Fair Value Assets is subsequently reported to the Board or a Committee thereof.
When determining the price for a Fair Value Asset, the BlackRock Valuation Committee shall seek to determine the price that the Fund might reasonably expect to receive from the current sale of that asset or liability in an arms-length transaction. The price generally may not be determined based on what the Fund might reasonably expect to receive for selling an asset or liability at a later time or if it holds the asset or liability to maturity. Fair value determinations shall be based upon all available factors that the BlackRock Valuation Committee deems relevant at the time of the determination, and may be based on analytical values determined by the Advisor using proprietary or third party valuation models.
Fair value represents a good faith approximation of the value of an asset or liability. The fair value of one or more assets or liabilities may not, in retrospect, be the price at which those assets or liabilities could have been sold during the period in which the particular fair values were used in determining the Funds NAV. As a result, the Funds sale or repurchase of its shares at NAV, at a time when a holding or holdings are valued at fair value, may have the effect of diluting or increasing the economic interest of existing shareholders.
The Funds annual audited financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP), follow the requirements for valuation set forth in Financial Accounting Standards Board Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (ASC 820), which defines and establishes a framework for measuring fair value under US GAAP and expands financial statement disclosure requirements relating to fair value measurements.
Generally, ASC 820 and other accounting rules applicable to investment companies and various assets in which they invest are evolving. Such changes may adversely affect the Fund. For example, the evolution of rules governing the determination of the fair market value of assets or liabilities to the extent such rules become more stringent would tend to increase the cost and/or reduce the availability of third-party determinations of fair market value.
The Fund intends to make regular monthly cash distributions of all or a portion of its net investment income to holders of the Funds common shares. Net capital gains, if any, will be distributed at least annually to holders of the Funds common shares. The Funds net investment income consists of all interest income accrued on portfolio assets less all expenses of the Fund. The Fund is required to allocate net capital gains and other taxable income, if any, received by the Fund among its shareholders on a pro rata basis in the year for which such capital gains and other income is realized.
The tax treatment and characterization of the Funds distributions may vary significantly from time to time because of the varied nature of the Funds investments. The ultimate tax characterization of the Funds distributions made in a fiscal year cannot finally be determined until after the end of that fiscal year. As a result, there is a possibility that the Fund may make total distributions during a fiscal year in an amount that exceeds the Funds earnings and profits for U.S. federal income tax purposes. In such situations, the amount by which the Funds total distributions exceed earnings and profits would generally be treated as a return of capital reducing the amount of a shareholders tax basis in such shareholders shares, with any amounts exceeding such basis treated as gain from the sale of shares.
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Various factors will affect the level of the Funds net investment income, such as its asset mix, its level of retained earnings, the amount of leverage utilized by the Fund and the effects thereof and the movement of interest rates for municipal bonds. To permit the Fund to maintain more stable monthly distributions and to the extent consistent with the distribution requirements imposed on regulated investment companies by the Code, the Fund may from time to time distribute less than the entire amount earned in a particular period. The income would be available to supplement future distributions. As a result, the distributions paid by the Fund for any particular month may be more or less than the amount actually earned by the Fund during that month. Undistributed earnings will increase the Funds NAV and, correspondingly, distributions from undistributed earnings and from capital, if any, will reduce the Funds NAV.
Shareholders will automatically have all dividends and distributions reinvested in common shares of the Fund in accordance with the Funds dividend reinvestment plan, unless an election is made to receive cash by contacting the Reinvestment Plan Agent (as defined herein), at (800) 699-1236. See Dividend Reinvestment Plan.
Unless the registered owner of common shares elects to receive cash by contacting Computershare Fund Company, N.A. (the Reinvestment Plan Agent), all dividends or other distributions (together, a dividend) declared for your common shares of the Fund will be automatically reinvested by the Reinvestment Plan Agent, as agent for shareholders in administering the Funds dividend reinvestment plan (the Reinvestment Plan), in additional common shares of the Fund. Shareholders who elect not to participate in the Reinvestment Plan will receive all dividends in cash paid by check mailed directly to the shareholder of record (or, if the common shares are held in street or other nominee name, then to such nominee) by the Reinvestment Plan Agent. You may elect not to participate in the Reinvestment Plan and to receive all dividends in cash by contacting the Reinvestment Plan Agent at the address set forth below. Participation in the Reinvestment Plan is completely voluntary and may be terminated or resumed at any time without penalty by written notice if received and processed by the Reinvestment Plan Agent prior to the dividend record date. Additionally, the Reinvestment Plan Agent seeks to process notices received after the record date but prior to the payable date and such notices often will become effective by the payable date. Where late notices are not processed by the applicable payable date, such termination or resumption will be effective with respect to any subsequently declared dividend.
Some brokers may automatically elect to receive cash on your behalf and may re-invest that cash in additional common shares of the Fund for you. If you wish for all dividends declared on your common shares of the Fund to be automatically reinvested pursuant to the Reinvestment Plan, please contact your broker.
The Reinvestment Plan Agent will open an account for each common shareholder under the Reinvestment Plan in the same name in which such common shareholders common shares are registered. Whenever the Fund declares a dividend payable in cash, non-participants in the Reinvestment Plan will receive cash and participants in the Reinvestment Plan will receive the equivalent in common shares. The common shares will be acquired by the Reinvestment Plan Agent for the participants accounts, depending upon the circumstances described below, either (i) through receipt of additional unissued but authorized common shares from the Fund (newly issued common shares) or (ii) by purchase of outstanding common shares on the open market (open-market purchases). If, on the dividend payment date, the NAV is equal to or less than the market price per share plus estimated brokerage commissions (such condition often referred to as a market premium), the Reinvestment Plan Agent will invest the dividend amount in newly issued common shares on behalf of the participants. The number of newly issued common shares to be credited to each participants account will be determined by dividing the dollar amount of the dividend by the NAV on the dividend payment date. However, if the NAV is less than 95% of the market price on the dividend payment date, the dollar amount of the dividend will be divided by 95% of the market price on the dividend payment date. If, on the dividend payment date, the NAV is greater than the market price per share plus estimated brokerage commissions (such condition often referred to as a market discount), the Reinvestment Plan Agent will invest the dividend amount in common shares acquired on behalf of the participants in open-market purchases. In the event of a market discount on the dividend payment date, the Reinvestment Plan Agent will have until the last business day before the next date on which the common shares trade on an ex-dividend basis or 30 days after the dividend payment date, whichever is sooner, to invest the dividend amount in common shares acquired in open-market purchases. It is contemplated that the Fund will pay monthly income dividends. If, before
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the Reinvestment Plan Agent has completed its open-market purchases, the market price per common share exceeds the NAV per common share, the average per common share purchase price paid by the Reinvestment Plan Agent may exceed the NAV of the common shares, resulting in the acquisition of fewer common shares than if the dividend had been paid in newly issued common shares on the dividend payment date. Because of the foregoing difficulty with respect to open-market purchases, the Reinvestment Plan provides that if the Reinvestment Plan Agent is unable to invest the full dividend amount in open-market purchases, or if the market discount shifts to a market premium during the purchase period, the Reinvestment Plan Agent may cease making open-market purchases and may invest any uninvested portion in newly issued shares. Investments in newly issued shares made in this manner would be made pursuant to the same process described above and the date of issue for such newly issued shares will substitute for the dividend payment date.
The Reinvestment Plan Agent maintains all shareholders accounts in the Reinvestment Plan and furnishes written confirmation of all transactions in the accounts, including information needed by shareholders for tax records. Common shares in the account of each Reinvestment Plan participant will be held by the Reinvestment Plan Agent on behalf of the Reinvestment Plan participant, and each shareholder proxy will include those shares purchased or received pursuant to the Reinvestment Plan.
In the case of shareholders such as banks, brokers or nominees, which hold shares for others who are the beneficial owners, the Reinvestment Plan Agent will administer the Reinvestment Plan on the basis of the number of common shares certified from time to time by the record shareholders name and held for the account of beneficial owners who participate in the Reinvestment Plan.
The Reinvestment Plan Agents fees for the handling of the reinvestment of dividends will be paid by the Fund. However, each participant will pay a $0.02 per share fee incurred in connection with open-market purchases, which will be deducted from the value of the dividend. The automatic reinvestment of dividends will not relieve participants of any U.S. federal, state or local income tax that may be payable (or required to be withheld) on such dividends. See Tax Matters.
Participants that request a sale of shares through the Reinvestment Plan Agent are subject to a $0.02 per share fee. Per share fees include any applicable brokerage commissions the Reinvestment Plan Agent is required to pay.
The Fund reserves the right to amend or terminate the Reinvestment Plan. There is no direct service charge to participants with regard to purchases in the Reinvestment Plan; however, the Fund reserves the right to amend the Reinvestment Plan to include a service charge payable by the participants. Notice of amendments to the Reinvestment Plan will be sent to participants.
All correspondence concerning the Reinvestment Plan should be directed to the Reinvestment Plan Agent, through the internet at http://www.computershare.com/blackrock, or in writing to Computershare, P.O. Box 505000, Louisville, KY 40233, Telephone: (800) 699-1236. Overnight correspondence should be directed to the Reinvestment Plan Agent at Computershare, 462 South 4th Street, Suite 1600, Louisville, KY 40202.
The Fund may in the future, and at its discretion, choose to make offerings of rights to its shareholders to purchase common shares. Rights may be issued independently or together with any other offered security and may or may not be transferable by the person purchasing or receiving the rights. In connection with a rights offering to shareholders, we would distribute certificates or other documentation (i.e., rights cards distributed in lieu of certificates) evidencing the rights and a Prospectus Supplement to our shareholders as of the record date that we set for determining the shareholders eligible to receive rights in such rights offering. Any such future rights offering will be made in accordance with the Investment Company Act. Under the laws of Maryland, the Board is authorized to approve rights offerings without obtaining shareholder approval.
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The staff of the SEC has interpreted the Investment Company Act as not requiring shareholder approval of a transferable rights offering to purchase common shares at a price below the then current NAV so long as certain conditions are met, including: (i) a good faith determination by a funds board that such offering would result in a net benefit to existing shareholders; (ii) the offering fully protects shareholders preemptive rights and does not discriminate among shareholders (except for the possible effect of not offering fractional rights); (iii) management uses its best efforts to ensure an adequate trading market in the rights for use by shareholders who do not exercise such rights; and (iv) the ratio of a transferable rights offering does not exceed one new share for each three rights held.
The applicable Prospectus Supplement would describe the following terms of the rights in respect of which this Prospectus is being delivered:
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the period of time the offering would remain open; |
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the underwriter or distributor, if any, of the rights and any associated underwriting fees or discounts applicable to purchases of the rights; |
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the title of such rights; |
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the exercise price for such rights (or method of calculation thereof); |
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the number of such rights issued in respect of each share; |
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the number of rights required to purchase a single share; |
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the extent to which such rights are transferable and the market on which they may be traded if they are transferable; |
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if applicable, a discussion of the material U.S. federal income tax considerations applicable to the issuance or exercise of such rights; |
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the date on which the right to exercise such rights will commence, and the date on which such right will expire (subject to any extension); |
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the extent to which such rights include an over-subscription privilege with respect to unsubscribed securities and the terms of such over-subscription privilege; and |
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termination rights we may have in connection with such rights offering. |
A certain number of rights would entitle the holder of the right(s) to purchase for cash such number of common shares at such exercise price as in each case is set forth in, or be determinable as set forth in, the Prospectus Supplement relating to the rights offered thereby. Rights would be exercisable at any time up to the close of business on the expiration date for such rights set forth in the Prospectus Supplement. After the close of business on the expiration date, all unexercised rights would become void. Upon expiration of the rights offering and the receipt of payment and the rights certificate or other appropriate documentation properly executed and completed and duly executed at the corporate trust office of the rights agent, or any other office indicated in the Prospectus Supplement, the common shares purchased as a result of such exercise will be issued as soon as practicable. To the extent permissible under applicable law, we may determine to offer any unsubscribed offered securities directly to persons other than shareholders, to or through agents, underwriters or dealers or through a combination of such methods, as set forth in the applicable Prospectus Supplement.
The following discussion is a brief summary of certain U.S. federal income tax considerations affecting the Fund and the purchase, ownership and disposition of the Funds common shares. A more detailed discussion of the tax rules applicable to the Fund and its common shareholders can be found in the SAI that is incorporated by reference into this Prospectus. Except as otherwise noted, this discussion assumes you are a taxable U.S. holder (as defined below) and that you hold your common shares as capital assets for U.S. federal income tax purposes (generally,
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assets held for investment). This discussion is based upon current provisions of the Code, the regulations promulgated thereunder and judicial and administrative authorities, all of which are subject to change or differing interpretations by the courts or the Internal Revenue Service, possibly with retroactive effect. No attempt is made to present a detailed explanation of all U.S. federal tax concerns affecting the Fund and its common shareholders. The discussion set forth herein does not constitute tax advice and potential investors are urged to consult their own tax advisers to determine the specific U.S. federal, state, local and foreign tax consequences to them of investing in the Fund.
In addition, no attempt is made to address tax considerations applicable to an investor with a special tax status, such as a financial institution, REIT, insurance company, regulated investment company, individual retirement account, other tax-exempt organization, dealer in securities or currencies, person holding shares of the Fund as part of a hedging, integrated, conversion or straddle transaction, trader in securities that has elected the mark-to-market method of accounting for its securities, U.S. holder (as defined below) whose functional currency is not the U.S. dollar, investor with applicable financial statements within the meaning of Section 451(b) of the Code, or non-U.S. investor. Furthermore, this discussion does not reflect possible application of the alternative minimum tax.
A U.S. holder is a beneficial owner that is for U.S. federal income tax purposes:
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a citizen or individual resident of the United States (including certain former citizens and former long-term residents); |
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a corporation or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States or any state thereof or the District of Columbia; |
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an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or |
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a trust with respect to which a court within the United States is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all of its substantial decisions or the trust has made a valid election in effect under applicable Treasury regulations to be treated as a U.S. person. |
Taxation of the Fund
The Fund has elected to be treated as a RIC under Subchapter M of the Code. In order to qualify as a RIC, the Fund must, among other things, satisfy certain requirements relating to the sources of its income, diversification of its assets, and distribution of its income to its shareholders. First, the Fund must derive at least 90% of its annual gross income from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock or securities or foreign currencies, or other income (including but not limited to gains from options, futures and forward contracts) derived with respect to its business of investing in such stock, securities or currencies, or net income derived from interests in qualified publicly traded partnerships (as defined in the Code) (the 90% gross income test). Second, the Fund must diversify its holdings so that, at the close of each quarter of its taxable year, (i) at least 50% of the value of its total assets consists of cash, cash items, U.S. Government securities, securities of other RICs and other securities, with such other securities limited in respect of any one issuer to an amount not greater in value than 5% of the value of the Funds total assets and to not more than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of the total assets is invested in the securities (other than U.S. Government securities and securities of other RICs) of any one issuer, any two or more issuers controlled by the Fund and engaged in the same, similar or related trades or businesses, or any one or more qualified publicly traded partnerships.
As long as the Fund qualifies as a RIC, the Fund will generally not be subject to corporate-level U.S. federal income tax on income and gains that it distributes each taxable year to its shareholders, provided that in such taxable year it distributes at least 90% of the sum of (i) its net tax-exempt interest income, if any, and (ii) its investment company taxable income (which includes, among other items, dividends, taxable interest, taxable original issue discount and market discount income, income from securities lending, net short-term capital gain in excess of net long-term capital loss, and any other taxable income other than net capital gain (as defined below) and is reduced by deductible expenses) determined without regard to the deduction for dividends paid. The Fund may retain for investment its net capital gain (which consists of the excess of its net long-term capital gain over its net short-term capital loss). However, if the Fund retains any net capital gain or any investment company taxable income, it will be subject to tax at regular corporate rates on the amount retained.
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The Code imposes a 4% nondeductible excise tax on the Fund to the extent the Fund does not distribute by the end of any calendar year at least the sum of (i) 98% of its ordinary income (not taking into account any capital gain or loss) for the calendar year and (ii) 98.2% of its capital gain in excess of its capital loss (adjusted for certain ordinary losses) for a one-year period generally ending on October 31 of the calendar year (unless an election is made to use the Funds fiscal year). In addition, the minimum amounts that must be distributed in any year to avoid the excise tax will be increased or decreased to reflect any under-distribution or over-distribution, as the case may be, from the previous year. For purposes of the excise tax, the Fund will be deemed to have distributed any income on which it paid U.S. federal income tax. While the Fund intends to distribute any income and capital gain in the manner necessary to minimize imposition of the 4% nondeductible excise tax, there can be no assurance that sufficient amounts of the Funds taxable income and capital gain will be distributed to entirely avoid the imposition of the excise tax. In that event, the Fund will be liable for the excise tax only on the amount by which it does not meet the foregoing distribution requirement.
If in any taxable year the Fund should fail to qualify under Subchapter M of the Code for tax treatment as a RIC, the Fund would incur a regular corporate U.S. federal income tax upon all of its taxable income for that year, and all distributions to its shareholders (including distributions of net capital gain) would be taxable to shareholders as ordinary dividend income for U.S. federal income tax purposes to the extent of the Funds earnings and profits. Provided that certain holding period and other requirements were met, such dividends would be eligible (i) to be treated as qualified dividend income in the case of shareholders taxed as individuals and (ii) for the dividends received deduction in the case of corporate shareholders. In addition, to qualify again to be taxed as a RIC in a subsequent year, the Fund would be required to distribute to shareholders its earnings and profits attributable to non-RIC years. In addition, if the Fund failed to qualify as a RIC for a period greater than two taxable years, then, in order to qualify as a RIC in a subsequent year, the Fund would be required to elect to recognize and pay tax on any net built-in gain (the excess of aggregate gain, including items of income, over aggregate loss that would have been realized if the Fund had been liquidated) or, alternatively, be subject to taxation on such built-in gain recognized for a period of five years.
The remainder of this discussion assumes that the Fund qualifies for taxation as a RIC.
The Funds Investments. Certain of the Funds investment practices are subject to special and complex U.S. federal income tax provisions (including mark-to-market, constructive sale, straddle, wash sale, short sale and other rules) that may, among other things, (i) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (ii) convert lower taxed long-term capital gains or 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 be qualified income for purposes of the 90% annual gross income requirement described above. These U.S. federal income tax provisions could therefore affect the amount, timing and character of distributions to common shareholders. The Fund intends to monitor its transactions and may make certain tax elections and may be required to dispose of securities to mitigate the effect of these provisions and prevent disqualification of the Fund as a RIC. Additionally, the Fund may be required to limit its activities in derivative instruments in order to enable it to maintain its RIC status.
The Fund may invest a portion of its net assets in below investment grade securities. Investments in these types of securities may present special tax issues for the Fund. U.S. federal income tax rules are not entirely clear about issues such as when the Fund may cease to accrue interest, original issue discount or market discount, when and to what extent deductions may be taken for bad debts or worthless securities, how payments received on obligations in default should be allocated between principal and income and whether modifications or exchanges of debt obligations in a bankruptcy or workout context are taxable. These and other issues could affect the Funds ability to distribute sufficient income to preserve its status as a RIC or to avoid the imposition of U.S. federal income or excise tax.
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Certain debt securities acquired by the Fund may be treated as debt securities that were originally issued at a discount. Generally, the amount of the original issue discount is treated as interest income and is included in taxable income (and required to be distributed by the Fund in order to qualify as a RIC and avoid U.S. federal income tax or the 4% excise tax on undistributed income) over the term of the security, even though payment of that amount is not received until a later time, usually when the debt security matures.
If the Fund purchases a debt security on a secondary market at a price lower than its adjusted issue price, the excess of the adjusted issue price over the purchase price is market discount. Unless the Fund makes an election to accrue market discount on a current basis, generally, any gain realized on the disposition of, and any partial payment of principal on, a debt security having market discount is treated as ordinary income to the extent the gain, or principal payment, does not exceed the accrued market discount on the debt security. Market discount generally accrues in equal daily installments. If the Fund ultimately collects less on the debt instrument than its purchase price plus the market discount previously included in income, the Fund may not be able to benefit from any offsetting loss deductions.
The Fund may invest in preferred securities or other securities the U.S. federal income tax treatment of which may not be clear or may be subject to recharacterization by the Internal Revenue Service. To the extent the tax treatment of such securities or the income from such securities differs from the tax treatment expected by the Fund, it could affect the timing or character of income recognized by the Fund, potentially requiring the Fund to purchase or sell securities, or otherwise change its portfolio, in order to comply with the tax rules applicable to RICs under the Code.
Gain or loss on the sale 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.
Because the Fund may invest in foreign securities, its income from such securities may be subject to non-U.S. taxes.
Foreign currency gain or loss on foreign currency exchange contracts, non-U.S. dollar-denominated securities contracts, and non-U.S. dollar-denominated futures contracts, options and forward contracts that are not section 1256 contracts (as defined below) generally will be treated as ordinary income and loss.
Income from options on individual securities written by the Fund will not be recognized by the Fund for tax purposes until an option is exercised, lapses or is subject to a closing transaction (as defined by applicable regulations) pursuant to which the Funds obligations with respect to the option are otherwise terminated. If the option lapses without exercise, the premiums received by the Fund from the writing of such options will generally be characterized as short-term capital gain. If the Fund enters into a closing transaction, the difference between the premiums received and the amount paid by the Fund to close out its position will generally be treated as short-term capital gain or loss. If an option written by the Fund is exercised, thereby requiring the Fund to sell the underlying security, the premium will increase the amount realized upon the sale of the security, and the character of any gain on such sale of the underlying security as short-term or long-term capital gain will depend on the holding period of the Fund in the underlying security. Because the Fund will not have control over the exercise of the options it writes, such exercises or other required sales of the underlying securities may cause the Fund to realize gains or losses at inopportune times.
Index options that qualify as section 1256 contracts will generally be marked-to-market for U.S. federal income tax purposes. As a result, the Fund will generally recognize gain or loss on the last day of each taxable year equal to the difference between the value of the option on that date and the adjusted basis of the option. The adjusted basis of the option will consequently be increased by such gain or decreased by such loss. Any gain or loss with respect to options on indices and sectors that qualify as section 1256 contracts will be treated as short-term capital gain or loss to the extent of 40% of such gain or loss and long-term capital gain or loss to the extent of 60% of such gain or loss. Because the mark-to-market rules may cause the Fund to recognize gain in advance of the receipt of cash, the Fund may be required to dispose of investments in order to meet its distribution requirements. Mark-to-market losses may be suspended or otherwise limited if such losses are part of a straddle or similar transaction.
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Taxation of Common Shareholders
Fund distributions of its tax-exempt interest on municipal securities, if properly reported by the Fund to its shareholders (exempt-interest dividends), will generally be exempt from regular federal income tax. In order for the Fund to pay exempt-interest dividends, at least 50% of the value of the Funds total assets must consist of tax-exempt obligations on a quarterly basis. Although the Fund intends to meet this requirement, no assurance can be given in this regard. If the Fund fails to do so, it would not be able to pay tax-exempt dividends, and your distributions attributable to interest received by the Fund from any source (including distributions of tax-exempt interest income) would be taxable as ordinary income to the extent of the Funds earnings and profits.
The Fund will either distribute or retain for reinvestment all or part of its net capital gain. If any such gain is retained, the Fund will be subject to a corporate income tax on such retained amount. In that event, the Fund expects to report the retained amount as undistributed capital gain in a notice to its common 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 as long-term capital gain its share of such undistributed amounts, (ii) will be entitled to credit its proportionate share of the tax paid by the Fund against its U.S. federal income tax liability and to claim refunds to the extent that the credit exceeds such liability and (iii) will increase its basis in its common shares by the amount of undistributed capital gains included in the shareholders income less the tax deemed paid by the shareholder under clause (ii).
Distributions paid to you by the Fund from its net capital gain, if any, that the Fund properly reports as capital gain dividends (capital gain dividends) are taxable as long-term capital gains, regardless of how long you have held your common shares. All other dividends paid to you by the Fund (including dividends from net short-term capital gains) from its current or accumulated earnings and profits, other than exempt-interest dividends (ordinary income dividends) are generally subject to tax as ordinary income. Provided that certain holding period and other requirements are met, ordinary income dividends (if properly reported by the Fund) may qualify (i) for the dividends received deduction in the case of corporate shareholders to the extent that the Funds income consists of dividend income from U.S. corporations, and (ii) in the case of individual shareholders, as qualified dividend income eligible to be taxed at long-term capital gains rates to the extent that the Fund receives qualified dividend income. Qualified dividend income is, in general, dividend income from taxable domestic corporations and certain qualified foreign corporations (e.g., generally, foreign corporations incorporated in a possession of the United States or in certain countries with a qualifying comprehensive tax treaty with the United States, or whose stock with respect to which such dividend is paid is readily tradable on an established securities market in the United States). There can be no assurance as to what portion, if any, of the Funds distributions will constitute qualified dividend income or be eligible for the dividends received deduction.
Any distributions you receive that are in excess of the Funds current and accumulated earnings and profits will be treated as a return of capital to the extent of your adjusted tax basis in your common shares, and thereafter as capital gain from the sale of common shares. The amount of any Fund distribution that is treated as a return of capital will reduce your adjusted tax basis in your common shares, thereby increasing your potential gain or reducing your potential loss on any subsequent sale or other disposition of your common shares.
Common shareholders may be entitled to offset their capital gain dividends with capital losses. The Code contains a number of statutory provisions affecting when capital losses may be offset against capital gain, and limiting the use of losses from certain investments and activities. Accordingly, common shareholders that have capital losses are urged to consult their tax advisers.
Dividends and other taxable distributions are taxable to you even though they are reinvested in additional common shares of the Fund. Dividends and other distributions paid by the Fund are generally treated under the Code as received by you at the time the dividend or distribution is made. If, however, the Fund pays you a dividend in January that was declared in the previous October, November or December to common shareholders of record on a specified date in one of such months, then such dividend will be treated for U.S. federal income tax purposes as being paid by the Fund and received by you on December 31 of the year in which the dividend was declared. In addition, certain other distributions made after the close of the Funds taxable year may be spilled back and treated as paid by the Fund (except for purposes of the 4% nondeductible excise tax) during such taxable year. In such case, you will be treated as having received such dividends in the taxable year in which the distributions were actually made.
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Interest on certain private activity bonds is an item of tax preference subject to the alternative minimum tax on individuals. The Fund may invest a portion of its assets in municipal bonds subject to this provision so that a portion of its exempt-interest dividends is an item of tax preference to the extent such dividends represent interest received from these private activity bonds. Accordingly, investment in the Fund could cause a holder of common shares to be subject to, or result in an increased liability under, the alternative minimum tax.
Exempt-interest dividends are included in determining what portion, if any, of a persons Social Security and railroad retirement benefits will be includable in gross income subject to federal income tax.
The price of common shares purchased at any time may reflect the amount of a forthcoming distribution. Those purchasing common shares just prior to the record date of a distribution will receive a distribution which will be taxable to them even though it represents, economically, a return of invested capital.
The Fund will send you information after the end of each year setting forth the amount and tax status of any distributions paid to you by the Fund.
The sale or other disposition of common shares will generally result in capital gain or loss to you and will be long-term capital gain or loss if you have held such common shares for more than one year at the time of sale. Any loss upon the sale or other disposition of common shares held for six months or less will be treated as long-term capital loss to the extent of any capital gain dividends received (including amounts credited as an undistributed capital gain dividend) by you with respect to such common shares. Any loss you recognize on a sale or other disposition of common shares will be disallowed if you acquire other common shares (whether through the automatic reinvestment of dividends or otherwise) within a 61-day period beginning 30 days before and ending 30 days after your sale or exchange of the common shares. In such case, your tax basis in the common shares acquired will be adjusted to reflect the disallowed loss.
If the Fund liquidates, shareholders generally will realize capital gain or loss upon such liquidation in an amount equal to the difference between the amount of cash or other property received by the shareholder (including any property deemed received by reason of its being placed in a liquidating trust) and the shareholders adjusted tax basis in its common shares. Any such gain or loss will be long-term if the shareholder is treated as having a holding period in the Fund shares of greater than one year, and otherwise will be short-term.
Current U.S. federal income tax law taxes both long-term and short-term capital gain of corporations at the rates applicable to ordinary income. For non-corporate taxpayers, short-term capital gain is currently taxed at rates applicable to ordinary income while long-term capital gain generally is taxed at a reduced maximum rate. The deductibility of capital losses is subject to limitations under the Code.
Certain U.S. holders who are individuals, estates or trusts and whose income exceeds certain thresholds will be required to pay a 3.8% Medicare tax on all or a portion of their net investment income, which includes dividends received from the Fund and capital gains from the sale or other disposition of the Funds common shares.
A common shareholder that is a nonresident alien individual or a foreign corporation (a foreign investor) generally will be subject to U.S. federal withholding tax at the rate of 30% (or possibly a lower rate provided by an applicable tax treaty) on ordinary income dividends (except as discussed below). In general, U.S. federal withholding tax and U.S. federal income tax will not apply to any gain or income realized by a foreign investor in respect of any distribution of exempt-interest dividends or net capital gain (including amounts credited as an undistributed capital gain dividend) or upon the sale or other disposition of common shares of the Fund. Different tax consequences may result if the foreign investor is engaged in a trade or business in the United States or, in the case of an individual, is present in the United States for 183 days or more during a taxable year and certain other conditions are met. Foreign investors should consult their tax advisers regarding the tax consequences of investing in the Funds common shares.
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Ordinary income dividends properly reported by a RIC are generally exempt from U.S. federal withholding tax where they (i) are paid in respect of the RICs qualified net interest income (generally, its U.S.-source interest income, other than certain contingent interest and interest from obligations of a corporation or partnership in which the RIC is at least a 10% shareholder, reduced by expenses that are allocable to such income) or (ii) are paid in respect of the RICs qualified short-term capital gains (generally, the excess of the RICs net short-term capital gain over its long-term capital loss for such taxable year). Depending on its circumstances, the Fund may report all, some or none of its potentially eligible dividends as such qualified net interest income or as qualified short-term capital gains, and/or treat such dividends, in whole or in part, as ineligible for this exemption from withholding. In order to qualify for this exemption from withholding, a foreign investor needs to comply with applicable certification requirements relating to its non-U.S. status (including, in general, furnishing an IRS Form W-8BEN, W-8BEN-E or substitute Form). In the case of common shares held through an intermediary, the intermediary may have withheld even if the Fund reported the payment as qualified net interest income or qualified short-term capital gain. Foreign investors should contact their intermediaries with respect to the application of these rules to their accounts. There can be no assurance as to what portion of the Funds distributions would qualify for favorable treatment as qualified net interest income or qualified short-term capital gains.
In addition, withholding at a rate of 30% will apply to dividends paid in respect of common shares of the Fund held by or through certain foreign financial institutions (including investment funds), unless such institution enters into an agreement with the Treasury to report, on an annual basis, information with respect to shares in, and accounts maintained by, the institution to the extent such shares or accounts are held by certain U.S. persons and by certain non-U.S. entities that are wholly or partially owned by U.S. persons and to withhold on certain payments. Accordingly, the entity through which common shares of the Fund are held will affect the determination of whether such withholding is required. Similarly, dividends paid in respect of common shares of the Fund held by an investor that is a non-financial foreign entity that does not qualify under certain exemptions will be subject to withholding at a rate of 30%, unless such entity either (i) certifies that such entity does not have any substantial United States owners or (ii) provides certain information regarding the entitys substantial United States owners, which the Fund or applicable withholding agent will in turn provide to the Secretary of the Treasury. An intergovernmental agreement between the United States and an applicable foreign country, or future Treasury regulations or other guidance, may modify these requirements. The Fund will not pay any additional amounts to common shareholders in respect of any amounts withheld. Foreign investors are encouraged to consult with their tax advisers regarding the possible implications of these rules on their investment in the Funds common shares.
U.S. federal backup withholding tax may be required on dividends, distributions and sale proceeds payable to certain non-exempt common shareholders who fail to supply their correct taxpayer identification number (in the case of individuals, generally, their social security number) or to make required certifications, or who are otherwise subject to backup withholding. Backup withholding is not an additional tax and any amount withheld may be refunded or credited against your U.S. federal income tax liability, if any, provided that you timely furnish the required information to the Internal Revenue Service.
Ordinary income dividends, capital gain dividends, and gain from the sale or other disposition of common shares of the Fund also may be subject to state, local, and/or foreign taxes. Common shareholders are urged to consult their own tax advisers regarding specific questions about U.S. federal, state, local or foreign tax consequences to them of investing in the Fund.
The foregoing is a general and abbreviated summary of certain provisions of the Code and the Treasury regulations currently in effect as they directly govern the taxation of the Fund and its common shareholders. These provisions are subject to change by legislative or administrative action, and any such change may be retroactive. A more detailed discussion of the tax rules applicable to the Fund and its common shareholders can be found in the SAI that is incorporated by reference into this Prospectus. Common shareholders are urged to consult their tax advisers regarding specific questions as to U.S. federal, state, local and foreign income or other taxes.
Please refer to the SAI for more detailed information. You are urged to consult your tax adviser.
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The value of a right will not be includible in the income of a common shareholder at the time the right is issued.
The basis of a right issued to a common shareholder will be zero, and the basis of the share with respect to which the subscription right was issued (the old share) will remain unchanged, unless either (a) the fair market value of the right on the date of distribution is at least 15% of the fair market value of the old share, or (b) such shareholder affirmatively elects (in the manner set out in Treasury regulations under the Code) to allocate to the subscription right a portion of the basis of the old share. If either (a) or (b) applies, then except as described below such shareholder must allocate basis between the old share and the right in proportion to their fair market values on the date of distribution.
The basis of a right purchased in the market will generally be its purchase price.
The holding period of a right issued to a common shareholder will include the holding period of the old share. No gain or loss will be recognized by a common shareholder upon the exercise of a right.
No loss will be recognized by a common shareholder if a right distributed to such common shareholder expires unexercised because the basis of the old share may be allocated to a right only if the right is exercised. If a right that has been purchased in the market expires unexercised, there will be a recognized loss equal to the basis of the right.
Any gain or loss on the sale of a right will be a capital gain or loss if the right is held as a capital asset (which in the case of rights issued to common shareholders will depend on whether the old share of common stock is held as a capital asset), and will be a long-term capital gain or loss if the holding period is deemed to exceed one year.
CERTAIN PROVISIONS IN THE CHARTER AND BYLAWS
The Funds Charter includes provisions that could have the effect of limiting the ability of other entities or persons to acquire control of the Fund or to change the composition of its Board of Directors and could have the effect of depriving common 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. A Director may be removed from office with or without cause but only by vote of the holders of at least 66 2/3% of the shares entitled to vote in an election to fill that directorship.
In addition, the Charter requires the favorable vote of the holders of at least 66 2/3% of the Funds shares to approve, adopt or authorize the following:
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a merger or consolidation or statutory share exchange of the Fund with any other corporation; |
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a sale of all or substantially all of the Funds assets (other than in the regular course of the Funds investment activities); or |
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a liquidation or dissolution of the Fund; |
unless such action has been approved, adopted or authorized by the affirmative vote of at least two-thirds of the total number of Directors fixed in accordance with the Bylaws, in which case the affirmative vote of a majority of the Funds shares of capital stock is required.
In addition, conversion of the Fund to an open-end investment company would require an amendment to the Funds Charter. The amendment would have to be declared advisable by the Board of Directors prior to its submission to stockholders. Such an amendment would require the favorable vote of the holders of at least 66 2/3% of the Funds outstanding shares of capital stock entitled to be voted on the matter, voting as a single class (or a majority of such shares if the amendment was previously approved, adopted or authorized by two-thirds of the total number of Directors fixed in accordance with the Bylaws). Such a vote also would satisfy a separate requirement in the 1940 Act that the change be approved by the stockholders. Shareholders of an open-end investment company may require the company to redeem their common shares at any time (except in certain circumstances as authorized by or under the 1940 Act) at their NAV, less such redemption charge, if any, as might be in effect at the time of a redemption. If the Fund is converted to an open-end investment company, it could be required to liquidate portfolio securities to meet requests for redemption, and the common shares would no longer be listed on a stock exchange.
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The Charter and Bylaws provide that the Board of Directors has the power, to the exclusion of stockholders, to make, alter or repeal any of the Bylaws (except for any Bylaw specified not to be amended or repealed by the Board), subject to the requirements of the 1940 Act. Neither this provision of the Charter, nor any of the foregoing provisions of the Charter requiring the affirmative vote of 66 2/3% of shares of capital stock of the Fund, can be amended or repealed except by the vote of such required number of shares.
The Board of Directors has determined that the 66 2/3% voting requirements described above, which are greater than the minimum requirements under Maryland law or the 1940 Act, are in the best interests of stockholders generally. Reference should be made to the Charter on file with the SEC for the full text of these provisions.
The Funds Bylaws generally require that advance notice be given to the Fund in the event a stockholder desires to nominate a person for election to the Board of Directors or to transact any other business at an annual meeting of stockholders. Notice of any such nomination or business must be delivered to or received at the principal executive offices of the Fund not less than 120 calendar days nor more than 150 calendar days prior to the anniversary date of the prior years annual meeting (subject to certain exceptions). Any notice by a stockholder must be accompanied by certain information as provided in the Bylaws.
The Maryland General Corporation Law provides that a Maryland corporation that has a class of securities registered under the Exchange Act and has at least three outside directors can elect to be subject to certain corporate governance provisions that may be inconsistent with the corporations charter or bylaws. Under the applicable statute, a board of directors may classify itself without the vote of stockholders. Further, the board of directors may, by electing into applicable statutory provisions and notwithstanding the charter or bylaws, (i) reserve for itself the right to fix the number of directors; (ii) retain for itself sole authority to fill vacancies created by an increase in the size of the board of directors or the death, removal or resignation of a director; and (iii) provide that all vacancies on the board of directors may be filled only by the affirmative vote of a majority of the remaining directors, in office, even if the remaining directors do not constitute a quorum. Any director elected to fill such vacancy shall hold office for the remainder of the unexpired term and until his or her successor is elected and qualified. A board of directors may implement all or any of these provisions without amending the charter or bylaws and without stockholder approval. A corporation may be prohibited by its charter or by resolution of its board of directors from electing any of the provisions of the statute. The Fund is not prohibited from implementing any or all of the statute.
Pursuant to the Funds Bylaws, the Fund has elected to be subject to a specific provision of the statute such that, at all times that the Fund is eligible to make that election, all vacancies on the Board of Directors resulting from an increase in the size of the Board or the death, resignation or removal of a Director, may be filled only by the affirmative vote of a majority of the remaining Directors, even if the remaining Directors do not constitute a quorum.
The Fund is a diversified, closed-end management investment company (commonly referred to as a closed-end fund). Closed-end funds differ from open-end funds (which are generally referred to as mutual funds) in that closed-end funds generally list their shares for trading on a stock exchange and do not redeem their shares at the request of the shareholder. This means that if you wish to sell your shares of a closed-end fund you must trade them on the stock exchange like any other stock at the prevailing market price at that time. In a mutual fund, if the shareholder wishes to sell shares of the fund, the mutual fund will redeem or buy back the shares at NAV. Also, mutual funds generally offer new shares on a continuous basis to new investors and closed-end funds generally do not. The continuous inflows and outflows of assets in a mutual fund can make it difficult to manage the funds investments. By comparison, closed-end funds are generally able to stay more fully invested in securities that are consistent with their investment objectives and also have greater flexibility to make certain types of investments and to use certain investment strategies, such as financial leverage and investments in illiquid securities.
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Shares of closed-end funds frequently trade at a discount to their NAV. Because of this possibility and the recognition that any such discount may not be in the interest of shareholders, the Board might consider from time to time engaging in open-market repurchases, tender offers for shares or other programs intended to reduce the discount. We cannot guarantee or assure, however, that the Board will decide to engage in any of these actions. Nor is there any guarantee or assurance that such actions, if undertaken, would result in the shares trading at a price equal or close to the NAV. See Repurchase of Common Shares below and Repurchase of Common Shares in the SAI. The Board might also consider converting the Fund to an open-end mutual fund, which would also require a vote of the shareholders of the Fund.
Shares of closed-end investment companies often trade at a discount to their NAVs and the Funds common shares may also trade at a discount to their NAV, although it is possible that they may trade at a premium above NAV. The market price of the Funds common shares will be determined by such factors as relative demand for and supply of such common shares in the market, the Funds NAV, general market and economic conditions and other factors beyond the control of the Fund. See Net Asset Value and Description of Capital StockCommon Shares. Although the Funds common shareholders will not have the right to redeem their common shares, the Fund may take action to repurchase common shares in the open market or make tender offers for its common shares. This may have the effect of reducing any market discount from NAV.
There is no assurance that, if action is undertaken to repurchase or tender for common shares, such action will result in the common shares trading at a price which approximates their NAV. Although share repurchases and tender offers could have a favorable effect on the market price of the Funds common shares, you should be aware that the acquisition of common shares by the Fund will decrease the capital of the Fund and, therefore, may have the effect of increasing the Funds expense ratio and decreasing the asset coverage with respect to any borrowings or preferred shares outstanding. Any share repurchases or tender offers will be made in accordance with the requirements of the Exchange Act, the Investment Company Act and the principal stock exchange on which the common shares are traded. For additional information, see Repurchase of Common Shares in the SAI.
We may sell common shares, including to existing shareholders in a rights offering, through underwriters or dealers, directly to one or more purchasers (including existing shareholders in a rights offering), through agents, to or through underwriters or dealers, or through a combination of any such methods of sale. The applicable Prospectus Supplement will identify any underwriter or agent involved in the offer and sale of our common shares, any sales loads, discounts, commissions, fees or other compensation paid to any underwriter, dealer or agent, the offering price, net proceeds and use of proceeds and the terms of any sale. In the case of a rights offering, the applicable Prospectus Supplement will set forth the number of our common shares issuable upon the exercise of each right and the other terms of such rights offering.
The distribution of our common shares may be effected from time to time in one or more transactions at a fixed price or prices, which may be changed, at prevailing market prices at the time of sale, at prices related to such prevailing market prices, or at negotiated prices. Sales of our common shares may be made in transactions that are deemed to be at the market as defined in Rule 415 under the Securities Act, including sales made directly on the NYSE or sales made to or through a market maker other than on an exchange.
We may sell our common shares directly to, and solicit offers from, institutional investors or others who may be deemed to be underwriters as defined in the Securities Act for any resales of the securities. In this case, no underwriters or agents would be involved. We may use electronic media, including the Internet, to sell offered securities directly.
In connection with the sale of our common shares, underwriters or agents may receive compensation from us in the form of discounts, concessions or commissions. Underwriters may sell our common shares to or through dealers, and such dealers may receive compensation in the form of discounts, concessions or commissions from the underwriters and/or commissions from the purchasers for whom they may act as agents. Underwriters, dealers and agents that participate in the distribution of our common shares may be deemed to be underwriters under the
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Securities Act, and any discounts and commissions they receive from us and any profit realized by them on the resale of our common shares may be deemed to be underwriting discounts and commissions under the Securities Act. Any such underwriter or agent will be identified and any such compensation received from us will be described in the applicable Prospectus Supplement. The maximum amount of compensation to be received by any Financial Industry Regulatory Authority member or independent broker-dealer will not exceed eight percent for the sale of any securities being offered pursuant to Rule 415 under the Securities Act. We will not pay any compensation to any underwriter or agent in the form of warrants, options, consulting or structuring fees or similar arrangements. In connection with any rights offering to existing shareholders, we may enter into a standby underwriting arrangement with one or more underwriters pursuant to which the underwriter(s) will purchase common shares remaining unsubscribed after the rights offering.
If a Prospectus Supplement so indicates, we may grant the underwriters an option to purchase additional common shares at the public offering price, less the underwriting discounts and commissions, within 45 days from the date of the Prospectus Supplement, to cover any over-allotments.
Under agreements into which we may enter, underwriters, dealers and agents who participate in the distribution of our common shares may be entitled to indemnification by us against certain liabilities, including liabilities under the Securities Act. Underwriters, dealers and agents may engage in transactions with us, or perform services for us, in the ordinary course of business.
If so indicated in the applicable Prospectus Supplement, we will ourselves, or will authorize underwriters or other persons acting as our agents to solicit offers by certain institutions to purchase our common shares from us pursuant to contracts providing for payment and delivery on a future date. Institutions with which such contacts may be made include commercial and savings banks, insurance companies, pension funds, investment companies, educational and charitable institutions and others, but in all cases such institutions must be approved by us. The obligation of any purchaser under any such contract will be subject to the condition that the purchase of the common shares shall not at the time of delivery be prohibited under the laws of the jurisdiction to which such purchaser is subject. The underwriters and such other agents will not have any responsibility in respect of the validity or performance of such contracts. Such contracts will be subject only to those conditions set forth in the Prospectus Supplement, and the Prospectus Supplement will set forth the commission payable for solicitation of such contracts.
To the extent permitted under the Investment Company Act and the rules and regulations promulgated thereunder, the underwriters may from time to time act as brokers or dealers and receive fees in connection with the execution of our portfolio transactions after the underwriters have ceased to be underwriters and, subject to certain restrictions, each may act as a broker while it is an underwriter.
A Prospectus and accompanying Prospectus Supplement in electronic form may be made available on the websites maintained by underwriters. The underwriters may agree to allocate a number of securities for sale to their online brokerage account holders. Such allocations of securities for Internet distributions will be made on the same basis as other allocations. In addition, securities may be sold by the underwriters to securities dealers who resell securities to online brokerage account holders.
In order to comply with the securities laws of certain states, if applicable, our common shares offered hereby will be sold in such jurisdictions only through registered or licensed brokers or dealers.
PRIVACY PRINCIPLES OF THE FUND
The Fund is committed to maintaining the privacy of shareholders and to safeguarding their non-public personal information. The following information is provided to help you understand what personal information the Fund collects, how we protect that information, and why in certain cases we may share such information with select other parties.
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The Fund does not receive any non-public personal information relating to its shareholders who purchase shares through their broker-dealers. In the case of shareholders who are record holders of the Fund, the Fund receives personal non-public information on account applications or other forms. With respect to these shareholders, the Fund also has access to specific information regarding their transactions in the Fund.
The Fund does not disclose any non-public personal information about its shareholders or former shareholders to anyone, except as permitted by law or as is necessary in order to service our shareholders accounts (for example, to a transfer agent).
The Fund restricts access to non-public personal information about its shareholders to BlackRock employees with a legitimate business need for the information. The Fund maintains physical, electronic and procedural safeguards designed to protect the non-public personal information of our shareholders.
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TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
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APPENDIX BPROXY VOTING POLICIES BLACKROCK U.S. REGISTERED FUNDS |
B-1 |
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$88,825,000
BLACKROCK MUNIASSETS FUND, INC.
Shares of Common Stock
Rights to Purchase Shares of Common Stock
PROSPECTUS
[], 2020
The information in this Prospectus Supplement is not complete and may be changed. BlackRock MuniAssets Fund, Inc. may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Prospectus Supplement is not an offer to sell these securities and is not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED [●], 2020
PROSPECTUS SUPPLEMENT
(To Prospectus dated [], 2020)
Filed Pursuant to Rule 497(c)
Registration Statement No. 333-236891
BLACKROCK MUNIASSETS FUND, INC.
Up to [] Shares of Common Stock
BlackRock MuniAssets Fund, Inc. (the Fund, we, us or our) is offering for sale [] of shares of our common stock (common shares). Our common shares are listed on the New York Stock Exchange (NYSE) under the symbol MUA. As of the close of business on [], 2020, the last reported net asset value per share of our common shares was $[] and the last reported sales price per share of our common shares on the NYSE was $[].
The Fund is a diversified, closed-end management investment company registered under the Investment Company Act of 1940, as amended (the Investment Company Act). The Funds investment objective is to provide high current income exempt from Federal income taxes by investing primarily in a portfolio of medium to lower grade or unrated municipal obligations the interest on which, in the opinion of bond counsel to the issuer, is exempt from Federal income taxes. The Funds investment adviser is BlackRock Advisors, LLC (the Advisor).
Sales of our common shares, if any, under this Prospectus Supplement and the accompanying Prospectus may be made in negotiated transactions or transactions that are deemed to be at the market as defined in Rule 415 under the Securities Act of 1933, as amended (the Securities Act), including sales made directly on the NYSE or sales made to or through a market maker other than on an exchange.
Investing in the Funds common shares involves certain risks that are described in the Risks section beginning on page 49 of the accompanying Prospectus.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS SUPPLEMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[●], 2020
S-1
This Prospectus Supplement, together with the accompanying Prospectus, sets forth concisely the information about the Fund that a prospective investor should know before investing. You should read this Prospectus Supplement and the accompanying Prospectus, which contain important information, before deciding whether to invest in the common shares. You should retain the accompanying Prospectus and this Prospectus Supplement for future reference. A Statement of Additional Information (SAI), dated [], 2020, containing additional information about the Fund, has been filed with the Securities and Exchange Commission (SEC) and, as amended from time to time, is incorporated by reference in its entirety into this Prospectus Supplement and the accompanying Prospectus. You can review the table of contents for the SAI on page 115 of the accompanying Prospectus. This Prospectus Supplement, the accompanying Prospectus and the SAI are part of a shelf registration statement filed with the SEC. This Prospectus Supplement describes the specific details regarding this offering, including the method of distribution. If information in this Prospectus Supplement is inconsistent with the accompanying Prospectus or the SAI, you should rely on this Prospectus Supplement. You may call (800) 882-0052, visit the Funds website (http://www.blackrock.com) or write to the Fund to obtain, free of charge, copies of the SAI and the Funds semi-annual and annual reports, as well as to obtain other information about the Fund or to make shareholder inquiries. The SAI, as well as the Funds semi-annual and annual reports, are also available for free on the SECs website (http://www.sec.gov). You may also e-mail requests for these documents to publicinfo@sec.gov. Information contained in, or that can be accessed through, the Funds website is not part of this Prospectus Supplement or the accompanying Prospectus.
You should not construe the contents of this Prospectus Supplement and the accompanying Prospectus as legal, tax or financial advice. You should consult with your own professional advisors as to the legal, tax, financial or other matters relevant to the suitability of an investment in the Fund.
The Funds common shares do not represent a deposit or an obligation of, and are not guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.
Beginning on January 1, 2021, as permitted by regulations adopted by the SEC, paper copies of the Funds shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the reports from BlackRock or from your financial intermediary, such as a broker-dealer or bank. Instead, the reports will be made available on a website, and you will be notified by mail each time a report is posted and provided with a website link to access the report.
You may elect to receive all future reports in paper free of charge. If you hold accounts directly with BlackRock, you can call Computershare at 1-800-699-1236 to request that you continue receiving paper copies of your shareholder reports. If you hold accounts through a financial intermediary, you can follow the instructions included with this disclosure, if applicable, or contact your financial intermediary to request that you continue to receive paper copies of your shareholder reports. Please note that not all financial intermediaries may offer this service. Your election to receive reports in paper will apply to all funds advised by BlackRock Advisors, LLC or its affiliates, or all funds held with your financial intermediary, as applicable.
If you already elected to receive shareholder reports electronically, you will not be affected by this change and you need not take any action. You may elect to receive electronic delivery of shareholder reports and other communications by contacting your financial intermediary, if you hold accounts through a financial intermediary. Please note that not all financial intermediaries may offer this service.
S-2
You should rely only on the information contained or incorporated by reference in this Prospectus Supplement and the accompanying Prospectus. Neither the Fund nor the underwriters have authorized anyone to provide you with different information. The Fund is not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this Prospectus Supplement and the accompanying Prospectus is accurate as of any date other than the date of this Prospectus Supplement and the accompanying Prospectus, respectively. Our business, financial condition, results of operations and prospects may have changed since those dates. In this Prospectus Supplement and in the accompanying Prospectus, unless otherwise indicated, Fund, us, our and we refer to BlackRock MuniAssets Fund, Inc., a Maryland corporation.
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S-3
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus Supplement, the accompanying Prospectus and the Statement of Additional Information (the SAI) contain forward-looking statements. Forward-looking statements can be identified by the words may, will, intend, expect, estimate, continue, plan, anticipate, and similar terms and the negative of such terms. Such forward-looking statements may be contained in this Prospectus Supplement as well as in the accompanying Prospectus. By their nature, all forward-looking statements involve risks and uncertainties, and actual results could differ materially from those contemplated by the forward-looking statements. Several factors that could materially affect our actual results are the performance of the portfolio of securities we hold, the price at which our shares will trade in the public markets and other factors discussed in our periodic filings with the SEC.
Although we believe that the expectations expressed in our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and are subject to inherent risks and uncertainties, such as those disclosed in the Risks section of the accompanying Prospectus. All forward-looking statements contained or incorporated by reference in this Prospectus Supplement or the accompanying Prospectus are made as of the date of this Prospectus Supplement or the accompanying Prospectus, as the case may be. Except for our ongoing obligations under the federal securities laws, we do not intend, and we undertake no obligation, to update any forward-looking statement. The forward-looking statements contained in this Prospectus Supplement, the accompanying Prospectus and the SAI are excluded from the safe harbor protection provided by Section 27A of the Securities Act.
Currently known risk factors that could cause actual results to differ materially from our expectations include, but are not limited to, the factors described in the Risks section of the accompanying Prospectus. We urge you to review carefully those sections for a more detailed discussion of the risks of an investment in our common shares.
S-4
The following summary is qualified in its entirety by reference to the more detailed information included elsewhere in this Prospectus Supplement and in the accompanying Prospectus and in the SAI.
The Fund
The Fund is a diversified, closed-end management investment company. [The Funds investment objective is to provide high current income exempt from Federal income taxes by investing primarily in a portfolio of medium to lower grade or unrated municipal obligations the interest on which, in the opinion of bond counsel to the issuer, is exempt from Federal income taxes. There can be no assurance that the Funds investment objective will be achieved or that the Funds investment program will be successful. The Funds common shares are listed for trading on the NYSE under the symbol MUA.
Investment Advisor
BlackRock Advisors, LLC (previously defined as the Advisor) is the Funds investment adviser. The Advisor receives an annual fee, payable monthly, in an amount equal to 0.55% of the average daily value of the Funds Net Assets. Net Assets means the total assets of the Fund minus the sum of its accrued liabilities.
The Offering
[The provisions of the Investment Company Act generally require that the public offering price of common shares (less any underwriting commissions and discounts) must equal or exceed the net asset value per share of a companys common shares (calculated within 48 hours of pricing).
Sales of our common shares, if any, under this Prospectus Supplement and the accompanying Prospectus may be made in negotiated transactions or transactions that are deemed to be at the market as defined in Rule 415 under the Securities Act, including sales made directly on the NYSE or sales made to or through a market maker other than on an exchange.]
Use of Proceeds
We currently anticipate that we will be able to invest all of the net proceeds of any sales of common shares pursuant to this Prospectus Supplement in accordance with our investment objective and policies as described in the accompanying Prospectus under The Funds Investments within approximately three months of the receipt of such proceeds. Pending such investment, it is anticipated that the proceeds will be invested in short-term investment grade securities or in high quality, short-term money market instruments. Depending on market conditions and operations, a portion of the cash held by the Fund, including any proceeds raised from the offering, may be used to pay distributions in accordance with the Funds distribution policy and may be a return of capital.
The following table and example are intended to assist you in understanding the various costs and expenses directly or indirectly associated with investing in our common shares.
Shareholder Transaction Expenses |
||||
Sales load paid by you (as a percentage of offering price) |
[ | ●]% | ||
Offering expenses borne by the Fund (as a percentage of offering price)(1) |
[ | ●]% | ||
Dividend reinvestment plan fees |
$
|
[●] per share for open-market
purchases of common shares(2) |
|
|
Estimated Annual Expenses (as a percentage of net assets attributable to common shares) |
||||
Management fees |
0.55 | % | ||
Other expenses(3) |
[ | ●]% | ||
Total annual expenses |
[ | ●]% | ||
Fee waiver(4) |
[ | ●]% | ||
Total annual Fund operating expenses after fee waiver(4) |
[ | ●]% |
S-5
(1) |
Fund shareholders will pay all offering expenses involved with this offering. |
(2) |
Computershare Fund Company, N.A.s (the Reinvestment Plan Agent) fees for the handling of the reinvestment of dividends will be paid by the Fund. However, you will pay a $0.02 per share fee incurred in connection with open-market purchases, which will be deducted from the value of the dividend. You will also be charged a $0.02 per share fee if you direct the Reinvestment Plan Agent to sell your common shares held in a dividend reinvestment account. Per share fees include any applicable brokerage commissions the Reinvestment Plan Agent is required to pay. |
(3) |
Other expenses have been estimated for the current fiscal year. |
(4) |
The Fund and the Advisor have entered into a fee waiver agreement (the Fee Waiver Agreement), pursuant to which the Advisor has contractually agreed to waive the management fee with respect to any portion of the Funds assets attributable to investments in any equity and fixed-income mutual funds and exchange-traded funds managed by the Advisor or its affiliates that have a contractual fee, through June 30, 2021. In addition, pursuant to the Fee Waiver Agreement, the Advisor has contractually agreed to waive its management fees by the amount of investment advisory fees the Fund pays to the Advisor indirectly through its investment in money market funds managed by the Advisor or its affiliates, through June 30, 2021. The Fee Waiver Agreement may be terminated at any time, without the payment of any penalty, only by the Fund (upon the vote of a majority of the Directors who are not interested persons (as defined in the Investment Company Act) of the Fund or a majority of the outstanding voting securities of the Fund), upon 90 days written notice by the Fund to the Advisor. |
Example
The following example illustrates the expenses (including the sales load of $[●] and offering costs of $[●]) that you would pay on a $1,000 investment in common shares, assuming (i) total net annual expenses of [●]% of net assets attributable to common shares and (ii) a 5% annual return:
1 Year | 3 Years | 5 Years | 10 Years | |||||||||||||
Total expenses incurred |
$ | [●] | $ | [●] | $ | [●] | $ | [●] |
The example should not be considered a representation of future expenses. The example assumes that the estimated Other expenses set forth in the Estimated Annual Expenses table are accurate and that all dividends and distributions are reinvested at net asset value. Actual expenses may be greater or less than those assumed. Moreover, the Funds actual rate of return may be greater or less than the hypothetical 5% return shown in the example.
We estimate the total net proceeds of the offering to be $[●], based on the public offering price of $[●] per share and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
The net proceeds from the issuance of common shares hereunder will be invested in accordance with the Funds investment objective and policies as set forth in this Prospectus Supplement and the accompanying Prospectus. We currently anticipate that we will be able to invest all of the net proceeds in accordance with our investment objective and policies within approximately three months of the receipt of such proceeds. Pending such investment, it is anticipated that the proceeds will be invested in short-term investment grade securities or in high quality, short-term money market instruments. Depending on market conditions and operations, a portion of the cash held by the Fund, including any proceeds raised from the offering, may be used to pay distributions in accordance with the Funds distribution policy and may be a return of capital. A return of capital is a return to investors of a portion of their original investment in the Fund. In general terms, a return of capital would involve a situation in which a Fund distribution (or a portion thereof) represents a return of a portion of a shareholders investment in the Fund, rather than making a distribution that is funded from the Funds earned income or other profits. Although return of capital distributions may not be currently taxable, such distributions would decrease the basis of a shareholders shares, and therefore, may increase a shareholders tax liability for capital gains upon a sale of shares, even if sold at a loss to the shareholders original investments.
S-6
The following table sets forth the unaudited capitalization of the Fund as of [], 2020 and its adjusted capitalization assuming the common shares available in the offering discussed in this Prospectus Supplement had been issued.
[To be provided.]
[To be provided.]
Certain legal matters in connection with the common shares will be passed upon for the Fund by Willkie Farr & Gallagher LLP, New York, New York, counsel to the Fund. Willkie Farr & Gallagher LLP may rely as to certain matters of Maryland law on the opinion of Miles & Stockbridge, P.C., Baltimore, Maryland. [Certain legal matters will be passed on by [] as special counsel to the Underwriters in connection with the offering.]
This Prospectus Supplement and the accompanying Prospectus constitute part of a Registration Statement filed by the Fund with the SEC under the Securities Act and the Investment Company Act. This Prospectus Supplement and the accompanying Prospectus omit certain of the information contained in the Registration Statement, and reference is hereby made to the Registration Statement and related exhibits for further information with respect to the Fund and the common shares offered hereby. Any statements contained herein concerning the provisions of any document are not necessarily complete, and, in each instance, reference is made to the copy of such document filed as an exhibit to the Registration Statement or otherwise filed with the SEC. Each such statement is qualified in its entirety by such reference. The complete Registration Statement may be obtained from the SEC upon payment of the fee prescribed by its rules and regulations or free of charge through the SECs website (http://www.sec.gov).
S-7
BLACKROCK MUNIASSETS FUND, INC.
Shares of Common Stock
PROSPECTUS SUPPLEMENT
[●], 2020
Until [ ], 2020 (25 days after the date of this Prospectus Supplement), all dealers that buy, sell or trade the common shares, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers obligation to deliver a prospectus when acting as underwriters.
The information in this Prospectus Supplement is not complete and may be changed. BlackRock MuniAssets Fund, Inc. may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Prospectus Supplement is not an offer to sell these securities and is not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED [●], 2020
PROSPECTUS SUPPLEMENT
(To |
Prospectus dated [●], 2020) |
Filed Pursuant to Rule 497(c)
Registration Statement No. 333-236891
BLACKROCK MUNIASSETS FUND, INC.
[●] Rights for [●] Shares of Common Stock
Subscription Rights to Acquire Shares of Common Stock
BlackRock MuniAssets Fund, Inc. (the Fund, we, us or our) is issuing subscription rights (the Rights) to our common stockholders (the Common Shareholders) to purchase additional shares of common stock (each, a Common Share and collectively, the Common Shares).
The Fund is a diversified, closed-end management investment company registered under the Investment Company Act of 1940, as amended. The Funds investment objective is to provide high current income exempt from U.S. federal income taxes by investing primarily in a portfolio of medium- to lower-grade or unrated municipal obligations the interest on which, in the opinion of bond counsel to the issuer, is exempt from U.S. federal income taxes. The Funds investment adviser is BlackRock Advisors, LLC (the Advisor).
The Common Shares are listed on the New York Stock Exchange (NYSE) under the symbol MUA. Common Shareholders of record on [●], 2020 (the Record Date) will receive [●] Right for each Common Share held. These Rights are transferable and will allow the holders thereof to purchase additional Common Shares. The Rights will be listed for trading on the [●] under the symbol [●] during the course of the Rights offering.
On [●], 2020 (the last trading date prior to the Common Shares trading ex-Rights), the last reported net asset value per share of the Common Shares was $[●] and the last reported sales price per share of Common Shares on the NYSE was $[●].
This Prospectus Supplement, together with the accompanying Prospectus, sets forth concisely the information about the Fund that a prospective investor should know before investing. You should read this Prospectus Supplement and the accompanying Prospectus, which contain important information, before deciding whether to invest in the Common Shares. You should retain the accompanying Prospectus and this Prospectus Supplement for future reference. A Statement of Additional Information (SAI), dated [●], 2020, containing additional information about the Fund, has been filed with the Securities and Exchange Commission (SEC) and, as amended from time to time, is incorporated by reference in its entirety into this Prospectus Supplement and the accompanying Prospectus. You can review the table of contents for the SAI on page 61 of the accompanying Prospectus. This Prospectus Supplement, the accompanying Prospectus and the SAI are part of a shelf registration statement filed with the SEC. This Prospectus Supplement describes the specific details regarding this offering, including the method of distribution. If information in this Prospectus Supplement is inconsistent with the accompanying Prospectus or the SAI, you should rely on this Prospectus Supplement. You may call (800) 882-0052, visit the Funds website http://www.blackrock.com) or write to the Fund to obtain, free of charge, copies of the SAI and the Funds semi-annual and annual reports, as well as to obtain other information about the Fund or to make shareholder inquiries. The SAI, as well as the Funds semi-annual and annual reports, are also available for free on the SECs website (http://www.sec.gov). You may also e-mail requests for these documents to publicinfo@sec.gov. Information contained in, or that can be accessed through, the Funds website is not part of this Prospectus Supplement or the accompanying Prospectus. Common Shareholders please call toll-free at [●] (banks and brokers please call [●]) or please send written requests to [●].
R-1
Investing in Common Shares through Rights involves certain risks that are described in the Special Characteristics and Risks of the Rights Offering section of this Prospectus Supplement.
SHAREHOLDERS WHO DO NOT FULLY EXERCISE THEIR RIGHTS MAY, AT THE COMPLETION OF THE OFFERING, OWN A SMALLER PROPORTIONAL INTEREST IN THE FUND THAN IF THEY EXERCISED THEIR RIGHTS. AS A RESULT OF THE OFFERING YOU MAY EXPERIENCE SUBSTANTIAL DILUTION OF THE AGGREGATE NET ASSET VALUE OF YOUR COMMON SHARES DEPENDING UPON WHETHER THE FUNDS NET ASSET VALUE PER COMMON SHARE IS ABOVE OR BELOW THE SUBSCRIPTION PRICE ON THE EXPIRATION DATE. ALL COSTS OF THE OFFERING WILL BE BORNE BY THE FUND, AND INDIRECTLY BY CURRENT SHAREHOLDERS WHETHER THEY EXERCISE THEIR RIGHTS OR NOT. RIGHTS EXERCISED BY A SHAREHOLDER ARE IRREVOCABLE.
ANY COMMON SHARES ISSUED AS A RESULT OF THE RIGHTS OFFERING WILL NOT BE RECORD DATE SHARES FOR THE FUNDS MONTHLY DISTRIBUTION TO BE PAID ON [●], 2019 AND WILL NOT BE ENTITLED TO RECEIVE SUCH DISTRIBUTION.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS SUPPLEMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Per Share | Total | |||||||
Estimated subscription price of Common Shares to shareholders exercising Rights(1) |
$ | [●] | $ | [ | ●] | |||
Underwriting discounts and commissions |
$ | [●] | $ | [ | ●] | |||
Estimated proceeds, before expenses, to the Fund(2) |
$ | [●] | $ | [ | ●] |
(1) |
The estimated subscription price to the public is based upon [●]% of the last reported sales price of the Funds Common Shares of beneficial interest on the NYSE on [●], 2020. |
(2) |
Before deduction of expenses related to the Rights offering, which are estimated approximately at $[●]. Any offering expenses are paid indirectly by shareholders. Such fees and expenses will immediately reduce the net asset value per share of each Common Share purchased by an investor in the Rights offering. The indirect expenses of the offering that shareholders will pay are estimated to be $[●] in the aggregate and $[●] per share. The amount of proceeds to the Fund net of any fees and expenses of the offering are estimated to be $[●] in the aggregate and $[●] per share. Shareholders will not directly bear any offering expenses. |
The Common Shares are expected to be ready for delivery in book-entry form through the [insert depository name] on or about [●], 2019[, unless extended. If the offering is extended, the Common Shares are expected to be ready for delivery in book-entry form through the [●] on or about [●], 2020.]
You should not construe the contents of this Prospectus Supplement and the accompanying Prospectus as legal, tax or financial advice. You should consult with your own professional advisors as to the legal, tax, financial or other matters relevant to the suitability of an investment in the Fund.
The Funds Common Shares do not represent a deposit or an obligation of, and are not guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.
R-2
Beginning on January 1, 2021, as permitted by regulations adopted by the SEC, paper copies of the Funds shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the reports from BlackRock or from your financial intermediary, such as a broker-dealer or bank. Instead, the reports will be made available on a website, and you will be notified by mail each time a report is posted and provided with a website link to access the report.
You may elect to receive all future reports in paper free of charge. If you hold accounts directly with BlackRock, you can call Computershare at 1-800-699-1236 to request that you continue receiving paper copies of your shareholder reports. If you hold accounts through a financial intermediary, you can follow the instructions included with this disclosure, if applicable, or contact your financial intermediary to request that you continue to receive paper copies of your shareholder reports. Please note that not all financial intermediaries may offer this service. Your election to receive reports in paper will apply to all funds advised by BlackRock Advisors, LLC or its affiliates, or all funds held with your financial intermediary, as applicable.
If you already elected to receive shareholder reports electronically, you will not be affected by this change and you need not take any action. You may elect to receive electronic delivery of shareholder reports and other communications by contacting your financial intermediary, if you hold accounts through a financial intermediary. Please note that not all financial intermediaries may offer this service.
The date of this Prospectus Supplement is [●], 2020.
R-3
You should rely only on the information contained or incorporated by reference in this Prospectus Supplement and the accompanying Prospectus. The Fund has not authorized anyone to provide you with different information. The Fund is not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this Prospectus Supplement and the accompanying Prospectus is accurate as of any date other than the date of this Prospectus Supplement and the accompanying Prospectus, respectively. This Prospectus Supplement will be amended to reflect material changes to the information contained herein and will be delivered to shareholders. Our business, financial condition, results of operations and prospects may have changed since those dates. In this Prospectus Supplement and in the accompanying Prospectus, unless otherwise indicated, Fund, us, our and we refer to BlackRock MuniAssets Fund, Inc., a Maryland corporation.
TABLE OF CONTENTS
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R-4
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus Supplement, the accompanying Prospectus and the Statement of Additional Information (SAI) contain forward-looking statements. Forward-looking statements can be identified by the words may, will, intend, expect, estimate, continue, plan, anticipate, and similar terms and the negative of such terms. Such forward-looking statements may be contained in this Prospectus Supplement as well as in the accompanying Prospectus and in the SAI. By their nature, all forward-looking statements involve risks and uncertainties, and actual results could differ materially from those contemplated by the forward-looking statements. Several factors that could materially affect our actual results are the performance of the portfolio of securities we hold, the price at which our shares will trade in the public markets and other factors discussed in our periodic filings with the SEC.
Although we believe that the expectations expressed in our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and are subject to inherent risks and uncertainties, such as those disclosed in the Risks section of the accompanying Prospectus and Special Characteristics and Risks of the Rights Offering in this Prospectus Supplement. All forward-looking statements contained or incorporated by reference in this Prospectus Supplement or the accompanying Prospectus, or in the SAI, are made as of the date of this Prospectus Supplement or the accompanying Prospectus or SAI, as the case may be. Except for our ongoing obligations under the federal securities laws, we do not intend, and we undertake no obligation, to update any forward-looking statement. The forward-looking statements contained in this Prospectus Supplement, the accompanying Prospectus and the SAI are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended (the Securities Act).
Currently known risk factors that could cause actual results to differ materially from our expectations include, but are not limited to, the factors described in the Risks section of the accompanying Prospectus as well as in the Special Characteristics and Risks of the Rights Offering section of this Prospectus Supplement. We urge you to review carefully those sections for a more detailed discussion of the risks of an investment in the Common Shares.
SUMMARY OF THE TERMS OF THE RIGHTS OFFERING
Terms of the Rights Offering |
[●] transferable subscription right (a Right) will be issued for each share of common stock of BlackRock MuniAssets Fund, Inc. (the Fund, we, us or our) (each, a Common Share, and collectively, the Common Shares) held on the Record Date (as defined below). Rights are expected to trade on the [●] under the symbol [●]. The Rights will allow common shareholders to subscribe for new Common Shares of the Fund. [●] Common Shares of the Fund are outstanding as of [●], 2020. [●] Rights will be required to purchase one Common Share. Shares of the Fund, as a closed-end fund, can trade at a discount to net asset value (NAV). Upon exercise of the Rights offering, Fund shares are expected to be issued at a price below NAV per Common Share. [An over-subscription privilege will be offered, [subject to the right of the Board of Directors of the Fund (the Board) to eliminate the over-subscription privilege.] [●] Common Shares of the Fund will be issued if all Rights are exercised. See Terms of the Rights Offering. Any Common Shares issued as a result of the Rights offering will not be record date shares for the Funds monthly distribution to be paid on [●], 2020 and will not be entitled to receive such distribution. The exercise of rights by a shareholder is irrevocable. |
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Amount Available for Primary Subscription |
Approximately $[●], before expenses. |
R-5
Title |
Subscription Rights to Acquire Shares of Common Stock |
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Subscription Price |
The final subscription price per Common Share (the Subscription Price) will be determined based upon a formula equal to [●]% of the average of the last reported sales price of the Funds Common Shares on the New York Stock Exchange (NYSE) on the Expiration Date (as defined below) and each of the [four] preceding trading days (the Formula Price). If, however, the Formula Price is less than [●]% of the NAV per Common Share of the Funds Common Shares at the close of trading on the NYSE on the Expiration Date, then the Subscription Price will be [●]% of the Funds NAV per Common Share at the close of trading on the NYSE on that day. See Terms of the Rights Offering. |
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Record Date |
Rights will be issued to holders of record of the Funds Common Shares as of the close of business on [●], 2020 (the Record Date). See Terms of the Rights Offering. |
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Number of Rights Issued |
[●] Right will be issued in respect of each Common Share of the Fund outstanding as of the close of business on the Record Date. See Terms of the Rights Offering. |
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Number of Rights Required to Purchase One Common Share |
A holder of Rights may purchase [●] Common Share of the Fund for every [●] Rights exercised. The number of Rights to be issued to a shareholder as of the close of business on the Record Date will be rounded up to the nearest number of Rights evenly divisible by [●]. See Terms of the Rights Offering. |
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Over-Subscription Privilege |
Holders of Common Shares as of the close of business on the Record Date (Record Date Shareholders) who fully exercise all Rights initially issued to them are entitled to buy those Common Shares, referred to as primary over-subscription shares, that were not purchased by other Rights holders at the same Subscription Price. If enough primary over-subscription shares are available, all such requests will be honored in full. If the requests for primary over-subscription shares exceed the primary over-subscription shares available, the available primary over-subscription shares will be allocated pro rata among those fully exercising Record Date Shareholders who over-subscribe based on the number of Rights originally issued to them by the Fund. Common Shares acquired pursuant to the primary over-subscription privilege are subject to allotment. Rights acquired in the secondary market may not participate in the primary over-subscription privilege. |
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[In addition, the Fund, in its sole discretion, may determine to issue additional Common Shares at the same Subscription Price in an amount of up to [●]% of the shares issued pursuant to the primary subscription, referred to as secondary over-subscription shares. Should the Fund determine to issue some or all of the secondary over-subscription shares, they will be allocated only among Record Date Shareholders who submitted over-subscription requests. Secondary over-subscription shares will be allocated pro rata among those fully exercising Record Date Shareholders who over-subscribe based on the number of Rights originally issued to them by the Fund. Rights acquired in the secondary market may not participate in the secondary over-subscription privilege.] |
R-6
Notwithstanding the above, the Board has the right in its absolute discretion to eliminate the primary over-subscription privilege and/or secondary over-subscription privilege (together, the over-subscription privilege) if it considers it to be in the best interest of the Fund to do so. The Board may make that determination at any time, without prior notice to Rights holders or others, up to and including the fifth day following the Expiration Date (as defined below). See Over-Subscription Privilege. |
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Any Common Shares issued pursuant to the over-subscription privilege will be shares registered under the Prospectus. |
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Transfer of Rights |
The Rights will be transferable. See Terms of the Rights Offering, Sales by Rights Agent and Method of Transferring Rights. |
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Subscription Period |
The Rights may be exercised at any time after issuance and prior to expiration of the Rights (the Subscription Period), which will be [5:00 PM Eastern Time] on [●], 2020 (the Expiration Date), unless otherwise extended. See Terms of the Rights Offering and Method of Exercise of Rights. The Rights offering may be terminated [or extended] by the Fund at any time for any reason before the Expiration Date. If the Fund terminates the rights offering, the Fund will issue a press release announcing such termination and will direct the Rights Agent (defined below) to return, without interest, all subscription proceeds received to such shareholders who had elected to purchase Common Shares. |
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Offering Expenses |
The expenses of the Rights offering are expected to be approximately $[●] and will be borne by holders of the Funds Common Shares. See Use of Proceeds. |
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Sale of Rights |
The Rights are transferable until the completion of the Subscription Period and will be admitted for trading on the [●] under the symbol [●]. Although no assurance can be given that a market for the Rights will develop, trading in the Rights on the [●] is expected to begin two Business Days prior to the Record Date and may be conducted until the close of trading on the last [●] trading day prior to the Expiration Date. For purposes of this Prospectus Supplement, a Business Day shall mean any day on which trading is conducted on the [●]. |
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The value of the Rights, if any, will be reflected by their market price on the [●]. Rights may be sold by individual holders through their broker or financial advisor or may be submitted to the Rights Agent (defined below) for sale. Any Rights submitted to the Rights Agent for sale must be received by the Rights Agent prior to [5:00 PM, Eastern Time], on or before [●], 2020, [●] Business Days prior to the Expiration Date (or, if the Subscription Period is extended, prior to [5:00 PM, Eastern Time], on the [●] Business Day prior to the extended Expiration Date). |
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Rights that are sold will not confer any right to acquire any Common Shares in any over-subscription, and any Record Date Shareholder who sells any Rights will not be eligible to participate in the over-subscription privilege, if any. |
R-7
Trading of the Rights on the [●] will be conducted on a when-issued basis until and including the date on which the Subscription Certificates (as defined below) are mailed to Record Date Shareholders of record and thereafter will be conducted on a regular-way basis until and including the last [●] trading day prior to the completion of the Subscription Period. The shares are expected to begin trading ex-Rights one Business Day prior to the Record Date. |
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If the Rights Agent receives Rights for sale in a timely manner, the Rights Agent will use its best efforts to sell the Rights on the [●]. The Rights Agent will also attempt to sell any Rights attributable to shareholders of record whose addresses are outside the United States, or who have an APO or FPO address. See Foreign Restrictions. The Rights Agent will attempt to sell such Rights, including by first offering such Rights to the Dealer Manager (defined below) for purchase by the Dealer Manager at the then-current market price on the [●]. The Rights Agent will offer Rights to the Dealer Manager before attempting to sell them on the [●]. |
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Any commissions will be paid by the selling Rights holders. Neither the Fund nor the Rights Agent will be responsible if Rights cannot be sold and neither has guaranteed any minimum sales price for the Rights. If the Rights can be sold, sales of these Rights will be deemed to have been effected at the weighted average price received by the Rights Agent on the day such Rights are sold, less any applicable brokerage commissions, taxes and other expenses (i.e., costs incidental to the sale of Rights). |
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For a discussion of actions that may be taken by [●] (the Dealer Manager) to seek to facilitate the trading market for Rights and the placement of Common Shares pursuant to the exercise of Rights, including the purchase of Rights and the sale during the Subscription Period by the Dealer Manager of Common Shares acquired through the exercise of Rights and the terms on which such sales will be made, see Plan of Distribution. |
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Shareholders are urged to obtain a recent trading price for the Rights on the [●] from their broker, bank, financial advisor or the financial press. |
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Banks, broker-dealers and trust companies that hold shares for the accounts of others are advised to notify those persons that purchase Rights in the secondary market that such Rights will not participate in any over-subscription privilege. See Terms of the Rights Offering and Sales by Rights Agent. |
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Use of Proceeds |
The Fund estimates the net proceeds of the Rights offering to be approximately $[●]. This figure is based on the Subscription Price per Common Share of $[●] ([●]% of the last reported sales price of the Funds Common Shares on the NYSE on [●], 2020) and assumes all new Common Shares offered are sold and that the expenses related to the Rights offering estimated at approximately $[●] are paid. |
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The Advisor anticipates that investment of the proceeds will be made in accordance with the Funds investment objective and policies as appropriate investment opportunities are identified, which is expected to be substantially completed in approximately [three] months; however, the identification of appropriate investment opportunities pursuant to the Funds investment style or changes in market conditions may cause the investment period to extend as long as [six] months. Pending such investment, the proceeds will be held in [cash and/or high quality, short-term debt securities and instruments]. |
R-8
Depending on market conditions and operations, a portion of the cash held by the Fund, including any proceeds raised from the offering, may be used to pay distributions in accordance with the Funds distribution policy and may be a return of capital. A return of capital is a return to investors of a portion of their original investment in the Fund. In general terms, a return of capital would involve a situation in which a Fund distribution (or a portion thereof) represents a return of a portion of a shareholders investment in the Fund, rather than making a distribution that is funded from the Funds earned income or other profits. Although return of capital distributions may not be currently taxable, such distributions would decrease the basis of a shareholders shares, and therefore, may increase a shareholders tax liability for capital gains upon a sale of shares, even if sold at a loss to the shareholders original investments. See Use of Proceeds. |
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Taxation/ERISA |
See Taxation and Employee Benefit Plan and IRA Considerations. |
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Rights Agent |
[●]. See Rights Agent. |
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Information Agent |
[●]. See Information Agent. |
DESCRIPTION OF THE RIGHTS OFFERING
Terms of the Rights Offering
The Fund is issuing to Record Date Shareholders Rights to subscribe for Common Shares of the Fund. Each Record Date Shareholder is being issued one transferable Right for each Common Share owned on the Record Date. The Rights entitle the holder to acquire, at a subscription price per Common Share (the Subscription Price) determined based upon a formula equal to [●]% of the average of the last reported sales price of the Funds Common Shares on the NYSE on the Expiration Date (as defined below) and each of the [four] preceding trading days (the Formula Price), [●] new Common Share for each [●] Rights held. If, however, the Formula Price is less than [●]% of the NAV per Common Share of the Funds Common Shares at the close of trading on the NYSE on the Expiration Date, then the Subscription Price will be [●]% of the Funds NAV per Common Share at the close of trading on the NYSE on that day. The estimated Subscription Price to the public of $[●] is based upon [●]% of the last reported sales price of the Funds Common Shares on the NYSE on [●], 2020. Fractional shares will not be issued upon the exercise of the Rights. Accordingly, Common Shares may be purchased only pursuant to the exercise of Rights in integral multiples of [●]. The number of Rights to be issued to a Record Date Shareholder will be rounded up to the nearest number of Rights evenly divisible by [●]. In the case of Common Shares held of record by Cede & Co. (Cede), as nominee for the Depository Fund Company (DTC)], or any other depository or nominee, the number of Rights issued to Cede or such other depository or nominee will be adjusted to permit rounding up (to the nearest number of Rights evenly divisible by [●]) of the Rights to be received by beneficial owners for whom it is the holder of record only if [insert nominee name] or such other depository or nominee provides to the Fund on or before the close of business on [●], 2020 written representation of the number of Rights required for such rounding. Rights may be exercised at any time during the period (the Subscription Period) which commences on [●], 2020, and ends at [5:00 PM Eastern Time] on [●], 2020 (the Expiration Date), unless otherwise extended. Shares of the Fund, as a closed-end fund, can trade at a discount to NAV. Upon exercise of the Rights offering, Fund shares are expected to be issued at a price below NAV per Common Share. The right to acquire one Common Share for each [●] Rights held during the Subscription Period (or any extension of the Subscription Period) at the Subscription Price will be referred to in the remainder of this Prospectus Supplement as the Rights offering. Rights will expire on the Expiration Date and thereafter may not be exercised. Any Common Shares issued as a result of the Rights offering will not be Record Date shares for the Funds monthly distribution to be paid on [●], 2019 and will not be entitled to receive such distribution.
R-9
The Fund has entered into a dealer manager agreement with [●] (the Dealer Manager) that allows the Dealer Manager to take actions to seek to facilitate the trading market for Rights and the placement of Common Shares pursuant to the exercise of Rights. Those actions are expected to involve the Dealer Manager purchasing and exercising Rights during the Subscription Period at prices determined at the time of such exercise, which are expected to vary from the Subscription Price. See Plan of Distribution for additional information.
Rights may be evidenced by subscription certificates or may be uncertificated and evidenced by other appropriate documentation (i.e., a rights card distributed to registered shareholders in lieu of a subscription certificate) (Subscription Certificates). The number of Rights issued to each holder will be stated on the Subscription Certificate delivered to the holder. The method by which Rights may be exercised and Common Shares paid for is set forth below in Method of Exercise of Rights, Payment for Shares and Plan of Distribution. A holder of Rights will have no right to rescind a purchase after [●] (the Rights Agent) has received payment. See Payment for Shares below. It is anticipated that the Common Shares issued pursuant to an exercise of Rights will be listed on the [●].
[Holders of Rights [who are Record Date Shareholders] are entitled to subscribe for additional Common Shares at the same Subscription Price pursuant to the over-subscription privilege, subject to certain limitations, allotment and the right of the Board to eliminate the primary over-subscription privilege [or secondary] over-subscription privilege. See Over-Subscription Privilege below.]
For purposes of determining the maximum number of Common Shares that may be acquired pursuant to the Rights offering, broker-dealers, trust companies, banks or others whose shares are held of record by Cede or by any other depository or nominee will be deemed to be the holders of the Rights that are held by Cede or such other depository or nominee on their behalf.
The Rights are transferable until the completion of the Subscription Period and will be admitted for trading on the [●] under the symbol [●]. Assuming a market exists for the Rights, the Rights may be purchased and sold through usual brokerage channels and also sold through the Rights Agent. Although no assurance can be given that a market for the Rights will develop, trading in the Rights on the [●] is expected to begin two Business Days prior to the Record Date and may be conducted until the close of trading on the last [●] trading day prior to the Expiration Date. Trading of the Rights on the [●] is expected to be conducted on a when-issued basis until and including the date on which the Subscription Certificates are mailed to Record Date Shareholders of record and thereafter is expected to be conducted on a regular way basis until and including the last [●] trading day prior to the Expiration Date. The method by which Rights may be transferred is set forth below under Method of Transferring Rights. The Common Shares are expected to begin trading ex-Rights one Business Day prior to the Record Date as determined and announced by the [●]. The Rights offering may be terminated or extended by the Fund at any time for any reason before the Expiration Date. If the Fund terminates the Rights offering, the Fund will issue a press release announcing such termination and will direct the Rights Agent to return, without interest, all subscription proceeds received to such shareholders who had elected to purchase Common Shares.
Nominees who hold the Funds Common Shares for the account of others, such as banks, broker-dealers, trustees or depositories for securities, 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. If the beneficial owner so instructs, the nominee should complete the Subscription Certificate and submit it to the Rights Agent with proper payment. In addition, beneficial owners of the Common Shares or Rights held through such a nominee should contact the nominee and request the nominee to effect transactions in accordance with such beneficial owners instructions.
[Participants in the Funds Dividend Reinvestment Plan (the Plan) will be issued Rights in respect of the Common Shares held in their accounts in the Plan. Participants wishing to exercise these Rights must exercise the Rights in accordance with the procedures set forth in Method of Exercise of Rights and Payment for Shares.]
R-10
Conditions of the Rights Offering
The Rights offering is being made in accordance with the Investment Company Act of 1940 Act, as amended (the Investment Company Act) without shareholder approval. The staff of the SEC has interpreted the Investment Company Act as not requiring shareholder approval of a transferable rights offering to purchase common shares at a price below the then current NAV so long as certain conditions are met, including: (i) a good faith determination by a funds board that such offering would result in a net benefit to existing shareholders; (ii) the offering fully protects shareholders preemptive rights and does not discriminate among shareholders (except for the possible effect of not offering fractional rights); (iii) management uses its best efforts to ensure an adequate trading market in the rights for use by shareholders who do not exercise such rights; and (iv) the ratio of a transferable rights offering does not exceed one new share for each three rights held.
Important Dates to Remember
[Please note that the dates in the table below may change if the Rights offering is extended.]
Event |
Date |
|
Record Date |
[●], 2020 |
|
Subscription Period* |
[●], 2020 through [●], 2020 |
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Final Date Rights Will Trade | ||
Expiration Date* |
[●], 2020 |
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Payment for Shares and Subscription Certificate or Notice of Guaranteed Delivery Due* |
[●], 2020 |
|
Issuance Date |
[●], 2020 |
|
Confirmation Date |
[●], 2020 |
* |
A shareholder exercising Rights must deliver to the Rights Agent by [5:00 PM Eastern Time] on [●], 2020 (unless the offer is extended) either (a) a Subscription Certificate and payment for Common Shares or (b) a notice of guaranteed delivery and payment for Common Shares. |
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Unless the offer is extended. |
[Over-Subscription Privilege
The Board has the right in its absolute discretion to eliminate the over-subscription privilege with respect to primary over-subscription shares and secondary over-subscription shares if it considers it to be in the best interest of the Fund to do so. The Board may make that determination at any time, without prior notice to Rights holders or others, up to and including the fifth day following the Expiration Date. If the primary over-subscription privilege is not eliminated, it will operate as set forth below.
Rights holders [who are Record Date Shareholders and who fully exercise their Rights] are entitled to subscribe for additional Common Shares at the same Subscription Price pursuant to the over-subscription privilege, subject to certain limitations and subject to allotment.
[Record Date Shareholders who fully exercise all Rights initially issued to them] are entitled to buy those Common Shares, referred to as primary over-subscription shares, that were not purchased by other holders of Rights at the same Subscription Price. If enough primary over-subscription shares are available, all such requests will be honored in full. If the requests for primary over-subscription shares exceed the primary over-subscription shares available, the available primary over-subscription shares will be allocated pro rata among those fully exercising [Record Date Shareholders] who over-subscribe based on the number of Rights originally issued to them by the Fund. Common Shares acquired pursuant to the over-subscription privilege are subject to allotment.
[In addition, the Fund, in its sole discretion, may determine to issue additional Common Shares at the same Subscription Price in an amount of up to [ ]% of the shares issued pursuant to the primary subscription, referred to as secondary over-subscription shares. Should the Fund determine to issue some or all of the secondary over-subscription shares, they will be allocated only among Record Date Shareholders who submitted over-subscription requests. Secondary over-subscription shares will be allocated pro rata among those fully exercising Record Date Shareholders who over-subscribe based on the number of Rights originally issued to them by the Fund. Rights acquired in the secondary market may not participate in the over-subscription privilege.]
R-11
Record Date Shareholders who are fully exercising their Rights during the Subscription Period should indicate, on the Subscription Certificate that they submit with respect to the exercise of the Rights issued to them, how many Common Shares they are willing to acquire pursuant to the over-subscription privilege. Rights acquired in the secondary market may not participate in the over-subscription privilege.
To the extent sufficient Common Shares are not available to fulfill all over-subscription requests, unsubscribed Common Shares (the Excess Shares) will be allocated pro rata among those Record Date Shareholders who over-subscribe based on the number of Rights issued to them by the Fund. The allocation process may involve a series of allocations in order to assure that the total number of Common Shares available for over-subscriptions is distributed on a pro rata basis.
The formula to be used in allocating the Excess Shares is as follows:
Shareholders Record Date Position |
X |
Excess Shares Remaining |
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Total Record Date Position of All Over-Subscribers |
Banks, broker-dealers, trustees and other nominee holders of Rights will be required to certify to the Rights Agent, before any over-subscription privilege may be exercised with respect to any particular beneficial owner, as to the aggregate number of Rights exercised during the Subscription Period and the number of Common Shares subscribed for pursuant to the over-subscription privilege by such beneficial owner and that such beneficial owners subscription was exercised in full. Nominee holder over-subscription forms and beneficial owner certification forms will be distributed to banks, broker-dealers, trustees and other nominee holders of Rights with the Subscription Certificates. [Nominees should also notify holders purchasing Rights in the secondary market that such Rights may not participate in the over-subscription privilege.]
The Fund will not otherwise offer or sell any Common Shares that are not subscribed for pursuant to the primary subscription, the primary over-subscription privilege or the secondary over-subscription privilege pursuant to the Rights offering.]
Sales by Rights Agent
Holders of Rights who are unable or do not wish to exercise any or all of their Rights may instruct the Rights Agent to sell any unexercised Rights. The Subscription Certificates representing the Rights to be sold by the Rights Agent must be received prior to [5:00 PM, Eastern Time], on [●], 2020, five Business Days prior to the Expiration Date (or, if the Subscription Period is extended, prior to [5:00 PM, Eastern Time], on the fifth Business Day prior to the extended Expiration Date). Upon the timely receipt of the appropriate instructions to sell Rights, the Rights Agent will use its best efforts to complete the sale and will remit the proceeds of sale, net of any commissions, to the holders. The Rights Agent will also attempt to sell any Rights attributable to shareholders of record whose addresses are outside the United States, or who have an APO or FPO address. The selling Rights holder will pay all brokerage commissions incurred by the Rights Agent. These sales may be effected by the Rights Agent. The Rights Agent will automatically attempt to sell any unexercised Rights that remain unclaimed as a result of Subscription Certificates being returned by the postal authorities as undeliverable as of the [●] Business Day prior to the Expiration Date. The Rights Agent will attempt to sell such Rights, including by first offering such Rights to the Dealer Manager for purchase by the Dealer Manager at the then-current market price on the [●]. The Rights Agent will offer Rights to the Dealer Manager before attempting to sell them on the [●], which may affect the market price for Rights on the [●] and reduce the number of Rights available for purchase on the [●], thereby reducing the ability of new investors to participate in the offering. These sales will be made net of commissions, taxes and any other expenses paid on behalf of the nonclaiming holders of Rights. Proceeds from those sales will be held by Computershare Fund Company, N.A. in its capacity as the Funds transfer agent, for the account of the nonclaiming holder of Rights until the proceeds are either claimed or escheated. There can be no assurance that the Rights Agent will be able to
R-12
complete the sale of any of these Rights and neither the Fund nor the Rights Agent has guaranteed any minimum sales price for the Rights. All of these Rights will be sold at the market price, if any, through an exchange or market trading the Rights. If the Rights can be sold, sales of the Rights will be deemed to have been effected at the weighted average price received by the Rights Agent on the day such Rights are sold, less any applicable brokerage commissions, taxes and other expenses.
[Dealer Manager
[●] (previously defined as the Dealer Manager), a registered broker-dealer, may also act on behalf of its clients to purchase or sell Rights in the open market and may receive commissions from its clients for such services. Holders of Rights attempting to sell any unexercised Rights in the open market through a broker-dealer other than the Dealer Manager may be charged a different commission and should consider the commissions and fees charged by the broker-dealer prior to selling their Rights on the open market. The Dealer Manager is not expected to purchase Rights as principal for its own account in order to seek to facilitate the trading market for Rights or otherwise. See Plan of Distribution for additional information.]
Sale of Rights
The Rights are transferable and will be admitted for trading on the [●] under the symbol [●]. Although no assurance can be given that a market for the Rights will develop, trading in the Rights on the [●] is expected to begin two Business Days prior to the Record Date and may be conducted until the close of trading on the last [●] trading day prior to the Expiration Date.
The value of the Rights, if any, will be reflected by the market price. Rights may be sold by individual holders or may be submitted to the Rights Agent for sale. Any Rights submitted to the Rights Agent for sale must be received by the Rights Agent prior to [5:00 PM, Eastern Time], on [●], 2020, five Business Days prior to the Expiration Date (or, if the Subscription Period is extended, prior to [5:00 PM, Eastern Time], on the [●] Business Day prior to the extended Expiration Date).
[Rights that are sold will not confer any right to acquire any Common Shares in any primary over-subscription privilege or secondary over-subscription privilege, if any, and any Record Date Shareholder who sells any Rights will not be eligible to participate in the primary over-subscription privilege or secondary over-subscription privilege, if any.]
Trading of the Rights on the [●] will be conducted on a when-issued basis until and including the date on which the Subscription Certificates are mailed to Record Date Shareholders of record and thereafter will be conducted on a regular-way basis until and including the last [●] trading day prior to the Expiration Date. The Common Shares are expected to begin trading ex-Rights one Business Day prior to the Record Date.
Shareholders are urged to obtain a recent trading price for the Rights on the [●] from their broker, bank, financial advisor or the financial press.
Method of Transferring Rights
The Rights evidenced by a single Subscription Certificate may be transferred in whole by endorsing the Subscription Certificate for transfer in accordance with the accompanying instructions. A portion of the Rights evidenced by a single Subscription Certificate (but not fractional Rights) may be transferred by delivering to the Rights Agent a Subscription Certificate properly endorsed for transfer, with instructions to register the portion of the Rights evidenced thereby in the name of the transferee (and to issue a new Subscription Certificate to the transferee evidencing the transferred Rights). In this event, a new Subscription Certificate evidencing the balance of the Rights will be issued to the Rights holder or, if the Rights holder so instructs, to an additional transferee.
R-13
Holders wishing to transfer all or a portion of their Rights (but not fractional Rights) should promptly transfer such Rights to ensure that: (i) the transfer instructions will be received and processed by the Rights Agent, (ii) a new Subscription Certificate will be issued and transmitted to the transferee or transferees with respect to transferred Rights, and to the holder with respect to retained Rights, if any, and (iii) the Rights evidenced by the new Subscription Certificates may be exercised or sold by the recipients thereof prior to the Expiration Date. Neither the Fund nor the Rights Agent shall have any liability to a transferee or holder of Rights if Subscription Certificates are not received in time for exercise or sale prior to the Expiration Date.
Except for the fees charged by the Rights Agent (which will be paid by the Fund as described below), all commissions, fees and other expenses (including brokerage commissions and transfer taxes) incurred in connection with the purchase, sale, transfer or exercise of Rights will be for the account of the holder of the Rights, and none of these commissions, fees or expenses will be borne by the Fund or the Rights Agent.
The Fund anticipates that the Rights will be eligible for transfer through, and that the exercise of the Rights may be effected through, the facilities of [insert depository] (Rights exercised through [insert depository] are referred to as [insert depository] Exercised Rights).
Rights Agent
The Rights Agent is [●]. The Rights Agent will receive from the Fund an amount estimated to be $[●], comprised of the fee for its services and the reimbursement for certain expenses related to the Rights offering. The shareholders of the Fund will indirectly pay such amount.
Information Agent
INQUIRIES BY ALL HOLDERS OF RIGHTS SHOULD BE DIRECTED TO: THE INFORMATION AGENT, [●]; HOLDERS PLEASE CALL TOLL-FREE AT [●]; BANKS AND BROKERS PLEASE CALL [●].
Method of Exercise of Rights
Rights may be exercised by completing and signing the Subscription Certificate and mailing it in the envelope provided, or otherwise delivering the completed and signed Subscription Certificate to the Rights Agent, together with payment for the Common Shares as described below under Payment for Shares. Rights may also be exercised through the broker of a holder of Rights, who may charge the holder of Rights a servicing fee in connection with such exercise. See Plan of Distribution for additional information regarding the purchase and exercise of Rights by the Dealer Manager.
Completed Subscription Certificates and payment must be received by the Rights Agent prior to [5:00 PM 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). Your broker, bank, trust company or other intermediary may impose a deadline for exercising Rights earlier than [5:00 PM, Eastern Time], on the Expiration Date. The Subscription Certificate and payment should be delivered to the Rights Agent at the following address:
If By Mail:
BlackRock MuniAssets Fund, Inc.
[●]
If By Overnight Courier:
BlackRock MuniAssets Fund, Inc.
[●]
R-14
Payment for Shares
Holders of Rights who acquire Common Shares in the Rights offering may choose between the following methods of payment:
(1) |
A holder of Rights can send the Subscription Certificate, together with payment in the form of a check (which must include the name of the shareholder on the check) for the Common Shares subscribed for in the Rights offering and, if eligible, for any additional Common Shares subscribed for pursuant to the over-subscription privilege, to the Rights Agent based on the Subscription Price. To be accepted, the payment, together with the executed Subscription Certificate, must be received by the Rights Agent at one of the addresses noted above prior to [5:00 PM Eastern Time] on the Expiration Date. The Rights Agent will deposit all share purchase checks received by it prior to the final due date into a segregated account pending proration and distribution of Common Shares. The Rights Agent will not accept cash as a means of payment for Common Shares. |
(2) |
Alternatively, a subscription will be accepted by the Rights Agent if, prior to [5:00 PM Eastern Time] on the Expiration Date, the Rights Agent has received a written notice of guaranteed delivery by mail or email from a bank, trust company, or a NYSE member, guaranteeing delivery of a properly completed and executed Subscription Certificate. In order for the notice of guarantee to be valid, full payment for the Common Shares at the Subscription Price must be received with the notice. The Rights Agent will not honor a notice of guaranteed delivery unless a properly completed and executed Subscription Certificate is received by the Rights Agent by the close of business on the [second] Business Day after the Expiration Date. The notice of guaranteed delivery must be emailed to the Rights Agent at [●] or delivered to the Rights Agent at one of the addresses noted above. |
A PAYMENT PURSUANT TO THIS METHOD MUST BE IN UNITED STATES DOLLARS BY CHECK (WHICH MUST INCLUDE THE NAME OF THE SHAREHOLDER ON THE CHECK) DRAWN ON A BANK LOCATED IN THE CONTINENTAL UNITED STATES, MUST BE PAYABLE TO BLACKROCK MUNIASSETS FUND, INC. AND MUST ACCOMPANY AN EXECUTED SUBSCRIPTION CERTIFICATE TO BE ACCEPTED.
The method and timing of payment for Common Shares acquired by the Dealer Manager through the exercise of Rights is described under Plan of Distribution.
If a holder of Rights who acquires Common Shares pursuant to the Rights offering does not make payment of all amounts due, the Fund reserves the right to take any or all of the following actions: (i) find other purchasers for such subscribed-for and unpaid-for Common Shares; (ii) apply any payment actually received by it toward the purchase of the greatest whole number of Common Shares which could be acquired by such holder upon exercise of the Rights or any over-subscription privilege; (iii) sell all or a portion of the Common 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 Common Shares and to enforce the relevant guarantee of payment.
Any payment required from a holder of Rights must be received by the Rights Agent prior to [5:00 PM Eastern Time] on the Expiration Date. Issuance and delivery of the Common Shares purchased are subject to collection of checks.
Within [●] Business Days following the Expiration Date (the Confirmation Date), a confirmation will be sent by the Rights Agent to each holder of Rights (or, if the Common Shares are held by [insert nominee name] or any other depository or nominee, to [insert nominee name] or such other depository or nominee), showing (i) the number of Common Shares acquired pursuant to the subscription, (ii) the number of Common Shares, if any, acquired pursuant to the over-subscription privilege, and (iii) the per share and total purchase price for the Common Shares. Any payment required from a holder of Rights must be received by the Rights Agent on or prior to the Expiration Date. Any excess payment to be refunded by the Fund to a holder of Rights, or to be paid to a holder of Rights as a result of sales of Rights on its behalf by the Rights Agent, will be mailed by the Rights Agent to the holder within [●] Business Days after the Expiration Date.
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A holder of Rights will have no right to rescind a purchase after the Rights Agent has received payment either by means of a notice of guaranteed delivery or a check, which must include the name of the shareholder on the check.
Upon acceptance of a subscription, all funds received by the Rights Agent shall be held by the Rights Agent as agent for the Fund and deposited in one or more bank accounts. Such funds may be invested by the Rights Agent in: bank accounts, short-term certificates of deposit, bank repurchase agreements, and disbursement accounts with commercial banks meeting certain standards. The Rights Agent may receive interest, dividends or other earnings in connection with such deposits or investments.
Holders, such as broker-dealers, trustees or depositories for securities, who hold Common Shares for the account of others, should notify the respective beneficial owners of the Common Shares as soon as possible to ascertain such beneficial owners intentions and to obtain instructions with respect to the Rights. If the beneficial owner so instructs, the record holder of the Rights should complete Subscription Certificates and submit them to the Rights Agent with the proper payment. In addition, beneficial owners of Common Shares or Rights held through such a holder should contact the holder and request that the holder effect transactions in accordance with the beneficial owners instructions. [Banks, broker-dealers, trustees and other nominee holders that hold Common Shares of the Fund for the accounts of others are advised to notify those persons that purchase Rights in the secondary market that such Rights may not participate in any over-subscription privilege offered.]
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 RIGHTS AGENT WILL BE AT THE ELECTION AND RISK OF THE RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT THE 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 RIGHTS AGENT AND CLEARANCE OF PAYMENT PRIOR TO [5:00 PM 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 CASHIERS CHECK, WHICH MUST INCLUDE THE NAME OF THE SHAREHOLDER ON THE CHECK.
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 Rights 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.
Foreign Restrictions
Subscription Certificates will only be mailed to Record Date Shareholders of record whose addresses are within the United States (other than an APO or FPO address). Because the Rights offering will not be registered in any jurisdiction other than the United States, the Rights Agent will attempt to sell all of the Rights issued to shareholders of record outside of these jurisdictions and remit the net proceeds, if any, to such shareholders of record. If the Rights can be sold, sales of these Rights will be deemed to have been effected at the weighted average price received by the Rights Agent on the day the Rights are sold, less any applicable brokerage commissions, taxes and other expenses.
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Notice of Net Asset Value Decline
The Fund has, pursuant to the SECs regulatory requirements, undertaken to suspend the Rights offering until the Fund amends this Prospectus Supplement if, after [●], 2020 (the date of this Prospectus Supplement), the Funds NAV declines more than 10% from the Funds NAV as of that date. In that event, the Expiration Date will be extended and the Fund will notify Record Date Shareholders of record of any such decline and permit Rights holders to cancel their exercise of Rights.
Employee Benefit Plan and IRA Considerations
[Holders of Rights that are employee benefit plans subject to limitations imposed by the Internal Revenue Code of 1986, as amended (the Code), such as employee plans subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA), Keogh Plans and Individual Retirement Accounts (IRA) (each a Benefit Plan and collectively, Benefit Plans), should be aware that the use of additional contributions of cash outside of the Benefit Plan to exercise Rights may be treated as additional contributions to the Benefit Plan. When taken together with contributions previously made, such deemed additional contributions may be in excess of tax limitations and subject the Rights holder to excise taxes for excess or nondeductible contributions. In the case of Benefit Plans qualified under Section 401(a) of the Code, additional contributions could cause the maximum contribution limitations of Section 415 of the Code or other qualification rules to be violated. Benefit Plans contemplating making additional contributions to exercise Rights should consult with their legal and tax counsel prior to making such contributions.
Benefit Plans and other tax exempt entities, including governmental plans, should also be aware that if they borrow to finance their exercise of Rights, they may become subject to the tax on unrelated business taxable income (UBTI) under Section 511 of the Code. If any portion of an IRA is used as security for a loan, the portion so used may also be treated as distributed to the IRA depositor.
A Benefit Plan may also be subject to laws, such as ERISA, that impose certain requirements on the Benefit Plan and on those persons who are fiduciaries with respect to the Benefit Plans (the Benefit Plan Fiduciary). Such requirements may include prudence and diversification requirements and require that investments be made in accordance with the documents governing the Benefit Plan. The exercise of Rights by a Benefit Plan Fiduciary for a Benefit Plan should be considered in light of such fiduciary requirements.
In addition, ERISA and the Code prohibit certain transactions involving the assets of a Benefit Plan and certain persons (referred to as parties in interest for purposes of ERISA and disqualified persons for purposes of the Code) having certain relationships to such Benefit Plans, unless a statutory or administrative exemption is applicable to the transaction. A party in interest or disqualified person who engages in a nonexempt prohibited transaction may be subject to excise taxes and other penalties and liabilities under ERISA and the Code (or with respect to certain Benefit Plans, such as IRAs, a prohibited transaction may cause the Benefit Plan to lose its tax-exempt status). In this regard, the U.S. Department of Labor has issued prohibited transaction class exemptions (PTCEs) that may apply to the exercise of the Rights and holding of the Common Shares. These class exemptions include, without limitation, PTCE 84-14 respecting transactions determined by independent qualified professional asset managers, PTCE 90-1 respecting insurance company pooled separate accounts, PTCE 91-38 respecting bank collective investment funds, PTCE 95-60 respecting life insurance company general accounts and PTCE 96-23 respecting transactions determined by in-house asset managers, PTCE 84-24 governing purchases of shares in investment companies) and PTCE 75-1 respecting sales of securities. In addition, Section 408(b)(17) of ERISA and Section 4975(d)(20) of the Code each provides a limited exemption, commonly referred to as the service provider exemption, from the prohibited transaction provisions of ERISA and Section 4975 of the Code for certain transactions between a Benefit Plan and a person that is a party in interest and/or a disqualified person (other than a fiduciary or an affiliate that, directly or indirectly, has or exercises any discretionary authority or control or renders any investment advice with respect to the assets of any Benefit Plan involved in the transaction) solely by reason of providing services to the Benefit Plan or by relationship to a service provider, provided that the Benefit Plan receives no less, nor pays no more, than adequate consideration. There can be no assurance that all of the conditions of any such exemptions or any other exemption will be satisfied at the time that the Rights are exercised, or thereafter while the Common Shares are held, if the facts relied upon for using a prohibited transaction exemption change.
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By its exercise of the Rights, each Benefit Plan will be deemed to have represented and warranted that (i) neither the exercise of the Rights, nor the investment in Common Shares pursuant to such exercise, will result in a non-exempt prohibited transaction under ERISA or Section 4975 of the Code, or any substantially similar law, and (ii) neither the Advisor, the Dealer Manager, the Fund or any of their affiliates is or will be a Benefit Plan Fiduciary with respect to the Benefit Plans exercise of the Rights or its investment in Common Shares, for purposes of ERISA and Section 4975 of the Code, or any applicable substantially similar law.
Due to the complexity of these rules and the penalties for noncompliance, fiduciaries of Benefit Plans, including the Benefit Plan Fiduciary, should consult with their legal and tax counsel regarding the consequences of their exercise of Rights under ERISA, the Code and other similar laws.]
The following table and example are intended to assist you in understanding the various costs and expenses directly or indirectly associated with investing in our Common Shares as a percentage of net assets attributable to Common Shares. Amounts are for the current fiscal year after giving effect to anticipated net proceeds of the Rights offering, assuming that we incur the estimated offering expenses.
Shareholder Transaction Expenses |
||
Sales load paid by you (as a percentage of offering price) |
[●]% | |
Offering expenses borne by the Fund (as a percentage of offering price)(1) |
[●]% | |
Dividend reinvestment plan fees |
$[●] per share for open-market purchases of common shares(2) | |
Estimated Annual Expenses (as a percentage of net assets attributable to common shares) |
||
Management fees |
0.55% | |
Other expenses(3) |
[●]% | |
Total annual expenses |
[●]% | |
Fee waiver(4) |
[●]% | |
Total annual Fund operating expenses after fee waiver(4) |
[●]% |
(1) |
Fund shareholders will pay all offering expenses involved with this offering. |
(2) |
Computershare Fund Company, N.A.s (the Reinvestment Plan Agent) fees for the handling of the reinvestment of dividends will be paid by the Fund. However, you will pay a $0.02 per share fee incurred in connection with open-market purchases, which will be deducted from the value of the dividend. You will also be charged a $0.02 per share fee if you direct the Reinvestment Plan Agent to sell your common shares held in a dividend reinvestment account. Per share fees include any applicable brokerage commissions the Reinvestment Plan Agent is required to pay. |
(3) |
Other expenses have been estimated for the current fiscal year. |
(4) |
The Fund and the Advisor have entered into a fee waiver agreement (the Fee Waiver Agreement), pursuant to which the Advisor has contractually agreed to waive the management fee with respect to any portion of the Funds assets attributable to investments in any equity and fixed-income mutual funds and exchange-traded funds managed by the Advisor or its affiliates that have a contractual fee, through June 30, 2021. In addition, pursuant to the Fee Waiver Agreement, the Advisor has contractually agreed to waive its management fees by the amount of investment advisory fees the Fund pays to the Advisor indirectly through its investment in money market funds managed by the Advisor or its affiliates, through June 30, 2021. The Fee Waiver Agreement may be terminated at any time, without the payment of any penalty, only by the Fund (upon the vote of a majority of the Directors who are not interested persons (as defined in the Investment Company Act) of the Fund or a majority of the outstanding voting securities of the Fund), upon 90 days written notice by the Fund to the Advisor. |
The purpose of the table above and the examples below is to help you understand all fees and expenses that you, as a holder of Common Shares, would bear directly or indirectly.
R-18
Example
The following example illustrates the expenses that you would pay on a $1,000 investment in common shares, assuming (i) total net annual expenses of [●]% of net assets attributable to common shares, and (ii) a 5% annual return:
1 Year | 3 Years | 5 Years | 10 Years | |||||||||||||
Total expenses incurred |
$ | [●] | $ | [●] | $ | [●] | $ | [●] |
* |
The example should not be considered a representation of future expenses. The example assumes that the estimated Other expenses set forth in the Estimated Annual Expenses table are accurate and that all dividends and distributions are reinvested at NAV. Actual expenses may be greater or less than those assumed. Moreover, the Funds actual rate of return may be greater or less than the hypothetical 5% return shown in the example. |
The Fund estimates the net proceeds of the Rights offering to be approximately $[●], based on the estimated Subscription Price per Common Share of $[●] ([●]% of the last reported sales price of the Funds Common Shares on the NYSE on [●], 2020), assuming all new Common Shares offered are sold and that the expenses related to the Rights offering estimated at approximately $[●] are paid.
The net proceeds from the Rights offering hereunder will be invested in accordance with the Funds investment objective and policies as set forth in this Prospectus Supplement and the accompanying Prospectus. We currently anticipate that we will be able to invest all of the net proceeds in accordance with our investment objective and policies within approximately three months of the receipt of such proceeds. Pending such investment, it is anticipated that the proceeds will be invested in short-term investment grade securities or in high quality, short-term money market instruments. Depending on market conditions and operations, a portion of the cash held by the Fund, including any proceeds raised from the offering, may be used to pay distributions in accordance with the Funds distribution policy and may be a return of capital. A return of capital is a return to investors of a portion of their original investment in the Fund. In general terms, a return of capital would involve a situation in which a Fund distribution (or a portion thereof) represents a return of a portion of a shareholders investment in the Fund, rather than making a distribution that is funded from the Funds earned income or other profits. Although return of capital distributions may not be currently taxable, such distributions would decrease the basis of a shareholders shares, and therefore, may increase a shareholders tax liability for capital gains upon a sale of shares, even if sold at a loss to the shareholders original investments.
The following table sets forth the unaudited capitalization of the Fund as of [●], 2020 and its adjusted capitalization assuming the Common Shares available in the Rights offering discussed in this Prospectus Supplement had been issued.
[To be provided.]
SPECIAL CHARACTERISTICS AND RISKS OF THE RIGHTS OFFERING
Risk is inherent in all investing. Therefore, before investing in the Common Shares you should consider the risks associated with such an investment carefully. See Risks in the Prospectus. The following summarizes some of the matters that you should consider before investing in the Fund through the Rights offering:
Dilution. Record Date Shareholders who do not fully exercise their Rights will, at the completion of the Rights offering, own a smaller proportional interest in the Fund than owned prior to the Rights offering. The completion of the Rights offering will result in immediate voting dilution for such shareholders. Further, both the sales load and the expenses associated with the Rights offering will immediately reduce the NAV of each outstanding Common
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Share. In addition, if the Subscription Price is less than the NAV per Common Share as of the Expiration Date, the completion of this Rights offering will result in an immediate dilution of the NAV per Common Share for all existing Common Shareholders (i.e., will cause the NAV per Common Share to decrease). It is anticipated that existing Common Shareholders will experience immediate dilution even if they fully exercise their Rights. Such dilution is not currently determinable because it is not known how many Common Shares will be subscribed for, what the NAV per Common Share or market price of the Common Shares will be on the Expiration Date or what the Subscription Price per Common Share will be. If the Subscription Price is substantially less than the current NAV per Common Share, this dilution could be substantial. The Fund will pay expenses associated with the Rights offering, estimated at approximately $[●]. In addition, the Fund has agreed to pay a dealer manager fee (sales load) equal to [●]% of the Subscription Price per Common Share issued pursuant to the exercise of Rights (including pursuant to the Over-Subscription Privilege). The Fund, not investors, pays the sales load, which is ultimately borne by all Common Shareholders. All of the costs of the Rights offering will be borne by the Funds Common Shareholders. See Table of Fees and Expenses in this Prospectus Supplement and Summary of Fund Expenses in the accompanying Prospectus for more information.
If you do not exercise all of your Rights, you may own a smaller proportional interest in the Fund when the Rights offering is over. In addition, you will experience an immediate dilution of the aggregate NAV per Common Share if you do not participate in the Rights offering and will experience a reduction in the NAV per Common Share whether or not you exercise your Rights, if the Subscription Price is below the Funds NAV per Common Share on the Expiration Date, because:
|
the offered Common Shares are being sold at less than their current NAV; |
|
you will indirectly bear the expenses of the Rights offering; and |
|
the number of Common Shares outstanding after the Rights offering will have increased proportionately more than the increase in the amount of the Funds net assets. |
On the other hand, if the Subscription Price is above the Funds NAV per Common Share on the Expiration Date, you may experience an immediate accretion of the aggregate NAV per share of your Common Shares even if you do not exercise your Rights and an immediate increase in the NAV per Common Share whether or not you participate in the Rights offering, because:
|
the offered Common Shares are being sold at more than their current NAV after deducting the expenses of the Rights offering; and |
|
the number of Common Shares outstanding after the Rights offering will have increased proportionately less than the increase in the amount of the Funds net assets. |
[Furthermore, if you do not participate in the secondary over-subscription, if it is available, your percentage ownership will also be diluted.] The Fund cannot state precisely the amount of any dilution because it is not known at this time what the NAV per Common Share will be on the Expiration Date or what proportion of the Rights will be exercised. The impact of the Rights offering on NAV per Common Share is shown by the following examples, assuming the Rights offering is fully subscribed and a $[●] Subscription Price:
[Scenario 1: (assumes NAV per share is above Subscription Price)(1)
NAV(2) |
[●] | |
Subscription Price(3) |
[●] | |
Reduction in NAV ($)(4) |
[●] | |
Reduction in NAV (%) |
[●]] |
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[Scenario 2: (assumes NAV per share is below Subscription Price)(1)
NAV(2) |
[●] | |
Subscription Price(3) |
[●] | |
Increase in NAV ($)(4) |
[●] | |
Increase in NAV (%) |
[●]] |
(1) |
Both examples assume the full primary subscription [and secondary over-subscription privilege] are exercised. Actual amounts may vary due to rounding. |
(2) |
For illustrative purposes only; reflects the Funds NAV per Common Share as of [●], 2020. It is not known at this time what the NAV per Common Share will be on the Expiration Date. |
(3) |
For illustrative purposes only; reflects an estimated Subscription Price of $[●] based upon [●]% of the last reported sales price of the Funds Common Shares on the NYSE on [●], 2020. It is not known at this time what the Subscription Price will be on the Expiration Date. |
(4) |
Assumes $[●] in estimated offering expenses. |
If you do not wish to exercise your Rights, you should consider selling them as set forth in this Prospectus Supplement. Any cash you receive from selling your Rights may serve as partial compensation for any possible dilution of your interest in the Fund. The Fund cannot give assurance, however, that a market for the Rights will develop or that the Rights will have any marketable value.
[The Funds largest shareholders could increase their percentage ownership in the Fund through the exercise of the primary subscription and over-subscription privilege.]
Risks of Investing in Rights. Shares of closed-end funds such as the Fund frequently trade at a discount to NAV. If the Formula Price is less than [●]% of NAV on the Expiration Date, then the Subscription Price will likely be greater than the market price of a Common Share on that date. In addition, the Formula Price, even if above [●]% of NAV, may be still above the market price of a Common Share on the Expiration Date. If either event occurs, the Rights will have no value, and a person who exercises Rights will experience an immediate loss of value.
Leverage. Leverage creates a greater risk of loss, as well as a potential for more gain, for the Common Shares than if leverage were not used. Following the completion of the Rights offering, the Funds amount of leverage outstanding will decrease. The leverage of the Fund as of [●], 2020 was approximately [●]% of the Funds Managed Assets. After the completion of the Rights offering, the amount of leverage outstanding is expected to decrease to approximately [●]% of the Funds Managed Assets. The use of leverage for investment purposes creates opportunities for greater total returns but at the same time increases risk. When leverage is employed, the NAV and market price of the Common Shares and the yield to holders of Common Shares may be more volatile. Any investment income or gains earned with respect to the amounts borrowed in excess of the interest due on the borrowing will augment the Funds income. Conversely, if the investment performance with respect to the amounts borrowed fails to cover the interest on such borrowings, the value of the Funds Common Shares may decrease more quickly than would otherwise be the case, and distributions on the Common Shares could be reduced or eliminated. Interest payments and fees incurred in connection with such borrowings will reduce the amount of net income available for distribution to holders of the Common Shares.
Because the fee paid to the Advisor is calculated on the basis of the Funds Managed Assets, which include the proceeds of leverage, the dollar amount of the management fee paid by the Fund to the Advisor will be higher (and the Advisor will be benefited to that extent) when leverage is used. The Advisor will use leverage only if it believes such action would result in a net benefit to the Funds shareholders after taking into account the higher fees and expenses associated with leverage (including higher management fees).
The Funds leveraging strategy may not be successful.
Increase in Share Price Volatility; Decrease in Share Price. The Rights offering may result in an increase in trading of the Common Shares, which may increase volatility in the market price of the Common Shares. The Rights offering may result in an increase in the number of shareholders wishing to sell their Common Shares, which would exert downward price pressure on the price of Common Shares.
R-21
Under-Subscription. It is possible that the Rights offering will not be fully subscribed. Under-subscription of the Rights offering would have an impact on the net proceeds of the Rights offering and whether the Fund achieves any benefits.
The following is a general summary of the U.S. federal income tax consequences of the Rights offering to Record Date Shareholders who are U.S. persons for U.S. federal income tax purposes. The following summary supplements the discussion set forth in the accompanying Prospectus and SAI and is subject to the qualifications and assumptions set forth therein. The discussion set forth herein does not constitute tax advice and potential investors are urged to consult their own tax advisers to determine the tax consequences of investing in the Fund.
Please refer to the Tax Matters section in the Funds Prospectus and SAI for a description of the consequences of investing in the Common Shares of the Fund. Special tax considerations relating to this Rights offering are summarized below:
|
The value of a Right will not be includible in the income of a Common Shareholder at the time the Right is issued. |
|
The basis of a Right issued to a Common Shareholder will be zero, and the basis of the Common Share with respect to which the Right was issued (the Old Common Share) will not change, unless either the fair market value of the Right on the date of distribution is at least 15% of the fair market value of the Old Common Share, or such Common Shareholder affirmatively elects (in the manner set out in Treasury Regulations under the Code) to allocate to the Right a portion of the basis of the Old Common Share. If the basis of a Right or Old Common Share changes, such Common Shareholder must allocate basis between the Old Common Share and the Right in proportion to their fair market values on the date of distribution. |
|
The basis of a Right purchased will generally be its purchase price. |
|
A Common Shareholders holding period in a Right issued includes the holding period of the Old Common Share. |
|
A Common Shareholder will not recognize a loss if a Right distributed to such Common Shareholder expires unexercised because the basis of the Old Common Share may be allocated to a Right only if the Right is sold or exercised. If a Right that has been purchased in the market expires unexercised, there will be a recognized loss equal to the basis of the Right. |
|
Any gain or loss on the sale of a Right will be a capital gain or loss if the Right is held as a capital asset (which in the case of a Right issued to Record Date Shareholders will depend on whether the Old Common Share is held as a capital asset), and will be a long term capital gain or loss if the holding period is deemed to exceed one year. |
|
No gain or loss will be recognized by a Common Shareholder upon the exercise of a Right, and the basis of any Common Share acquired upon exercise (the New Common Share) will equal the sum of the basis, if any, of the Right and the Subscription Price for the New Common Share. The holding period for the New Common Share will begin on the date when the Right is exercised (or, in the case of a Right purchased in the market, potentially the day after the date of exercise). |
The foregoing is a general and brief summary of the provisions of the Code and the Treasury Regulations in effect as they directly govern the taxation of the Fund and its Common Shareholders, with respect to U.S. federal income taxation only. Other tax issues such as state and local taxation may apply. Investors are urged to consult their own tax advisors to determine the tax consequences of investing in the Fund. These provisions are subject to change by legislative or administrative action, and any such change may be retroactive.
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[Distribution Arrangements
[●] will act as Dealer Manager for this Rights offering. Under the terms and subject to the conditions contained in the Dealer Manager Agreement among the Dealer Manager, the Fund and the Advisor, the Dealer Manager will provide financial structuring and solicitation services in connection with the Rights offering and will solicit the exercise of Rights and participation in the over-subscription privilege. The Rights offering is not contingent upon any number of Rights being exercised. The Dealer Manager will also be responsible for forming and managing a group of selling broker-dealers (each, a Selling Group Member and collectively, the Selling Group Members), whereby each Selling Group Member will enter into a Selling Group Agreement with the Dealer Manager to solicit the exercise of Rights and to sell Common Shares purchased by the Selling Group
Member from the Dealer Manager. In addition, the Dealer Manager will enter into a Soliciting Dealer Agreement with other soliciting broker-dealers (each, a Soliciting Dealer and collectively, the Soliciting Dealers) to solicit the exercise of Rights. See Compensation to Dealer Manager for a discussion of fees and other compensation to be paid to the Dealer Manager, Selling Group Members and Soliciting Dealers in connection with the Rights offering.
The Fund and the Advisor have each agreed to indemnify the Dealer Manager for losses arising out of certain liabilities, including liabilities under the Securities Act. The Dealer Manager Agreement also provides that the Dealer Manager will not be subject to any liability to the Fund in rendering the services contemplated by the Dealer Manager Agreement except for any act of willful misfeasance, bad faith or gross negligence of the Dealer Manager or reckless disregard by the Dealer Manager of its obligations and duties under the Dealer Manager Agreement.
In order to seek to facilitate the trading market in the Rights for the benefit of non-exercising shareholders, and the placement of the Common Shares to new or existing investors pursuant to the exercise of the Rights, the Dealer Manager Agreement provides for special arrangements with the Dealer Manager. Under these arrangements, the Dealer Manager is expected to purchase Rights on the [●], as well as Rights received by the Rights Agent for sale by Record Date Stockholders and offered to the Dealer Manager and unexercised Rights of Record Date Shareholders whose record addresses are outside the United States that are held by the Subscription Agent and for which no instructions are received. The number of rights, if any, purchased by the Dealer Manager will be determined by the Dealer Manager in its sole discretion. The Dealer Manager is not obligated to purchase Rights or Common Shares as principal for its own account to facilitate the trading market for Rights or for investment purposes. Rather, its purchases are expected to be closely related to interest in acquiring Common Shares generated by the Dealer Manager through its marketing and soliciting activities. The Dealer Manager intends to exercise Rights purchased by it during the Subscription Period but prior to the Expiration Date. The Dealer Manager may exercise those Rights at its option on one or more dates, which are expected to be prior to the Expiration Date. The Subscription Price for the Common Shares issued through the exercise of Rights by the Dealer Manager prior to the Expiration Date will be the greater of [●]% of the last reported sale price of a Common Share on the NYSE on the date of exercise or [●]% of the last reported NAV of a Common Share on the date prior to the date of exercise. The price and timing of these exercises are expected to differ from those described herein for the Rights offering. The Subscription Price will be paid to the Fund and the dealer manager fee with respect to such proceeds will be paid by the Fund on the applicable settlement date(s) of such exercise(s).
In connection with the exercise of Rights and receipt of Common Shares, the Dealer Manager intends to offer those Common Shares for sale to the public and/or through a group of selling members it has established. The Dealer Manager may set the price for those Common Shares at any price that it determines, in its sole discretion. The Dealer Manager has advised that the price at which such Common Shares are offered is expected to be at or slightly below the closing price of the Common Shares on the NYSE on the date the Dealer Manager exercises Rights. No portion of the amount paid to the Dealer Manager or to a Selling Group Member from the sale of Common Shares in this manner will be paid to the Fund. If the sales price of the Common Shares is greater than the Subscription Price paid by the Dealer Manager for such Common Shares plus the costs to purchase Rights for the purpose
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of acquiring those Common Shares, the Dealer Manager will receive a gain. Alternatively, if the sales price of the Common Shares is less than the Subscription Price for such Common Shares plus the costs to purchase Rights for the purpose of acquiring those Common Shares, the Dealer Manager will incur a loss. The Dealer Manager will pay a concession to Selling Group Members in an amount equal to approximately [2.50]% of the aggregate price of the Common Shares sold by the respective Selling Group Member. Neither the Fund nor the Advisor has a role in setting the terms, including the sales price, on which the Dealer Manager offers for sale and sells Common Shares it has acquired through purchasing and exercising Rights or the timing of the exercise of Rights or sales of Common Shares by the Dealer Manager. Persons who purchase Common Shares from the Dealer Manager or the selling group will purchase shares at a price set by the Dealer Manager, which may be more or less than the Subscription Price, and at a time set by the Dealer Manager, which is expected to be prior to the Expiration Date.
The Dealer Manager may purchase Rights as principal or act as agent on behalf of its clients for the resale of such Rights. The Dealer Manager may realize gains (or losses) in connection with the purchase and sale of Rights and the sale of Common Shares, although such transactions are intended by the Dealer Manager to facilitate the trading market in the Rights and the placement of the Common Shares to new or existing investors pursuant to the exercise of the Rights. Any gains (or losses) realized by the Dealer Manager from the purchase and sale of Rights and the sale of Common Shares is independent of and in addition to its fee as Dealer Manager. The Dealer Manager has advised that any such gains (or losses) are expected to be immaterial relative to its fee as Dealer Manager.
Since neither the Dealer Manager nor persons who purchase Common Shares from the Dealer Manager or members of the selling group were Record Date Shareholders, they would not be able to participate in the over-subscription privilege.
Persons who purchase Common Shares from the Dealer Manager or the selling group will not purchase shares at the Subscription Price based on the formula price mechanism through which Common Shares will be sold in the Rights offering. Instead, those persons will purchase Common Shares at a price set by the Dealer Manager, which may be more or less than the Subscription Price, and will not have the uncertainty of waiting for the determination of the Subscription Price on the Expiration Date.
There is no limit on the number of Rights the Dealer Manager can purchase or exercise. Common Shares acquired by the Dealer Manager pursuant to the exercise of Rights acquired by it will reduce the number of Common Shares available pursuant to the over-subscription privilege, perhaps materially, depending on the number of Rights purchased and exercised by the Dealer Manager.
Although the Dealer Manager can seek to facilitate the trading market for Rights as described above, investors can acquire Common Shares at the Subscription Price by acquiring Rights on the [●] and exercising them in the method described above under Description of the RightsMethod of Exercise of Rights and Description of the RightsPayment for Shares.
In the ordinary course of their businesses, the Dealer Manager and/or its affiliates may engage in investment banking or financial transactions with the Fund, the Advisor and their affiliates. In addition, in the ordinary course of their businesses, the Dealer Manager and/or its affiliates may, from time to time, own securities of the Fund or its affiliates.
The principal business address of the Dealer Manager is [●].
Compensation to Dealer Manager
Pursuant to the Dealer Manager Agreement, the Fund has agreed to pay the Dealer Manager a fee for its financial structuring and solicitation services equal to [●]% of the Subscription Price per Common Share for each Common Share issued pursuant to the exercise of Rights, including the over-subscription privilege.
The Dealer Manager will reallow to Selling Group Members in the selling group to be formed and managed by the Dealer Manager selling fees equal to [●]% of the Subscription Price for each Common Share issued pursuant to the Rights offering or the over-subscription privilege as a result of their selling efforts. In addition, the Dealer Manager will reallow to Soliciting Dealers that have executed and delivered a Soliciting Dealer Agreement and have solicited the exercise of Rights, solicitation fees equal to [●]% of the Subscription Price for each Common Share issued
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pursuant to the exercise of Rights as a result of their soliciting efforts, subject to a maximum fee based on the number of Common Shares held by such Soliciting Dealer through [insert depository] on the Record Date. Fees will be paid to the broker-dealer designated on the applicable portion of the subscription certificates or, in the absence of such designation, to the Dealer Manager.
In addition, the Fund, has agreed to pay the Dealer Manager an amount up to $[●] as a partial reimbursement of its expenses incurred in connection with the Rights offering, including reasonable out-of-pocket fees and expenses, if any and not to exceed $[●], incurred by the Dealer Manager, Selling Group Members, Soliciting Dealers and other brokers, dealers and financial institutions in connection with their customary mailing and handling of materials related to the Rights offering to their customers. No other fees will be payable by the Fund or the Advisor to the Dealer Manager in connection with the Rights offering.
Certain legal matters in connection with the common shares will be passed upon for the Fund by Willkie Farr & Gallagher LLP, New York, New York, counsel to the Fund. Willkie Farr & Gallagher LLP may rely as to certain matters of Maryland law on the opinion of Miles & Stockbridge, P.C., Baltimore, Maryland. [Certain legal matters will be passed on by [●] as special counsel to the Dealer Manager in connection with the Rights offering.]
The audited annual financial statements of the Fund for the fiscal year ended April 30, 20[●] [and the unaudited financial statements for the six months ended October 31, 20[●]] are incorporated by reference into this Prospectus Supplement, the accompanying Prospectus and the Statement of Additional Information (SAI). Portions of the Funds annual report [and semiannual report] other than the financial statements and related footnotes thereto are not incorporated into, and do not for a part of, this Prospectus Supplement, the accompanying Prospectus or the SAI.
This Prospectus Supplement and the accompanying Prospectus constitute part of a Registration Statement filed by the Fund with the SEC under the Securities Act and the Investment Company Act. This Prospectus Supplement and the accompanying Prospectus omit certain of the information contained in the Registration Statement, and reference is hereby made to the Registration Statement and related exhibits for further information with respect to the Fund and the common shares offered hereby. Any statements contained herein concerning the provisions of any document are not necessarily complete, and, in each instance, reference is made to the copy of such document filed as an exhibit to the Registration Statement or otherwise filed with the SEC. Each such statement is qualified in its entirety by such reference. The complete Registration Statement may be obtained from the SEC upon payment of the fee prescribed by its rules and regulations or free of charge through the SECs website (http://www.sec.gov).
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BLACKROCK MUNIASSETS FUND, INC.
[●] Rights for [●] Shares of Common Stock
Subscription Rights to Acquire Shares of Common Stock
Issuable Upon Exercise of Rights to Subscribe for
Such Shares of Common Stock
PROSPECTUS SUPPLEMENT
[●], 2019
Until [ ], 2020 (25 days after the date of this Prospectus Supplement), all dealers that buy, sell or trade the common shares, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers obligation to deliver a prospectus when acting as underwriters.
Subject to Completion Dated May 27, 2020
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
BlackRock MuniAssets Fund, Inc.
STATEMENT OF ADDITIONAL INFORMATION
BlackRock MuniAssets Fund, Inc. (the Fund) is a diversified, closed-end management investment company. This Statement of Additional Information (SAI) relating to shares of the Funds common stock (common shares) does not constitute a prospectus, but should be read in conjunction with the prospectus relating thereto dated [], 2020 and any related prospectus supplement. This SAI, which is not a prospectus, does not include all information that a prospective investor should consider before purchasing common shares, and investors should obtain and read the prospectus and any related prospectus supplement prior to purchasing such shares. A copy of the prospectus and any related prospectus supplement may be obtained without charge by calling (800) 882-0052. You may also obtain a copy of the prospectus on the Securities and Exchange Commissions (the SEC) website (http://www.sec.gov). Capitalized terms used but not defined in this SAI have the meanings ascribed to them in the prospectus.
References to the Investment Company Act of 1940, as amended (the Investment Company Act), or other applicable law, will include any rules promulgated thereunder and any guidance, interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, including court interpretations, and exemptive, no-action or other relief or permission from the SEC, SEC staff or other authority.
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APPENDIX BPROXY VOTING POLICIES BLACKROCK U.S. REGISTERED FUNDS |
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This Statement of Additional Information is dated [], 2020.
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The Fund is a diversified, closed-end management investment company registered under the Investment Company Act. The Fund was organized as a Maryland corporation on April 15, 1993, pursuant to the Funds Articles of Incorporation (the Charter), which are governed by the laws of the State of Maryland. The Funds investment adviser is BlackRock Advisors, LLC (the Advisor).
The common shares of the Fund are listed on the New York Stock Exchange (NYSE) under the symbol MUA. As of May 20, 2020, the Fund has outstanding 36,110,788 common shares.
INVESTMENT OBJECTIVE AND POLICIES
Investment Restrictions
The Fund has adopted restrictions and policies relating to the investment of the Funds assets and its activities. Certain of the restrictions are fundamental policies of the Fund and may not be changed without the approval of the holders of a majority of the Funds outstanding voting securities (which for this purpose and under the Investment Company Act means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or (ii) more than 50% of the outstanding shares), including class approval by a majority of the Funds outstanding shares of preferred stock (preferred shares), if any (which for this purpose and under the Investment Company Act means the lesser of (i) 67% of the preferred shares, as a single class, represented at a meeting at which more than 50% of the Funds outstanding preferred shares are represented or (ii) more than 50% of the outstanding preferred shares).
Fundamental Investment Restrictions. Under these fundamental investment restrictions, the Fund may not:
1. |
Make investments for the purpose of exercising control or management. |
2. |
Purchase securities of other investment companies, except (i) in connection with a merger, consolidation, acquisition or reorganization, (ii) by purchase of shares of money market funds advised by the Advisor or its affiliates (as defined in the Investment Company Act) to the extent permitted by an exemptive order issued to the Fund by the Securities and Exchange Commission, or (iii) by purchase in the open market of securities of closed-end investment companies and only if immediately thereafter not more than 10% of the Funds total assets would be invested in such securities. |
3. |
Purchase or sell real estate, real estate limited partnerships, commodities or commodity contracts; provided that the Fund may invest in securities secured by real estate or interests therein or issued by companies that invest in real estate or interests therein and the Fund may purchase and sell financial futures contracts and options thereon. |
4. |
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. |
5. |
Make loans to other persons, except that the Fund may purchase Municipal Bonds and other debt securities and enter into repurchase agreements in accordance with its investment objective, policies and limitations. |
6. |
Invest more than 25% of its total assets (taken at market value at the time of each investment) in securities of issuers in a single industry. (For purposes of this restriction, states, municipalities and their political subdivisions are not considered to be part of any industry). |
7. |
Issue senior securities or borrow money other than as permitted by the 1940 Act. |
For purposes of restriction (6), the exception for states, municipalities and their political subdivisions applies only to tax-exempt securities issued by such entities.
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Non-Fundamental Investment Restrictions. Additional investment restrictions adopted by the Fund, which may be changed by the Funds Board of Directors (the Board) without shareholder approval, provide that the Fund may not:
A. |
Invest more than 25% of its total assets (taken at market value at the time of each investment) in the Municipal Bonds of any one state. |
B. |
Mortgage, pledge, hypothecate or in any manner transfer, as security for indebtedness, any securities owned or held by the Fund except as may be necessary in connection with transactions in financial futures contracts and options thereon. |
C. |
Purchase any securities on margin, except that the Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities (the deposit or payment by the Fund of initial or variation margin in connection with financial futures contracts and options thereon is not considered the purchase of a security on margin). |
D. |
Make short sales of securities or maintain a short position or invest in put, call, straddle or spread options except that the Fund may write, purchase and sell options and futures on municipal bonds, U.S. Government obligations and related indices or otherwise in connection with bona fide hedging activities and may purchase and sell call rights to require a mandatory tender for the purchase of related municipal bonds. |
In addition, in order to comply with Federal tax requirements for qualification as a regulated investment company, the Funds investments will be limited in a manner such that at the close of each quarter of each taxable year, (i) not more than 25% of the market value of the Funds total assets will be invested in (A) the securities of a single issuer (other than U.S. Government securities and securities of other regulated investment companies), (B) the securities of two or more issuers (other than securities of other regulated investment companies) controlled by the Fund and engaged in the same, similar or related trades or businesses or (C) the securities of one or more qualified publicly traded partnerships and (ii) with respect to 50% of the market value of its total assets, not more than 5% of the market value of its total assets will be invested in the securities of a single issuer and the Fund will not own more than 10% of the outstanding voting securities of a single issuer (other than U.S. Government securities and securities of other regulated investment companies). These tax-related limitations may be changed by the Board to the extent appropriate in light of changes to applicable tax requirements.
Unless otherwise indicated, all limitations under the Funds fundamental or non-fundamental investment restrictions apply only at the time that a transaction is undertaken. Any change in the percentage of the Funds assets invested in certain securities or other instruments resulting from market fluctuations or other changes in the Funds total assets will not require the Fund to dispose of an investment until the Advisor determines that it is practicable to sell or close out the investment without undue market or tax consequences.
Any policies of the Fund not described as fundamental in the Prospectus or this Statement of Additional Information may be changed by the Board without shareholder approval.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Funds investment objective, policies and techniques that are described in the prospectus.
Restricted and Illiquid Investments
The Fund may invest in investments that lack an established secondary trading market or otherwise are considered illiquid. Liquidity of an investment relates to the ability to dispose easily of the investment and the price to be obtained upon disposition of the investment, which may be less than would be obtained for a comparable more liquid investment. Illiquid investments may trade at a discount from comparable, more liquid investments. Investment of the Funds assets in illiquid investments 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 Funds operations require cash, such as when the Fund pays dividends, and could result in the Fund borrowing to meet short-term cash requirements or incurring capital losses on the sale of illiquid investments.
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The Fund may invest in securities that are not registered under the Securities Act (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. Where registration is required for restricted securities, a considerable time period may elapse between the time the Fund decides to sell the security and the time it is actually permitted to sell the security under an effective registration statement. If during such period, adverse market conditions were to develop, the Fund might obtain less favorable pricing terms than when it decided to sell the security. Transactions in restricted securities may entail other transaction costs that are higher than those for transactions in unrestricted securities. Certain of the Funds 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 Funds ability to conduct portfolio transactions in such securities.
Strategic Transactions and Other Management Techniques
As described in the prospectus, the Fund may use Strategic Transactions (as defined in the prospectus). This section contains various additional information about the type of Strategic Transactions in which the Fund may engage.
Swaps and Swaptions. The Fund may enter into swap agreements, including interest rate and index swap agreements. Swap agreements are two party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than one year. In a standard swap transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or swapped between the parties are calculated with respect to a notional amount, i.e., the dollar amount invested at a particular interest rate, in a particular foreign currency, or in a basket of securities representing a particular index. The notional amount of the swap agreement is only a fictive basis on which to calculate the obligations that the parties to a swap agreement have agreed to exchange. The Funds obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the net amount). The Funds obligations under a swap agreement will be accrued daily (offset against any amounts owing to the Fund) and the Fund will segregate with a custodian or earmark on its books and records an amount of cash or liquid assets having an aggregate NAV at all times at least equal to any accrued but unpaid net amounts owed to a swap counterparty.
Whether the Funds use of swap agreements will be successful in furthering its investment objective will depend on the Advisors ability to correctly predict whether certain types of investments are likely to produce greater returns than other investments. Moreover, the Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. Swap agreements also bear the risk that the Fund will not be able to meet its payment obligations to the counterparty. As noted, however, the Fund will deposit in a segregated account, or earmark on its books and records, liquid assets permitted to be so segregated or earmarked by the SEC in an amount equal to or greater than the market value of the Funds liabilities under the swap agreement or the amount it would cost the Fund initially to make an equivalent direct investment plus or minus any amount the Fund is obligated to pay or is to receive under the swap agreement. Restrictions imposed by the tax rules applicable to RICs may limit the Funds ability to use swap agreements. It is possible that developments in the swap market, including government regulation, could adversely affect the Funds ability to terminate existing swap agreements or to realize amounts to be received under such agreements.
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A swaption is a contract that gives a counterparty the right (but not the obligation) to enter into a new swap agreement or to shorten, extend, cancel or otherwise modify an existing swap agreement, at some designated future time on specified terms. The Fund may write (sell) and purchase put and call swaptions. Depending on the terms of the particular option agreement, the Fund will generally incur a greater degree of risk when it writes a swaption than it will incur when it purchases a swaption. When the Fund purchases a swaption, it risks losing only the amount of the premium it has paid should it decide to let the option expire unexercised. However, when the Fund writes a swaption, upon exercise of the option the Fund will become obligated according to the terms of the underlying agreement.
Total Return Swaps. Total return swap agreements are contracts in which one party agrees to make periodic payments to another party based on the change in market value of the assets underlying the contract, which may include a specified security, basket of securities or securities indices during the specified period, in return for periodic payments based on a fixed or variable interest rate or the total return from other underlying assets. Total return swap agreements may be used to obtain exposure to a security or market without owning or taking physical custody of such security or investing directly in such market. Total return swap agreements may effectively add leverage to the Funds portfolio because, in addition to its Managed Assets (as defined in the prospectus), the Fund would be subject to investment exposure on the notional amount of the swap.
Total return swap agreements are subject to the risk that a counterparty will default on its payment obligations to the Fund thereunder. Swap agreements also bear the risk that the Fund will not be able to meet its obligation to the counterparty. Generally, the Fund will enter into total return swaps on a net basis (i.e., the two payment streams are netted against one another with the Fund receiving or paying, as the case may be, only the net amount of the two payments). The net amount of the excess, if any, of the Funds obligations over its entitlements with respect to each total return swap will be accrued on a daily basis, and an amount of liquid assets having an aggregate net asset value (NAV) at least equal to the accrued excess will be segregated by the Fund or earmarked on its books and records. If the total return swap transaction is entered into on other than a net basis, the full amount of the Funds obligations will be accrued on a daily basis, and the full amount of the Funds obligations will be segregated or earmarked by the Fund in an amount equal to or greater than the market value of the liabilities under the total return swap agreement or the amount it would have cost the Fund initially to make an equivalent direct investment, plus or minus any amount the Fund is obligated to pay or is to receive under the total return swap agreement.
Foreign Exchange Transactions. The Fund may engage in spot and forward foreign exchange transactions and currency swaps, purchase and sell options on currencies and purchase and sell currency futures and related options thereon (collectively, Currency Instruments) for purposes of hedging against the decline in the value of currencies in which its portfolio holdings are denominated against the U.S. dollar or may seek to enhance returns. Such transactions could be effected with respect to hedges on foreign dollar denominated securities owned by the Fund, sold by the Fund but not yet delivered, or committed or anticipated to be purchased by the Fund. As an illustration, the Fund may use such techniques to hedge the stated value in U.S. dollars of an investment in a yen-denominated security. In such circumstances, for example, the Fund may purchase a foreign currency put option enabling it to sell a specified amount of yen for dollars at a specified price by a future date. To the extent the hedge is successful, a loss in the value of the yen relative to the dollar will tend to be offset by an increase in the value of the put option. To offset, in whole or in part, the cost of acquiring such a put option, the Fund may also sell a call option which, if exercised, requires it to sell a specified amount of yen for dollars at a specified price by a future date (a technique called a straddle). By selling such a call option in this illustration, the Fund gives up the opportunity to profit without limit from increases in the relative value of the yen to the dollar. Straddles of the type that may be used by the Fund are considered to constitute hedging transactions. The Fund may not attempt to hedge any or all of its foreign portfolio positions.
Forward Foreign Currency Contracts. The Fund may enter into forward currency contracts to purchase or sell foreign currencies for a fixed amount of U.S. dollars or another foreign currency. A forward currency contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days (term) from the date of the forward currency contract agreed upon by the parties, at a price set at the time the forward currency contract is entered into. Forward currency contracts are traded directly between currency traders
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(usually large commercial banks) and their customers. The Fund may purchase a forward currency contract to lock in the U.S. dollar price of a security denominated in a foreign currency that the Fund intends to acquire. The Fund may sell a forward currency contract to lock in the U.S. dollar equivalent of the proceeds from the anticipated sale of a security or a dividend or interest payment denominated in a foreign currency. The Fund may also use forward currency contracts to shift the Funds exposure to foreign currency exchange rate changes from one currency to another. For example, if the Fund owns securities denominated in a foreign currency and the Advisor believes that currency will decline relative to another currency, the Fund might enter into a forward currency contract to sell the appropriate amount of the first foreign currency with payment to be made in the second currency. The Fund may also purchase forward currency contracts to enhance income when the Advisor anticipates that the foreign currency will appreciate in value but securities denominated in that currency do not present attractive investment opportunities. The Fund may also use forward currency contracts to hedge against a decline in the value of existing investments denominated in a foreign currency. Such a hedge would tend to offset both positive and negative currency fluctuations, but would not offset changes in security values caused by other factors. The Fund could also hedge the position by entering into a forward currency contract to sell another currency expected to perform similarly to the currency in which the Funds existing investments are denominated. This type of transaction could offer advantages in terms of cost, yield or efficiency, but may not hedge currency exposure as effectively as a simple forward currency transaction to sell U.S. dollars. This type of transaction may result in losses if the currency used to hedge does not perform similarly to the currency in which the hedged securities are denominated. The Fund may also use forward currency contracts in one currency or a basket of currencies to attempt to hedge against fluctuations in the value of securities denominated in a different currency if the Advisor anticipates that there will be a correlation between the two currencies.
The cost to the Fund of engaging in forward currency contracts varies with factors such as the currency involved, the length of the contract period and the market conditions then prevailing. Because forward currency contracts are usually entered into on a principal basis, no fees or commissions are involved. When the Fund enters into a forward currency contract, it relies on the counterparty to make or take delivery of the underlying currency at the maturity of the contract. Failure by the counterparty to do so would result in the loss of some or all of any expected benefit of the transaction. Secondary markets generally do not exist for forward currency contracts, with the result that closing transactions generally can be made for forward currency contracts only by negotiating directly with the counterparty. Thus, there can be no assurances that the Fund will in fact be able to close out a forward currency contract at a favorable price prior to maturity. In addition, in the event of insolvency of the counterparty, the Fund might be unable to close out a forward currency contract. In either event, the Fund would continue to be subject to market risk with respect to the position, and would continue to be required to maintain a position in securities denominated in the foreign currency or to maintain cash or liquid assets in a segregated account or earmark such cash or liquid assets on its books and records. The precise matching of forward currency contract amounts and the value of the securities involved generally will not be possible because the value of such securities, measured in the foreign currency, will change after the forward currency contract has been established. Thus, the Fund might need to purchase or sell foreign currencies in the spot (cash) market to the extent such foreign currencies are not covered by forward currency contracts. The projection of short-term currency market movements is extremely difficult and the successful execution of a short-term hedging strategy is highly uncertain.
Use of Options as Strategic Transactions. The Fund may also use options as Strategic Transactions.
Call Options as Strategic Transactions. The Fund may purchase call options on any of the types of securities or instruments in which it may invest. A purchased call option gives the Fund the right to buy, and obligates the seller to sell, the underlying security at the exercise price at any time during the option period. The Fund also may purchase and sell call options on indices. Index options are similar to options on securities except that, rather than taking or making delivery of securities underlying the option at a specified price upon exercise, an index option gives the holder the right to receive cash upon exercise of the option if the level of the index upon which the option is based is greater than the exercise price of the option.
The Fund may write (i.e., sell) covered call options on the securities or instruments it holds and enter into closing purchase transactions with respect to certain of such options. A covered call option is an option in which the Fund, in return for a premium, gives another party a right to buy specified securities owned by the Fund at a specified future date and price set at the time of the contract. The principal reason for writing covered call options is the attempt to realize, through the receipt of premiums, a greater return than would be realized on the securities alone.
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By writing covered call options, the Fund gives up the opportunity, while the option is in effect, to profit from any price increase in the underlying security above the option exercise price. In addition, the Funds ability to sell the underlying security will be limited while the option is in effect unless the Fund enters into a closing purchase transaction. A closing purchase transaction cancels out the Funds position as the writer of an option by means of an offsetting purchase of an identical option prior to the expiration of the option it has written. Covered call options also serve as a partial hedge to the extent of the premium received against the price of the underlying security declining. The Fund may not write covered call options on underlying securities in an amount exceeding 15% of the market value of its total assets.
The Fund may write (i.e., sell) uncovered call options on securities or instruments in which it may invest but that are not currently held by the Fund. The principal reason for writing uncovered call options is to realize income without committing capital to the ownership of the underlying securities or instruments. When writing uncovered call options, the Fund must deposit and maintain sufficient margin with the broker-dealer through which it made the uncovered call option as collateral to ensure that the securities can be purchased for delivery if and when the option is exercised. In addition, in connection with each such transaction the Fund will segregate, or designate on its books and records, liquid assets or cash with a value at least equal to the Funds exposure (the difference between the unpaid amounts owed by the Fund on such transaction minus any collateral deposited with the broker-dealer), on a marked-to-market basis (as calculated pursuant to requirements of the SEC). Such segregation or earmarking will ensure that the Fund has assets available to satisfy its obligations with respect to the transaction and will avoid any potential leveraging of the Funds portfolio. Such designation will not limit the Funds exposure to loss. During periods of declining securities prices or when prices are stable, writing uncovered calls can be a profitable strategy to increase the Funds income with minimal capital risk. Uncovered calls are riskier than covered calls because there is no underlying security held by the Fund that can act as a partial hedge. Uncovered calls have speculative characteristics and the potential for loss is unlimited. When an uncovered call is exercised, the Fund must purchase the underlying security to meet its call obligation. There is also a risk, especially with less liquid preferred and debt securities, that the securities may not be available for purchase. If the purchase price exceeds the exercise price, the Fund will lose the difference.
Put Options as Strategic Transactions. The Fund may purchase put options. By buying a put option, the Fund acquires a right to sell such underlying securities or instruments at the exercise price, thus limiting the Funds risk of loss through a decline in the market value of the securities or instruments until the put option expires. The amount of any appreciation in the value of the underlying securities or instruments will be partially offset by the amount of the premium paid for the put option and any related transaction costs. Prior to its expiration, a put option may be sold in a closing sale transaction and profit or loss from the sale will depend on whether the amount received is more or less than the premium paid for the put option plus the related transaction costs. A closing sale transaction cancels out the Funds position as the purchaser of an option by means of an offsetting sale of an identical option prior to the expiration of the option it has purchased. The Fund will not purchase options on securities if, as a result of such purchase, the aggregate cost of all outstanding options on securities held by that Fund would exceed 5% of the market value of the Funds total assets.
The Fund also may write (i.e., sell) put options on securities or instruments in which it may invest but that the Fund does not currently have a corresponding short position or has not deposited cash equal to the exercise value of the put option with the broker dealer through which it made the uncovered put option as collateral. The principal reason for writing such put options is to receive premium income and to acquire such securities or instruments at a net cost below the current market value. The Fund has the obligation to buy the securities or instruments at an agreed upon price if the securities or instruments decrease below the exercise price. If the securities or instruments price increases during the option period, the option will expire worthless and the Fund will retain the premium and will not have to purchase the securities or instruments at the exercise price. In connection with such transaction, the Fund will segregate or designate on its books and records liquid assets or cash with a value at least equal to the Funds exposure, on a marked-to-market basis (as calculated pursuant to requirements of the SEC). Such designation will ensure that the Fund has assets available to satisfy its obligations with respect to the transaction and will avoid any potential leveraging of the Funds portfolio. Such designation will not limit the Funds exposure to loss.
The Fund will not sell puts if, as a result, more than 50% of the Funds total assets would be required to cover its potential obligations under its hedging and other investment transactions. In selling puts, there is a risk that the Fund may be required to buy the underlying security at a price higher than the current market price.
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Futures Contracts and Options on Futures Contracts. The Fund may engage in transactions in financial futures contracts (futures contracts) and related options on such futures contracts. A futures contract is an agreement between two parties which obligates the purchaser of the futures contract to buy and the seller of a futures contract to sell a security for a set price on a future date or, in the case of an index futures contract, to make and accept a cash settlement based upon the difference in value of the index between the time the contract was entered into and the time of its settlement. A majority of transactions in futures contracts, however, do not result in the actual delivery of the underlying instrument or cash settlement, but are settled through liquidation (i.e., by entering into an offsetting transaction). Futures contracts have been designed by boards of trade which have been designated contract markets by the CFTC.
The Fund may sell financial futures contracts in anticipation of an increase in the general level of interest rates. Generally, as interest rates rise, the market values of securities that may be held by the Fund will fall, thus reducing the NAV of the Fund. However, as interest rates rise, the value of the Funds short position in the futures contract also will tend to increase, thus offsetting all or a portion of the depreciation in the market value of the Funds investments which are being hedged. While the Fund will incur commission expenses in selling and closing out futures positions, these commissions are generally less than the transaction expenses which the Fund would have incurred had the Fund sold portfolio securities in order to reduce its exposure to increases in interest rates. The Fund also may purchase financial futures contracts in anticipation of a decline in interest rates when it is not fully invested in a particular market in which it intends to make investments to gain market exposure that may in part or entirely offset an increase in the cost of securities it intends to purchase. It is anticipated that, in a substantial majority of these transactions, the Fund will purchase securities upon termination of the futures contract.
The Fund may purchase and write call and put options on futures contracts. Options on futures contracts are similar to options on securities except that an option on a futures contract gives the purchaser the right in return for the premium paid to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put). Generally, these strategies are utilized under the same market and market sector conditions (i.e., conditions relating to specific types of investments) in which the Fund enters into futures transactions. The Fund may purchase put options or write call options on futures contracts rather than selling the underlying futures contract in anticipation of a decrease in the market value of securities or an increase in interest rates. Similarly, the Fund may purchase call options, or write put options on futures contracts, as a substitute for the purchase of such futures to hedge against the increased cost resulting from an increase in the market value or a decline in interest rates of securities which the Fund intends to purchase.
The Fund may engage in options and futures transactions on exchanges and options in the OTC markets. In general, exchange-traded contracts are third-party contracts (i.e., performance of the parties obligation is guaranteed by an exchange or clearing corporation) with standardized strike prices and expiration dates. OTC options transactions are two-party contracts with price and terms negotiated by the buyer and seller. See Additional Information About Options, below.
At the time a futures contract is purchased or sold, the Fund must allocate cash or securities as a deposit payment (initial margin). It is expected that the initial margin that the Fund will pay may range from approximately 1% to approximately 5% of the value of the securities or commodities underlying the contract. In certain circumstances, however, such as periods of high volatility, the Fund may be required by an exchange to increase the level of its initial margin payment. Additionally, initial margin requirements may be increased generally in the future by regulatory action. An outstanding futures contract is valued daily and the payment in case of variation margin may be required, a process known as marking to the market. Transactions in listed options and futures are usually settled by entering into an offsetting transaction, and are subject to the risk that the position may not be able to be closed if no offsetting transaction can be arranged.
When the Fund purchases a futures contract or writes a put option or purchases a call option thereon, an amount of cash or liquid assets will be segregated or designated on the Funds books and records so that the amount so designated, plus the amount of variation margin held in the account of its broker, equals the market value of the futures contract, thereby ensuring that the use of such futures is unleveraged.
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Additional Information About Options. In the case of either put or call options that it has purchased, if the option expires without being sold or exercised, the Fund will experience a loss in the amount of the option premium plus any commissions paid by the Fund. When the Fund sells put and call options, it receives a premium as the seller of the option. The premium that the Fund receives for selling the option will serve as a partial and limited (to the dollar amount of the premium) hedge, in the amount of the option premium, against changes in the value of the securities in its portfolio. During the term of the option, however, a covered call seller has, in return for the premium on the option, given up the opportunity for capital appreciation above the exercise price of the option if the value of the underlying security increases, but has retained the risk of loss should the price of the underlying security decline. Conversely, a put seller retains the risk of loss should the market value of the underlying security decline below the exercise price of the option, less the premium received on the sale of the option. The Fund may purchase and sell exchange-listed options and OTC options which are privately negotiated with the counterparty. Listed options are issued by the OCC, which guarantees the performance of the obligations of the parties to such options.
The Funds ability to close out its position as a purchaser or seller of an exchange-listed put or call option is dependent upon the existence of a liquid secondary market on option exchanges. Among the possible reasons for the absence of a liquid secondary market on an exchange are: (i) insufficient trading interest in certain options; (ii) restrictions on transactions imposed by an exchange; (iii) trading halts, suspensions or other restrictions imposed with respect to particular classes or series of options or underlying securities; (iv) interruption of the normal operations on an exchange; (v) inadequacy of the facilities of an exchange or OCC to handle current trading volume; or (vi) a decision by one or more exchanges to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that exchange (or in that class or series of options) would cease to exist, although outstanding options on that exchange that had been listed by the OCC as a result of trades on that exchange would generally continue to be exercisable in accordance with their terms. OTC options are purchased from or sold to dealers, financial institutions or other counterparties which have entered into direct agreements with the Fund. With OTC options, such variables as expiration date, exercise price and premium will be agreed upon between the Fund and the counterparty, without the intermediation of a third party such as the OCC. If the counterparty fails to make or take delivery of the securities underlying an option it has written, or otherwise settle the transaction in accordance with the terms of that option as written, the Fund would lose the premium paid for the option as well as any anticipated benefit of the transaction. OTC options and assets used to cover OTC options written by the Fund are considered by the staff of the SEC to be illiquid. The illiquidity of such options or assets may prevent a successful sale of such options or assets, result in a delay of sale, or reduce the amount of proceeds that might otherwise be realized.
The hours of trading for options on debt securities may not conform to the hours during which the underlying securities are traded. To the extent that the option markets close before the markets for the underlying securities, significant price and rate movements can take place in the underlying markets that cannot be reflected in the option markets.
Restrictions on OTC Options. The Fund will engage in OTC options only with member banks of the Federal Reserve System and primary dealers in U.S. Government securities or with affiliates of such banks or dealers that have capital of at least $50 million or whose obligations are guaranteed by an entity having capital of at least $50 million. OTC options and assets used to cover OTC options written by the Fund may be considered to be illiquid. The illiquidity of such options or assets may prevent a successful sale of such options or assets, result in a delay of sale, or reduce the amount of proceeds that might otherwise be realized.
Hybrid Instruments. A hybrid instrument is a type of potentially high-risk derivative that combines a traditional bond, stock or commodity with an option or forward contract. Generally, the principal amount, amount payable upon maturity or redemption, or interest rate of a hybrid is tied (positively or negatively) to the price of some commodity, currency or securities index or another interest rate or some other economic factor (each a benchmark). The interest rate or (unlike most fixed-income securities) the principal amount payable at maturity of a hybrid security may be increased or decreased, depending on changes in the value of the benchmark. An example of a hybrid could be a bond issued by an oil company that pays a small base level of interest with additional interest that accrues in correlation to the extent to which oil prices exceed a certain predetermined level. Such a hybrid instrument would be a combination of a bond and a call option on oil. Hybrids can be used as an efficient means of pursuing a variety of investment goals, including currency hedging, duration management and increased total return. Hybrids may not bear interest or pay dividends. The value of a hybrid or its interest rate may be a multiple of a benchmark and, as a result, may be leveraged and move (up or down) more steeply and rapidly than the benchmark. These benchmarks may be sensitive to economic and political events, such as commodity shortages and currency
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devaluations, which cannot be readily foreseen by the purchaser of a hybrid. Under certain conditions, the redemption value of a hybrid could be zero. Thus, an investment in a hybrid may entail significant market risks that are not associated with a similar investment in a traditional, U.S. dollar-denominated bond that has a fixed principal amount and pays a fixed rate or floating rate of interest. The purchase of hybrids also exposes the Fund to the credit risk of the issuer of the hybrids. These risks may cause significant fluctuations in the NAV of the Funds common shares if the Fund invests in hybrid instruments.
New Products. The financial markets continue to evolve and financial products continue to be developed. The Fund reserves the right to invest in new financial products as they are developed or become more widely accepted. As with any new financial product, these products will entail risks, including risks to which the Fund currently is not subject.
The principal risks relating to the use of futures contracts and other Strategic Transactions are: (i) less than perfect correlation between the prices of the instrument and the market value of the securities in the Funds portfolio; (ii) possible lack of a liquid secondary market for closing out a position in such instruments; (iii) losses resulting from interest rate or other market movements not anticipated by the Advisor; and (iv) the obligation to meet additional variation margin or other payment requirements, all of which could result in the Fund being in a worse position than if such transactions had not been used.
Certain provisions of the Code may restrict or affect the ability of the Fund to engage in Strategic Transactions. See Tax Matters.
Risk Factors in Strategic Transactions and Derivatives
The Funds use of derivative instruments involves risks different from, and possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of risks such as credit risk, leverage risk, illiquidity risk, correlation risk and index risk as described below:
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Credit Riskthe risk that the counterparty in a derivative transaction will be unable to honor its financial obligation to the Fund, or the risk that the reference entity in a derivative will not be able to honor its financial obligations. In particular, derivatives traded in OTC markets often are not guaranteed by an exchange or clearing corporation and often do not require payment of margin, and to the extent that the Fund has unrealized gains in such instruments or has deposited collateral with its counterparties the Fund is at risk that its counterparties will become bankrupt or otherwise fail to honor their obligations. |
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Currency Riskthe risk that changes in the exchange rate between two currencies will adversely affect the value (in U.S. dollar terms) of an investment. |
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Leverage Riskthe risk associated with certain types of investments or trading strategies (such as, for example, borrowing money to increase the amount of investments) that relatively small market movements may result in large changes in the value of an investment. Certain transactions in derivatives (such as futures transactions or sales of put options) involve substantial leverage risk and may expose the Fund to potential losses that exceed the amount originally invested by the Fund. When the Fund engages in such a transaction, the Fund will deposit in a segregated account, or earmark on its books and records, liquid assets with a value at least equal to the Funds exposure, on a mark-to-market basis, to the transaction (as calculated pursuant to requirements of the SEC). Such segregation or earmarking will ensure that the Fund has assets available to satisfy its obligations with respect to the transaction, but will not limit the Funds exposure to loss. |
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Illiquidity Riskthe risk that certain securities may be difficult or impossible to sell at the time that the Fund would like or at the price that the Fund as seller believes the security is currently worth. There can be no assurance that, at any specific time, either a liquid secondary market will exist for a derivative or the Fund will otherwise be able to sell such instrument at an acceptable price. It may, therefore, not be possible to close a position in a derivative without incurring substantial losses, if at all. The absence of liquidity may also make it more difficult for the Fund to ascertain a market value for such instruments. Although both OTC and exchange-traded derivatives markets may experience a lack of liquidity, certain derivatives traded in OTC markets, including swaps and OTC options, involve substantial illiquidity risk. The illiquidity of the derivatives markets may be due to various factors, including congestion, disorderly markets, limitations on deliverable supplies, the participation of speculators, government regulation and intervention, and technical and operational or system failures. In addition, the liquidity of a secondary market in an exchange-traded derivative contract may be adversely affected by daily price fluctuation limits established by the exchanges which limit the amount of fluctuation in an exchange-traded contract price during a single trading day. Once the daily limit has been reached in the contract, no trades may be entered into at a price beyond the limit, thus preventing the liquidation of open positions. Prices have in the past moved beyond the daily limit on a number of consecutive trading days. If it is not possible to close an open derivative position entered into by the Fund, the Fund would continue to be required to make daily cash payments of variation margin in the event of adverse price movements. In such a situation, if the Fund has insufficient cash, it may have to sell portfolio securities to meet daily variation margin requirements at a time when it may be disadvantageous to do so. |
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Correlation Riskthe risk that changes in the value of a derivative will not match the changes in the value of the portfolio holdings that are being hedged or of the particular market or security to which the Fund seeks exposure through the use of the derivative. There are a number of factors which may prevent a derivative instrument from achieving the desired correlation (or inverse correlation) with an underlying asset, rate or index, such as the impact of fees, expenses and transaction costs, the timing of pricing, and disruptions or illiquidity in the markets for such derivative instrument. |
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Index RiskIf the derivative is linked to the performance of an index, it will be subject to the risks associated with changes in that index. If the index changes, the Fund could receive lower interest payments or experience a reduction in the value of the derivative to below the price that the Fund paid for such derivative. |
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Volatility Riskthe risk that the Funds use of derivatives may reduce income or gain and/or increase volatility. Volatility is defined as the characteristic of a security, an index or a market to fluctuate significantly in price over a defined time period. The Fund could suffer losses related to its derivative positions as a result of unanticipated market movements, which losses are potentially unlimited. |
When a derivative is used as a hedge against a position that the Fund holds, any loss generated by the derivative generally should be substantially offset by gains on the hedged investment, and vice versa. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. Hedges are sometimes subject to imperfect matching between the derivative and the underlying security, and there can be no assurance that the Funds hedging transactions will be effective. The Fund could also suffer losses related to its derivative positions as a result of unanticipated market movements, which losses are potentially unlimited. The Advisor may not be able to predict correctly the direction of securities prices, interest rates and other economic factors, which could cause the Funds derivatives positions to lose value. In addition, some derivatives are more sensitive to interest rate changes and market price fluctuations than other securities. The possible lack of a liquid secondary market for derivatives and the resulting inability of the Fund to sell or otherwise close a derivatives position could expose the Fund to losses and could make derivatives more difficult for the Fund to value accurately.
When engaging in a hedging transaction, the Fund may determine not to seek to establish a perfect correlation between the hedging instruments utilized and the portfolio holdings being hedged. Such an imperfect correlation may prevent the Fund from achieving the intended hedge or expose the Fund to a risk of loss. The Fund may also determine not to hedge against a particular risk because it does not regard the probability of the risk occurring to be sufficiently high as to justify the cost of the hedge or because it does do not foresee the occurrence of the risk. It may not be possible for the Fund to hedge against a change or event at attractive prices or at a price sufficient to protect the assets of the Fund from the decline in value of the portfolio positions anticipated as a result of such change. The Fund may also be restricted in its ability to effectively manage the portion of its assets that are segregated or earmarked to cover its obligations. In addition, it may not be possible to hedge at all against certain risks.
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If the Fund invests in a derivative instrument it could lose more than the principal amount invested. Moreover, derivatives raise certain tax, legal, regulatory and accounting issues that may not be presented by investments in securities, and there is some risk that certain issues could be resolved in a manner that could adversely impact the performance of the Fund.
The Fund is not required to use derivatives or other portfolio strategies to seek to increase return or to seek to hedge its portfolio and may choose not to do so. Also, suitable derivative transactions may not be available in all circumstances and there can be no assurance that the Fund will engage in these transactions to reduce exposure to other risks when that would be beneficial. Although the Advisor seeks to use derivatives to further the Funds investment objective, there is no assurance that the use of derivatives will achieve this result.
Options Risk. There are several risks associated with transactions in options on securities and indexes. For example, there are significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objective. In addition, a liquid secondary market for particular options, whether traded OTC or on a recognized securities exchange (e.g., NYSE), separate trading boards of a securities exchange or through a market system that provides contemporaneous transaction pricing information (an Exchange) may be absent for reasons which include the following: there may be insufficient trading interest in certain options; restrictions may be imposed by an Exchange on opening transactions or closing transactions or both; trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options or underlying securities; unusual or unforeseen circumstances may interrupt normal operations on an Exchange; the facilities of an Exchange or the OCC may not at all times be adequate to handle current trading volume; or one or more Exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that Exchange (or in that class or series of options) would cease to exist, although outstanding options that had been issued by the OCC as a result of trades on that Exchange would continue to be exercisable in accordance with their terms.
Futures Transactions and Options Risk. The primary risks associated with the use of futures contracts and options are (a) the imperfect correlation between the change in market value of the instruments held by the Fund and the price of the futures contract or option; (b) possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures contract when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; (d) the Advisors inability to predict correctly the direction of securities prices, interest rates, currency exchange rates and other economic factors; and (e) the possibility that the counterparty will default in the performance of its obligations.
Investment in futures contracts involves the risk of imperfect correlation between movements in the price of the futures contract and the price of the security being hedged. The hedge will not be fully effective when there is imperfect correlation between the movements in the prices of two financial instruments. For example, if the price of the futures contract moves more or less than the price of the hedged security, the Fund will experience either a loss or gain on the futures contract which is not completely offset by movements in the price of the hedged securities. To compensate for imperfect correlations, the Fund may purchase or sell futures contracts in a greater dollar amount than the hedged securities if the volatility of the hedged securities is historically greater than the volatility of the futures contracts. Conversely, the Fund may purchase or sell fewer futures contracts if the volatility of the price of the hedged securities is historically lower than that of the futures contracts.
The particular securities comprising the index underlying a securities index financial futures contract may vary from the securities held by the Fund. As a result, the Funds ability to hedge effectively all or a portion of the value of its securities through the use of such financial futures contracts will depend in part on the degree to which price movements in the index underlying the financial futures contract correlate with the price movements of the securities held by the Fund. The correlation may be affected by disparities in the average maturity, ratings, geographical mix or structure of the Funds investments as compared to those comprising the securities index and general economic or political factors. In addition, the correlation between movements in the value of the securities
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index may be subject to change over time as additions to and deletions from the securities index alter its structure. The correlation between futures contracts on U.S. Government securities and the securities held by the Fund may be adversely affected by similar factors and the risk of imperfect correlation between movements in the prices of such futures contracts and the prices of securities held by the Fund may be greater. The trading of futures contracts also is subject to certain market risks, such as inadequate trading activity, which could at times make it difficult or impossible to liquidate existing positions.
The Fund may liquidate futures contracts it enters into through offsetting transactions on the applicable contract market. There can be no assurance, however, that a liquid secondary market will exist for any particular futures contract at any specific time. Thus, it may not be possible to close out a futures position. In the event of adverse price movements, the Fund would continue to be required to make daily cash payments of variation margin. In such situations, if the Fund has insufficient cash, it may be required to sell portfolio securities to meet daily variation margin requirements at a time when it may be disadvantageous to do so. The inability to close out futures positions also could have an adverse impact on the Funds ability to hedge effectively its investments in securities. The liquidity of a secondary market in a futures contract may be adversely affected by daily price fluctuation limits established by commodity exchanges which limit the amount of fluctuation in a futures contract price during a single trading day. Once the daily limit has been reached in the contract, no trades may be entered into at a price beyond the limit, thus preventing the liquidation of open futures positions. Prices have in the past moved beyond the daily limit on a number of consecutive trading days.
The successful use of transactions in futures and related options also depends on the ability of the Advisor to forecast correctly the direction and extent of interest rate movements within a given time frame. To the extent interest rates remain stable during the period in which a futures contract or option is held by the Fund or such rates move in a direction opposite to that anticipated, the Fund may realize a loss on the Strategic Transaction which is not fully or partially offset by an increase in the value of portfolio securities. As a result, the Funds total return for such period may be less than if it had not engaged in the Strategic Transaction.
Because of low initial margin deposits made upon the opening of a futures position, futures transactions involve substantial leverage. As a result, relatively small movements in the price of the futures contracts can result in substantial unrealized gains or losses. There is also the risk of loss by the Fund of margin deposits in the event of bankruptcy of a broker with which the Fund has an open position in a financial futures contract. Because the Fund will engage in the purchase and sale of futures contracts for hedging purposes or to seek to enhance the Funds return, any losses incurred in connection therewith may, if the strategy is successful, be offset in whole or in part by increases in the value of securities held by the Fund or decreases in the price of securities the Fund intends to acquire.
The amount of risk the Fund assumes when it purchases an option on a futures contract is the premium paid for the option plus related transaction costs. In addition to the correlation risks discussed above, the purchase of an option on a futures contract also entails the risk that changes in the value of the underlying futures contract will not be fully reflected in the value of the option purchased.
General Risk Factors in Hedging Foreign Currency. Hedging transactions involving Currency Instruments involve substantial risks, including correlation risk. While the Funds use of Currency Instruments to effect hedging strategies is intended to reduce the volatility of the NAV of the Funds common shares, the NAV of the Funds common shares will fluctuate. Moreover, although Currency Instruments may be used with the intention of hedging against adverse currency movements, transactions in Currency Instruments involve the risk that anticipated currency movements will not be accurately predicted and that the Funds hedging strategies will be ineffective. To the extent that the Fund hedges against anticipated currency movements that do not occur, the Fund may realize losses and decrease its total return as the result of its hedging transactions. Furthermore, the Fund will only engage in hedging activities from time to time and may not be engaging in hedging activities when movements in currency exchange rates occur.
It may not be possible for the Fund to hedge against currency exchange rate movements, even if correctly anticipated, in the event that (i) the currency exchange rate movement is so generally anticipated that the Fund is not able to enter into a hedging transaction at an effective price, or (ii) the currency exchange rate movement relates to a market with respect to which Currency Instruments are not available and it is not possible to engage in effective foreign currency hedging. The cost to the Fund of engaging in foreign currency transactions varies with such factors as the currencies involved, the length of the contract period and the market conditions then prevailing. Since transactions in foreign currency exchange usually are conducted on a principal basis, no fees or commissions are involved.
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Foreign Currency Forwards Risk. Forward foreign currency exchange contracts do not eliminate fluctuations in the value of Non-U.S. Securities (as defined in the prospectus) but rather allow the Fund to establish a fixed rate of exchange for a future point in time. This strategy can have the effect of reducing returns and minimizing opportunities for gain.
In connection with its trading in forward foreign currency contracts, the Fund will contract with a foreign or domestic bank, or foreign or domestic securities dealer, to make or take future delivery of a specified amount of a particular currency. There are no limitations on daily price moves in such forward contracts, and banks and dealers are not required to continue to make markets in such contracts. There have been periods during which certain banks or dealers have refused to quote prices for such forward contracts or have quoted prices with an unusually wide spread between the price at which the bank or dealer is prepared to buy and that at which it is prepared to sell. Governmental imposition of credit controls might limit any such forward contract trading. With respect to its trading of forward contracts, if any, the Fund will be subject to the risk of bank or dealer failure and the inability of, or refusal by, a bank or dealer to perform with respect to such contracts. Any such default would deprive the Fund of any profit potential or force the Fund to cover its commitments for resale, if any, at the then market price and could result in a loss to the Fund.
The Fund may also engage in proxy hedging transactions to reduce the effect of currency fluctuations on the value of existing or anticipated holdings of portfolio securities. Proxy hedging is often used when the currency to which the Fund is exposed is difficult to hedge or to hedge against the dollar. Proxy hedging entails entering into a forward contract to sell a currency whose changes in value are generally considered to be linked to a currency or currencies in which some or all of the Funds securities are, or are expected to be, denominated, and to buy U.S. dollars. Proxy hedging involves some of the same risks and considerations as other transactions with similar instruments. Currency transactions can result in losses to the Fund if the currency being hedged fluctuates in value to a degree or in a direction that is not anticipated. In addition, there is the risk that the perceived linkage between various currencies may not be present or may not be present during the particular time that the Fund is engaging in proxy hedging. The Fund may also cross-hedge currencies by entering into forward contracts to sell one or more currencies that are expected to decline in value relative to other currencies to which the Fund has or in which the Fund expects to have portfolio exposure. For example, the Fund may hold both Canadian government bonds and Japanese government bonds, and the Advisor may believe that Canadian dollars will deteriorate against Japanese yen. The Fund would sell Canadian dollars to reduce its exposure to that currency and buy Japanese yen. This strategy would be a hedge against a decline in the value of Canadian dollars, although it would expose the Fund to declines in the value of the Japanese yen relative to the U.S. dollar.
Some of the forward non-U.S. currency contracts entered into by the Fund may be classified as non-deliverable forwards (NDFs). NDFs are cash-settled, short-term forward contracts that may be thinly traded or are denominated in non-convertible foreign currency, where the profit or loss at the time at the settlement date is calculated by taking the difference between the agreed upon exchange rate and the spot rate at the time of settlement, for an agreed upon notional amount of funds. All NDFs have a fixing date and a settlement date. The fixing date is the date at which the difference between the prevailing market exchange rate and the agreed upon exchange rate is calculated. The settlement date is the date by which the payment of the difference is due to the party receiving payment. NDFs are commonly quoted for time periods of one month up to two years, and are normally quoted and settled in U.S. dollars. They are often used to gain exposure to and/or hedge exposure to foreign currencies that are not internationally traded.
Currency Futures Risk. The Fund may also seek to hedge against the decline in the value of a currency or to enhance returns through use of currency futures or options thereon. Currency futures are similar to forward foreign exchange transactions except that futures are standardized, exchange-traded contracts while forward foreign exchange transactions are traded in the OTC market. Currency futures involve substantial currency risk, and also involve leverage risk.
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Currency Options Risk. The Fund may also seek to hedge against the decline in the value of a currency or to enhance returns through the use of currency options. Currency options are similar to options on securities. For example, in consideration for an option premium the writer of a currency option is obligated to sell (in the case of a call option) or purchase (in the case of a put option) a specified amount of a specified currency on or before the expiration date for a specified amount of another currency. The Fund may engage in transactions in options on currencies either on exchanges or OTC markets. Currency options involve substantial currency risk, and may also involve credit, leverage or illiquidity risk.
Currency Swaps Risk. The Fund may enter into currency swaps, which are transactions in which one currency is simultaneously bought for a second currency on a spot basis and sold for the second currency on a forward basis. Currency swaps involve the exchange of the rights of the Fund and another party to make or receive payments in specified currencies. Currency swaps usually involve the delivery of the entire principal value of one designated currency in exchange for the other designated currency. Because currency swaps usually involve the delivery of the entire principal value of one designated currency in exchange for the other designated currency, the entire principal value of a currency swap is subject to the risk that the other party to the swap will default on its contractual delivery obligations.
Over-the-Counter Trading Risk. The derivative instruments that may be purchased or sold by the Fund may include instruments not traded on an exchange. The risk of nonperformance by the counterparty to an instrument may be greater than, and the ease with which the Fund can dispose of or enter into closing transactions with respect to an instrument may be less than, the risk associated with an exchange traded instrument. In addition, significant disparities may exist between bid and asked prices for derivative instruments that are not traded on an exchange. The absence of liquidity may make it difficult or impossible for the Fund to sell such instruments promptly at an acceptable price. Derivative instruments not traded on exchanges also are not subject to the same type of government regulation as exchange traded instruments, and many of the protections afforded to participants in a regulated environment may not be available in connection with the transactions. Because derivatives traded in OTC markets generally are not guaranteed by an exchange or clearing corporation and generally do not require payment of margin, to the extent that the Fund has unrealized gains in such instruments or has deposited collateral with its counterparties the Fund is at risk that its counterparties will become bankrupt or otherwise fail to honor its obligations.
Dodd-Frank Act Risk. Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) (the Derivatives Title) imposed a substantially new regulatory structure on derivatives markets, with particular emphasis on swaps (which were subject to oversight by the CFTC) and security-based swaps (which were subject to oversight by the SEC). The regulatory framework covers a broad range of swap market participants, including banks, non-banks, credit unions, insurance companies, broker-dealers and investment advisers. Prudential regulators were granted authority to regulate margining of swaps and security-based swaps of banks and bank-related entities.
Although the CFTC and the prudential regulators have adopted and have begun implementing required regulations, the SEC rules were not finalized until December 2019 and firms have until October 2021 to come into compliance.
Current regulations for swaps require the mandatory central clearing and mandatory exchange trading of particular types of interest rate swaps and index credit default swaps (together, Covered Swaps). The Fund is required to clear its Covered Swaps through a clearing broker, which requires, among other things, posting initial margin and variation margin to the Funds clearing broker in order to enter into and maintain positions in Covered Swaps.
Covered Swaps generally are required to be executed through a swap execution facility (SEF), which can involve additional transaction fees.
Additionally, under the Dodd-Frank Act, swaps (and both swaps and security-based swaps entered into with banks) are subject to margin requirements and swap dealers are required to collect margin from the Fund and post variation margin to the Fund with respect to such derivatives. Specifically, regulations are now in effect that require swap dealers to post and collect variation margin (comprised of specified liquid instruments and subject to a required haircut) in connection with trading of OTC swaps with the Fund. Shares of investment companies
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(other than certain money market funds) may not be posted as collateral under these regulations. Requirements for posting of initial margin in connection with OTC swaps (as well as security-based swaps in addition to OTC swaps where the dealer is a bank or subsidiary of a bank holding company) will be phased-in through September 2021. The CFTC has not yet adopted capital requirements for swap dealers. As uncleared capital requirements for swap dealers and uncleared capital and margin requirements for security-based swaps are phased in and implemented, such requirements may make certain types of trades and/or trading strategies more costly. There may be market dislocations due to uncertainty during the implementation period of any new regulation and the Advisor cannot know how the derivatives market will adjust to the CFTCs new capital regulations and to the new SEC regulations governing security-based swaps.
In addition, regulations adopted by global prudential regulators that are now in effect require certain bank- regulated counterparties and certain of their affiliates to include in qualified financial contracts, including many derivatives contracts as well as repurchase agreements and securities lending agreements, terms that delay or restrict the rights of counterparties to terminate such contracts, foreclose upon collateral, exercise other default rights or restrict transfers of affiliate credit enhancements (such as guarantees) in the event that the bank-regulated counterparty and/or its affiliates are subject to certain types of resolution or insolvency proceedings.
Legal and Regulatory Risk. At any time after the date hereof, legislation or additional regulations may be enacted that could negatively affect the assets of the Fund. Changing approaches to regulation may have a negative impact on the securities in which the Fund invests. Legislation or regulation may also change the way in which the Fund itself is regulated. There can be no assurance that future legislation, regulation or deregulation will not have a material adverse effect on the Fund or will not impair the ability of the Fund to achieve its investment objective. In addition, as new rules and regulations resulting from the passage of the Dodd-Frank Act are implemented and new international capital and liquidity requirements are introduced under the Basel III Accords, the market may not react the way the Advisor expects. Whether the Fund achieves its investment objective may depend on, among other things, whether the Advisor correctly forecasts market reactions to this and other legislation. In the event the Advisor incorrectly forecasts market reaction, the Fund may not achieve its investment objective.
Investment Management Agreement
Although the Advisor intends to devote such time and effort to the business of the Fund as is reasonably necessary to perform its duties to the Fund, the services of the Advisor are not exclusive and the Advisor provides similar services to other investment companies and other clients and may engage in other activities.
The investment management agreement between the Advisor and the Fund (the Investment Management Agreement) also provides that except for a loss resulting from a breach of fiduciary duty with respect to the receipt of compensation or a loss resulting from willful misfeasance, bad faith or gross negligence on the Advisors part in the performance of its duties or from reckless disregard by the Advisor of its duties under the Investment Management Agreement, the Advisor is not liable for any error of judgment or mistake of law or for any loss suffered by the Advisor or the Fund in connection with the performance of the Investment Management Agreement. The Investment Management Agreement also provides for indemnification by the Fund of the Advisor and each of the Advisors directors, officers, employees, agents, associates and controlling persons, and the directors, partners, members, officers, employees and agents thereof (including any individual who serves at the Advisors request as director, officer, partner, member, trustee or the like of another entity) for liabilities and expenses incurred by them in connection with their services to the Fund, subject to certain limitations and conditions.
The Investment Management Agreement provides for the Fund to pay a monthly management fee at an annual rate equal to 0.55% of the average daily value of the Funds net assets.
The Fund and the Advisor have entered into a fee waiver agreement (the Fee Waiver Agreement), pursuant to which the Advisor has contractually agreed to waive the management fee with respect to any portion of the Funds assets attributable to investments in any equity and fixed-income mutual funds and ETFs managed by the Advisor or its affiliates that have a contractual fee, through June 30, 2021. In addition, effective December 1, 2019, pursuant to the Fee Waiver Agreement, the Advisor has contractually agreed to waive its management fees by the amount of
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investment advisory fees the Fund pays to the Advisor indirectly through its investment in money market funds advised by the Advisor or its affiliates, through June 30, 2021. The Fee Waiver Agreement may be continued from year to year thereafter, provided that such continuance is specifically approved by the Advisor and the Fund (including by a majority of the Directors who are not interested persons (as defined in the Investment Company Act) (the Independent Directors)). Neither the Advisor nor the Fund is obligated to extend the Fee Waiver Agreement. The Fee Waiver Agreement may be terminated at any time, without the payment of any penalty, only by the Fund (upon the vote of a majority of the Independent Directors or a majority of the outstanding voting securities of the Fund), upon 90 days written notice by the Fund to the Advisor. Prior to December 1, 2019, the agreement to waive a portion of the Funds management fee in connection with the Funds investment in affiliated money market funds was voluntary.
The Investment Management Agreement will continue in effect from year to year provided that each continuance is specifically approved at least annually by both (1) the vote of a majority of the Board or the vote of a majority of the outstanding voting securities of the Fund (as such term is defined in the Investment Company Act) and (2) by the vote of a majority of the Directors who are not parties to the Investment Management Agreement or interested persons (as such term is defined in the Investment Company Act) of any such party, cast in person at a meeting called for the purpose of voting on such approval. The Investment Management Agreement may be terminated as a whole at any time by the Fund, without the payment of any penalty, upon the vote of a majority of the Directors or a majority of the outstanding voting securities of the Fund or by the Advisor, on 60 days written notice by either party to the other which can be waived by the non-terminating party. The Investment Management Agreement will terminate automatically in the event of its assignment (as such term is defined in the Investment Company Act and the rules thereunder).
The table below sets forth information about the total management fees paid by the Fund to the Advisor, and the amounts waived by the Advisor, for the periods indicated:
Fiscal Year Ended April 30, |
Paid to the Advisor | Waived by the Advisor | ||||||
2020 |
$ | 3,213,220 | $ | (1,384 | ) | |||
2019 |
$ | 3,169,074 | $ | (2,715 | ) | |||
2018 |
$ | 3,172,580 | $ | (3,077 | ) |
Biographical Information Pertaining to the Directors
The Board consists of ten individuals (each, a Director), eight of whom are Independent Directors. The registered investment companies advised by the Advisor or its affiliates (the BlackRock-advised Funds) are organized into one complex of closed-end funds and open-end non-index fixed-income funds (the BlackRock Fixed-Income Complex), one complex of open-end equity, multi-asset, index and money market funds (the BlackRock Multi-Asset Complex) and one complex of exchange-traded funds (each, a BlackRock Fund Complex). The Fund is included in the BlackRock Fund Complex referred to as the BlackRock Fixed-Income Complex. The Directors also oversee as board members the operations of the other open-end and closed-end registered investment companies included in the BlackRock Fixed-Income Complex.
Certain biographical and other information relating to the Directors of the Fund is set forth below, including their year of birth, their principal occupation for at least the last five years, the length of time served, the total number of BlackRock-advised Funds overseen and any public directorships or trusteeships.
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Name and Year of Birth1,2 |
Position(s)
Held (Length of Service)3 |
Principal Occupation(s) During Past Five Years |
Number
of
BlackRock- Advised Registered Investment Companies (RICs) Consisting of Investment Portfolios (Portfolios) Overseen |
Public Company and Other Investment Company Directorships Held During Past Five Years |
||||
Independent Directors | ||||||||
Richard E. Cavanagh
1946 |
Co-Chair of
the Board (Since 2019) and Director (Since 2007) |
Director, The Guardian Life Insurance Company of America since 1998; Board Chair, Volunteers of America (a not-for-profit organization) from 2015 to 2018 (board member since 2009); Director, Arch Chemicals (chemical and allied products) from 1999 to 2011; Trustee, Educational Testing Service from 1997 to 2009 and Chairman thereof from 2005 to 2009; Senior Advisor, The Fremont Group since 2008 and Director thereof since 1996; Faculty Member/Adjunct Lecturer, Harvard University since 2007 and Executive Dean from 1987 to 1995; President and Chief Executive Officer, The Conference Board, Inc. (global business research organization) from 1995 to 2007. |
87 RICs
consisting of 111 Portfolios |
None | ||||
Karen P. Robards
1950 |
Co-Chair of
the Board (Since 2019) and Director (Since 2007) |
Principal of Robards & Company, LLC (consulting and private investing) since 1987; Co-founder and Director of the Cooke Center for Learning and Development (a not-for-profit organization) since 1987; Director of Enable Injections, LLC (medical devices) since 2019; Investment Banker at Morgan Stanley from 1976 to 1987. |
87 RICs
consisting of 111 Portfolios |
Greenhill & Co., Inc.; AtriCure, Inc. (medical devices) from 2000 until 2017 | ||||
Michael J. Castellano
1946 |
Director
(Since 2011) |
Chief Financial Officer of Lazard Group LLC from 2001 to 2011; Chief Financial Officer of Lazard Ltd from 2004 to 2011; Director, Support Our Aging Religious (non-profit) from 2009 to June 2015 and since 2017; Director, National Advisory Board of Church Management at Villanova University since 2010; Trustee, Domestic Church Media Foundation since 2012; Director, CircleBlack Inc. (financial technology company) since 2015. |
87 RICs
consisting of 111 Portfolios |
None |
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Name and Year of Birth1,2 |
Position(s)
Held (Length of Service)3 |
Principal Occupation(s) During Past Five Years |
Number
of
BlackRock- Advised Registered Investment Companies (RICs) Consisting of Investment Portfolios (Portfolios) Overseen |
Public Company and Other Investment Company Directorships Held During Past Five Years |
||||
Cynthia L. Egan
1955 |
Director
(Since 2016) |
Advisor, U.S. Department of the Treasury from 2014 to 2015; President, Retirement Plan Services, for T. Rowe Price Group, Inc. from 2007 to 2012; executive positions within Fidelity Investments from 1989 to 2007. |
87 RICs
consisting of 111 Portfolios |
Unum (insurance); The Hanover Insurance Group (insurance); Envestnet (investment platform) from 2013 until 2016 | ||||
Frank J. Fabozzi4
1948 |
Director
(Since 2007) |
Editor of The Journal of Portfolio Management since 1986; Professor of Finance, EDHEC Business School (France) since 2011; Visiting Professor, Princeton University for the 2013 to 2014 academic year and Spring 2017 semester; Professor in the Practice of Finance, Yale University School of Management from 1994 to 2011 and currently a Teaching Fellow in Yales Executive Programs; Board Member, BlackRock Equity-Liquidity Funds from 2014 to 2016; affiliated professor Karlsruhe Institute of Technology from 2008 to 2011. |
88 RICs
consisting of 112 Portfolios |
None |
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Name and Year of Birth1,2 |
Position(s)
Held (Length of Service)3 |
Principal Occupation(s) During Past Five Years |
Number
of
BlackRock- Advised Registered Investment Companies (RICs) Consisting of Investment Portfolios (Portfolios) Overseen |
Public
Company and Other Investment Company Directorships Held During Past Five Years |
||||
R. Glenn Hubbard
1958 |
Director
(Since 2007) |
Dean, Columbia Business School from 2004 to 2019; Faculty member, Columbia Business School since 1988. |
87 RICs
consisting of 111 Portfolios |
ADP (data and
information services); Metropolitan Life Insurance Company (insurance); KKR Financial Corporation (finance) from 2004 until 2014 |
||||
W. Carl Kester4
1951 |
Director
(Since 2007) |
George Fisher Baker Jr. Professor of Business Administration, Harvard Business School since 2008; Deputy Dean for Academic Affairs from 2006 to 2010; Chairman of the Finance Unit, from 2005 to 2006; Senior Associate Dean and Chairman of the MBA Program from 1999 to 2005; Member of the faculty of Harvard Business School since 1981. |
88 RICs
consisting of 112 Portfolios |
None | ||||
Catherine A. Lynch4
1961 |
Director
(Since 2016) |
Chief Executive Officer, Chief Investment Officer and various other positions, National Railroad Retirement Investment Trust from 2003 to 2016; Associate Vice President for Treasury Management, The George Washington University from 1999 to 2003; Assistant Treasurer, Episcopal Church of America from 1995 to 1999. |
88 RICs
consisting of 112 Portfolios |
None |
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Name and Year of Birth1,2 |
Position(s)
Held (Length of Service)3 |
Principal Occupation(s) During Past Five Years |
Number
of
BlackRock- Advised Registered Investment Companies (RICs) Consisting of Investment Portfolios (Portfolios) Overseen |
Public
Company and Other Investment Company Directorships Held During Past Five Years |
||||
Interested Directors5 | ||||||||
Robert Fairbairn
1965 |
Director
(Since 2018) |
Vice Chairman of BlackRock, Inc. since 2019; Member of BlackRocks Global Executive and Global Operating Committees; Co-Chair of BlackRocks Human Capital Committee; Senior Managing Director of BlackRock, Inc. from 2010 to 2019; oversaw BlackRocks Strategic Partner Program and Strategic Product Management Group from 2012 to 2019; Member of the Board of Managers of BlackRock Investments, LLC from 2011 to 2018; Global Head of BlackRocks Retail and iShares® businesses from 2012 to 2016. |
123 RICs
consisting of 264 Portfolios |
None | ||||
John M. Perlowski4
1964 |
Director
(Since 2015) and President and Chief Executive Officer (Since 2010) |
Managing Director of BlackRock, Inc. since 2009; Head of BlackRock Global Accounting and Product Services since 2009; Advisory Director of Family Resource Network (charitable foundation) since 2009. |
124 RICs
consisting of 265 Portfolios |
None |
1 |
The address of each Director is c/o BlackRock, Inc., 55 East 52nd Street, New York, New York 10055. |
2 |
Each Independent Director holds office until his or her successor is duly elected and qualifies or until his or her earlier death, resignation, retirement or removal as provided by the Funds bylaws or charter or statute, or until December 31 of the year in which he or she turns 75. Directors who are interested persons, as defined in the Investment Company Act, serve until their successor is duly elected and qualifies or until their earlier death, resignation, retirement or removal as provided by the Funds bylaws or statute, or until December 31 of the year in which they turn 72. The Board may determine to extend the terms of Independent Directors on a case-by-case basis, as appropriate. |
3 |
Following the combination of Merrill Lynch Investment Managers, L.P. (MLIM) and BlackRock in September 2006, the various legacy MLIM and legacy BlackRock fund boards were realigned and consolidated into three new fund boards in 2007. Certain Independent Directors first became members of the boards of other legacy MLIM or legacy BlackRock funds as follows: Richard E. Cavanagh, 1994; Frank J. Fabozzi, 1988; R. Glenn Hubbard, 2004; W. Carl Kester, 1995; and Karen P. Robards, 1998. Certain other Independent Directors became members of the boards of the closed-end funds in the BlackRock Fixed-Income Complex as follows: Michael J. Castellano, 2011; Cynthia L. Egan, 2016; and Catherine A. Lynch, 2016. |
4 |
Dr. Fabozzi, Dr. Kester, Ms. Lynch and Mr. Perlowski are also trustees of the BlackRock Credit Strategies Fund. |
5 |
Mr. Fairbairn and Mr. Perlowski are both interested persons, as defined in the Investment Company Act, of the Fund based on their positions with BlackRock, Inc. and its affiliates. Mr. Fairbairn and Mr. Perlowski are also board members of the BlackRock Multi-Asset Complex. |
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Experience, Qualifications and Skills of the Directors
The Independent Directors have adopted a statement of policy that describes the experiences, qualifications, skills and attributes that are necessary and desirable for potential Independent Director candidates (the Statement of Policy). The Board believes that each Independent Director satisfied, at the time he or she was initially elected or appointed a Director, and continues to satisfy, the standards contemplated by the Statement of Policy as well as the standards set forth in the Funds Bylaws. Furthermore, in determining that a particular Director was and continues to be qualified to serve as a Director, the Board has considered a variety of criteria, none of which, in isolation, was controlling. The Board believes that, collectively, the Directors have balanced and diverse experiences, skills, attributes and qualifications, which will allow the Board to operate effectively in governing the Fund and protecting the interests of shareholders. Among the attributes common to all Directors is their ability to review critically, evaluate, question and discuss information provided to them, to interact effectively with the Advisor, other service providers, counsel and independent auditors, and to exercise effective business judgment in the performance of their duties as Directors. Each Directors ability to perform his or her duties effectively is evidenced by his or her educational background or professional training; business, consulting, public service or academic positions; experience from service as a board member of the Fund or the other funds in the BlackRock Fund Complexes (and any predecessor funds), other investment funds, public companies, or not-for-profit entities or other organizations; ongoing commitment and participation in Board and Committee meetings, as well as his or her leadership of standing and other committees of other BlackRock-advised Funds throughout the years; or other relevant life experiences.
The table below discusses some of the experiences, qualifications and skills of each Director that support the conclusion that he or she should serve on the Board.
Director |
Experience, Qualifications and Skills |
|
Independent Directors |
||
Richard E. Cavanagh | Richard E. Cavanagh brings to the Board a wealth of practical business knowledge and leadership as an experienced director/trustee of various public and private companies. In particular, because Mr. Cavanagh served for over a decade as President and Chief Executive Officer of The Conference Board, Inc., a global business research organization, he is able to provide the Board with expertise about business and economic trends and governance practices. Mr. Cavanagh created the blue ribbon Commission on Public Fund and Private Enterprise in 2002, which recommended corporate governance enhancements. Mr. Cavanaghs service as a director of The Guardian Life Insurance Company of America and as a senior advisor and director of The Fremont Group provides added insight into investment trends and conditions. Mr. Cavanaghs long-standing service as a director/trustee/chair of the BlackRock Fixed-Income Complex also provides him with a specific understanding of the Fund, its operations, and the business and regulatory issues facing the Fund. Mr. Cavanagh is also an experienced board leader, having served as the lead independent director of a NYSE public company (Arch Chemicals) and as the Board Chairman of the Educational Testing Service. Mr. Cavanaghs independence from the Fund and the Advisor enhances his service as Co-Chair of the Board, Chair of the Executive Committee, and a member of the Compliance Committee, the Governance and Nominating Committee and the Performance Oversight Committee. |
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Director |
Experience, Qualifications and Skills |
|
Karen P. Robards | The Board benefits from Karen P. Robards many years of experience in investment banking and the financial advisory industry where she obtained extensive knowledge of the capital markets and advised clients on corporate finance transactions, including mergers and acquisitions and the issuance of debt and equity securities. Ms. Robards prior position as an investment banker at Morgan Stanley provides useful oversight of the Funds investment decisions and investment valuation processes. Additionally, Ms. Robards experience as a director of publicly held and private companies allows her to provide the Board with insight into the management and governance practices of other companies. Ms. Robards long-standing service on the boards of directors/trustees of closed-end funds in the BlackRock Fixed-Income Complex also provides her with a specific understanding of the Fund, its operations, and the business and regulatory issues facing the Fund. Ms. Robards knowledge of financial and accounting matters qualifies her to serve as Co-Chair of the Board and Chair of the Audit Committee. Ms. Robards independence from the Fund and the Advisor enhances her service as a member of the Governance and Nominating Committee, the Performance Oversight Committee, and the Executive Committee. | |
Michael J. Castellano | The Board benefits from Michael J. Castellanos career in accounting which spans over forty years. Mr. Castellano has served as Chief Financial Officer of Lazard Ltd. and as a Managing Director and Chief Financial Officer of Lazard Group. Prior to joining Lazard, Mr. Castellano held various senior management positions at Merrill Lynch & Co., including Senior Vice PresidentChief Control Officer for Merrill Lynchs capital markets businesses, Chairman of Merrill Lynch International Bank and Senior Vice PresidentCorporate Controller. Prior to joining Merrill Lynch & Co., Mr. Castellano was a partner with Deloitte & Touche where he served a number of investment banking clients over the course of his 24 years with the firm. Mr. Castellano currently serves as a director for CircleBlack Inc. Mr. Castellanos knowledge of financial and accounting matters is expected to qualify him to serve as a member of the Audit Committee. Mr. Castellanos independence from the Fund and the Advisor is expected to enhance his service as a member of the Governance and Nominating Committee and the Performance Oversight Committee. | |
Cynthia L. Egan | Cynthia L. Egan brings to the Board a broad and diverse knowledge of investment companies and the retirement industry as a result of her many years of experience as President, Retirement Plan Services, for T. Rowe Price Group, Inc. and her various senior operating officer positions at Fidelity Investments, including her service as Executive Vice President of FMR Co., President of Fidelity Institutional Services Company and President of the Fidelity Charitable Gift Fund. Ms. Egan has also served as an advisor to the U.S. Department of Treasury as an expert in domestic retirement security. Ms. Egan began her professional career at the Board of Governors of the Federal Reserve and the Federal Reserve Bank of New York. Ms. Egan is also a director of UNUM Corporation, a publicly traded insurance company providing personal risk reinsurance, and of The Hanover Group, a public property casualty insurance company. Ms. Egans independence from the Fund and the Advisor enhances her service as Chair of the Compliance Committee, and a member of the Governance and Nominating Committee and the Performance Oversight Committee. |
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Director |
Experience, Qualifications and Skills |
|
Frank J. Fabozzi | Frank J. Fabozzi has served for over 25 years on the boards of registered investment companies. Dr. Fabozzi holds the designations of Chartered Financial Analyst and Certified Public Accountant. Dr. Fabozzi was inducted into the Fixed-income Analysts Societys Hall of Fame and is the 2007 recipient of the C. Stewart Sheppard Award and the 2015 recipient of the James R. Vertin Award, both given by the CFA Institute. The Board benefits from Dr. Fabozzis experiences as a professor and author in the field of finance. Dr. Fabozzis experience as a professor at various institutions, including EDHEC Business School, Yale, MIT, and Princeton, as well as Dr. Fabozzis experience as a Professor in the Practice of Finance and Becton Fellow at the Yale University School of Management and as editor of the Journal of Portfolio Management demonstrates his wealth of expertise in the investment management and structured finance areas. Dr. Fabozzi has authored and edited numerous books and research papers on topics in investment management and financial econometrics, and his writings have focused on fixed-income securities and portfolio management, many of which are considered standard references in the investment management industry. Dr. Fabozzis long-standing service on the boards of directors/trustees of the closed-end funds in the BlackRock Fixed-Income Complex also provides him with a specific understanding of the Fund, its operations and the business and regulatory issues facing the Fund. Moreover, Dr. Fabozzis knowledge of financial and accounting matters qualifies him to serve as a member of the Audit Committee. Dr. Fabozzis independence from the Fund and the Advisor enhances his service as Chair of the Performance Oversight Committee. | |
R. Glenn Hubbard | R. Glenn Hubbard has served in numerous roles in the field of economics, including as the Chairman of the U.S. Council of Economic Advisers of the President of the United States. Dr. Hubbard has served as the Dean of Columbia Business School, as a member of the Columbia Faculty and as a Visiting Professor at the John F. Kennedy School of Government at Harvard University, the Harvard Business School and the University of Chicago. Dr. Hubbards experience as an adviser to the President of the United States adds a dimension of balance to the Funds governance and provides perspective on economic issues. Dr. Hubbards service on the boards of ADP and Metropolitan Life Insurance Company provides the Board with the benefit of his experience with the management practices of other financial companies. Dr. Hubbards long-standing service on the boards of directors/trustees of the closed-end funds in the BlackRock Fixed-Income Complex also provides him with a specific understanding of the Fund, its operations, and the business and regulatory issues facing the Fund. Dr. Hubbards independence from the Fund and the Advisor is expected to enhance his service as Chair of the Governance and Nominating Committee and a member of the Compliance Committee and the Performance Oversight Committee. |
S-23
Director |
Experience, Qualifications and Skills |
|
W. Carl Kester | The Board benefits from W. Carl Kesters experiences as a professor and author in finance, and his experience as the George Fisher Baker Jr. Professor of Business Administration at Harvard Business School and as Deputy Dean of Academic Affairs at Harvard Business School from 2006 through 2010 adds to the Board a wealth of expertise in corporate finance and corporate governance. Dr. Kester has authored and edited numerous books and research papers on both subject matters, including co-editing a leading volume of finance case studies used worldwide. Dr. Kesters long-standing service on the boards of directors/trustees of the closed-end funds in the BlackRock Fixed-Income Complex also provides him with a specific understanding of the Fund, its operations, and the business and regulatory issues facing the Fund. Dr. Kesters knowledge of financial and accounting matters qualifies him to serve as a member of the Audit Committee. Dr. Kesters independence from the Fund and the Advisor enhances his service as a member of the Performance Oversight Committee. | |
Catherine A. Lynch | Catherine A. Lynch, who served as the Chief Executive Officer and Chief Investment Officer of the National Railroad Retirement Investment Fund, benefits the Board by providing business leadership and experience and a diverse knowledge of pensions and endowments. Ms. Lynch also holds the designation of Chartered Financial Analyst. Ms. Lynchs knowledge of financial and accounting matters is expected to qualify her to serve as a member of the Audit Committee. Ms. Lynchs independence from the Fund and the Advisor is expected to enhance her service as a member of the Performance Oversight Committee. | |
Interested Directors | ||
Robert Fairbairn | Robert Fairbairn has more than 25 years of experience with BlackRock, Inc. and over 30 years of experience in finance and asset management. In particular, Mr. Fairbairns positions as Vice Chairman of BlackRock, Inc., Member of BlackRocks Global Executive and Global Operating Committees and Co-Chair of BlackRocks Human Capital Committee provide the Board with a wealth of practical business knowledge and leadership. In addition, Mr. Fairbairn has global investment management and oversight experience through his former positions as Global Head of BlackRocks Retail and iShares® businesses, Head of BlackRocks Global Client Group, Chairman of BlackRocks international businesses and his previous oversight over BlackRocks Strategic Partner Program and Strategic Product Management Group. Mr. Fairbairn also serves as a board member for the funds in the BlackRock Multi-Asset Complex. | |
John M. Perlowski | John M. Perlowskis experience as Managing Director of BlackRock, Inc. since 2009, as the Head of BlackRock Global Accounting and Product Services since 2009, and as President and Chief Executive Officer of the Fund provides him with a strong understanding of the Fund, its operations, and the business and regulatory issues facing the Fund. Mr. Perlowskis prior position as Managing Director and Chief Operating Officer of the Global Product Group at Goldman Sachs Asset Management, and his former service as Treasurer and Senior Vice President of the Goldman Sachs Mutual Funds and as Director of the Goldman Sachs Offshore Funds provides the Board with the benefit of his experience with the management practices of other financial companies. Mr. Perlowski also serves as a board member for the funds in the BlackRock Multi-Asset Complex. Mr. Perlowskis experience with BlackRock enhances his service as a member of the Executive Committee. |
Board Leadership Structure and Oversight
The Board has overall responsibility for the oversight of the Fund. The Co-Chairs of the Board and the Chief Executive Officer are different people. Not only is each Co-Chair of the Board an Independent Director, but also the Chair of each Board committee (each, a Committee) is an Independent Director. The Board has five standing Committees: an Audit Committee, a Governance and Nominating Committee, a Compliance Committee, a Performance Oversight Committee and an Executive Committee. The role of each Co-Chair of the Board is to
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preside over all meetings of the Board and to act as a liaison with service providers, officers, attorneys, and other Directors between meetings. The Chair of each Committee performs a similar role with respect to the Committee. The Co-Chairs of the Board or Chair of a Committee may also perform such other functions as may be delegated by the Board or the Committee from time to time. The Independent Directors meet regularly outside the presence of the Funds management, in executive sessions or with other service providers to the Fund. The Board has regular meetings five times a year, including a meeting to consider the approval of the Funds investment management agreement, and, if necessary, may hold special meetings before its next regular meeting. Each Committee meets regularly to conduct the oversight functions delegated to that Committee by the Board and reports its findings to the Board. The Board and each standing Committee conduct annual assessments of their oversight function and structure. The Board has determined that the Boards leadership structure is appropriate because it allows the Board to exercise independent judgment over management and to allocate areas of responsibility among Committees and the Board to enhance oversight.
The Board decided to separate the roles of Chief Executive Officer from the Co-Chairs because it believes that having independent Co-Chairs:
|
increases the independent oversight of the Fund and enhances the Boards objective evaluation of the Chief Executive Officer; |
|
allows the Chief Executive Officer to focus on the Funds operations instead of Board administration; |
|
provides greater opportunities for direct and independent communication between shareholders and the Board; and |
|
provides an independent spokesman for the Fund. |
The Board has engaged the Advisor to manage the Fund on a day-to-day basis. The Board is responsible for overseeing the Advisor, other service providers, the operations of the Fund and associated risks in accordance with the provisions of the Investment Company Act, state law, other applicable laws, the Funds Charter, and the Funds investment objective and strategies. The Board reviews, on an ongoing basis, the Funds performance, operations, and investment strategies and techniques. The Board also conducts reviews of the Advisor and its role in running the operations of the Fund.
Day-to-day risk management with respect to the Fund is the responsibility of the Advisor or other service providers (depending on the nature of the risk), subject to the supervision of the Advisor. The Fund is subject to a number of risks, including investment, compliance, operational and valuation risks, among others. While there are a number of risk management functions performed by the Advisor or other service providers, as applicable, it is not possible to eliminate all of the risks applicable to the Fund. Risk oversight is part of the Boards general oversight of the Fund and is addressed as part of various Board and Committee activities. The Board, directly or through Committees, also reviews reports from, among others, management, the independent registered public accounting firm for the Fund, the Advisor, and internal auditors for the Advisor or its affiliates, as appropriate, regarding risks faced by the Fund and managements or the service providers risk functions. The Committee system facilitates the timely and efficient consideration of matters by the Directors and facilitates effective oversight of compliance with legal and regulatory requirements and of the Funds activities and associated risks. The Board approved the appointment of a Chief Compliance Officer (CCO), who oversees the implementation and testing of the Funds compliance program and reports regularly to the Board regarding compliance matters for the Fund and its service providers. The Independent Directors have engaged independent legal counsel to assist them in performing their oversight responsibilities.
Audit Committee. The Board has a standing Audit Committee composed of Michael J. Castellano (Chair), Frank J. Fabozzi, Catherine A. Lynch and Karen P. Robards, all of whom are Independent Directors. The principal responsibilities of the Audit Committee are to assist the Board in fulfilling its oversight responsibilities relating to the accounting and financial reporting policies and practices of the Fund. The Audit Committees responsibilities include, without limitation: (i) approving and recommending to the full Board for approval the selection, retention, termination and compensation of the Funds independent registered public accounting firm (the Independent Registered Public Accounting Firm) and evaluating the independence and objectivity of the Independent Registered
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Public Accounting Firm; (ii) approving all audit engagement terms and fees for the Fund; (iii) reviewing the conduct and results of each audit; (iv) reviewing any issues raised by the Funds Independent Registered Public Accounting Firm or management regarding the accounting or financial reporting policies and practices of the Fund, its internal controls, and, as appropriate, the internal controls of certain service providers and managements response to any such issues; (v) reviewing and discussing the Funds audited and unaudited financial statements and disclosure in the Funds shareholder reports relating to the Funds performance; (vi) assisting the Boards responsibilities with respect to the internal controls of the Fund and its service providers with respect to accounting and financial matters; and (vii) resolving any disagreements between the Funds management and the Funds Independent Registered Public Accounting Firm regarding financial reporting. The Board has adopted a written charter for the Boards Audit Committee. A copy of the Audit Committee Charter for the Fund can be found in the Corporate Governance section of the BlackRock Closed-End Fund website at www.blackrock.com. During the fiscal year ended April 30, 2020, the Audit Committee met 12 times.
Governance and Nominating Committee. The Board has a standing Governance and Nominating Committee composed of R. Glenn Hubbard (Chair), Michael J. Castellano, Richard E. Cavanagh, Cynthia L. Egan and Karen P. Robards, all of whom are Independent Directors. The principal responsibilities of the Governance and Nominating Committee are: (i) identifying individuals qualified to serve as Independent Directors and recommending Board nominees that are not interested persons of the Fund (as defined in the Investment Company Act) for election by shareholders or appointment by the Board; (ii) advising the Board with respect to Board composition, procedures and Committees of the Board (other than the Audit Committee); (iii) overseeing periodic self-assessments of the Board and Committees of the Board (other than the Audit Committee); (iv) reviewing and making recommendations in respect to Independent Director compensation; (v) monitoring corporate governance matters and making recommendations in respect thereof to the Board; (vi) acting as the administrative committee with respect to Board policies and procedures, committee policies and procedures (other than the Audit Committee) and codes of ethics as they relate to the Independent Directors; and (vii) reviewing and making recommendations to the Board in respect of Fund share ownership by the Independent Directors. The Board has adopted a written charter for the Boards Governance and Nominating Committee. During the fiscal year ended April 30, 2020, the Governance and Nominating Committee met 6 times.
The Governance and Nominating Committee of the Board seeks to identify individuals to serve on the Board who have a diverse range of viewpoints, qualifications, experiences, backgrounds and skill sets so that the Board will be better suited to fulfill its responsibility of overseeing the Funds activities. In so doing, the Governance and Nominating Committee reviews the size of the Board, the ages of the current Directors and their tenure on the Board, and the skills, background and experiences of the Directors in light of the issues facing the Fund in determining whether one or more new trustees should be added to the Board. The Board as a group strives to achieve diversity in terms of gender, race and geographic location. The Governance and Nominating Committee believes that the Directors as a group possess the array of skills, experiences and backgrounds necessary to guide the Fund. The Directors biographies included herein highlight the diversity and breadth of skills, qualifications and expertise that the Directors bring to the Fund.
The Governance and Nominating Committee may consider nominations for Directors made by the Funds shareholders as it deems appropriate. Under the Funds Bylaws, shareholders must follow certain procedures to nominate a person for election as a Director at an annual or special meeting, or to introduce an item of business at an annual meeting. Under these advance notice procedures, shareholders must submit the proposed nominee or item of business by delivering a notice to the Secretary of the Fund at its principal executive offices. The Fund must receive notice of a shareholders intention to introduce a nomination or proposed item of business for an annual shareholder meeting not less than 120 days nor more than 150 days before the anniversary date of the prior years annual shareholder meeting. However, if the Fund holds its annual shareholder meeting on a date that is not within 25 days before or after the anniversary date of the prior years annual shareholder meeting, the Fund must receive the notice of a shareholders intention to introduce a nomination or proposed item of business not later than the close of business on the tenth day following the day on which the notice of the date of the shareholder meeting was mailed or the public disclosure of the date of the shareholder meeting was made, whichever comes first.
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The Funds Bylaws provide that notice of a proposed nomination must include certain information about the shareholder and the nominee, as well as a written consent of the proposed nominee to serve if elected. A notice of a proposed item of business must include a description of and the reasons for bringing the proposed business to the meeting, any material interest of the shareholder in the business, and certain other information about the shareholder.
Further, the Fund has adopted Director qualification requirements which can be found in the Funds Bylaws and are applicable to all Directors that may be nominated, elected, appointed, qualified or seated to serve as Directors. The qualification requirements include: (i) age limits; (ii) limits on service on other boards; (iii) restrictions on relationships with investment advisers other than BlackRock; and (iv) character and fitness requirements. In addition to not being an interested person of the Fund as defined under Section 2(a)(19) of the Investment Company Act, each Independent Director may not be or have certain relationships with a shareholder owning five percent or more of the Funds voting securities or owning other percentage ownership interests in investment companies registered under the Investment Company Act. Reference is made to the Funds Bylaws for more details.
A copy of the Governance and Nominating Committee Charter for the Fund can be found in the Corporate Governance section of the BlackRock Closed-End Fund website at www.blackrock.com.
Compliance Committee. The Board has a Compliance Committee composed of Cynthia L. Egan (Chair), Richard E. Cavanagh, R. Glenn Hubbard and W. Carl Kester, all of whom are Independent Directors. The Compliance Committees purpose is to assist the Board in fulfilling its responsibility with respect to the oversight of regulatory and fiduciary compliance matters involving the Fund, the fund-related activities of BlackRock, and any subadviser and the Funds other third party service providers. The Compliance Committees responsibilities include, without limitation: (i) overseeing the compliance policies and procedures of the Fund and its service providers and recommending changes or additions to such policies and procedures; (ii) reviewing information on and, where appropriate, recommending policies concerning the Funds compliance with applicable law; (iii) reviewing information on any significant correspondence with or other actions by regulators or governmental agencies with respect to the Fund and any employee complaints or published reports that raise concerns regarding compliance matters; and (iv) reviewing reports from, overseeing the annual performance review of, and making certain recommendations in respect of, the CCO, including, without limitation, determining the amount and structure of the CCOs compensation. The Board has adopted a written charter for the Boards Compliance Committee. During the fiscal year ended April 30, 2020, the Compliance Committee met 5 times.
Performance Oversight Committee. The Board has a Performance Oversight Committee composed of Frank J. Fabozzi (Chair), Michael J. Castellano, Richard E. Cavanagh, Cynthia L. Egan, R. Glenn Hubbard, W. Carl Kester, Catherine A. Lynch and Karen P. Robards, all of whom are Independent Directors. The Performance Oversight Committees purpose is to assist the Board in fulfilling its responsibility to oversee the Funds investment performance relative to the Funds investment objective, policies and practices. The Performance Oversight Committees responsibilities include, without limitation: (i) reviewing the Funds investment objective, policies and practices; (ii) recommending to the Board any required action in respect of changes in fundamental and non-fundamental investment restrictions; (iii) reviewing information on appropriate benchmarks and competitive universes; (iv) reviewing the Funds investment performance relative to such benchmarks; (v) reviewing information on unusual or exceptional investment matters; (vi) reviewing whether the Fund has complied with its investment policies and restrictions; and (vii) overseeing policies, procedures and controls regarding valuation of the Funds investments. The Board has adopted a written charter for the Boards Performance Oversight Committee. During the fiscal year ended April 30, 2020, the Performance Oversight Committee met 4 times.
Executive Committee. The Board has an Executive Committee composed of Richard E. Cavanagh (Chair), and Karen P. Robards, both of whom are Independent Directors, and John M. Perlowski, who serves as an interested Director. The principal responsibilities of the Executive Committee include, without limitation: (i) acting on routine matters between meetings of the Board; (ii) acting on such matters as may require urgent action between meetings of the Board; and (iii) exercising such other authority as may from time to time be delegated to the Executive Committee by the Board. The Board has adopted a written charter for the Boards Executive Committee. During the fiscal year ended April 30, 2020, the Executive Committee did not meet.
Information about the specific experience, skills, attributes and qualifications of each Director, which in each case led to the Boards conclusion that the Director should serve (or continue to serve) as a Director of the Fund, is provided in Biographical Information of the Directors.
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Director Share Ownership
Information relating to each Directors share ownership in the Fund as of April 30, 2020 and in all BlackRock-advised Funds that are currently overseen by the respective Director (Supervised Funds) as of December 31, 2019 is set forth in the chart below:
Name of Director |
Dollar Range of Equity
Securities in the Fund* |
Aggregate Dollar Range of Equity
Securities in Supervised Funds* |
||||||
Independent Directors |
||||||||
Michael J. Castellano |
$ | 10,001-$50,000 | Over $ 100,000 | |||||
Richard E. Cavanagh |
$ | 1-$10,000 | Over $ 100,000 | |||||
Cynthia L. Egan |
None | Over $ 100,000 | ||||||
Frank J. Fabozzi |
$ | 1-$10,000 | Over $ 100,000 | |||||
R. Glenn Hubbard |
None | Over $ 100,000 | ||||||
W. Carl Kester |
$ | 1-$10,000 | Over $ 100,000 | |||||
Catherine A. Lynch |
$ | 10,001-$50,000 | Over $ 100,000 | |||||
Karen P. Robards |
None | Over $ 100,000 | ||||||
Interested Directors |
||||||||
Robert Fairbairn |
None | Over $ 100,000 | ||||||
John M. Perlowski |
None | Over $ 100,000 |
* |
Includes share equivalents owned under the deferred compensation plan in the Supervised Funds by certain Independent Directors who have participated in the deferred compensation plan of the Supervised Funds. |
Compensation of Directors
Each Director who is an Independent Director is paid an annual retainer of $330,000 per year for his or her services as a Board member of the BlackRock-advised Funds, including the Fund, and each Independent Director may also receive a $10,000 Board meeting fee for special unscheduled meetings or meetings in excess of six Board meetings held in a calendar year, together with out-of-pocket expenses in accordance with a Board policy on travel and other business expenses relating to attendance at meetings. In addition, each Co-Chair of the Board is paid an additional annual retainer of $100,000. The Chairs of the Audit Committee, Performance Oversight Committee, Compliance Committee, and Governance and Nominating Committee are paid an additional annual retainer of $45,000, $30,000, $45,000 and $20,000, respectively. Each of the members of the Audit Committee and Compliance Committee are paid an additional annual retainer of $30,000 and $25,000, respectively, for his or her service on such committee. The Fund will pay a pro rata portion quarterly (based on relative net assets) of the foregoing Director fees paid by the funds in the BlackRock Fixed-Income Complex.
The Independent Directors have agreed that a maximum of 50% of each Independent Directors total compensation paid by funds in the BlackRock Fixed-Income Complex may be deferred pursuant to the BlackRock Fixed-Income Complexs deferred compensation plan. Under the deferred compensation plan, deferred amounts earn a return for the Independent Directors as though equivalent dollar amounts had been invested in shares of certain funds in the BlackRock Fixed-Income Complex selected by the Independent Directors. This has approximately the same economic effect for the Independent Directors as if they had invested the deferred amounts in such funds in the BlackRock Fixed-Income Complex. The deferred compensation plan is not funded and obligations thereunder represent general unsecured claims against the general assets of a fund and are recorded as a liability for accounting purposes.
The following table sets forth the compensation paid to the Directors by the Fund for the fiscal year ended April 30, 2020, and the aggregate compensation paid to them by all BlackRock-advised Funds for the calendar year ended December 31, 2019. Messrs. Fairbairn and Perlowski serve without compensation from the Fund because of their affiliation with BlackRock, Inc. and the Advisor.
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Name(1) |
Compensation
from the Fund |
Estimated Annual
Benefits upon Retirement |
Aggregate Compensation from the
BlackRock-Advised Funds(2) |
|||||||||
Independent Directors |
||||||||||||
Michael J. Castellano |
$ | 4,093 | None | $405,000 | (3) | |||||||
Richard E. Cavanagh |
$ | 4,601 | None | $455,000 | (3) | |||||||
Cynthia L. Egan |
$ | 4,042 | None | $400,000 | (3) | |||||||
Frank J. Fabozzi |
$ | 3,941 | None | $405,000 | (3) | |||||||
Henry Gabbay(4) |
$ | 2,732 | None | $360,000 | (3) | |||||||
R. Glenn Hubbard |
$ | 3,789 | None | $375,000 | (3) | |||||||
W. Carl Kester |
$ | 3,586 | None | $370,000 | (3) | |||||||
Catherine A. Lynch |
$ | 3,636 | None | $375,000 | (3) | |||||||
Karen P. Robards |
$ | 4,651 | None | $460,000 | (3) | |||||||
Interested Directors |
||||||||||||
Robert Fairbairn |
None | None | None | |||||||||
John M. Perlowski |
None | None | None |
(1) |
For the number of BlackRock-advised Funds from which each Director receives compensation, see the Biographical Information chart beginning on page S-17. |
(2) |
For the Independent Directors, this amount represents the aggregate compensation earned from the funds in the BlackRock Fixed-Income Complex during the calendar year ended December 31, 2019. Of this amount, Mr. Castellano, Mr. Cavanagh, Dr. Fabozzi, Dr. Hubbard, Dr. Kester, Ms. Lynch and Ms. Robards deferred $120,528, $112,840, $0, $186,000, $49,600, $55,818 and $22,816, respectively, pursuant to the BlackRock Fixed-Income Complexs deferred compensation plan. |
(3) |
Total amount of deferred compensation payable by the BlackRock Fixed-Income Complex to Mr. Castellano, Mr. Cavanagh, Dr. Fabozzi, Dr. Hubbard, Dr. Kester, Ms. Lynch and Ms. Robards is $1,053,110, $1,638,381, $905,955, $2,751,743, $1,394,527, $209,827 and $1,021,994, respectively, as of December 31, 2019. Ms. Egan and Mr. Gabbay did not participate in the deferred compensation plan as of December 31, 2019. |
(4) |
Mr. Gabbay resigned as a Director effective February 19, 2020. |
Independent Director Ownership of Securities
As of December 31, 2019, none of the Independent Directors of the Fund or their immediate family members owned beneficially or of record any securities of BlackRock or any affiliate of any BlackRock person controlling, controlled by or under common control with BlackRock nor did any Independent Director of the Fund or their immediate family member have any material interest in any transaction, or series of similar transactions, during the most recently completed two calendar years involving the Fund, BlackRock or any affiliate of any BlackRock person controlling, controlled by or under common control with the Fund or BlackRock.
As of the date of this SAI, the officers and Directors of the Fund, as a group, beneficially owned less than 1% of the outstanding common shares of the Fund.
Information Pertaining to the Officers
Certain biographical and other information relating to the officers of the Fund who are not Directors is set forth below, including their address and year of birth, principal occupations for at least the last five years and length of time served. With the exception of the CCO, executive officers receive no compensation from the Fund. The Fund compensates the CCO for his services as its CCO.
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Each executive officer is an interested person of the Fund (as defined in the Investment Company Act) by virtue of that individuals position with BlackRock or its affiliates described in the table below.
Name and Year of Birth1,2 |
Position(s) Held (Length of Service) |
Principal Occupations(s) During Past Five Years |
||
Officers Who Are Not Directors | ||||
Jonathan Diorio
1980 |
Vice President (Since 2015) |
Managing Director of BlackRock since 2015; Director of BlackRock, Inc. from 2011 to 2015; Director of Deutsche Asset & Wealth Management from 2009 to 2011. | ||
Neal J. Andrews
1966 |
Chief Financial Officer (Since 2014) |
Chief Financial Officer of the iShares® exchange traded funds from 2019 to 2020; Managing Director of BlackRock since 2006. | ||
Jay M. Fife
1970 |
Treasurer (Since 2014) |
Managing Director of BlackRock since 2007. | ||
Charles Park
1967 |
Chief Compliance Officer (Since 2014) |
Anti-Money Laundering Compliance Officer for certain BlackRock-advised Funds from 2014 to 2015; Chief Compliance Officer of BlackRock Advisors, LLC and the BlackRock-advised Funds in the BlackRock Multi-Asset Complex and the BlackRock Fixed-Income Complex since 2014; Principal of and Chief Compliance Officer for iShares® Delaware Trust Sponsor LLC since 2012 and BlackRock Fund Advisors (BFA) since 2006; Chief Compliance Officer for the BFA-advised iShares® exchange traded funds since 2006; Chief Compliance Officer for BlackRock Asset Management International Inc. since 2012. | ||
Janey Ahn
1975 |
Secretary (Since 2014) |
Managing Director of BlackRock, Inc. since 2018; Director of BlackRock, Inc. from 2009 to 2017. |
1 |
The address of each Officer is c/o BlackRock, Inc., 55 East 52nd Street, New York, NY 10055. |
2 |
Officers of the Fund serve at the pleasure of the Board. |
Indemnification of Directors and Officers
The governing documents of the Fund generally provide that, to the extent permitted by applicable law, the Fund will indemnify its Directors and officers against liabilities and expenses incurred in connection with litigation in which they may be involved because of their offices with the Fund unless, as to liability to the Fund or its investors, it is finally adjudicated that they engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in their offices. In addition, the Fund will not indemnify Directors with respect to any matter as to which Directors did not act in good faith in the reasonable belief that his or her action was in the best interest of the Fund or, in the case of any criminal proceeding, as to which Directors had reasonable cause to believe that the conduct was unlawful. Indemnification provisions contained in the Funds governing documents are subject to any limitations imposed by applicable law.
Closed-end funds in the BlackRock Fixed-Income Complex, including the Fund, have also entered into a separate indemnification agreement with the board members of each board of such funds (the Indemnification Agreement). The Indemnification Agreement (i) extends the indemnification provisions contained in a funds governing documents to board members who leave that funds board and serve on an advisory board of a different fund in the BlackRock Fixed-Income Complex; (ii) sets in place the terms of the indemnification provisions of a funds governing documents once a board member retires from a board; and (iii) in the case of board members who left the board of a fund in connection with or prior to the board consolidation that occurred in 2007 as a result of the merger of BlackRock and Merrill Lynch & Co., Inc.s investment management business, clarifies that such fund continues to indemnify the trustee for claims arising out of his or her past service to that fund.
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Portfolio Management
Portfolio Manager Assets Under Management
The following table sets forth information about funds and accounts other than the Fund for which the portfolio managers are primarily responsible for the day-to-day portfolio management as of April 30, 2020:
Number of Other Accounts Managed
and Assets by Account Type |
Number of Other Accounts and
Assets for Which Advisory Fee is Performance-Based |
|||||||||||
Name of Portfolio Manager |
Other
Registered Investment Companies |
Other
Pooled Investment Vehicles |
Other
Accounts |
Other
Registered Investment Companies |
Other Pooled
Investment Vehicles |
Other
Accounts |
||||||
Theodore R. Jaeckel, Jr. |
33 | 0 | 0 | 0 | 0 | 0 | ||||||
$26.33 Billion | $0 | $0 | $0 | $0 | $0 | |||||||
Walter OConnor |
29 | 0 | 0 | 0 | 0 | 0 | ||||||
$26.72 Billion | $0 | $0 | $0 | $0 | $0 |
Portfolio Manager Compensation Overview
The discussion below describes the portfolio managers compensation as of April 30, 2020.
The Advisors financial arrangements with its portfolio managers, its competitive compensation and its career path emphasis at all levels reflect the value senior management places on key resources. Compensation may include a variety of components and may vary from year to year based on a number of factors. The principal components of compensation include a base salary, a performance-based discretionary bonus, participation in various benefits programs and one or more of the incentive compensation programs established by the Advisor.
Base Compensation. Generally, portfolio managers receive base compensation based on their position with the firm.
Discretionary Incentive Compensation
Discretionary incentive compensation is a function of several components: the performance of BlackRock, Inc., the performance of the portfolio managers group within BlackRock, the investment performance, including risk-adjusted returns, of the firms assets under management or supervision by that portfolio manager relative to predetermined benchmarks, and the individuals performance and contribution to the overall performance of these portfolios and BlackRock. In most cases, these benchmarks are the same as the benchmark or benchmarks against which the performance of the Fund or other accounts managed by the portfolio managers are measured. Among other things, BlackRocks Chief Investment Officers make a subjective determination with respect to each portfolio managers compensation based on the performance of the Fund and other accounts managed by each portfolio manager relative to the various benchmarks. Performance of fixed-income funds is measured on a pre-tax and/or after-tax basis over various time periods including 1-, 3- and 5- year periods, as applicable. With respect to these portfolio managers, such benchmarks for the Fund and other accounts are: a combination of market-based indices (e.g., Standard & Poors Municipal Bond Index), certain customized indices and certain fund industry peer groups.
Distribution of Discretionary Incentive Compensation. Discretionary incentive compensation is distributed to portfolio managers in a combination of cash, deferred BlackRock, Inc. stock awards, and/or deferred cash awards that notionally track the return of certain BlackRock investment products.
Portfolio managers receive their annual discretionary incentive compensation in the form of cash. Portfolio managers whose total compensation is above a specified threshold also receive deferred BlackRock, Inc. stock awards annually as part of their discretionary incentive compensation. Paying a portion of discretionary incentive compensation in the form of deferred BlackRock, Inc. stock puts compensation earned by a portfolio manager for a
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given year at risk based on BlackRocks ability to sustain and improve its performance over future periods. In some cases, additional deferred BlackRock, Inc. stock may be granted to certain key employees as part of a long-term incentive award to aid in retention, align interests with long-term shareholders and motivate performance. Deferred BlackRock, Inc. stock awards are generally granted in the form of BlackRock, Inc. restricted stock units that vest pursuant to the terms of the applicable plan and, once vested, settle in BlackRock, Inc. common stock. The portfolio managers of this Fund have deferred BlackRock, Inc. stock awards.
For certain portfolio managers, a portion of the discretionary incentive compensation is also distributed in the form of deferred cash awards that notionally track the returns of select BlackRock investment products they manage, which provides direct alignment of portfolio manager discretionary incentive compensation with investment product results. Deferred cash awards vest ratably over a number of years and, once vested, settle in the form of cash. Only portfolio managers who manage specified products and whose total compensation is above a specified threshold are eligible to participate in the deferred cash award program.
Other Compensation Benefits. In addition to base salary and discretionary incentive compensation, portfolio managers may be eligible to receive or participate in one or more of the following:
Incentive Savings PlansBlackRock, Inc. has created a variety of incentive savings plans in which BlackRock, Inc. employees are eligible to participate, including a 401(k) plan, the BlackRock Retirement Savings Plan (RSP), and the BlackRock Employee Stock Purchase Plan (ESPP). The employer contribution components of the RSP include a company match equal to 50% of the first 8% of eligible pay contributed to the plan capped at $5,000 per year, and a company retirement contribution equal to 3-5% of eligible compensation up to the Internal Revenue Service limit ($285,000 for 2020). The RSP offers a range of investment options, including registered investment companies and collective investment funds managed by the firm. BlackRock, Inc. contributions follow the investment direction set by participants for their own contributions or, absent participant investment direction, are invested into a target date fund that corresponds to, or is closest to, the year in which the participant attains age 65. The ESPP allows for investment in BlackRock, Inc. common stock at a 5% discount on the fair market value of the stock on the purchase date. Annual participation in the ESPP is limited to the purchase of 1,000 shares of common stock or a dollar value of $25,000 based on its fair market value on the purchase date. All of the eligible portfolio managers are eligible to participate in these plans.
Securities Ownership of Portfolio Managers
As of April 30, 2020, the end of the Funds most recently completed fiscal year end, the dollar range of securities beneficially owned by each portfolio manager in the Fund is shown below:
Portfolio Manager |
Dollar Range of Equity
Securities Beneficially Owned |
|
Theodore R. Jaeckel, Jr. |
$50,001 - $100,000 | |
Walter OConnor |
None |
Potential Material Conflicts of Interest
The Advisor has built a professional working environment, firm-wide compliance culture and compliance procedures and systems designed to protect against potential incentives that may favor one account over another. The Advisor has adopted policies and procedures that address the allocation of investment opportunities, execution of portfolio transactions, personal trading by employees and other potential conflicts of interest that are designed to ensure that all client accounts are treated equitably over time. Nevertheless, the Advisor furnishes investment management and advisory services to numerous clients in addition to the Fund, and the Advisor may, consistent with applicable law, make investment recommendations to other clients or accounts (including accounts which are hedge funds or have performance or higher fees paid to the Advisor, or in which portfolio managers have a personal interest in the receipt of such fees), which may be the same as or different from those made to the Fund. In addition, BlackRock, Inc., its affiliates and significant shareholders and any officer, director, shareholder or employee may or may not have an interest in the securities whose purchase and sale the Advisor recommends to the Fund. BlackRock, Inc., or any of its affiliates or significant shareholders, or any officer, director, shareholder, employee or any member of their families may take different actions than those recommended to the Fund by the Advisor with
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respect to the same securities. Moreover, the Advisor may refrain from rendering any advice or services concerning securities of companies of which any of BlackRock, Inc.s (or its affiliates or significant shareholders) officers, directors or employees are directors or officers, or companies as to which BlackRock, Inc. or any of its affiliates or significant shareholders or the officers, directors and employees of any of them has any substantial economic interest or possesses material non-public information. Certain portfolio managers also may manage accounts whose investment strategies may at times be opposed to the strategy utilized for a fund. It should also be noted that a portfolio manager may be managing certain hedge fund and/or long only accounts, or may be part of a team managing certain hedge fund and/or long only accounts, subject to incentive fees. Such portfolio managers may therefore be entitled to receive a portion of any incentive fees earned on such accounts. Currently, the portfolio managers of this fund are not entitled to receive a portion of incentive fees of other accounts.
As a fiduciary, the Advisor owes a duty of loyalty to its clients and must treat each client fairly. When the Advisor purchases or sells securities for more than one account, the trades must be allocated in a manner consistent with its fiduciary duties. The Advisor attempts to allocate investments in a fair and equitable manner among client accounts, with no account receiving preferential treatment. To this end, BlackRock, Inc. has adopted policies that are intended to ensure reasonable efficiency in client transactions and provide the Advisor with sufficient flexibility to allocate investments in a manner that is consistent with the particular investment discipline and client base, as appropriate.
Proxy Voting Policies
The Board has delegated the voting of proxies for the Funds securities to the Advisor pursuant to the Advisors proxy voting guidelines. Under these guidelines, the Advisor will vote proxies related to Fund securities in the best interests of the Fund and its shareholders. From time to time, a vote may present a conflict between the interests of the Funds shareholders, on the one hand, and those of the Advisor, or any affiliated person of the Fund or the Advisor, on the other. In such event, provided that the Advisors Equity Investment Policy Oversight Committee, or a sub-committee thereof (the Oversight Committee), is aware of the real or potential conflict, if the matter to be voted on represents a material, non-routine matter and if the Oversight Committee does not reasonably believe it is able to follow its general voting guidelines (or if the particular proxy matter is not addressed in the guidelines) and vote impartially, the Oversight Committee may retain an independent fiduciary to advise the Oversight Committee on how to vote or to cast votes on behalf of the Advisors clients. If the Advisor determines not to retain an independent fiduciary, or does not desire to follow the advice of such independent fiduciary, the Oversight Committee shall determine how to vote the proxy after consulting with the Advisors Portfolio Management Group and/or the Advisors Legal and Compliance Department and concluding that the vote cast is in its clients best interest notwithstanding the conflict. A copy of the Closed-End Fund Proxy Voting Policy is included as Appendix B to this SAI. Information on how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 will be available (i) at www.blackrock.com and (ii) on the SECs website at http://www.sec.gov.
Codes of Ethics
The Fund and the Advisor have adopted codes of ethics pursuant to Rule 17j-1 under the Investment Company Act. These codes permit personnel subject to the codes to invest in securities, including securities that may be purchased or held by the Fund. These codes may be obtained by calling the SEC at (202) 551-8090. These codes of ethics are available on the EDGAR Database on the SECs website (http://www.sec.gov), and copies of these codes may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov.
Other Information
BlackRock, Inc. is independent in ownership and governance, with no single majority stockholder and a majority of independent directors.
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PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board, the Advisor is primarily responsible for the execution of the Funds portfolio transactions and the allocation of brokerage. The Advisor does not execute transactions through any particular broker or dealer, but seeks to obtain the best net results for the Fund, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution, operational facilities of the firm and the firms risk and skill in positioning blocks of securities. While the Advisor generally seeks reasonable trade execution costs, the Fund does not necessarily pay the lowest spread or commission available, and payment of the lowest commission or spread is not necessarily consistent with obtaining the best price and execution in particular transactions. Subject to applicable legal requirements, the Advisor may select a broker based partly upon brokerage or research services provided to the Advisor and its clients, including the Fund. In return for such services, the Advisor may cause the Fund to pay a higher commission than other brokers would charge if the Advisor determines in good faith that the commission is reasonable in relation to the services provided.
In selecting brokers or dealers to execute portfolio transactions, the Advisor seeks to obtain the best price and most favorable execution for the Fund, taking into account a variety of factors including: (i) the size, nature and character of the security or instrument being traded and the markets in which it is purchased or sold; (ii) the desired timing of the transaction; (iii) the Advisors knowledge of the expected commission rates and spreads currently available; (iv) the activity existing and expected in the market for the particular security or instrument, including any anticipated execution difficulties; (v) the full range of brokerage services provided; (vi) the brokers or dealers capital; (vii) the quality of research and research services provided; (viii) the reasonableness of the commission, dealer spread or its equivalent for the specific transaction; and (ix) the Advisors knowledge of any actual or apparent operational problems of a broker or dealer.
Section 28(e) of the Exchange Act (Section 28(e)) permits an investment adviser, under certain circumstances, to cause an account to pay a broker or dealer a commission for effecting a transaction that exceeds the amount another broker or dealer would have charged for effecting the same transaction in recognition of the value of brokerage and research services provided by that broker or dealer. This includes commissions paid on riskless principal transactions under certain conditions. Brokerage and research services include: (1) furnishing advice as to the value of securities, including pricing and appraisal advice, credit analysis, risk measurement analysis, performance and other analysis, as well as the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; (2) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and (3) effecting securities transactions and performing functions incidental to securities transactions (such as clearance, settlement, and custody). The Advisor believes that access to independent investment research is beneficial to its investment decision-making processes and, therefore, to the Fund.
The Advisor may participate in client commission arrangements under which the Advisor may execute transactions through a broker-dealer and request that the broker-dealer allocate a portion of the commissions or commission credits to another firm that provides research to the Advisor. The Advisor believes that research services obtained through soft dollar or commission sharing arrangements enhance its investment decision-making capabilities, thereby increasing the prospects for higher investment returns. The Advisor will engage only in soft dollar or commission sharing transactions that comply with the requirements of Section 28(e). The Advisor regularly evaluates the soft dollar products and services utilized, as well as the overall soft dollar and commission sharing arrangements to ensure that trades are executed by firms that are regarded as best able to execute trades for client accounts, while at the same time providing access to the research and other services the Advisor views as impactful to its trading results.
The Advisor may utilize soft dollars and related services, including research (whether prepared by the broker-dealer or prepared by a third-party and provided to the Advisor by the broker-dealer) and execution or brokerage services within applicable rules and the Advisors policies to the extent that such permitted services do not compromise the Advisors ability to seek to obtain best execution. In this regard, the portfolio management investment and/or trading teams may consider a variety of factors, including the degree to which the broker-dealer: (a) provides access to company management; (b) provides access to their analysts; (c) provides meaningful/insightful research notes on companies or other potential investments; (d) facilitates calls on which meaningful or insightful ideas about companies or potential investments are discussed; (e) facilitates conferences at which meaningful or insightful ideas about companies or potential investments are discussed; or (f) provides research tools such as market data, financial analysis, and other third party related research and brokerage tools that aid in the investment process.
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Research-oriented services for which the Advisor might pay with Fund commissions may be in written form or through direct contact with individuals and may include information as to particular companies or industries and securities or groups of securities, as well as market, economic, or institutional advice and statistical information, political developments and technical market information that assists in the valuation of investments. Except as noted immediately below, research services furnished by brokers may be used in servicing some or all client accounts and not all services may be used in connection with the Fund or account that paid commissions to the broker providing such services. In some cases, research information received from brokers by investment company management personnel, or personnel principally responsible for the Advisors individually managed portfolios, is not necessarily shared by and between such personnel. Any investment advisory or other fees paid by the Fund to the Advisor are not reduced as a result of the Advisors receipt of research services. In some cases, the Advisor may receive a service from a broker that has both a research and a non-research use. When this occurs the Advisor makes a good faith allocation, under all the circumstances, between the research and non-research uses of the service. The percentage of the service that is used for research purposes may be paid for with client commissions, while the Advisor will use its own funds to pay for the percentage of the service that is used for non-research purposes. In making this good faith allocation, the Advisor faces a potential conflict of interest, but the Advisor believes that its allocation procedures are reasonably designed to ensure that it appropriately allocates the anticipated use of such services to their research and non-research uses.
Payments of commissions to brokers who are affiliated persons of the Fund will be made in accordance with Rule 17e-1 under the Investment Company Act.
From time to time, the Fund may purchase new issues of securities in a fixed price offering. In these situations, the broker may be a member of the selling group that will, in addition to selling securities, provide the Advisor with research services. The Financial Industry Regulatory Authority, Inc. has adopted rules expressly permitting these types of arrangements under certain circumstances. Generally, the broker will provide research credits in these situations at a rate that is higher than that available for typical secondary market transactions. These arrangements may not fall within the safe harbor of Section 28(e).
The Advisor does not consider sales of shares of the investment companies it advises as a factor in the selection of brokers or dealers to execute portfolio transactions for the Fund; however, whether or not a particular broker or dealer sells shares of the investment companies advised by the Advisor neither qualifies nor disqualifies such broker or dealer to execute transactions for those investment companies.
The Fund anticipates that its brokerage transactions involving foreign securities generally will be conducted primarily on the principal stock exchanges of the applicable country. Foreign equity securities may be held by the Fund in the form of depositary receipts, or other securities convertible into foreign equity securities. Depositary receipts may be listed on stock exchanges, or traded in OTC markets in the United States or Europe, as the case may be. American Depositary Receipts, like other securities traded in the United States, will be subject to negotiated commission rates.
The Fund may invest in certain securities traded in the OTC market and intends to deal directly with the dealers who make a market in the particular securities, except in those circumstances in which better prices and execution are available elsewhere. Under the Investment Company Act, persons affiliated with the Fund and persons who are affiliated with such affiliated persons are prohibited from dealing with the Fund as principal in the purchase and sale of securities unless a permissive order allowing such transactions is obtained from the SEC. Since transactions in the OTC market usually involve transactions with the dealers acting as principal for their own accounts, the Fund will not deal with affiliated persons in connection with such transactions. However, an affiliated person of the Fund may serve as its broker in OTC transactions conducted on an agency basis provided that, among other things, the fee or commission received by such affiliated broker is reasonable and fair compared to the fee or commission received by non-affiliated brokers in connection with comparable transactions.
OTC issues, including most fixed-income securities such as corporate debt and U.S. Government securities, are normally traded on a net basis without a stated commission, through dealers acting for their own account and not as brokers. The Fund will primarily engage in transactions with these dealers or deal directly with the issuer unless a better price or execution could be obtained by using a broker. Prices paid to a dealer with respect to both foreign and domestic securities will generally include a spread, which is the difference between the prices at which the dealer is willing to purchase and sell the specific security at the time, and includes the dealers normal profit.
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Purchases of money market instruments by the Fund are made from dealers, underwriters and issuers. The Fund does not currently expect to incur any brokerage commission expense on such transactions because money market instruments are generally traded on a net basis with dealers acting as principal for their own accounts without a stated commission. The price of the security, however, usually includes a profit to the dealer.
Securities purchased in underwritten offerings include a fixed amount of compensation to the underwriter, generally referred to as the underwriters concession or discount. When securities are purchased or sold directly from or to an issuer, no commissions or discounts are paid.
The Advisor may seek to obtain an undertaking from issuers of commercial paper or dealers selling commercial paper to consider the repurchase of such securities from the Fund prior to maturity at their original cost plus interest (sometimes adjusted to reflect the actual maturity of the securities), if it believes that the Funds anticipated need for liquidity makes such action desirable. Any such repurchase prior to maturity reduces the possibility that the Fund would incur a capital loss in liquidating commercial paper, especially if interest rates have risen since acquisition of such commercial paper.
Investment decisions for the Fund and for other investment accounts managed by the Advisor are made independently of each other in light of differing conditions. The Advisor allocates investments among client accounts in a fair and equitable manner. A variety of factors will be considered in making such allocations. These factors include: (i) investment objectives or strategies for particular accounts, including sector, industry, country or region and capitalization weightings, (ii) tax considerations of an account, (iii) risk or investment concentration parameters for an account, (iv) supply or demand for a security at a given price level, (v) size of available investment, (vi) cash availability and liquidity requirements for accounts, (vii) regulatory restrictions, (viii) minimum investment size of an account, (ix) relative size of account, and (x) such other factors as may be approved by the Advisors general counsel. Moreover, investments may not be allocated to one client account over another based on any of the following considerations: (i) to favor one client account at the expense of another, (ii) to generate higher fees paid by one client account over another or to produce greater performance compensation to the Advisor, (iii) to develop or enhance a relationship with a client or prospective client, (iv) to compensate a client for past services or benefits rendered to the Advisor or to induce future services or benefits to be rendered to the Advisor, or (v) to manage or equalize investment performance among different client accounts.
Equity securities will generally be allocated among client accounts within the same investment mandate on a pro rata basis. This pro-rata allocation may result in the Fund receiving less of a particular security than if pro-ration had not occurred. All allocations of equity securities will be subject, where relevant, to share minimums established for accounts and compliance constraints.
Initial public offerings of securities may be over-subscribed and subsequently trade at a premium in the secondary market. When the Advisor is given an opportunity to invest in such an initial offering or new or hot issue, the supply of securities available for client accounts is often less than the amount of securities the accounts would otherwise take. In order to allocate these investments fairly and equitably among client accounts over time, each portfolio manager or a member of his or her respective investment team will indicate to the Advisors trading desk their level of interest in a particular offering with respect to eligible clients accounts for which that team is responsible. Initial public offerings of U.S. equity securities will be identified as eligible for particular client accounts that are managed by portfolio teams who have indicated interest in the offering based on market capitalization of the issuer of the security and the investment mandate of the client account and in the case of international equity securities, the country where the offering is taking place and the investment mandate of the client account. Generally, shares received during the initial public offering will be allocated among participating client accounts within each investment mandate on a pro rata basis. In situations where supply is too limited to be allocated among all accounts for which the investment is eligible, portfolio managers may rotate such investment opportunities among one or more accounts so long as the rotation system provides for fair access for all client accounts over time. Other allocation methodologies that are considered by the Advisor to be fair and equitable to clients may be used as well.
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Because different accounts may have differing investment objectives and policies, the Advisor may buy and sell the same securities at the same time for different clients based on the particular investment objective, guidelines and strategies of those accounts. For example, the Advisor may decide that it may be entirely appropriate for a growth fund to sell a security at the same time a value fund is buying that security. To the extent that transactions on behalf of more than one client of the Advisor or its affiliates during the same period may increase the demand for securities being purchased or the supply of securities being sold, there may be an adverse effect on price. For example, sales of a security by the Advisor on behalf of one or more of its clients may decrease the market price of such security, adversely impacting other of the Advisors clients that still hold the security. If purchases or sales of securities arise for consideration at or about the same time that would involve the Fund or other clients or funds for which the Advisor or an affiliate act as investment manager, transactions in such securities will be made, insofar as feasible, for the respective funds and clients in a manner deemed equitable to all.
In certain instances, the Advisor may find it efficient for purposes of seeking to obtain best execution, to aggregate or bunch certain contemporaneous purchases or sale orders of its advisory accounts. In general, all contemporaneous trades for client accounts under management by the same portfolio manager or investment team will be bunched in a single order if the trader believes the bunched trade would provide each client with an opportunity to achieve a more favorable execution at a potentially lower execution cost. The costs associated with a bunched order will be shared pro rata among the clients in the bunched order. Generally, if an order for a particular portfolio manager or management team is filled at several different prices through multiple trades, all accounts participating in the order will receive the average price except in the case of certain international markets where average pricing is not permitted. While in some cases this practice could have a detrimental effect upon the price or value of the security as far as the Fund is concerned, in other cases it could be beneficial to the Fund. Transactions effected by the Advisor on behalf of more than one of its clients during the same period may increase the demand for securities being purchased or the supply of securities being sold, causing an adverse effect on price. The trader will give the bunched order to the broker dealer that the trader has identified as being able to provide the best execution of the order. Orders for purchase or sale of securities will be placed within a reasonable amount of time of the order receipt and bunched orders will be kept bunched only long enough to execute the order.
The Fund will not purchase securities during the existence of any underwriting or selling group relating to such securities of which the Advisor or any affiliated person (as defined in the Investment Company Act) thereof is a member except pursuant to procedures adopted by the Board in accordance with Rule 10f-3 under the Investment Company Act. In no instance will portfolio securities be purchased from or sold to the Advisor or any affiliated person of the foregoing entities except as permitted by SEC exemptive order or by applicable law.
While the Fund generally does not expect to engage in trading for short-term gains, it will effect portfolio transactions without regard to any holding period if, in the Advisors judgment, such transactions are advisable in light of a change in circumstances of a particular company or within a particular industry or in general market, economic or financial conditions. The portfolio turnover rate is calculated by dividing the lesser of the Funds annual sales or purchases of portfolio securities (exclusive of purchases or sales of U.S. Government Securities and all other securities whose maturities at the time of acquisition were one year or less) by the monthly average value of the securities in the portfolio during the year. A high rate of portfolio turnover results in certain tax consequences, such as increased capital gain dividends and/or ordinary income dividends, and in correspondingly greater transaction costs in the form of dealer spreads and brokerage commissions, which are borne directly by the Fund.
Information about the brokerage commissions paid by the Fund, including commissions paid to affiliates, for the last three fiscal years, is set forth in the following table:
Fiscal Year Ended April 30, |
Aggregate Brokerage
Commissions Paid |
Commissions Paid to Affiliates | ||||||
2020 |
$ | 2,583 | $ | 0 | ||||
2019 |
$ | 2,544 | $ | 0 | ||||
2018 |
$ | 3,657 | $ | 0 |
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For the fiscal year ended April 30, 2020, the brokerage commissions paid to affiliates by the Fund represented 0% of the aggregate brokerage commissions paid and involved 0% of the dollar amount of transactions involving payment of commissions during the year.
The following table shows the dollar amount of brokerage commissions paid to brokers for providing third-party research services and the approximate dollar amount of the transactions involved for the fiscal year ended April 30, 2020. The provision of third-party research services was not necessarily a factor in the placement of all brokerage business with such brokers.
Amount of Commissions Paid to Brokers for Providing Research Services |
Amount of Brokerage Transactions Involved |
|
$0 |
$0 |
As of April 30 2020, the Fund held no securities of its regular brokers or dealers (as defined in Rule 10b-1 under the Investment Company Act) whose shares were purchased during the fiscal year ended April 30, 2020.
The PNC Financial Services Group, Inc. (PNC), through a subsidiary, has a significant economic interest in BlackRock, Inc., the parent of the Advisor. Certain activities of BlackRock, Inc., the Advisor and the other subsidiaries of BlackRock, Inc. (collectively referred to in this section as BlackRock) and PNC and its subsidiaries (collectively referred to in this section as the Entities), and their respective directors, officers or employees, with respect to the Fund and/or other accounts managed by BlackRock or Entities, may give rise to actual or perceived conflicts of interest such as those described below.
BlackRock is one of the worlds largest asset management firms. PNC is a diversified financial services organization spanning the retail, business and corporate markets. BlackRock, PNC and their respective subsidiaries and each of their respective directors, officers and employees, including, in the case of BlackRock, the business units or entities and personnel who may be involved in the investment activities and business operations of the Fund, are engaged worldwide in businesses, including managing equities, fixed-income securities, cash and alternative investments, and banking and other financial services, and have interests other than that of managing the Fund. These are considerations of which investors in the Fund should be aware, and which may cause conflicts of interest that could disadvantage the Fund and its shareholders. These businesses and interests include potential multiple advisory, transactional, financial and other relationships with, or interests in companies and interests in securities or other instruments that may be purchased or sold by the Fund.
BlackRock and the Entities have proprietary interests in, and may manage or advise with respect to, accounts or funds (including separate accounts and other funds and collective investment vehicles) that have investment objectives similar to those of the Fund and/or that engage in transactions in the same types of securities, currencies and instruments as the Fund. BlackRock and the Entities are also major participants in the global currency, equities, swap and fixed-income markets, in each case, for the accounts of clients and, in some cases, on a proprietary basis. As such, BlackRock and the Entities are or may be actively engaged in transactions in the same securities, currencies, and instruments in which the Fund invests. Such activities could affect the prices and availability of the securities, currencies, and instruments in which the Fund invests, which could have an adverse impact on the Funds performance. Such transactions, particularly in respect of most proprietary accounts or client accounts, will be executed independently of the Funds transactions and thus at prices or rates that may be more or less favorable than those obtained by the Fund.
When BlackRock seeks to purchase or sell the same assets for managed accounts, including the Fund, the assets actually purchased or sold may be allocated among the accounts on a basis determined in its good faith discretion to be equitable. In some cases, this system may adversely affect the size or price of the assets purchased or sold for the Fund. In addition, transactions in investments by one or more other accounts managed by BlackRock (or Entities) may have the effect of diluting or otherwise disadvantaging the values, prices or investment strategies of the Fund, particularly, but not limited to, with respect to small capitalization, emerging market or less liquid strategies. This may occur with respect to BlackRock-advised accounts when investment decisions regarding the Fund are based on
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research or other information that is also used to support decisions for other accounts. When BlackRock implements a portfolio decision or strategy on behalf of another account ahead of, or contemporaneously with, similar decisions or strategies for the Fund, market impact, liquidity constraints, or other factors could result in the Fund receiving less favorable trading results and the costs of implementing such decisions or strategies could be increased or the Fund could otherwise be disadvantaged. BlackRock may, in certain cases, elect to implement internal policies and procedures designed to limit such consequences, which may cause the Fund to be unable to engage in certain activities, including purchasing or disposing of securities, when it might otherwise be desirable for it to do so.
Conflicts may also arise because portfolio decisions regarding the Fund may benefit other accounts managed by BlackRock. For example, the sale of a long position or establishment of a short position by the Fund may impair the price of the same security sold short by (and therefore benefit) BlackRock or its other accounts or funds, and the purchase of a security or covering of a short position in a security by the Fund may increase the price of the same security held by (and therefore benefit) BlackRock or its other accounts or funds. In addition, to the extent permitted by applicable law, the Fund may invest its assets in other funds advised by BlackRock, including funds that are managed by one or more of the same portfolio managers, which could result in conflicts of interest relating to asset allocation, timing of Fund purchases and redemptions, and increased remuneration and profitability for BlackRock and/or its personnel, including portfolio managers.
In certain circumstances, BlackRock, on behalf of the Fund, may seek to buy from or sell securities to another fund or account advised by BlackRock. BlackRock may (but is not required to) effect purchases and sales between BlackRock clients (cross trades), including the Fund, if BlackRock believes such transactions are appropriate based on each partys investment objectives and guidelines, subject to applicable law and regulation. There may be potential conflicts of interest or regulatory issues relating to these transactions which could limit BlackRocks decision to engage in these transactions for the Fund. BlackRock may have a potentially conflicting division of loyalties and responsibilities to the parties in such transactions.
BlackRock and the Entities and their respective clients may pursue or enforce rights with respect to an issuer in which the Fund has invested, and those activities may have an adverse effect on the Fund. As a result, prices, availability, liquidity and terms of the Funds investments may be negatively impacted by the activities of BlackRock or the Entities or their respective clients, and transactions for the Fund may be impaired or effected at prices or terms that may be less favorable than would otherwise have been the case.
The results of the Funds investment activities may differ significantly from the results achieved by BlackRock for its proprietary accounts or other accounts (including investment companies or collective investment vehicles) which it manages or advises. It is possible that one or more accounts managed or advised by BlackRock and such other accounts will achieve investment results that are substantially more or less favorable than the results achieved by the Fund. Moreover, it is possible that the Fund will sustain losses during periods in which one or more proprietary or other accounts managed or advised by BlackRock achieve significant profits. The opposite result is also possible.
From time to time, the Fund may be restricted from purchasing or selling securities, or from engaging in other investment activities because of regulatory, legal or contractual requirements applicable to BlackRock or one or more Entities or other accounts managed or advised by BlackRock or an Entity for clients worldwide, and/or the internal policies of BlackRock and the Entities designed to comply with such requirements. As a result, there may be periods, for example, when BlackRock will not initiate or recommend certain types of transactions in certain securities or instruments with respect to which BlackRock and/or one or more Entities are performing services or when position limits have been reached. For example, the investment activities of BlackRock for its proprietary accounts and accounts under its management may limit the investment opportunities for the Fund in certain emerging and other markets in which limitations are imposed upon the amount of investment, in the aggregate or in individual issuers, by affiliated foreign investors.
In connection with its management of the Fund, BlackRock may have access to certain fundamental analysis and proprietary technical models developed by BlackRock. BlackRock will not be under any obligation, however, to effect transactions on behalf of the Fund in accordance with such analysis and models. In addition, BlackRock will not have any obligation to make available any information regarding their proprietary activities or strategies, or the activities or strategies used for other accounts managed by them, for the benefit of the management of the Fund and it is not anticipated that BlackRock will have access to such information for the purpose of managing the Fund. The proprietary activities or portfolio strategies of BlackRock or the activities or strategies used for accounts managed by BlackRock or other client accounts could conflict with the transactions and strategies employed by BlackRock in managing the Fund.
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In addition, certain principals and certain employees of the Funds investment adviser are also principals or employees of other business units or entities within BlackRock. As a result, these principals and employees may have obligations to such other business units or entities or their clients and such obligations to other business units or entities or their clients may be a consideration of which investors in the Fund should be aware.
BlackRock may enter into transactions and invest in securities, instruments and currencies on behalf of the Fund in which clients of BlackRock or an Entity, or, to the extent permitted by the SEC and applicable law, BlackRock or an Entity, serves as the counterparty, principal or issuer. In such cases, such partys interests in the transaction will be adverse to the interests of the Fund, and such party may have no incentive to assure that the Fund obtains the best possible prices or terms in connection with the transactions. In addition, the purchase, holding and sale of such investments by the Fund may enhance the profitability of BlackRock or an Entity.
BlackRock or one or more Entities may also create, write or issue derivatives for their clients, the underlying securities, currencies or instruments of which may be those in which the Fund invests or which may be based on the performance of the Fund. BlackRock has entered into an arrangement with Markit Indices Limited, the index provider for underlying fixed-income indexes used by certain iShares ETFs, related to derivative fixed-income products that are based on such iShares ETFs. In connection with these products, BlackRock will receive certain payments for licensing intellectual property belonging to BlackRock and for facilitating provision of data in connection with such derivative products, which may include payments based on the trading volumes of, or revenues generated by, such products. The Fund and other accounts managed by BlackRock may transact in such products where permitted by the Funds investment strategy. These transactions could contribute to the viability of such products, potentially leading to increased payments to BlackRock, as well as greater liquidity for such products, increased purchase activity with respect to the applicable iShares ETFs and increased assets under management for BlackRock.
The Fund may, subject to applicable law, purchase investments that are the subject of an underwriting or other distribution by BlackRock or one or more Entities and may also enter into transactions with other clients of BlackRock or an Entity where such other clients have interests adverse to those of the Fund.
At times, these activities may cause business units or entities within BlackRock or an Entity to give advice to clients that may cause these clients to take actions adverse to the interests of the Fund. To the extent such transactions are permitted, the Fund will deal with BlackRock and/or Entities on an arms-length basis.
To the extent authorized by applicable law, BlackRock or one or more Entities may act as broker, dealer, agent, lender or adviser or in other commercial capacities for the Fund. It is anticipated that the commissions, mark-ups, mark-downs, financial advisory fees, underwriting and placement fees, sales fees, financing and commitment fees, brokerage fees, other fees, compensation or profits, rates, terms and conditions charged by BlackRock or an Entity will be in its view commercially reasonable, although BlackRock and each Entity, including its sales personnel, will have an interest in obtaining fees and other amounts that are favorable to BlackRock or the Entity and such sales personnel, which may have an adverse effect on the Fund.
Subject to applicable law, BlackRock and the Entities (and their personnel and other distributors) will be entitled to retain fees and other amounts that they receive in connection with their service to the Fund as broker, dealer, agent, lender, adviser or in other commercial capacities. No accounting to the Fund or its shareholders will be required, and no fees or other compensation payable by the Fund or its shareholders will be reduced by reason of receipt by BlackRock or an Entity of any such fees or other amounts.
When BlackRock or an Entity acts as broker, dealer, agent, adviser or in other commercial capacities in relation to the Fund, BlackRock or the Entity may take commercial steps in its own interests, which may have an adverse effect on the Fund. The Fund will be required to establish business relationships with its counterparties based on the Funds own credit standing. BlackRock will not have any obligation to allow credit to be used in connection with the Funds establishment of its business relationships, nor is it expected that the Funds counterparties will rely on the credit of BlackRock in evaluating the Funds creditworthiness.
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BlackRock Investment Management, LLC (BIM), an affiliate of BlackRock, pursuant to SEC exemptive relief, acts as securities lending agent to, and receives a share of securities lending revenues from, the Fund. BIM may receive compensation for managing the reinvestment of the cash collateral from securities lending. There are potential conflicts of interests in managing a securities lending program, including but not limited to: (i) BIM as securities lending agent may have an incentive to increase or decrease the amount of securities on loan or to lend particular securities in order to generate additional risk-adjusted revenue for BIM and its affiliates; and (ii) BIM as securities lending agent may have an incentive to allocate loans to clients that would provide more revenue to BIM. As described further below, BIM seeks to mitigate this conflict by providing its securities lending clients with equal lending opportunities over time in order to approximate pro-rata allocation.
As part of its securities lending program, BlackRock indemnifies certain clients and/or funds against a shortfall in collateral in the event of borrower default. BlackRocks Risk and Quantitative Analytics Group (RQA) calculates, on a regular basis, BlackRocks potential dollar exposure to the risk of collateral shortfall upon counterparty default (shortfall risk) under the securities lending program for both indemnified and non-indemnified clients. On a periodic basis, RQA also determines the maximum amount of potential indemnified shortfall risk arising from securities lending activities (indemnification exposure limit) and the maximum amount of counterparty-specific credit exposure (credit limits) BlackRock is willing to assume as well as the programs operational complexity. RQA oversees the risk model that calculates projected shortfall values using loan-level factors such as loan and collateral type and market value as well as specific borrower counterparty credit characteristics. When necessary, RQA may further adjust other securities lending program attributes by restricting eligible collateral or reducing counterparty credit limits. As a result, the management of the indemnification exposure limit may affect the amount of securities lending activity BlackRock may conduct at any given point in time and impact indemnified and non-indemnified clients by reducing the volume of lending opportunities for certain loans (including by asset type, collateral type and/or revenue profile).
BlackRock uses a predetermined systematic process in order to approximate pro-rata allocation over time. In order to allocate a loan to a portfolio: (i) BlackRock as a whole must have sufficient lending capacity pursuant to the various program limits (i.e. indemnification exposure limit and counterparty credit limits); (ii) the lending portfolio must hold the asset at the time a loan opportunity arrives; and (iii) the lending portfolio must also have enough inventory, either on its own or when aggregated with other portfolios into one single market delivery, to satisfy the loan request. In doing so, BlackRock seeks to provide equal lending opportunities for all portfolios, independent of whether BlackRock indemnifies the portfolio. Equal opportunities for lending portfolios does not guarantee equal outcomes. Specifically, short and long-term outcomes for individual clients may vary due to asset mix, asset/liability spreads on different securities, and the overall limits imposed by the firm.
Purchases and sales of securities and other assets for the Fund may be bunched or aggregated with orders for other BlackRock client accounts, including with accounts that pay different transaction costs solely due to the fact that they have different research payment arrangements. BlackRock, however, is not required to bunch or aggregate orders if portfolio management decisions for different accounts are made separately, or if they determine that bunching or aggregating is not practicable or required, or in cases involving client direction.
Prevailing trading activity frequently may make impossible the receipt of the same price or execution on the entire volume of securities purchased or sold. When this occurs, the various prices may be averaged, and the Fund will be charged or credited with the average price. Thus, the effect of the aggregation may operate on some occasions to the disadvantage of the Fund. In addition, under certain circumstances, the Fund will not be charged the same commission or commission equivalent rates in connection with a bunched or aggregated order.
As discussed in the section entitled Portfolio Transactions and Brokerage in this SAI, BlackRock, unless prohibited by applicable law, may cause the Fund or account to pay a broker or dealer a commission for effecting a transaction that exceeds the amount another broker or dealer would have charged for effecting the same transaction in recognition of the value of brokerage and research services provided by that broker or dealer.
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Subject to applicable law, BlackRock may select brokers (including, without limitation, certain Entities) that furnish BlackRock, the Fund, other BlackRock client accounts or personnel, directly or through correspondent relationships, with research or other appropriate services which provide, in BlackRocks view, appropriate assistance to BlackRock in the investment decision-making process (including with respect to futures, fixed-price offerings and OTC transactions). Such research or other services may include, to the extent permitted by law, research reports on companies, industries and securities; economic and financial data; financial publications; proxy analysis; trade industry seminars; computer data bases; research-oriented software and other services and products.
Research or other services obtained in this manner may be used in servicing any or all of the Fund and other BlackRock client accounts, including in connection with BlackRock client accounts other than those that pay commissions to the broker relating to the research or other service arrangements. Such products and services may disproportionately benefit other BlackRock client accounts relative to the Fund based on the amount of brokerage commissions paid by the Fund and such other BlackRock client accounts. For example, research or other services that are paid for through one clients commissions may not be used in managing that clients account. In addition, other BlackRock client accounts may receive the benefit, including disproportionate benefits, of economies of scale or price discounts in connection with products and services that may be provided to the Fund and to such other BlackRock client accounts. To the extent that BlackRock uses soft dollars, it will not have to pay for those products and services itself.
BlackRock, unless prohibited by applicable law, may endeavor to execute trades through brokers who, pursuant to such arrangements, provide research or other services in order to ensure the continued receipt of research or other services BlackRock believes are useful in its investment decision-making process. BlackRock may from time to time choose not to engage in the above described arrangements to varying degrees. BlackRock, unless prohibited by applicable law, may also enter into commission sharing arrangements under which BlackRock may execute transactions through a broker-dealer, including, where permitted, an Entity, and request that the broker-dealer allocate a portion of the commissions or commission credits to another firm that provides research to BlackRock. To the extent that BlackRock engages in commission sharing arrangements, many of the same conflicts related to traditional soft dollars may exist.
BlackRock may utilize certain electronic crossing networks (ECNs) (including, without limitation, ECNs in which BlackRock or an Entity has an investment or other interest, to the extent permitted by applicable law) in executing client securities transactions for certain types of securities. These ECNs may charge fees for their services, including access fees and transaction fees. The transaction fees, which are similar to commissions or markups/markdowns, will generally be charged to clients and, like commissions and markups/markdowns, would generally be included in the cost of the securities purchased. Access fees may be paid by BlackRock even though incurred in connection with executing transactions on behalf of clients, including the Fund. In certain circumstances, ECNs may offer volume discounts that will reduce the access fees typically paid by BlackRock.
BlackRock will only utilize ECNs consistent with its obligation to seek to obtain best execution in client transactions.
BlackRock has adopted policies and procedures designed to prevent conflicts of interest from influencing proxy voting decisions that it makes on behalf of advisory clients, including the Fund, and to help ensure that such decisions are made in accordance with BlackRocks fiduciary obligations to its clients. Nevertheless, notwithstanding such proxy voting policies and procedures, actual proxy voting decisions of BlackRock may have the effect of favoring the interests of other clients or businesses of other divisions or units of BlackRock and/or an Entity, provided that BlackRock believes such voting decisions to be in accordance with its fiduciary obligations. For a more detailed discussion of these policies and procedures, see Appendix B.
It is possible that the Fund may invest in securities of, or engage in transactions with, companies with which an Entity has developed or is trying to develop investment banking relationships as well as securities of entities in which BlackRock or an Entity has significant debt or equity investments or other interests or in which an Entity makes a market. The Fund may also invest in issuances (such as structured notes) by entities for which BlackRock provides and is compensated for cash management services relating to the proceeds from the sale of such issuances. The Fund also may invest in securities of, or engage in transactions with, companies to which an Entity provides or may in the future provide research coverage. Such investments or transactions could cause conflicts
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between the interests of the Fund and the interests of BlackRock, other clients of BlackRock or an Entity. In making investment decisions for the Fund, BlackRock is not permitted to obtain or use material non-public information acquired by any unit of BlackRock, in the course of these activities. In addition, from time to time, the activities of BlackRock or an Entity may limit the Funds flexibility in purchases and sales of securities. When an Entity is engaged in an underwriting or other distribution of securities of an entity, BlackRock may be prohibited from purchasing or recommending the purchase of certain securities of that entity for the Fund. As indicated below, BlackRock or an Entity may engage in transactions with companies in which BlackRock-advised funds or other clients of BlackRock or of an Entity have an investment.
BlackRock and Chubb Limited (Chubb), a public company whose securities are held by BlackRock-advised funds and other accounts, partially funded the creation of a re-insurance company (Re Co) pursuant to which each has approximately a 9.9% ownership interest and each has representation on the board of directors. Certain employees and executives of BlackRock have a less than 1/2 of 1% ownership interest in Re Co. BlackRock manages the investment portfolio of Re Co, which is held in a wholly-owned subsidiary. Re Co participates as a reinsurer with reinsurance contracts underwritten by subsidiaries of Chubb.
BlackRock may provide valuation assistance to certain clients with respect to certain securities or other investments and the valuation recommendations made for such clients accounts may differ from the valuations for the same securities or investments assigned by the Funds pricing vendors, especially if such valuations are based on broker-dealer quotes or other data sources unavailable to the Funds pricing vendors. While BlackRock will generally communicate its valuation information or determinations to the Funds pricing vendors and/or fund accountants, there may be instances where the Funds pricing vendors or fund accountants assign a different valuation to a security or other investment than the valuation for such security or investment determined or recommended by BlackRock.
As disclosed in more detail in Net Asset Value in the prospectus, when market quotations are not readily available or are believed by BlackRock to be unreliable, the Funds investments are valued at fair value by BlackRock, in accordance with procedures adopted by the Funds Board of Directors. When determining a fair value price, BlackRock seeks to determine the price that the Fund might reasonably expect to receive from the current sale of that asset or liability in an arms-length transaction. The price generally may not be determined based on what the Fund might reasonably expect to receive for selling an asset or liability at a later time or if it holds the asset or liability to maturity. While fair value determinations will be based upon all available factors that BlackRock deems relevant at the time of the determination, and may be based on analytical values determined by BlackRock using proprietary or third party valuation models, fair value represents only a good faith approximation of the value of an asset or liability. The fair value of one or more assets or liabilities may not, in retrospect, be the price at which those assets or liabilities could have been sold during the period in which the particular fair values were used in determining the Funds NAV. As a result, the Funds sale or repurchase of its shares at NAV, at a time when a holding or holdings are valued by BlackRock (pursuant to Board-adopted procedures) at fair value, may have the effect of diluting or increasing the economic interest of existing shareholders and may affect the amount of revenue received by BlackRock with respect to services for which it receives an asset-based fee.
To the extent permitted by applicable law, the Fund may invest all or some of its short-term cash investments in any money market fund or similarly-managed private fund advised or managed by BlackRock. In connection with any such investments, the Fund, to the extent permitted by the Investment Company Act, may pay its share of expenses of a money market fund or other similarly-managed private fund in which it invests, which may result in the Fund bearing some additional expenses.
BlackRock and its directors, officers and employees, may buy and sell securities or other investments for their own accounts and may have conflicts of interest with respect to investments made on behalf of the Fund. As a result of differing trading and investment strategies or constraints, positions may be taken by directors, officers, and employees of BlackRock that are the same, different from or made at different times than positions taken for the Fund. To lessen the possibility that the Fund will be adversely affected by this personal trading, the Fund and the Advisor each have adopted a Code of Ethics in compliance with Section 17(j) of the Investment Company Act that restricts securities trading in the personal accounts of investment professionals and others who normally come into possession of information regarding the Funds portfolio transactions. Each Code of Ethics is also available on the EDGAR Database on the SECs Internet site at http://www.sec.gov, and copies may be obtained, after paying a duplicating fee, by e-mail at publicinfo@sec.gov.
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BlackRock will not purchase securities or other property from, or sell securities or other property to, the Fund, except that the Fund may in accordance with rules or guidance adopted under the Investment Company Act engage in transactions with accounts that are affiliated with the Fund as a result of common officers, directors, or investment advisers or pursuant to exemptive orders granted to the Fund and/or BlackRock by the SEC. These transactions would be effected in circumstances in which BlackRock determined that it would be appropriate for the Fund to purchase and another client of BlackRock to sell, or the Fund to sell and another client of BlackRock to purchase, the same security or instrument on the same day. From time to time, the activities of the Fund may be restricted because of regulatory requirements applicable to BlackRock and/or BlackRocks internal policies designed to comply with, limit the applicability of, or otherwise relate to such requirements. A client not advised by BlackRock would not be subject to some of those considerations. There may be periods when BlackRock may not initiate or recommend certain types of transactions, or may otherwise restrict or limit their advice in certain securities or instruments issued by or related to companies for which BlackRock or an Entity is performing investment banking, market making, advisory or other services or has proprietary positions. For example, when BlackRock is engaged to provide advisory or risk management services for a company, BlackRock may be prohibited from or limited in purchasing or selling securities of that company on behalf of the Fund, particularly where such services result in BlackRock obtaining material non-public information about the company (e.g., in connection with participation in a creditors committee). Similar situations could arise if personnel of BlackRock serve as directors of companies the securities of which the Fund wishes to purchase or sell. However, if permitted by applicable law, and where consistent with BlackRocks policies and procedures (including the necessary implementation of appropriate information barriers), the Fund may purchase securities or instruments that are issued by such companies, are the subject of an underwriting, distribution, or advisory assignment by an Entity or are the subject of an advisory or risk management assignment by BlackRock, or where personnel of BlackRock are directors or officers of the issuer.
The investment activities of BlackRock for their proprietary accounts and for client accounts may also limit the investment strategies and rights of the Fund. For example, in certain circumstances where the Fund invests in securities issued by companies that operate in certain regulated industries, in certain emerging or international markets, or are subject to corporate or regulatory ownership restrictions, or invest in certain futures and derivative transactions, there may be limits on the aggregate amount invested by BlackRock for their proprietary accounts and for client accounts (including the Fund) that may not be exceeded without the grant of a license or other regulatory or corporate consent, or, if exceeded, may cause BlackRock, the Fund or other client accounts to suffer disadvantages or business restrictions. If certain aggregate ownership thresholds are reached or certain transactions undertaken, the ability of BlackRock on behalf of clients (including the Fund) to purchase or dispose of investments, or exercise rights or undertake business transactions, may be restricted by regulation or otherwise impaired. As a result, BlackRock on behalf of its clients (including the Fund) may limit purchases, sell existing investments, or otherwise restrict, forgo or limit the exercise of rights (including transferring, outsourcing or limiting voting rights or forgoing the right to receive dividends) when BlackRock, in its sole discretion, deems it appropriate in light of potential regulatory or other restrictions on ownership or other consequences resulting from reaching investment thresholds.
In those circumstances where ownership thresholds or limitations must be observed, BlackRock seeks to allocate limited investment opportunities equitably among clients (including the Fund), taking into consideration benchmark weight and investment strategy. When ownership in certain securities nears an applicable threshold, BlackRock may limit purchases in such securities to the issuers weighting in the applicable benchmark used by BlackRock to manage the Fund. If client (including Fund) holdings of an issuer exceed an applicable threshold and BlackRock is unable to obtain relief to enable the continued holding of such investments, it may be necessary to sell down these positions to meet the applicable limitations. In these cases, benchmark overweight positions will be sold prior to benchmark positions being reduced to meet applicable limitations.
In addition to the foregoing, other ownership thresholds may trigger reporting requirements to governmental and regulatory authorities, and such reports may entail the disclosure of the identity of a client or BlackRocks intended strategy with respect to such security or asset.
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BlackRock may maintain securities indices. To the extent permitted by applicable laws, the Fund may seek to license and use such indices as part of their investment strategy. Index based funds that seek to track the performance of securities indices also may use the name of the index or index provider in the fund name. Index providers, including BlackRock (to the extent permitted by applicable law), may be paid licensing fees for use of their index or index name. BlackRock is not obligated to license its indices to the Fund and the Fund is under no obligation to use BlackRock indices. The Fund cannot be assured that the terms of any index licensing agreement with BlackRock will be as favorable as those terms offered to other licensees.
BlackRock may enter into contractual arrangements with third-party service providers to the Fund (e.g., custodians, administrators and index providers) pursuant to which BlackRock receives fee discounts or concessions in recognition of BlackRocks overall relationship with such service providers. To the extent that BlackRock is responsible for paying these service providers out of its management fee, the benefits of any such fee discounts or concessions may accrue, in whole or in part, to BlackRock.
BlackRock owns or has an ownership interest in certain trading, portfolio management, operations and/or information systems used by Fund service providers. These systems are, or will be, used by the Fund service provider in connection with the provision of services to accounts managed by BlackRock and funds managed and sponsored by BlackRock, including the Fund, that engage the service provider (typically the custodian). The Funds service provider remunerates BlackRock for the use of the systems. The Funds service providers payments to BlackRock for the use of these systems may enhance the profitability of BlackRock.
BlackRocks receipt of fees from a service provider in connection with the use of systems provided by BlackRock may create an incentive for BlackRock to recommend that the Fund enter into or renew an arrangement with the service provider.
The Fund from time to time may purchase in the secondary market (i) certain mortgage pass-through securities packaged and master serviced by PNC Mortgage Securities Corp. (PNC Mortgage) or Midland Loan Services, Inc. (Midland), or (ii) mortgage-related securities containing loans or mortgages originated by PNC Bank, National Association (PNC Bank) or its affiliates. It is possible that under some circumstances, PNC Mortgage, Midland or other affiliates could have interests that are in conflict with the holders of these mortgage-backed securities, and such holders could have rights against PNC Mortgage, Midland or their affiliates. For example, if PNC Mortgage, Midland or their affiliates engaged in negligence or willful misconduct in carrying out its duties as a master servicer, then any holder of the mortgage-backed security could seek recourse against PNC Mortgage, Midland or their affiliates, as applicable. Also, as a master servicer, PNC Mortgage, Midland or their affiliates may make certain representations and warranties regarding the quality of the mortgages and properties underlying a mortgage-backed security. If one or more of those representations or warranties is false, then the holders of the mortgage-backed securities could trigger an obligation of PNC Mortgage, Midland or their affiliates, as applicable, to repurchase the mortgages from the issuing trust. Finally, PNC Mortgage, Midland or their affiliates may own securities that are subordinate to the senior mortgage-backed securities owned by the Fund.
Present and future activities of BlackRock (including BlackRock Advisors, LLC) and the Entities, and their respective directors, officers and employees, in addition to those described in this section, may give rise to additional conflicts of interest.
Common Shares
The Fund intends to hold annual meetings of shareholders so long as the common shares are listed on a national securities exchange and such meetings are required as a condition to such listing.
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Preferred Shares
The Fund currently does not intend to issue preferred stock. Although the terms of any preferred stock that the Fund might issue in the future, including dividend rate, liquidation preference and redemption provisions, will be determined by the Board, subject to applicable law and the Charter, it is likely that any such preferred stock issued would be structured to carry a relatively short-term dividend rate reflecting interest rates on short-term debt securities, by providing for the periodic redetermination of the dividend rate at relatively short intervals through a fixed spread or remarketing procedure, subject to a maximum rate which would increase over time in the event of an extended period of unsuccessful remarketing. The Fund also believes that it is likely that the liquidation preference, voting rights and redemption provisions of any such preferred stock would be similar to those stated below.
Liquidation Preference. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Fund, the holders of shares of any outstanding preferred stock will be entitled to receive a preferential liquidating distribution (expected to equal the original purchase price per share plus an amount equal to accumulated but unpaid dividends, whether or not earned or declared) before any distribution of assets is made to holders of common stock. After payment of the full amount of the liquidating distribution to which they are entitled, it is expected that preferred stockholders will not be entitled to any further participation in any distribution of assets by the Fund. A consolidation or merger of the Fund with or into any other corporation or corporations or a sale of all or substantially all of the assets of the Fund will not be deemed to be a liquidation, dissolution or winding up of the Fund.
Voting Rights. Except as otherwise indicated in this prospectus and except as otherwise required by applicable law, holders of shares of any outstanding preferred stock will have equal voting rights with holders of shares of common stock (one vote per share) and will vote together with holders of common stock as a single class. In connection with the election of the Funds Directors, holders of shares of any outstanding preferred stock, voting as a separate class, will be entitled to elect two of the Funds Directors, and the remaining Directors will be elected by all holders of capital stock, voting as a single class. So long as any preferred stock is outstanding, it is expected that the Fund will have not less than five Directors. If at any time dividends on shares of any outstanding preferred stock shall be unpaid in an amount equal to two full years dividends thereon, the holders of all outstanding shares of preferred stock, voting as a separate class, will be entitled to elect a majority of the Funds Directors until all dividends in default have been paid or declared and set apart for payment. It is expected that the affirmative vote of the holders of a majority of the outstanding shares of any outstanding preferred stock, voting as a separate class, will be required to (i) authorize, create or issue any class or series of stock ranking prior to any series of preferred stock with respect to payment of dividends or the distribution of assets on liquidation or (ii) amend, alter or repeal the provisions of the Charter, whether by merger, consolidation or otherwise, so as to adversely affect any of the contract rights expressly set forth in the Charter of holders of preferred stock.
Redemption Provisions. It is anticipated that any outstanding shares of preferred stock will generally be redeemable at the option of the Fund at a price equal to their liquidation preference plus accumulated but unpaid dividends to the date of redemption plus, under certain circumstances, a redemption premium. Shares of preferred stock will also be subject to mandatory redemption at a price equal to their liquidation preference plus accumulated but unpaid dividends to the date of redemption upon the occurrence of certain specified events, such as the failure of the Fund to maintain asset coverage requirements for the preferred stock specified by the 1940 Act and rating services that issue ratings on the preferred stock.
Liquidity Feature. Preferred stock may include a liquidity feature that allows holders of preferred stock to have their shares purchased by a liquidity provider in the event that sell orders have not been matched with purchase orders and successfully settled in a remarketing. The Fund would pay a fee to the provider of this liquidity feature, which would be borne by common shareholders of the Fund. The terms of such liquidity feature may require the Fund to redeem preferred stock still owned by the liquidity provider following a certain period of continuous, unsuccessful remarketing, which may adversely impact the Fund.
The discussion above describes the possible offering of preferred stock by the Fund. If the Board determines to proceed with such an offering, the terms of the preferred stock may be the same as, or different from, the terms described above, subject to applicable law and the Charter. The Board, without the approval of the holders of common shares, may authorize an offering of preferred stock or may determine not to authorize such an offering, and may fix the terms of the preferred stock to be offered.
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Other Shares
The Board (subject to applicable law and the Charter) may authorize an offering, without the approval of the holders of common shares and, depending on their terms, any preferred stock outstanding at that time, of other classes of shares, or other classes or series of shares, as they determine to be necessary, desirable or appropriate, having such terms, rights, preferences, privileges, limitations and restrictions as the Board sees fit. The Fund currently does not expect to issue any other classes of shares, or series of shares, except for the common shares.]
The Fund is a closed-end management investment company and as such its shareholders will not have the right to cause the Fund to redeem their shares. Instead, the Funds common shares will trade in the open market at a price that will be a function of several factors, including dividend levels (which are in turn affected by expenses), NAV, call protection for portfolio securities, dividend stability, liquidity, relative demand for and supply of the common shares in the market, general market and economic conditions and other factors. Because shares of a closed-end investment company may frequently trade at prices lower than NAV, the Board may consider action that might be taken to reduce or eliminate any material discount from NAV in respect of common shares, which may include the repurchase of such shares in the open market or in private transactions, the making of a tender offer for such shares, or the conversion of the Fund to an open-end investment company. The Board may decide not to take any of these actions. In addition, there can be no assurance that share repurchases or tender offers, if undertaken, will reduce market discount.
Notwithstanding the foregoing, at any time when the Fund has preferred shares outstanding, the Fund may not purchase, redeem or otherwise acquire any of its common shares unless (1) all accrued preferred share dividends have been paid and (2) at the time of such purchase, redemption or acquisition, the NAV of the Funds portfolio (determined after deducting the acquisition price of the common shares) is at least 200% of the liquidation value of any outstanding preferred shares (expected to equal the original purchase price per share plus any accrued and unpaid dividends thereon). Any service fees incurred in connection with any tender offer made by the Fund will be borne by the Fund and will not reduce the stated consideration to be paid to tendering shareholders.
Subject to its investment restrictions, the Fund may borrow to finance the repurchase of shares or to make a tender offer. Interest on any borrowings to finance share repurchase transactions or the accumulation of cash by the Fund in anticipation of share repurchases or tender offers will reduce the Funds net income. Any share repurchase, tender offer or borrowing that might be approved by the Board would have to comply with the Exchange Act, the Investment Company Act and the rules and regulations thereunder.
Although the decision to take action in response to a discount from NAV will be made by the Board at the time it considers such issue, it is the Boards present policy, which may be changed by the Board, not to authorize repurchases of common shares or a tender offer for such shares if: (i) such transactions, if consummated, would (a) result in the delisting of the common shares from the NYSE, or (b) impair the Funds status as a RIC under the Code, (which would make the Fund a taxable entity, causing the Funds income to be taxed at the corporate level in addition to the taxation of shareholders who receive dividends from the Fund) or as a registered closed-end investment company under the Investment Company Act; (ii) the Fund would not be able to liquidate portfolio securities in an orderly manner and consistent with the Funds investment objective and policies in order to repurchase shares; or (iii) there is, in the Boards judgment, any (a) material legal action or proceeding instituted or threatened challenging such transactions or otherwise materially adversely affecting the Fund, (b) general suspension of or limitation on prices for trading securities on the NYSE, (c) declaration of a banking moratorium by federal or state authorities or any suspension of payment by United States or New York banks, (d) material limitation affecting the Fund or the issuers of its portfolio securities by federal or state authorities on the extension of credit by lending institutions or on the exchange of foreign currency, (e) commencement of war, armed hostilities or other international or national calamity directly or indirectly involving the United States, or (f) other event or condition which would have a material adverse effect (including any adverse tax effect) on the Fund or its shareholders if shares were repurchased. The Board may in the future modify these conditions in light of experience.
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The repurchase by the Fund of its shares at prices below NAV will result in an increase in the NAV of those shares that remain outstanding. However, there can be no assurance that share repurchases or tender offers at or below NAV will result in the Funds common shares trading at a price equal to their NAV. Nevertheless, the fact that the Funds common shares may be the subject of repurchases or tender offers from time to time, or that the Fund may be converted to an open-end investment company, may reduce any spread between market price and NAV that might otherwise exist.
In addition, a purchase by the Fund of its common shares will decrease the Funds net assets which would likely have the effect of increasing the Funds expense ratio. Any purchase by the Fund of its common shares at a time when preferred shares are outstanding will increase the leverage applicable to the outstanding common shares then remaining.
Before deciding whether to take any action if the common shares trade below NAV, the Board would likely consider all relevant factors, including the extent and duration of the discount, the liquidity of the Funds portfolio, the impact of any action that might be taken on the Fund or its shareholders and market considerations. Based on these considerations, even if the Funds common shares should trade at a discount, the Board may determine that, in the interest of the Fund and its shareholders, no action should be taken.
The following is a description of certain U.S. federal income tax consequences to a shareholder of acquiring, holding and disposing of common shares of the Fund. Except as otherwise noted, this discussion assumes you are a taxable U.S. holder (as defined below). This discussion is based upon current provisions of the Internal Revenue Code of 1986, as amended (the Code), the regulations promulgated thereunder and judicial and administrative authorities, all of which are subject to change or differing interpretations by the courts or the Internal Revenue Service, possibly with retroactive effect. No attempt is made to present a detailed explanation of all U.S. federal income tax concerns affecting the Fund and its shareholders, and the discussions set forth here do not constitute tax advice. This discussion assumes that investors hold common shares of the Fund as capital assets (generally, for investment). The Fund has not sought and will not seek any ruling from the Internal Revenue Service regarding any matters discussed herein. No assurance can be given that the Internal Revenue Service would not assert, or that a court would not sustain, a position contrary to those set forth below. This summary does not discuss any aspects of foreign, state or local tax. Prospective investors must consult their own tax advisers as to the U.S. federal income tax consequences (including the alternative minimum tax consequences) of acquiring, holding and disposing of the Funds common shares, as well as the effects of state, local and non-U.S. tax laws.
In addition, no attempt is made to address tax considerations applicable to an investor with a special tax status, such as a financial institution, REIT, insurance company, regulated investment company, individual retirement account, other tax-exempt organization, dealer in securities or currencies, person holding shares of the Fund as part of a hedging, integrated, conversion or straddle transaction, trader in securities that has elected the mark-to-market method of accounting for its securities, U.S. holder (as defined below) whose functional currency is not the U.S. dollar, investor with applicable financial statements within the meaning of Section 451(b) of the Code, or non-U.S. investor. Furthermore, this discussion does not reflect possible application of the alternative minimum tax.
A U.S. holder is a beneficial owner that is for U.S. federal income tax purposes:
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a citizen or individual resident of the United States (including certain former citizens and former long-term residents); |
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a corporation or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States or any state thereof or the District of Columbia; |
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an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or |
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a trust with respect to which a court within the United States is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all of its substantial decisions or the trust has made a valid election in effect under applicable Treasury regulations to be treated as a U.S. person. |
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Taxation of the Fund
The Fund intends to elect to be treated and to qualify to be taxed as a RIC under Subchapter M of the Code. In order to qualify as a RIC, the Fund must, among other things, satisfy certain requirements relating to the sources of its income, diversification of its assets, and distribution of its income to its shareholders. First, the Fund must derive at least 90% of its annual gross income from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock or securities or foreign currencies, or other income (including but not limited to gains from options, futures and forward contracts) derived with respect to its business of investing in such stock, securities or currencies, or net income derived from interests in qualified publicly traded partnerships (as defined in the Code) (the 90% gross income test). Second, the Fund must diversify its holdings so that, at the close of each quarter of its taxable year, (i) at least 50% of the value of its total assets consists of cash, cash items, U.S. Government securities, securities of other RICs and other securities, with such other securities limited in respect of any one issuer to an amount not greater in value than 5% of the value of the Funds total assets and to not more than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of the total assets is invested in the securities (other than U.S. Government securities and securities of other RICs) of any one issuer, any two or more issuers controlled by the Fund and engaged in the same, similar or related trades or businesses, or any one or more qualified publicly traded partnerships.
As long as the Fund qualifies as a RIC, the Fund will generally not be subject to corporate-level U.S. federal income tax on income and gains that it distributes each taxable year to its shareholders, provided that in such taxable year it distributes at least 90% of the sum of (i) its net tax-exempt interest income, if any, and (ii) its investment company taxable income (which includes, among other items, dividends, taxable interest, taxable original issue discount and market discount income, income from securities lending, net short-term capital gain in excess of net long-term capital loss, and any other taxable income other than net capital gain (as defined below) and is reduced by deductible expenses) determined without regard to the deduction for dividends paid. The Fund may retain for investment its net capital gain (which consists of the excess of its net long-term capital gain over its net short-term capital loss). However, if the Fund retains any net capital gain or any investment company taxable income, it will be subject to tax at regular corporate rates on the amount retained.
The Code imposes a 4% nondeductible excise tax on the Fund to the extent the Fund does not distribute by the end of any calendar year at least the sum of (i) 98% of its ordinary income (not taking into account any capital gain or loss) for the calendar year and (ii) 98.2% of its capital gain in excess of its capital loss (adjusted for certain ordinary losses) for a one-year period generally ending on October 31 of the calendar year (unless an election is made to use the Funds fiscal year). In addition, the minimum amounts that must be distributed in any year to avoid the excise tax will be increased or decreased to reflect any under-distribution or over-distribution, as the case may be, from the previous year. For purposes of the excise tax, the Fund will be deemed to have distributed any income on which it paid U.S. federal income tax. While the Fund intends to distribute any income and capital gain in the manner necessary to minimize imposition of the 4% nondeductible excise tax, there can be no assurance that sufficient amounts of the Funds taxable income and capital gain will be distributed to entirely avoid the imposition of the excise tax. In that event, the Fund will be liable for the excise tax only on the amount by which it does not meet the foregoing distribution requirement.
If in any taxable year the Fund should fail to qualify under Subchapter M of the Code for tax treatment as a RIC, the Fund would incur a regular corporate U.S. federal income tax upon all of its taxable income for that year, and all distributions to its shareholders (including distributions of net capital gain) would be taxable to shareholders as ordinary dividend income for U.S. federal income tax purposes to the extent of the Funds earnings and profits. Provided that certain holding period and other requirements were met, such dividends would be eligible (i) to be treated as qualified dividend income in the case of shareholders taxed as individuals and (ii) for the dividends received deduction in the case of corporate shareholders. In addition, to qualify again to be taxed as a RIC in a subsequent year, the Fund would be required to distribute to shareholders its earnings and profits attributable to non-RIC years. In addition, if the Fund failed to qualify as a RIC for a period greater than two taxable years, then, in order to qualify as a RIC in a subsequent year, the Fund would be required to elect to recognize and pay tax on any net built-in gain (the excess of aggregate gain, including items of income, over aggregate loss that would have been realized if the Fund had been liquidated) or, alternatively, be subject to taxation on such built-in gain recognized for a period of five years.
The remainder of this discussion assumes that the Fund qualifies for taxation as a RIC.
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The Funds Investments
Certain of the Funds investment practices are subject to special and complex U.S. federal income tax provisions (including mark-to-market, constructive sale, straddle, wash sale, short sale and other rules) that may, among other things, (i) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (ii) convert lower taxed long-term capital gains or 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 be qualified income for purposes of the 90% annual gross income requirement described above. These U.S. federal income tax provisions could therefore affect the amount, timing and character of distributions to common shareholders. The Fund intends to monitor its transactions and may make certain tax elections and may be required to dispose of securities to mitigate the effect of these provisions and prevent disqualification of the Fund as a RIC. Additionally, the Fund may be required to limit its activities in derivative instruments in order to enable it to maintain its RIC status.
The Fund may invest a portion of its net assets in below investment grade securities, commonly known as junk securities. Investments in these types of securities may present special tax issues for the Fund. U.S. federal income tax rules are not entirely clear about issues such as when the Fund may cease to accrue interest, original issue discount or market discount, when and to what extent deductions may be taken for bad debts or worthless securities, how payments received on obligations in default should be allocated between principal and income and whether modifications or exchanges of debt obligations in a bankruptcy or workout context are taxable. These and other issues could affect the Funds ability to distribute sufficient income to preserve its status as a RIC or to avoid the imposition of U.S. federal income or excise tax.
Certain debt securities acquired by the Fund may be treated as debt securities that were originally issued at a discount. Generally, the amount of the original issue discount is treated as interest income and is included in taxable income (and required to be distributed by the Fund in order to qualify as a RIC and avoid U.S. federal income tax or the 4% excise tax on undistributed income) over the term of the security, even though payment of that amount is not received until a later time, usually when the debt security matures.
If the Fund purchases a debt security on a secondary market at a price lower than its adjusted issue price, the excess of the adjusted issue price over the purchase price is market discount. Unless the Fund makes an election to accrue market discount on a current basis, generally, any gain realized on the disposition of, and any partial payment of principal on, a debt security having market discount is treated as ordinary income to the extent the gain, or principal payment, does not exceed the accrued market discount on the debt security. Market discount generally accrues in equal daily installments. If the Fund ultimately collects less on the debt instrument than its purchase price plus the market discount previously included in income, the Fund may not be able to benefit from any offsetting loss deductions.
The Fund may invest in preferred securities or other securities the U.S. federal income tax treatment of which may not be clear or may be subject to recharacterization by the Internal Revenue Service. To the extent the tax treatment of such securities or the income from such securities differs from the tax treatment expected by the Fund, it could affect the timing or character of income recognized by the Fund, potentially requiring the Fund to purchase or sell securities, or otherwise change its portfolio, in order to comply with the tax rules applicable to RICs under the Code.
Gain or loss on the sale 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.
Because the Fund may invest in foreign securities, its income from such securities may be subject to non-U.S. taxes.
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Foreign currency gain or loss on foreign currency exchange contracts, non-U.S. dollar-denominated securities contracts, and non-U.S. dollar-denominated futures contracts, options and forward contracts that are not section 1256 contracts (as defined below) generally will be treated as ordinary income and loss.
Income from options on individual securities written by the Fund will generally not be recognized by the Fund for tax purposes until an option is exercised, lapses or is subject to a closing transaction (as defined by applicable regulations) pursuant to which the Funds obligations with respect to the option are otherwise terminated. If the option lapses without exercise, the premiums received by the Fund from the writing of such options will generally be characterized as short-term capital gain. If the Fund enters into a closing transaction, the difference between the premiums received and the amount paid by the Fund to close out its position will generally be treated as short-term capital gain or loss. If an option written by the Fund is exercised, thereby requiring the Fund to sell the underlying security, the premium will increase the amount realized upon the sale of the security, and the character of any gain on such sale of the underlying security as short-term or long-term capital gain will depend on the holding period of the Fund in the underlying security. Because the Fund will not have control over the exercise of the options it writes, such exercises or other required sales of the underlying securities may cause the Fund to realize gains or losses at inopportune times.
Options on indices of securities and sectors of securities that qualify as section 1256 contracts will generally be marked-to-market for U.S. federal income tax purposes. As a result, the Fund will generally recognize gain or loss on the last day of each taxable year equal to the difference between the value of the option on that date and the adjusted basis of the option. The adjusted basis of the option will consequently be increased by such gain or decreased by such loss. Any gain or loss with respect to options on indices and sectors that qualify as section 1256 contracts will be treated as short-term capital gain or loss to the extent of 40% of such gain or loss and long-term capital gain or loss to the extent of 60% of such gain or loss. Because the mark-to-market rules may cause the Fund to recognize gain in advance of the receipt of cash, the Fund may be required to dispose of investments in order to meet its distribution requirements. Mark-to-market losses may be suspended or otherwise limited if such losses are part of a straddle or similar transaction.
Taxation of Common Shareholders
Fund distributions of its tax-exempt interest on municipal securities, if properly reported by the Fund to its shareholders (exempt-interest dividends), will generally be exempt from regular federal income tax. In order for the Fund to pay exempt-interest dividends, at least 50% of the value of the Funds total assets must consist of tax-exempt obligations on a quarterly basis. Although the Fund intends to meet this requirement, no assurance can be given in this regard. If the Fund failed to do so, it would not be able to pay tax-exempt dividends, and your distributions attributable to interest received by the Fund from any source (including distributions of tax-exempt interest income) would be taxable as ordinary income to the extent of the Funds earnings and profits.
The Fund will either distribute or retain for reinvestment all or part of its net capital gain. If any such gain is retained, the Fund will be subject to a corporate income tax on such retained amount. In that event, the Fund expects to report the retained amount as undistributed capital gain in a notice to its common 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 as long-term capital gain its share of such undistributed amounts, (ii) will be entitled to credit its proportionate share of the tax paid by the Fund against its U.S. federal income tax liability and to claim refunds to the extent that the credit exceeds such liability and (iii) will increase its basis in its common shares by the amount of undistributed capital gains included in the shareholders income less the tax deemed paid by the shareholder under clause (ii).
Distributions paid to you by the Fund from its net capital gain, if any, that the Fund properly reports as capital gain dividends (capital gain dividends) are taxable as long-term capital gains, regardless of how long you have held your common shares. All other dividends paid to you by the Fund (including dividends from net short-term capital gains) from its current or accumulated earnings and profits, other than exempt-interest dividends (ordinary income dividends), are generally subject to tax as ordinary income. Provided that certain holding period and other requirements are met, ordinary income dividends (if properly reported by the Fund) may qualify (i) for the dividends received deduction in the case of corporate shareholders to the extent that the Funds income consists of dividend income from U.S. corporations, and (ii) in the case of individual shareholders, as qualified dividend income
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eligible to be taxed at long-term capital gains rates to the extent that the Fund receives qualified dividend income. Qualified dividend income is, in general, dividend income from taxable domestic corporations and certain qualified foreign corporations (e.g., generally, foreign corporations incorporated in a possession of the United States or in certain countries with a qualifying comprehensive tax treaty with the United States, or whose stock with respect to which such dividend is paid is readily tradable on an established securities market in the United States). There can be no assurance as to what portion, if any, of the Funds distributions will constitute qualified dividend income or be eligible for the dividends received deduction.
Any distributions you receive that are in excess of the Funds current and accumulated earnings and profits will be treated as a return of capital to the extent of your adjusted tax basis in your common shares, and thereafter as capital gain from the sale of common shares. The amount of any Fund distribution that is treated as a return of capital will reduce your adjusted tax basis in your common shares, thereby increasing your potential gain or reducing your potential loss on any subsequent sale or other disposition of your common shares.
Common shareholders may be entitled to offset their capital gain dividends with capital losses. The Code contains a number of statutory provisions affecting when capital losses may be offset against capital gain, and limiting the use of losses from certain investments and activities. Accordingly, common shareholders that have capital losses are urged to consult their tax advisers.
Dividends and other taxable distributions are taxable to you even though they are reinvested in additional common shares of the Fund. Dividends and other distributions paid by the Fund are generally treated under the Code as received by you at the time the dividend or distribution is made. If, however, the Fund pays you a dividend in January that was declared in the previous October, November or December to common shareholders of record on a specified date in one of such months, then such dividend will be treated for U.S. federal income tax purposes as being paid by the Fund and received by you on December 31 of the year in which the dividend was declared. In addition, certain other distributions made after the close of the Funds taxable year may be spilled back and treated as paid by the Fund (except for purposes of the 4% nondeductible excise tax) during such taxable year. In such case, you will be treated as having received such dividends in the taxable year in which the distributions were actually made.
Interest on certain private activity bonds is an item of tax preference subject to the alternative minimum tax on individuals. The Fund may invest a portion of its assets in municipal bonds subject to this provision so that a portion of its exempt-interest dividends is an item of tax preference to the extent such dividends represent interest received from these private activity bonds. Accordingly, investment in the Fund could cause a holder of common shares to be subject to, or result in an increased liability under, the alternative minimum tax.
Exempt-interest dividends are included in determining what portion, if any, of a persons Social Security and railroad retirement benefits will be includable in gross income subject to federal income tax.
The price of common shares purchased at any time may reflect the amount of a forthcoming distribution. Those purchasing common shares just prior to the record date for a distribution will receive a distribution which will be taxable to them even though it represents, economically, a return of invested capital.
The Fund will send you information after the end of each year setting forth the amount and tax status of any distributions paid to you by the Fund.
The sale or other disposition of common shares will generally result in capital gain or loss to you and will be long-term capital gain or loss if you have held such common shares for more than one year at the time of sale. Any loss upon the sale or other disposition of common shares held for six months or less will be treated as long-term capital loss to the extent of any capital gain dividends received (including amounts credited as an undistributed capital gain dividend) by you with respect to such common shares. Any loss you recognize on a sale or other disposition of common shares will be disallowed if you acquire other common shares (whether through the automatic reinvestment of dividends or otherwise) within a 61-day period beginning 30 days before and ending 30 days after your sale or exchange of the common shares. In such case, your tax basis in the common shares acquired will be adjusted to reflect the disallowed loss.
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If the Fund conducts a tender offer for its shares, a repurchase by the Fund of a shareholders shares pursuant to such tender offer generally will be treated as a sale or exchange of the shares by a shareholder provided that either (i) the shareholder tenders, and the Fund repurchases, all of such shareholders shares, thereby reducing the shareholders percentage ownership of the Fund, whether directly or by attribution under Section 318 of the Code, to 0%, (ii) the shareholder meets numerical safe harbors under the Code with respect to percentage voting interest and reduction in ownership of the Fund following completion of the tender offer, or (iii) the tender offer otherwise results in a meaningful reduction of the shareholders ownership percentage interest in the Fund, which determination depends on a particular shareholders facts and circumstances.
If a tendering shareholders proportionate ownership of the Fund (determined after applying the ownership attribution rules under Section 318 of the Code) is not reduced to the extent required under the tests described above, such shareholder will be deemed to receive a distribution from the Fund under Section 301 of the Code with respect to the shares held (or deemed held under Section 318 of the Code) by the shareholder after the tender offer (a Section 301 distribution). The amount of this distribution will equal the price paid by the Fund to such shareholder for the shares sold, and will be taxable as a dividend, i.e., as ordinary income, to the extent of the Funds current or accumulated earnings and profits allocable to such distribution, with the excess treated as a return of capital reducing the shareholders tax basis in the shares held after the tender offer, and thereafter as capital gain. Any Fund shares held by a shareholder after a tender offer will be subject to basis adjustments in accordance with the provisions of the Code.
Provided that no tendering shareholder is treated as receiving a Section 301 distribution as a result of selling shares pursuant to a particular tender offer, shareholders who do not sell shares pursuant to that tender offer will not realize constructive distributions on their shares as a result of other shareholders selling shares in the tender offer. In the event that any tendering shareholder is deemed to receive a Section 301 distribution, it is possible that shareholders whose proportionate ownership of the Fund increases as a result of that tender offer, including shareholders who do not tender any shares, will be deemed to receive a constructive distribution under Section 305(c) of the Code in an amount equal to the increase in their percentage ownership of the Fund as a result of the tender offer. Such constructive distribution will be treated as a dividend to the extent of current or accumulated earnings and profits allocable to it.
Use of the Funds cash to repurchase shares may adversely affect the Funds ability to satisfy the distribution requirements for treatment as a regulated investment company described above. The Fund may also recognize income in connection with the sale of portfolio securities to fund share purchases, in which case the Fund would take any such income into account in determining whether such distribution requirements have been satisfied.
If the Fund liquidates, shareholders generally will realize capital gain or loss upon such liquidation in an amount equal to the difference between the amount of cash or other property received by the shareholder (including any property deemed received by reason of its being placed in a liquidating trust) and the shareholders adjusted tax basis in its shares. Any such gain or loss will be long-term if the shareholder is treated as having a holding period in Fund shares of greater than one year, and otherwise will be short-term.
The foregoing discussion does not address the tax treatment of shareholders who do not hold their shares as a capital asset. Such shareholders should consult their own tax advisors on the specific tax consequences to them of participating or not participating in the tender offer or upon liquidation of the Fund.
Current U.S. federal income tax law taxes both long-term and short-term capital gain of corporations at the rates applicable to ordinary income. For non-corporate taxpayers, short-term capital gain is currently taxed at rates applicable to ordinary income while long-term capital gain generally is taxed at a reduced maximum rate. The deductibility of capital losses is subject to limitations under the Code.
Certain U.S. holders who are individuals, estates or trusts and whose income exceeds certain thresholds will be required to pay a 3.8% Medicare tax on all or a portion of their net investment income, which includes dividends received from the Fund and capital gains from the sale or other disposition of the Funds common shares.
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A common shareholder that is a nonresident alien individual or a foreign corporation (a foreign investor) generally will be subject to U.S. federal withholding tax at the rate of 30% (or possibly a lower rate provided by an applicable tax treaty) on ordinary income dividends (except as discussed below). In general, U.S. federal withholding tax and U.S. federal income tax will not apply to any gain or income realized by a foreign investor in respect of any distribution of exempt-interest dividends or net capital gain (including amounts credited as an undistributed capital gain dividend) or upon the sale or other disposition of common shares of the Fund. Different tax consequences may result if the foreign investor is engaged in a trade or business in the United States or, in the case of an individual, is present in the United States for 183 days or more during a taxable year and certain other conditions are met. Foreign investors should consult their tax advisers regarding the tax consequences of investing in the Funds common shares.
Ordinary income dividends properly reported by the RIC are generally exempt from U.S. federal withholding tax where they (i) are paid in respect of the RICs qualified net interest income (generally, its U.S.-source interest income, other than certain contingent interest and interest from obligations of a corporation or partnership in which the RIC is at least a 10% shareholder, reduced by expenses that are allocable to such income) or (ii) are paid in respect of the RICs qualified short-term capital gains (generally, the excess of the RICs net short-term capital gain over its long-term capital loss for such taxable year). Depending on its circumstances, the Fund may report all, some or none of its potentially eligible dividends as such qualified net interest income or as qualified short-term capital gains, and/or treat such dividends, in whole or in part, as ineligible for this exemption from withholding. In order to qualify for this exemption from withholding, a foreign investor needs to comply with applicable certification requirements relating to its non-U.S. status (including, in general, furnishing an IRS Form W-8BEN, W-8BEN-E, or substitute Form). In the case of common shares held through an intermediary, the intermediary may have withheld even if the Fund reported the payment as qualified net interest income or qualified short-term capital gain. Foreign investors should contact their intermediaries with respect to the application of these rules to their accounts. There can be no assurance as to what portion of the Funds distributions would qualify for favorable treatment as qualified net interest income or qualified short-term capital gains if the provision is extended.
In addition withholding at a rate of 30% will apply to dividends paid in respect of common shares of the Fund held by or through certain foreign financial institutions (including investment funds), unless such institution enters into an agreement with the Treasury to report, on an annual basis, information with respect to shares in, and accounts maintained by, the institution to the extent such shares or accounts are held by certain U.S. persons and by certain non-U.S. entities that are wholly or partially owned by U.S. persons and to withhold on certain payments. Accordingly, the entity through which common shares of the Fund are held will affect the determination of whether such withholding is required. Similarly, dividends paid in respect of common shares of the Fund held by an investor that is a non-financial foreign entity that does not qualify under certain exemptions will be subject to withholding at a rate of 30%, unless such entity either (i) certifies that such entity does not have any substantial United States owners or (ii) provides certain information regarding the entitys substantial United States owners, which the applicable withholding agent will in turn provide to the Secretary of the Treasury. An intergovernmental agreement between the United States and an applicable foreign country, or future Treasury regulations or other guidance, may modify these requirements. The Fund will not pay any additional amounts to common shareholders in respect of any amounts withheld. Foreign investors are encouraged to consult with their tax advisers regarding the possible implications of these rules on their investment in the Funds common shares.
U.S. federal backup withholding tax may be required on dividends, distributions and sale proceeds payable to certain non-exempt common shareholders who fail to supply their correct taxpayer identification number (in the case of individuals, generally, their social security number) or to make required certifications, or who are otherwise subject to backup withholding. Backup withholding is not an additional tax and any amount withheld may be refunded or credited against your U.S. federal income tax liability, if any, provided that you timely furnish the required information to the Internal Revenue Service.
Ordinary income dividends, capital gain dividends, and gain from the sale or other disposition of common shares of the Fund also may be subject to state, local, and/or foreign taxes. Common shareholders are urged to consult their own tax advisers regarding specific questions about U.S. federal, state, local or foreign tax consequences to them of investing in the Fund.
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The foregoing is a general and abbreviated summary of certain provisions of the Code and the Treasury Regulations presently in effect as they directly govern the taxation of the Fund and its shareholders. For complete provisions, reference should be made to the pertinent Code sections and Treasury Regulations. The Code and the Treasury Regulations are subject to change by legislative or administrative action, and any such change may be retroactive with respect to Fund transactions. Holders of common shares are advised to consult their own tax advisers for more detailed information concerning the U.S. federal income taxation of the Fund and the income tax consequences to its holders of common shares.
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The custodian of the assets of the Fund is State Street Bank and Fund Company, whose principal business address is One Lincoln Street, Boston, Massachusetts 02111. The custodian is responsible for, among other things, receipt of and disbursement of funds from the Funds accounts, establishment of segregated accounts as necessary, and transfer, exchange and delivery of Fund portfolio securities.
Computershare Fund Company, N.A., whose principal business address is 250 Royall Street, Canton, Massachusetts 02021, serves as the Funds transfer agent with respect to the common shares.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP, whose principal business address is 200 Berkeley Street, Boston, MA 02116, is the independent registered public accounting firm of the Fund and is expected to render an opinion annually on the financial statements of the Fund.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
A control person is a person who beneficially owns, either directly or indirectly, more than 25% of the voting securities of a company. As of May 20, 2020, the Fund did not know of any person or entity who controlled the Fund. As of May 20, 2020, to the knowledge of the Fund, no person owned of record or beneficially 5% or more of the outstanding common shares of any class of the Fund.
The audited financial statements included in the Annual Report to the Funds shareholders for the fiscal year ended April 30, 2019, together with the report of Deloitte & Touche LLP for the Funds Annual Report, and the unaudited financial statements included in the Semi-Annual Report to the Funds shareholders for the fiscal period ended October 31, 2019 are incorporated herein by reference to the Funds Annual Report and Semi-Annual Report to shareholders, respectively. All other portions of the Annual Report and Semi-Annual Report to shareholders are not incorporated herein by reference and are not part of the registration statement, the SAI, the prospectus or any prospectus supplement.
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RATINGS OF INVESTMENTS
S&P Global RatingsA brief description of the applicable S&P Global Ratings (S&P) rating symbols and their meanings (as published by S&P) follows:
An S&P issue credit rating is a forward-looking opinion about the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium-term note programs and commercial paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The opinion reflects S&Ps view of the obligors capacity and willingness to meet its financial commitments as they come due, and this opinion may assess terms, such as collateral security and subordination, which could affect ultimate payment in the event of default.
Issue credit ratings can be either long-term or short-term. Short-term ratings are generally assigned to those obligations considered short-term in the relevant market. Short-term ratings are also used to indicate the creditworthiness of an obligor with respect to put features on long-term obligations. Medium-term notes are assigned long-term ratings.
Long-Term Issue Credit Ratings*
Issue credit ratings are based, in varying degrees, on S&Ps analysis of the following considerations:
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The likelihood of payment the capacity and willingness of the obligor to meet its financial commitments on an obligation in accordance with the terms of the obligation; |
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The nature and provisions of the financial obligation, and the promise we impute; and |
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The protection afforded by, and relative position of, the financial obligation in the event of a bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors rights. |
An issue rating is an assessment of default risk but may incorporate an assessment of relative seniority or ultimate recovery in the event of default. Junior obligations are typically rated lower than senior obligations, to reflect lower priority in bankruptcy, as noted above. (Such differentiation may apply when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations.)
AAA | An obligation rated AAA has the highest rating assigned by S&P. The obligors capacity to meet its financial commitments on the obligation is extremely strong. | |
AA | An obligation rated AA differs from the highest-rated obligations only to a small degree. The obligors capacity to meet its financial commitments on the obligation is very strong. | |
A | An obligation rated A is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligors capacity to meet its financial commitments on the obligation is still strong. | |
BBB | An obligation rated BBB exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to weaken the obligors capacity to meet its financial commitments on the obligation. |
A-1
BB; B; CCC; CC; and C | Obligations rated BB, B, CCC, CC, and C are regarded as having significant speculative characteristics. BB indicates the least degree of speculation and C the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposure to adverse conditions. | |
BB | An obligation rated BB is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to the obligors inadequate capacity to meet its financial commitments on the obligation. | |
B | An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but the obligor currently has the capacity to meet its financial commitments on the obligation. Adverse business, financial, or economic conditions will likely impair the obligors capacity or willingness to meet its financial commitments on the obligation. | |
CCC | An obligation rated CCC is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitments on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitments on the obligation. | |
CC | An obligation rated CC is currently highly vulnerable to nonpayment. The CC rating is used when a default has not yet occurred but S&P expects default to be a virtual certainty, regardless of the anticipated time to default. | |
C | An obligation rated C is currently highly vulnerable to nonpayment, and the obligation is expected to have lower relative seniority or lower ultimate recovery compared with obligations that are rated higher. | |
D | An obligation rated D is in default or in breach of an imputed promise. For non-hybrid capital instruments, the D rating category is used when payments on an obligation are not made on the date due, unless S&P Global Ratings believes that such payments will be made within five business days in the absence of a stated grace period or within the earlier of the stated grace period or 30 calendar days. The D rating also will be used upon the filing of a bankruptcy petition or the taking of similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions. A rating on an obligation is lowered to D if it is subject to a distressed exchange offer. |
* The ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the rating categories.
Short-Term Issue Credit Ratings
A-1 | A short-term obligation rated A-1 is rated in the highest category by S&P. The obligors capacity to meet its financial commitments on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligors capacity to meet its financial commitments on these obligations is extremely strong. | |
A-2 | A short-term obligation rated A-2 is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligors capacity to meet its financial commitments on the obligation is satisfactory. | |
A-3 | A short-term obligation rated A-3 exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to weaken an obligors capacity to meet its financial commitments on the obligation. | |
B | A short-term obligation rated B is regarded as vulnerable and has significant speculative characteristics. The obligor currently has the capacity to meet its financial commitments; however, it faces major ongoing uncertainties that could lead to the obligors inadequate capacity to meet its financial commitments. |
A-2
C | A short-term obligation rated C is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitments on the obligation. | |
D | A short-term obligation rated D is in default or in breach of an imputed promise. For non-hybrid capital instruments, the D rating category is used when payments on an obligation are not made on the date due, unless S&P believes that such payments will be made within any stated grace period. However, any stated grace period longer than five business days will be treated as five business days. The D rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions. A rating on an obligation is lowered to D if it is subject to a distressed exchange offer. |
Description of S&Ps Municipal Short-Term Note Ratings
An S&P U.S. municipal note rating reflects S&Ps opinion about the liquidity factors and market access risks unique to the notes. Notes due in three years or less will likely receive a note rating. Notes with an original maturity of more than three years will most likely receive a long-term debt rating. In determining which type of rating, if any, to assign, S&Ps analysis will review the following considerations:
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Amortization schedule the larger the final maturity relative to other maturities, the more likely it will be treated as a note; and |
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Source of payment the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note. |
Municipal Short-Term Note Ratings
SP-1 | Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+) designation. | |
SP-2 | Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes. | |
SP-3 | Speculative capacity to pay principal and interest. | |
D | D is assigned upon failure to pay the note when due, completion of a distressed exchange offer, or the filing of a bankruptcy petition or the taking of similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions. |
Moodys Investors Service Inc. A brief description of the applicable Moodys Investors Service Inc. (Moodys) rating symbols and their meanings (as published by Moodys) follows:
Ratings assigned on Moodys global long-term and short-term rating scales are forward-looking opinions of the relative credit risks of financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project finance vehicles, and public sector entities. Long-term ratings are assigned to issuers or obligations with an original maturity of one year or more and reflect both on the likelihood of a default or impairment on contractual financial obligations and the expected financial loss suffered in the event of default or impairment. Short-term ratings are assigned to obligations with an original maturity of thirteen months or less and reflect both on the likelihood of a default or impairment on contractual financial obligations and the expected financial loss suffered in the event of default or impairment.
Global Long-Term Rating Scale
Aaa | Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk. | |
Aa | Obligations rated Aa are judged to be of high quality and are subject to very low credit risk. |
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A | Obligations rated A are judged to be upper-medium grade and are subject to low credit risk. | |
Baa | Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics. | |
Ba | Obligations rated Ba are judged to be speculative and are subject to substantial credit risk. | |
B | Obligations rated B are considered speculative and are subject to high credit risk. | |
Caa | Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk. | |
Ca | Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest. | |
C | Obligations rated C are the lowest rated and are typically in default, with little prospect for recovery of principal or interest. |
Note: Moodys appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category. Additionally, a (hyb) indicator is appended to all ratings of hybrid securities issued by banks, insurers, finance companies, and securities firms.*
* By their terms, hybrid securities allow for the omission of scheduled dividends, interest, or principal payments, which can potentially result in impairment if such an omission occurs. Hybrid securities may also be subject to contractually allowable write-downs of principal that could result in impairment. Together with the hybrid indicator, the long-term obligation rating assigned to a hybrid security is an expression of the relative credit risk associated with that security.
Global Short-Term Rating Scale
P-1 | Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations. | |
P-2 | Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations. | |
P-3 | Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay short-term obligations. | |
NP | Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories. |
Description of Moodys US Municipal Short-Term Obligation Ratings
The Municipal Investment Grade (MIG) scale is used to rate US municipal bond anticipation notes of up to five years maturity. Municipal notes rated on the MIG scale may be secured by either pledged revenues or proceeds of a take-out financing received prior to note maturity. MIG ratings expire at the maturity of the obligation, and the issuers long-term rating is only one consideration in assigning the MIG rating. MIG ratings are divided into three levelsMIG 1 through MIG 3while speculative grade short-term obligations are designated SG.
MIG 1 | This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to the market for refinancing. | |
MIG 2 | This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group. |
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MIG 3 | This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely to be less well-established. | |
SG | This designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection. |
Description of Moodys Demand Obligation Ratings
In the case of variable rate demand obligations (VRDOs), a two-component rating is assigned: a long or short-term debt rating and a demand obligation rating. The first element represents Moodys evaluation of risk associated with scheduled principal and interest payments. The second element represents Moodys evaluation of risk associated with the ability to receive purchase price upon demand (demand feature). The second element uses a rating from a variation of the MIG scale called the Variable Municipal Investment Grade (VMIG) scale.
VMIG 1 | This designation denotes superior credit quality. Excellent protection is afforded by the superior short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand. | |
VMIG 2 | This designation denotes strong credit quality. Good protection is afforded by the strong short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand. | |
VMIG 3 | This designation denotes acceptable credit quality. Adequate protection is afforded by the satisfactory short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand. | |
SG | This designation denotes speculative-grade credit quality. Demand features rated in this category may be supported by a liquidity provider that does not have an investment grade short-term rating or may lack the structural and/or legal protections necessary to ensure the timely payment of purchase price upon demand. |
Fitch Ratings, Inc. A brief description of the applicable Fitch Ratings, Inc. (Fitch) ratings symbols and meanings (as published by Fitch) follows:
Fitchs credit ratings relating to issuers are an opinion on the relative ability of an entity to meet financial commitments, such as interest, preferred dividends, repayment of principal, insurance claims or counterparty obligations. Credit ratings are used by investors as indications of the likelihood of receiving the money owed to them in accordance with the terms on which they invested.
Fitchs credit ratings do not directly address any risk other than credit risk. In particular, ratings do not deal with the risk of a market value loss on a rated security due to changes in interest rates, liquidity and other market considerations. However, in terms of payment obligation on the rated liability, market risk may be considered to the extent that it influences the ability of an issuer to pay upon a commitment. Ratings nonetheless do not reflect market risk to the extent that they influence the size or other conditionality of the obligation to pay upon a commitment (for example, in the case of index-linked bonds).
In the default components of ratings assigned to individual obligations or instruments, the agency typically rates to the likelihood of non-payment or default in accordance with the terms of that instruments documentation. In limited cases, Fitch may include additional considerations (i.e. rate to a higher or lower standard than that implied in the obligations documentation).
The terms investment grade and speculative grade have established themselves over time as shorthand to describe the categories AAA to BBB (investment grade) and BB to D (speculative grade). The terms investment grade and speculative grade are market conventions and do not imply any recommendation or endorsement of a specific security for investment purposes. Investment grade categories indicate relatively low to moderate credit risk, while ratings in the speculative categories either signal a higher level of credit risk or that a default has already occurred.
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A designation of Not Rated or NR is used to denote securities not rated by Fitch where Fitch has rated some, but not all, securities comprising an issuance capital structure.
Description of Fitchs Long-Term Credit Ratings Scale
Rated entities in a number of sectors, including financial and non-financial corporations, sovereigns, insurance companies and certain sectors within public finance, are generally assigned Issuer Default Ratings (IDRs). IDRs are also assigned to certain entities or enterprises in global infrastructure, project finance and public finance. IDRs opine on an entitys relative vulnerability to default (including by way of a distressed debt exchange) on financial obligations. The threshold default risk addressed by the IDR is generally that of the financial obligations whose non-payment would best reflect the uncured failure of that entity. As such, IDRs also address relative vulnerability to bankruptcy, administrative receivership or similar concepts.
In aggregate, IDRs provide an ordinal ranking of issuers based on the agencys view of their relative vulnerability to default, rather than a prediction of a specific percentage likelihood of default.
AAA | Highest credit quality. AAA ratings denote the lowest expectation of default risk. They are assigned only in cases of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events. | |
AA | Very high credit quality. AA ratings denote expectations of very low default risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events. | |
A | High credit quality. A ratings denote expectations of low default risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings. | |
BBB | Good credit quality. BBB ratings indicate that expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate, but adverse business or economic conditions are more likely to impair this capacity. | |
BB | Speculative. BB ratings indicate an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time; however, business or financial flexibility exists that supports the servicing of financial commitments. | |
B | Highly speculative. B ratings indicate that material default risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is vulnerable to deterioration in the business and economic environment. | |
CCC | Substantial credit risk. Default is a real possibility. | |
CC | Very high levels of credit risk. Default of some kind appears probable. | |
C | Near default. A default or default-like process has begun, or the issuer is in standstill, or for a closed funding vehicle, payment capacity is irrevocably impaired. Conditions that are indicative of a C category rating for an issuer include: | |
a. the issuer has entered into a grace or cure period following non-payment of a material financial obligation; |
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b. the issuer has entered into a temporary negotiated waiver or standstill agreement following a payment default on a material financial obligation; |
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c. the formal announcement by the issuer or their agent of a distressed debt exchange; |
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d. a closed financing vehicle where payment capacity is irrevocably impaired such that it is not expected to pay interest and/or principal in full during the life of the transaction, but where no payment default is imminent. |
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RD | Restricted default. RD ratings indicate an issuer that in Fitchs opinion has experienced: | |
a. an uncured payment default or distressed debt exchange on a bond, loan or other material financial obligation, but |
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b. has not entered into bankruptcy filings, administration, receivership, liquidation, or other formal winding-up procedure, and |
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c. has not otherwise ceased operating. |
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This would include: | ||
i. the selective payment default on a specific class or currency of debt; |
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ii. the uncured expiry of any applicable grace period, cure period or default forbearance period following a payment default on a bank loan, capital markets security or other material financial obligation; |
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iii. the extension of multiple waivers or forbearance periods upon a payment default on one or more material financial obligations, either in series or in parallel; ordinary execution of a distressed debt exchange on one or more material financial obligations. |
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D | Default. D ratings indicate an issuer that in Fitchs opinion has entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure or that has otherwise ceased business. | |
Default ratings are not assigned prospectively to entities or their obligations; within this context, non-payment on an instrument that contains a deferral feature or grace period will generally not be considered a default until after the expiration of the deferral or grace period, unless a default is otherwise driven by bankruptcy or other similar circumstance, or by a distressed debt exchange. | ||
In all cases, the assignment of a default rating reflects the agencys opinion as to the most appropriate rating category consistent with the rest of its universe of ratings and may differ from the definition of default under the terms of an issuers financial obligations or local commercial practice. |
Notes: The modifiers + or - may be appended to a rating to denote relative status within major rating categories.
Description of Fitchs Short-Term Credit Ratings Scale
A short-term issuer or obligation rating is based in all cases on the short-term vulnerability to default of the rated entity and relates to the capacity to meet financial obligations in accordance with the documentation governing the relevant obligation. Short-term deposit ratings may be adjusted for loss severity. Short-Term Ratings are assigned to obligations whose initial maturity is viewed as short term based on market convention. Typically, this means up to 13 months for corporate, sovereign, and structured obligations and up to 36 months for obligations in U.S. public finance markets.
F1 | Highest short-term credit quality. Indicates the strongest intrinsic capacity for timely payment of financial commitments; may have an added + to denote any exceptionally strong credit feature. | |
F2 | Good short-term credit quality. Good intrinsic capacity for timely payment of financial commitments. | |
F3 | Fair short-term credit quality. The intrinsic capacity for timely payment of financial commitments is adequate. | |
B | Speculative short-term credit quality. Minimal capacity for timely payment of financial commitments, plus heightened vulnerability to near term adverse changes in financial and economic conditions. | |
C | High short-term default risk. Default is a real possibility. |
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RD | Restricted default. Indicates an entity that has defaulted on one or more of its financial commitments, although it continues to meet other financial obligations. Typically applicable to entity ratings only. | |
D | Default. Indicates a broad-based default event for an entity, or the default of a short-term obligation. |
Specific Limitations Relating to Credit Rating Scales
The following specific limitations relate to issuer default scales, ratings assigned to corporate finance obligations, ratings assigned to public finance obligations, ratings assigned to structured finance transactions, ratings assigned to global infrastructure and project finance transactions, ratings assigned for banks (Viability Ratings, Support Ratings, Support Floors), derivative counterparty ratings and insurer financial strength ratings.
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The ratings do not predict a specific percentage of default likelihood or failure likelihood over any given time period. |
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The ratings do not opine on the market value of any issuers securities or stock, or the likelihood that this value may change. |
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The ratings do not opine on the liquidity of the issuers securities or stock. |
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The ratings do not opine on the possible loss severity on an obligation should an issuer (or an obligation with respect to structured finance transactions) default, except in the following cases: |
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Ratings assigned to individual obligations of issuers in corporate finance, banks, non-bank financial institutions, insurance and covered bonds. |
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In limited circumstances for U.S. public finance obligations where Chapter 9 of the Bankruptcy Code provides reliably superior prospects for ultimate recovery to local government obligations that benefit from a statutory lien on revenues or during the pendency of a bankruptcy proceeding under the Code if there is sufficient visibility on potential recovery prospects. |
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The ratings do not opine on the suitability of an issuer as a counterparty to trade credit. |
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The ratings do not opine on any quality related to an issuers business, operational or financial profile other than the agencys opinion on its relative vulnerability to default or in the case of bank Viability Ratings on its relative vulnerability to failure. For the avoidance of doubt, not all defaults will be considered a default for rating purposes. Typically, a default relates to a liability payable to an unaffiliated, outside investor. |
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The ratings do not opine on any quality related to a transactions profile other than the agencys opinion on the relative vulnerability to default of an issuer and/or of each rated tranche or security. |
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The ratings do not predict a specific percentage of extraordinary support likelihood over any given period. |
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In the case of bank Support Ratings and Support Rating Floors, the ratings do not opine on any quality related to an issuers business, operational or financial profile other than the agencys opinion on its relative likelihood of receiving external extraordinary support. |
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The ratings do not opine on the suitability of any security for investment or any other purposes |
The above list is not exhaustive and is provided for the readers convenience.
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Closed-End Fund Proxy Voting Policy
September 5, 2019
Effective Date: September 5, 2019
Applies to the following types of Funds registered under the 1940 Act:
☐ Open-End Mutual Funds (including money market funds)
☐ Money Market Funds Only
☐ iShares ETFs
☒ Closed-End Funds
☐ Other
The Boards of Trustees/Directors (the Directors) of the closed-end funds advised by BlackRock Advisors, LLC (BlackRock) (the Funds) have the responsibility for the oversight of voting proxies relating to portfolio securities of the Funds, and have determined that it is in the best interests of the Funds and their shareholders to delegate that responsibility to BlackRock as part of BlackRocks authority to manage, acquire and dispose of account assets, all as contemplated by the Funds respective investment management agreements.
BlackRock has adopted guidelines and procedures (together and as from time to time amended, the BlackRock Proxy Voting Guidelines) governing proxy voting by accounts managed by BlackRock. BlackRock will cast votes on behalf of each of the Funds on specific proxy issues in respect of securities held by each such Fund in accordance with the BlackRock Proxy Voting Guidelines; provided, however, that in the case of underlying closed-end funds (including business development companies and other similarly-situated asset pools) held by the Funds that have, or are proposing to adopt, a classified board structure, BlackRock will typically (a) vote in favor of proposals to adopt classification and against proposals to eliminate classification, and (b) not vote against directors as a result of their adoption of a classified board structure.
BlackRock will report on an annual basis to the Directors on (1) a summary of all proxy votes that BlackRock has made on behalf of the Funds in the preceding year together with a representation that all votes were in accordance with the BlackRock Proxy Voting Guidelines (as modified pursuant to the immediately preceding paragraph), and (2) any changes to the BlackRock Proxy Voting Guidelines that have not previously been reported.
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BlackRock Investment Stewardship
Global Corporate Governance & Engagement Principles
January 2020
BlackRock
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Contents
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- Capital structure, mergers, asset sales and other special transactions |
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- General corporate governance matters and shareholder protections |
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BlackRocks oversight of its investment stewardship activities |
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If you would like additional information, please contact:
ContactStewardship@blackrock.com
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BlackRocks purpose is to help more and more people experience financial well-being. As a fiduciary to our clients, we provide the investment and technology solutions they need when planning for their most important goals. We manage assets on behalf of institutional and individual clients, across a full spectrum of investment strategies, asset classes and regions. Our client base includes pension plans, endowments, foundations, charities, official institutions, insurers and other financial institutions, as well as individuals around the world.
PHILOSOPHY ON CORPORATE GOVERNANCE
BlackRock Investment Stewardship (BIS) activities are focused on maximizing long-term value for our clients. BIS does this through engagement with boards and management of investee companies and, for those clients who have given us authority, through voting at shareholder meetings.
We believe that there are certain fundamental rights attached to shareholding. Companies and their boards should be accountable to shareholders and structured with appropriate checks and balances to ensure that they operate in shareholders best interests. Effective voting rights are central to the rights of ownership and there should be one vote for one share. Shareholders should have the right to elect, remove and nominate directors, approve the appointment of the auditor and to amend the corporate charter or by-laws. Shareholders should be able to vote on matters that are material to the protection of their investment, including but not limited to, changes to the purpose of the business, dilution levels and pre-emptive rights, and the distribution of income and capital structure. In order to make informed decisions, we believe that shareholders have the right to sufficient and timely information.
Our primary focus is on the performance of the board of directors. As the agent of shareholders, the board should set the companys strategic aims within a framework of prudent and effective controls, which enables risk to be assessed and managed. The board should provide direction and leadership to management and oversee managements performance. Our starting position is to be supportive of boards in their oversight efforts on shareholders behalf and we would generally expect to support the items of business they put to a vote at shareholder meetings. Votes cast against or withheld from resolutions proposed by the board are a signal that we are concerned that the directors or management have either not acted in the best interests of shareholders or have not responded adequately to shareholder concerns. We assess voting matters on a case-by-case basis and in light of each companys unique circumstances taking into consideration regional best practices and long-term value creation.
These principles set out our approach to engaging with companies, provide guidance on our position on corporate governance and outline how our views might be reflected in our voting decisions. Corporate governance practices can vary internationally, so our expectations in relation to individual companies are based on the legal and regulatory framework of each local market. However, we believe there are overarching principles of corporate governance that apply globally and provide a framework for more detailed, market-specific assessments.
We believe BlackRock has a responsibility in relation to monitoring and providing feedback to companies, sometimes known as stewardship. These ownership responsibilities include engaging with management or board members on corporate governance matters, voting proxies in the best long-term economic interests of our clients, and engaging with regulatory bodies to ensure a sound policy framework consistent with promoting long-term shareholder value creation. We also believe in the responsibility to our clients to have appropriate resources and oversight structures. Our approach is set out in the section below titled BlackRocks oversight of its investment stewardship activities and is further detailed in a team profile on our website.
CORPORATE GOVERNANCE, ENGAGEMENT AND VOTING
We recognize that accepted standards of corporate governance differ between markets, but we believe there are sufficient common threads globally to identify an overarching set of principles. The objective of our investment stewardship activities is the protection and enhancement of the value of our clients investments in public corporations. Thus, these principles focus on practices and structures that we consider to be supportive of long-term value creation. We discuss below the principles under six key themes. In our regional and market-specific voting guidelines we explain how these principles inform our voting decisions in relation to specific resolutions that may appear on the agenda of a shareholder meeting in the relevant market.
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The six key themes are:
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Boards and directors |
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Auditors and audit-related issues |
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Capital structure, mergers, asset sales and other special transactions |
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Compensation and benefits |
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Environmental and social issues |
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General corporate governance matters and shareholder protections |
At a minimum, we expect companies to observe the accepted corporate governance standards in their domestic market or to explain why doing so is not in the interests of shareholders. Where company reporting and disclosure is inadequate or the approach taken is inconsistent with our view of what is in the best interests of shareholders, we will engage with the company and/or use our vote to encourage a change in practice. In making voting decisions, we perform independent research and analysis, such as reviewing relevant information published by the company and apply our voting guidelines to achieve the outcome we believe best protects our clients long-term economic interests. We also work closely with our active portfolio managers, and may take into account internal and external research.
BlackRock views engagement as an important activity; engagement provides us with the opportunity to improve our understanding of the challenges and opportunities that investee companies are facing and their governance structures. Engagement also allows us to share our philosophy and approach to investment and corporate governance with companies to enhance their understanding of our objectives. Our engagements often focus on providing our feedback on company disclosures, particularly where we believe they could be enhanced. There are a range of approaches we may take in engaging companies depending on the nature of the issue under consideration, the company and the market.
BlackRocks engagements emphasize direct dialogue with corporate leadership on the governance issues identified in these principles that have a material impact on financial performance. These engagements enable us to cast informed votes aligned with clients long-term economic interests. We generally prefer to engage in the first instance where we have concerns and give management time to address or resolve the issue. As a long-term investor, we are patient and persistent in working with our portfolio companies to have an open dialogue and develop mutual understanding of governance matters, to promote the adoption of best practices and to assess the merits of a companys approach to its governance. We monitor the companies in which we invest and engage with them constructively and privately where we believe doing so helps protect shareholders interests. We do not try to micro-manage companies, or tell management and boards what to do. We present our views as a long-term shareholder and listen to companies responses. The materiality and immediacy of a given issue will generally determine the level of our engagement and whom we seek to engage at the company, which could be management representatives or board directors.
The performance of the board is critical to the economic success of the company and to the protection of shareholders interests. Board members serve as agents of shareholders in overseeing the strategic direction and operation of the company. For this reason, BlackRock focuses on directors in many of our engagements and sees the election of directors as one of our most important responsibilities in the proxy voting context.
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We expect the board of directors to promote and protect shareholder interests by:
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establishing an appropriate corporate governance structure |
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supporting and overseeing management in setting long-term strategic goals, applicable measures of value-creation and milestones that will demonstrate progress, and steps taken if any obstacles are anticipated or incurred |
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ensuring the integrity of financial statements |
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making independent decisions regarding mergers, acquisitions and disposals |
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establishing appropriate executive compensation structures |
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addressing business issues, including environmental and social issues, when they have the potential to materially impact company reputation and performance |
There should be clear definitions of the role of the board, the committees of the board and senior management such that the responsibilities of each are well understood and accepted. Companies should report publicly the approach taken to governance (including in relation to board structure) and why this approach is in the best interest of shareholders. We will seek to engage with the appropriate directors where we have concerns about the performance of the board or the company, the broad strategy of the company, or the performance of individual board members. We believe that when a company is not effectively addressing a material issue, its directors should be held accountable.
BlackRock believes that directors should stand for re-election on a regular basis. We assess directors nominated for election or re-election in the context of the composition of the board as a whole. There should be detailed disclosure of the relevant credentials of the individual directors in order for shareholders to assess the caliber of an individual nominee. We expect there to be a sufficient number of independent directors on the board to ensure the protection of the interests of all shareholders. Common impediments to independence may include but are not limited to:
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current or former employment at the company or a subsidiary within the past several years |
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being, or representing, a shareholder with a substantial shareholding in the company |
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interlocking directorships |
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having any other interest, business or other relationship which could, or could reasonably be perceived to, materially interfere with the directors ability to act in the best interests of the company |
BlackRock believes that the operation of the board is enhanced when there is a clearly independent, senior non-executive director to chair it or, where the chairman is also the CEO (or is otherwise not independent), an independent lead director. The role of this director is to enhance the effectiveness of the independent members of the board through shaping the agenda, ensuring adequate information is provided to the board and encouraging independent participation in board deliberations. The lead independent board director should be available to shareholders in those situations where a director is best placed to explain and justify a companys approach.
To ensure that the board remains effective, regular reviews of board performance should be carried out and assessments made of gaps in skills or experience amongst the members. BlackRock believes it is beneficial for new directors to be brought onto the board periodically to refresh the groups thinking and to ensure both continuity and adequate succession planning. In identifying potential candidates, boards should take into consideration the multiple dimensions of diversity, including personal factors such as gender, ethnicity, and age; as well as professional characteristics, such as a directors industry, area of expertise, and geographic location. The board should review these dimensions of the current directors and how they might be augmented by incoming directors. We believe that directors are in the best position to assess the optimal size for the board, but we would be concerned if a board seemed too small to have an appropriate balance of directors or too large to be effective.
There are matters for which the board has responsibility that may involve a conflict of interest for executives or for affiliated directors. BlackRock believes that shareholders interests are best served when the board forms committees of fully independent directors to deal with such matters. In many markets, these committees of the board specialize in audit, director nominations and compensation matters. An ad hoc committee might also be formed to decide on a special transaction, particularly one with a related party or to investigate a significant adverse event.
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Auditors and audit-related issues
Comprehensive disclosure provides investors with a sense of the companys long-term operational risk management practices and, more broadly, the quality of the boards oversight. In the absence of robust disclosures, we may reasonably conclude that companies are not adequately managing risk.
BlackRock recognizes the critical importance of financial statements, which should provide a true and fair picture of a companys financial condition. We will hold the members of the audit committee or equivalent responsible for overseeing the management of the audit function. We take particular note of cases involving significant financial restatements or ad hoc notifications of material financial weakness.
The integrity of financial statements depends on the auditor being free of any impediments to being an effective check on management. To that end, we believe it is important that auditors are, and are seen to be, independent. Where the audit firm provides services to the company in addition to the audit, the fees earned should be disclosed and explained. Audit committees should have in place a procedure for assessing annually the independence of the auditor.
Capital structure, mergers, asset sales and other special transactions
The capital structure of a company is critical to its owners, the shareholders, as it impacts the value of their investment and the priority of their interest in the company relative to that of other equity or debt investors. Pre-emptive rights are a key protection for shareholders against the dilution of their interests.
Effective voting rights are central to the rights of ownership and we believe strongly in one vote for one share as a guiding principle that supports good corporate governance. Shareholders, as the residual claimants, have the strongest interest in protecting company value, and voting power should match economic exposure.
We are concerned that the creation of a dual share class may result in an over-concentration of power in the hands of a few shareholders, thus disenfranchising other shareholders and amplifying the potential conflict of interest, which the one share, one vote principle is designed to mitigate. However, we recognize that in certain circumstances, companies may have a valid argument for dual-class listings, at least for a limited period of time. We believe that such companies should review these dual-class structures on a regular basis or as company circumstances change. Additionally, they should receive shareholder approval of their capital structure on a periodic basis via a management proposal in the companys proxy. The proposal should give unaffiliated shareholders the opportunity to affirm the current structure or establish mechanisms to end or phase out controlling structures at the appropriate time, while minimizing costs to shareholders.
In assessing mergers, asset sales or other special transactions, BlackRocks primary consideration is the long-term economic interests of shareholders. Boards proposing a transaction need to clearly explain the economic and strategic rationale behind it. We will review a proposed transaction to determine the degree to which it enhances long-term shareholder value. We would prefer that proposed transactions have the unanimous support of the board and have been negotiated at arms length. We may seek reassurance from the board that executives and/or board members financial interests in a given transaction have not adversely affected their ability to place shareholders interests before their own. Where the transaction involves related parties, we would expect the recommendation to support it to come from the independent directors and it is good practice to be approved by a separate vote of the non-conflicted shareholders.
BlackRock believes that shareholders have a right to dispose of company shares in the open market without unnecessary restriction. In our view, corporate mechanisms designed to limit shareholders ability to sell their shares are contrary to basic property rights. Such mechanisms can serve to protect and entrench interests other than those of the shareholders. We believe that shareholders are broadly capable of making decisions in their own best interests. We expect any so-called shareholder rights plans proposed by a board to be subject to shareholder approval upon introduction and periodically thereafter for continuation.
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BlackRock expects a companys board of directors to put in place a compensation structure that incentivizes and rewards executives appropriately and is aligned with shareholder interests, particularly generating sustainable long-term shareholder returns. We would expect the compensation committee to take into account the specific circumstances of the company and the key individuals the board is trying to incentivize. We encourage companies to ensure that their compensation plans incorporate appropriate and challenging performance conditions consistent with corporate strategy and market practice. We use third party research, in addition to our own analysis, to evaluate existing and proposed compensation structures. We hold members of the compensation committee or equivalent board members accountable for poor compensation practices or structures.
BlackRock believes that there should be a clear link between variable pay and company performance that drives shareholder returns. We are not supportive of one-off or special bonuses unrelated to company or individual performance. We acknowledge that the use of peer group evaluation by compensation committees can help ensure competitive pay; however, we are concerned when increases in total compensation at a company are justified solely on peer benchmarking rather than outperformance. We support incentive plans that foster the sustainable achievement of results relative to competitors. The vesting timeframes associated with incentive plans should facilitate a focus on long-term value creation. We believe consideration should be given to building claw back provisions into incentive plans such that executives would be required to forgo rewards when they are not justified by actual performance. Compensation committees should guard against contractual arrangements that would entitle executives to material compensation for early termination of their contract. Finally, pension contributions and other deferred compensation arrangements should be reasonable in light of market practice.
Non-executive directors should be compensated in a manner that is commensurate with the time and effort expended in fulfilling their professional responsibilities. Additionally, these compensation arrangements should not risk compromising their independence or aligning their interests too closely with those of the management, whom they are charged with overseeing.
Environmental and social issues
Our fiduciary duty to clients is to protect and enhance their economic interest in the companies in which we invest on their behalf. It is within this context that we undertake our corporate governance activities. We believe that well -managed companies will deal effectively with the material environmental and social (E&S) factors relevant to their businesses. Robust disclosure is essential for investors to effectively gauge companies business practices and planning related to E&S risks and opportunities.
BlackRock expects companies to issue reports aligned with the recommendations of the Task Force on Climate -related Financial Disclosures (TCFD) and the standards put forward by the Sustainability Accounting Standards Board (SASB). We view the SASB and TCFD frameworks as complementary in achieving the goal of disclosing more financially material information, particularly as it relates to industry -specific metrics and target setting. TCFDs recommendations provide an overarching framework for disclosure on the business implications of climate change, and potentially other E&S factors. We find SASBs industry-specific guidance (as identified in its materiality map) beneficial in helping companies identify and discuss their governance, risk assessments, and performance against these key performance indicators (KPIs). Any global standards adopted, peer group benchmarking undertaken, and verification processes in place should also be disclosed and discussed in this context.
BlackRock has been engaging with companies for several years on disclosure of material E&S factors. Given the increased understanding of sustainability risks and opportunities, and the need for better information to assess them, we specifically ask companies to:
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publish a disclosure in line with industry-specific SASB guidelines by year-end, if they have not already done so, or disclose a similar set of data in a way that is relevant to their particular business; and |
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disclose climate-related risks in line with the TCFDs recommendations, if they have not already done so. This should include the companys plan for operating under a scenario where the Paris Agreements goal of limiting global warming to less than two degrees is fully realized, as expressed by the TCFD guidelines. |
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See our commentary on our approach to engagement on TCFD and SASB aligned reporting for greater detail of our expectations.
We will use these disclosures and our engagements to ascertain whether companies are properly managing and overseeing these risks within their business and adequately planning for the future. In the absence of robust disclosures, investors, including BlackRock, will increasingly conclude that companies are not adequately managing risk.
We believe that when a company is not effectively addressing a material issue, its directors should be held accountable. We will generally engage directly with the board or management of a company when we identify issues. We may vote against the election of directors where we have concerns that a company might not be dealing with E&S factors appropriately. Sometimes we may reflect such concerns by supporting a shareholder proposal on the issue, where there seems to be either a significant potential threat or realized harm to shareholders interests caused by poor management of material E&S factors.
In deciding our course of action, we will assess the companys disclosures and the nature of our engagement with the company on the issue over time, including whether:
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The company has already taken sufficient steps to address the concern |
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The company is in the process of actively implementing a response |
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There is a clear and material economic disadvantage to the company in the near-term if the issue is not addressed in the manner requested by the shareholder proposal |
We do not see it as our role to make social or political judgments on behalf of clients. Our consideration of these E&S factors is consistent with protecting the long-term economic interest of our clients assets. We expect investee companies to comply, at a minimum, with the laws and regulations of the jurisdictions in which they operate. They should explain how they manage situations where local laws or regulations that significantly impact the companys operations are contradictory or ambiguous to global norms.
Within the framework laid out above, as well as our guidance on How BlackRock Investment Stewardship engages on climate risk, we believe that climate presents significant investment risks and opportunities that may impact the longterm financial sustainability of companies. We believe that the reporting frameworks developed by TCFD and SASB provide useful guidance to companies on identifying, managing, and reporting on climate -related risks and opportunities.
We expect companies to help their investors understand how the company may be impacted by climate risk, in the context of its ability to realize a long-term strategy and generate value over time. We expect companies to convey their governance around this issue through their corporate disclosures aligned with TCFD and SASB. For companies in sectors that are significantly exposed to climate-related risk, we expect the whole board to have demonstrable fluency in how climate risk affects the business and how management approaches assessing, adapting to, and mitigating that risk.
Where a company receives a shareholder proposal related to climate risk, in addition to the factors laid out above, our assessment will take into account the robustness of the companys existing disclosures as well as our understanding of its management of the issues as revealed through our engagements with the company and board members over time. In certain instances, we may disagree with the details of a climate-related shareholder proposal but agree that the company in question has not made sufficient progress on climate-related disclosures. In these instances, we may not support the proposal, but may vote against the election of relevant directors.
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General corporate governance matters and shareholder protections
BlackRock believes that shareholders have a right to timely and detailed information on the financial performance and viability of the companies in which they invest. In addition, companies should also publish information on the governance structures in place and the rights of shareholders to influence these. The reporting and disclosure provided by companies help shareholders assess whether their economic interests have been protected and the quality of the boards oversight of management. We believe shareholders should have the right to vote on key corporate governance matters, including changes to governance mechanisms, to submit proposals to the shareholders meeting and to call special meetings of shareholders.
BLACKROCKS OVERSIGHT OF ITS INVESTMENT STEWARDSHIP ACTIVITIES
We hold ourselves to a very high standard in our investment stewardship activities, including proxy voting. This function is executed by a team called BlackRock Investment Stewardship (BIS) which is comprised of BlackRock employees who do not have other responsibilities other than their roles in BIS. BIS is considered an investment function. The team does not have sales responsibilities.
BlackRock maintains three regional advisory committees (Stewardship Advisory Committees) for (a) the Americas; (b) Europe, the Middle East and Africa (EMEA); and (c) Asia-Pacific, generally consisting of senior BlackRock investment professionals and/or senior employees with practical boardroom experience. The regional Stewardship Advisory Committees review and advise on amendments to the proxy voting guidelines covering markets within each respective region (Guidelines).
In addition to the regional Stewardship Advisory Committees, the Investment Stewardship Global Oversight Committee (Global Committee) is a risk-focused committee, comprised of senior representatives from various BlackRock investment teams, BlackRocks Deputy General Counsel, the Global Head of Investment Stewardship (Global Head), and other senior executives with relevant experience and team oversight.
The Global Head has primary oversight of the activities of BIS, including voting in accordance with the Guidelines, which require the application of professional judgment and consideration of each companys unique circumstances. The Global Committee reviews and approves amendments to these Global Corporate Governance & Engagement Principles. The Global Committee also reviews and approves amendments to the regional Guidelines, as proposed by the regional Stewardship Advisory Committees.
In addition, the Global Committee receives and reviews periodic reports regarding the votes cast by BIS, as well as regular updates on material process issues, procedural changes and other risk oversight considerations. The Global Committee reviews these reports in an oversight capacity as informed by the BIS corporate governance engagement program and Guidelines.
BIS carries out engagement with companies, monitors and executes proxy votes, and conducts vote operations (including maintaining records of votes cast) in a manner consistent with the relevant Guidelines. BIS also conducts research on corporate governance issues and participates in industry discussions to keep abreast of important developments in the corporate governance field. BIS may utilize third parties for certain of the foregoing activities and performs oversight of those third parties. BIS may raise complicated or particularly controversial matters for internal discussion with the relevant investment teams and/or refer such matters to the appropriate regional Stewardship Advisory Committees for review, discussion and guidance prior to making a voting decision.
We carefully consider proxies submitted to funds and other fiduciary account(s) (Fund or Funds) for which we have voting authority. BlackRock votes (or refrains from voting) proxies for each Fund for which we have voting authority based on our evaluation of the best long-term economic interests of shareholders, in the exercise of our independent business judgment, and without regard to the relationship of the issuer of the proxy (or any shareholder proponent or dissident shareholder) to the Fund, the Funds affiliates (if any), BlackRock or BlackRocks affiliates, or BlackRock employees (see Conflicts management policies and procedures, below).
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When exercising voting rights, BlackRock will normally vote on specific proxy issues in accordance with the Guidelines for the relevant market. The Guidelines are reviewed regularly and are amended consistent with changes in the local market practice, as developments in corporate governance occur, or as otherwise deemed advisable by BlackRocks Stewardship Advisory Committees. BIS may, in the exercise of their professional judgment, conclude that the Guidelines do not cover the specific matter upon which a proxy vote is required or that an exception to the Guidelines would be in the best long-term economic interests of BlackRocks clients.
In the uncommon circumstance of there being a vote with respect to fixed income securities or the securities of privately held issuers, the decision generally will be made by a Funds portfolio managers and/or BIS based on their assessment of the particular transactions or other matters at issue.
In certain markets, proxy voting involves logistical issues which can affect BlackRocks ability to vote such proxies, as well as the desirability of voting such proxies. These issues include but are not limited to: (i) untimely notice of shareholder meetings; (ii) restrictions on a foreigners ability to exercise votes; (iii) requirements to vote proxies in person; (iv) share-blocking (requirements that investors who exercise their voting rights surrender the right to dispose of their holdings for some specified period in proximity to the shareholder meeting); (v) potential difficulties in translating the proxy; (vi) regulatory constraints; and (vii) requirements to provide local agents with unrestricted powers of attorney to facilitate voting instructions. We are not supportive of impediments to the exercise of voting rights such as shareblocking or overly burdensome administrative requirements.
As a consequence, BlackRock votes proxies on a best-efforts basis. In addition, BIS may determine that it is generally in the best interests of BlackRocks clients not to vote proxies if the costs (including but not limited to opportunity costs associated with shareblocking constraints) associated with exercising a vote are expected to outweigh the benefit the client would derive by voting on the proposal.
Portfolio managers have full discretion to vote the shares in the Funds they manage based on their analysis of the economic impact of a particular ballot item. Portfolio managers may from time to time reach differing views on how best to maximize economic value with respect to a particular investment. Therefore, portfolio managers may, and sometimes do, vote shares in the Funds under their management differently from one another. However, because BlackRocks clients are mostly long-term investors with long-term economic goals, ballots are frequently cast in a uniform manner.
Conflicts management policies and procedures
BIS maintains the following policies and procedures that seek to prevent undue influence on BlackRocks proxy voting activity. Such influence might stem from any relationship between the investee company (or any shareholder proponent or dissident shareholder) and BlackRock, BlackRocks affiliates, a Fund or a Funds affiliates, or BlackRock employees. The following are examples of sources of perceived or potential conflicts of interest:
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BlackRock clients who may be issuers of securities or proponents of shareholder resolutions |
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BlackRock business partners or third parties who may be issuers of securities or proponents of shareholder resolutions |
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BlackRock employees who may sit on the boards of public companies held in Funds managed by BlackRock |
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Significant BlackRock, Inc. investors who may be issuers of securities held in Funds managed by BlackRock |
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Securities of BlackRock, Inc. or BlackRock investment funds held in Funds managed by BlackRock |
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BlackRock, Inc. board members who serve as senior executives of public companies held in Funds managed by BlackRock |
BlackRock has taken certain steps to mitigate perceived or potential conflicts including, but not limited to, the following:
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Adopted the Guidelines which are designed to protect and enhance the economic value of the companies in which BlackRock invests on behalf of clients. |
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Established a reporting structure that separates BIS from employees with sales, vendor management or business partnership roles. In addition, BlackRock seeks to ensure that all engagements with corporate issuers, dissident shareholders or shareholder proponents are managed consistently and without regard to BlackRocks relationship with such parties. Clients or business partners are not given special treatment or differentiated access to BIS. BIS prioritizes engagements based on factors including but not limited to our need for additional information to make a voting decision or our view on the likelihood that an engagement could lead to positive outcome(s) over time for the economic value of the company. Within the normal course of business, BIS may engage directly with BlackRock clients, business partners and/or third parties, and/or with employees with sales, vendor management or business partnership roles, in discussions regarding our approach to stewardship, general corporate governance matters, client reporting needs, and/or to otherwise ensure that proxy-related client service levels are met. |
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Determined to engage, in certain instances, an independent fiduciary to vote proxies as a further safeguard to avoid potential conflicts of interest, to satisfy regulatory compliance requirements, or as may be otherwise required by applicable law. In such circumstances, the independent fiduciary provides BlackRocks proxy voting agent with instructions, in accordance with the Guidelines, as to how to vote such proxies, and BlackRocks proxy voting agent votes the proxy in accordance with the independent fiduciarys determination. BlackRock uses an independent fiduciary to vote proxies of (i) any company that is affiliated with BlackRock, Inc., (ii) any public company that includes BlackRock employees on its board of directors, (iii) The PNC Financial Services Group, Inc., (iv) any public company of which a BlackRock, Inc. board member serves as a senior executive, and (v) companies when legal or regulatory requirements compel BlackRock to use an independent fiduciary. In selecting an independent fiduciary, we assess several characteristics, including but not limited to: independence, an ability to analyze proxy issues and vote in the best economic interest of our clients, reputation for reliability and integrity, and operational capacity to accurately deliver the assigned votes in a timely manner. We may engage more than one independent fiduciary, in part in order to mitigate potential or perceived conflicts of interest at an independent fiduciary. The Global Committee appoints and reviews the performance of the independent fiduciar(ies), generally on an annual basis. |
When so authorized, BlackRock acts as a securities lending agent on behalf of Funds. With regard to the relationship between securities lending and proxy voting, BlackRocks approach is driven by our clients economic interests. The decision whether to recall securities on loan to vote is based on a formal analysis of the revenue producing value to clients of loans, against the assessed economic value of casting votes. Generally, we expect that the likely economic value to clients of casting votes would be less than the securities lending income, either because, in our assessment, the resolutions being voted on will not have significant economic consequences or because the outcome would not be affected by BlackRock recalling loaned securities in order to vote. BlackRock also may, in our discretion, determine that the value of voting outweighs the cost of recalling shares, and thus recall shares to vote in that instance.
Periodically, BlackRock reviews our process for determining whether to recall securities on loan in order to vote and may modify it as necessary.
The issue-specific Guidelines published for each region/country in which we vote are intended to summarize BlackRocks general philosophy and approach to issues that may commonly arise in the proxy voting context in each market where we invest. These Guidelines are not intended to be exhaustive. BIS applies the Guidelines on a case-by-case basis, in the context of the individual circumstances of each company and the specific issue under review. As such, these Guidelines do not indicate how BIS will vote in every instance. Rather, they share our view about corporate governance issues generally, and provide insight into how we typically approach issues that commonly arise on corporate ballots.
Reporting and vote transparency
We inform clients about our engagement and voting policies and activities through direct communication and through disclosure on our website. Each year we publish an annual report, an annual engagement and voting statistics report, and our full voting record to our website. On a quarterly basis, we publish regional reports which provide an overview of our investment stewardship engagement and voting activities during the quarter, including market developments, speaking engagements, and engagement and voting statistics. Additionally, we make public our market-specific voting guidelines for the benefit of clients and companies with whom we engage.
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This document is provided for information purposes only and must not be relied upon as a forecast, research, or investment advice. BlackRock is not making any recommendation or soliciting any action based upon the information contained herein and nothing in this document should be construed as constituting an offer to sell, or a solicitation of any offer to buy, securities in any jurisdiction to any person. This information provided herein does not constitute financial, tax, legal or accounting advice, you should consult your own advisers on such matters.
The information and opinions contained in this document are as of January 2020 unless it is stated otherwise and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Although such information is believed to be reliable for the purposes used herein, BlackRock does not assume any responsibility for the accuracy or completeness of such information. Reliance upon information in this material is at the sole discretion of the reader. Certain information contained herein represents or is based upon forward-looking statements or information. BlackRock and its affiliates believe that such statements and information are based upon reasonable estimates and assumptions. However, forward-looking statements are inherently uncertain, and factors may cause events or results to differ from those projected. Therefore, undue reliance should not be placed on such forward-looking statements and information.
Prepared by BlackRock, Inc.
©2020 BlackRock, Inc. All rights reserved.
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BlackRock Investment Stewardship
Corporate governance and proxy voting guidelines for U.S. securities
January 2020
BlackRock
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Contents
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If you would like additional information, please contact:
ContactStewardship@blackrock.com
These guidelines should be read in conjunction with the BlackRock Investment Stewardship Global Corporate Governance Guidelines & Engagement Principles.
BlackRock, Inc. and its subsidiaries (collectively, BlackRock) seek to make proxy voting decisions in the manner most likely to protect and enhance the economic value of the securities held in client accounts. The following issue-specific proxy voting guidelines (the Guidelines) are intended to summarize BlackRock Investment Stewardships general philosophy and approach to corporate governance issues that most commonly arise in proxy voting for U.S. securities. These Guidelines are not intended to limit the analysis of individual issues at specific companies and are not intended to provide a guide to how BlackRock will vote in every instance. Rather, they share our view about corporate governance issues generally, and provide insight into how we typically approach issues that commonly arise on corporate ballots , as well as our expectations of boards of directors. They are applied with discretion, taking into consideration the range of issues and facts specific to the company and the individual ballot item.
These guidelines are divided into eight key themes which group together the issues that frequently appear on the agenda of annual and extraordinary meetings of shareholders:
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Boards and directors |
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Auditors and audit-related issues |
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Capital structure |
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Mergers, asset sales, and other special transactions |
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Executive compensation |
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Environmental and social issues |
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General corporate governance matters |
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Shareholder protections |
Director elections
In general, BlackRock supports the election of directors as recommended by the board in uncontested elections. However, we believe that when a company is not effectively addressing a material issue, its directors should be held account able. We may withhold votes from directors or members of particular board committees in certain situations, as indicated below.
Independence
We expect a majority of the directors on the board to be independent. In addition, all members of key committees, including audit, compensation, and nominating / governance committees, should be independent. Our view of independence may vary slightly from listing standards.
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In particular, common impediments to independence in the U.S. may include:
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Employment as a senior executive by the company or a subsidiary within the past five years |
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An equity ownership in the company in excess of 20% |
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Having any other interest, business, or relationship which could, or could reasonably be perceived to, materially interfere with the directors ability to act in the best interests of the company |
We may vote against directors serving on key committees that we do not consider to be independent.
When evaluating controlled companies, as defined by the U.S. stock exchanges, we will only vote against insiders or affiliates who sit on the audit committee, but not other key committees.
Oversight
We expect the board to exercise appropriate oversight over management and business activities of the company. We will consider voting against committee members and / or individual directors in the following circumstances:
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Where the board has failed to exercise oversight with regard to accounting practices or audit oversight, we will consider voting against the current audit committee, and any other members of the board who may be responsible. For example, this may apply to members of the audit committee during a period when the board failed to facilitate quality, independent auditing if substantial accounting irregularities suggest insufficient oversight by that committee |
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Members of the compensation committee during a period in which executive compensation appears excessive relative to performance and peers, and where we believe the compensation committee has not already substantially addressed this issue |
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The chair of the nominating / governance committee, or where no chair exists, the nominating / governance committee member with the longest tenure, where the board is not comprised of a majority of independent directors. However, this would not apply in the case of a controlled company |
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Where it appears the director has acted (at the company or at other companies) in a manner that compromises his / her reliability to represent the best long-term economic interests of shareholders |
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Where a director has a pattern of poor attendance at combined board and applicable key committee meetings. Excluding exigent circumstances, BlackRock generally considers attendance at less than 75% of the combined board and applicable key committee meetings by a board member to be poor attendance |
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Where a director serves on an excess number of boards, which may limit his / her capacity to focus on each boards requirements. The following illustrates the maximum number of boards on which a director may serve, before he / she is considered to be over-committed: |
Public Company CEO | # Outside Public Boards* | Total # of Public Boards | ||||||||||
Director A |
Ö | 1 | 2 | |||||||||
Director B |
3 | 4 |
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In addition to the company under review |
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Responsiveness to shareholders
We expect a board to be engaged and responsive to its shareholders. Where we believe a board has not substantially addressed shareholder concerns, we may vote against the appropriate committees and / or individual directors. The following illustrates common circumstances:
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The independent chair or lead independent director, members of the nominating / governance committee, and / or the longest tenured director(s), where we observe a lack of board responsiveness to shareholders, evidence of board entrenchment, and / or failure to promote adequate board succession planning |
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The chair of the nominating / governance committee, or where no chair exists, the nominating / governance committee member with the longest tenure, where board member(s) at the most recent election of directors have received withhold votes from more than 30% of shares voted and the board has not taken appropriate action to respond to shareholder concerns. This may not apply in cases where BlackRock did not support the initial withhold vote |
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The independent chair or lead independent director and / or members of the nominating / governance committee, where a board fails to implement shareholder proposals that receive a majority of votes cast at a prior shareholder meeting, and the proposals, in our view, have a direct and substantial impact on shareholders fundamental rights or long-term economic interests |
Shareholder rights
We expect a board to act with integrity and to uphold governance best practices. Where we believe a board has not acted in the best interests of its shareholders, we may vote against the appropriate committees and / or individual directors. The following illustrates common circumstances:
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The independent chair or lead independent director and members of the governance committee, where a board implements or renews a poison pill without shareholder approval |
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The independent chair or lead independent director and members of the governance committee, where a board amends the charter / articles / bylaws such that the effect may be to entrench directors or to significantly reduce shareholder rights |
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Members of the compensation committee where the company has repriced options without shareholder approval |
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If a board maintains a classified structure, it is possible that the director(s) with whom we have a particular concern may not be subject to election in the year that the concern arises. In such situations, if we have a concern regarding a committee or committee chair that is not up for re-election, we will generally register our concern by withholding votes from all available members of the relevant committee. |
Board composition and effectiveness
We encourage boards to periodically renew their membership to ensure relevant skills and experience within the boardroom. To this end, regular performance reviews and skills assessments should be conducted by the nominating / governance committee.
Furthermore, we expect boards to be comprised of a diverse selection of individuals who bring their personal and professional experiences to bear in order to create a constructive debate of competing views and opinions in the boardroom. We recognize that diversity has multiple dimensions. In identifying potential candidates, boards should take into consideration the full breadth of diversity including personal
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factors, such as gender, ethnicity, and age; as well as professional characteristics, such as a directors industry, area of expertise, and geographic location. In addition to other elements of diversity, we encourage companies to have at least two women directors on their board. Our publicly available commentary explains our approach to engaging on board diversity.
We encourage boards to disclose their views on:
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The mix of competencies, experience, and other qualities required to effectively oversee and guide management in light of the stated long-term strategy of the company |
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The process by which candidates are identified and selected, including whether professional firms or other sources outside of incumbent directors networks have been engaged to identify and / or assess candidates |
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The process by which boards evaluate themselves and any significant outcomes of the evaluation process, without divulging inappropriate and / or sensitive details |
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The consideration given to board diversity, including, but not limited to, gender, ethnicity, race, age, experience, geographic location, skills, and perspective in the nomination process |
While we support regular board refreshment, we are not opposed in principle to long-tenured directors, nor do we believe that long board tenure is necessarily an impediment to director independence. A variety of director tenures within the boardroom can be beneficial to ensure board quality and continuity of experience.
Our primary concern is that board members are able to contribute effectively as corporate strategy evolves and business conditions change, and that all directors, regardless of tenure, demonstrate appropriate responsiveness to shareholders. We acknowledge that no single person can be expected to bring all relevant skill sets to a board; at the same time, we generally do not believe it is necessary or appropriate to have any particular director on the board solely by virtue of a singular background or specific area of expertise.
Where boards find that age limits or term limits are the most efficient and objective mechanism for ensuring periodic board refreshment, we generally defer to the boards determination in setting such limits.
To the extent that we believe that a company has not adequately accounted for diversity in its board composition within a reasonable timeframe, we may vote against the nominating / governance committee for an apparent lack of commitment to board effectiveness.
Board size
We typically defer to the board in setting the appropriate size and believe directors are generally in the best position to assess the optimal board size to ensure effectiveness. However, we may oppose boards that appear too small to allow for effective shareholder representation or too large to function efficiently.
CEO and management succession planning
There should be a robust CEO and senior management succession plan in place at the board level that is reviewed and updated on a regular basis. We expect succession planning to cover both long-term planning consistent with the strategic direction of the company and identified leadership needs over time, as well as short-term planning in the event of an unanticipated executive departure. We encourage the company to explain its executive succession planning process, including where accountability lies within the boardroom for this task, without prematurely divulging sensitive information commonly associated with this exercise.
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Classified board of directors / staggered terms
We believe that directors should be re-elected annually and that classification of the board generally limits shareholders rights to regularly evaluate a boards performance and select directors. While we will typically support proposals requesting board de-classification, we may make exceptions, should the board articulate an appropriate strategic rationale for a classified board structure, such as when a company needs consistency and stability during a time of transition, e.g. newly public companies or companies undergoing a strategic restructuring. A classified board structure may also be justified at non-operating companies in certain circumstances. We would, however, expect boards with a classified structure to periodically review the rationale for such structure and consider when annual elections might be appropriate.
Without a voting mechanism to immediately address concerns of a specific director, we may choose to vote against or withhold votes from the available slate of directors by default (see Shareholder rights for additional detail).
Contested director elections
The details of contested elections, or proxy contests, are assessed on a case-by-case basis. We evaluate a number of factors, which may include: the qualifications of the dissident and management candidates; the validity of the concerns identified by the dissident; the viability of both the dissidents and managements plans; the likelihood that the dissidents solutions will produce the desired change; and whether the dissident represents the best option for enhancing long -term shareholder value.
Cumulative voting
We believe that a majority vote standard is in the best long -term interest of shareholders. It ensures director accountability via the requirement to be elected by more than half of the votes cast. As such, we will generally oppose proposals requesting the adoption of cumulative voting, which may disproportionately aggregate votes on certain issues or director candidates.
Director compensation and equity programs
We believe that compensation for directors should be structured to attract and retain the best possible directors, while also aligning their interests with those of shareholders. We believe director compensation packages that are based on the companys long-term value creation and include some form of long-term equity compensation are more likely to meet this goal. In addition, we expect directors to build meaningful share ownership over time.
Majority vote requirements
BlackRock believes that directors should generally be elected by a majority of the shares voted and will normally support proposals seeking to introduce bylaws requiring a majority vote standard for director elections. Majority voting standards assist in ensuring that directors who are not broadly supported by shareholders are not elected to serve as their representatives. Some companies with a plurality voting standard have adopted a resignation policy for directors who do not receive support from at least a majority of votes cast. Where we believe that the company already has a sufficiently robust majority voting process in place, we may not support a shareholder proposal seeking an alternative mechanism.
Risk oversight
Companies should have an established process for identifying, monitoring, and managing key risks. Independent directors should have ready access to relevant management information and outside advice, as appropriate, to ensure they can properly oversee risk management. We encourage companies to provide transparency around risk measurement, mitigation, and reporting to the board. We are particularly interested in understanding how risk oversight processes evolve in response to changes in corporate strategy and / or shifts in the business and related risk environment. Comprehensive disclosure provides investors with a sense of the companys long -term operational risk management practices and, more broadly, the quality of the boards oversight. In the absence of robust disclosures, we may reasonably conclude that companies are not adequately managing risk.
B-5
Separation of chairman and CEO
We believe that independent leadership is important in the boardroom. In the U.S. there are two commonly accepted structures for independent board leadership: 1) an independent chairman; or 2) a lead independent director when the roles of chairman and CEO are combined.
In the absence of a significant governance concern, we defer to boards to designate the most appropriate leadership structure to ensure adequate balance and independence.
In the event that the board chooses a combined chair / CEO model, we generally support the designation of a lead independent director if they have the power to: 1) provide formal input into board meeting agendas; 2) call meetings of the independent directors; and 3) preside at meetings of independent directors. Furthermore, while we anticipate that most directors will be elected annually, we believe an element of continuity is important for this role for an extended period of time to provide appropriate leadership balance to the chair / CEO.
The following table illustrates examples of responsibilities under each board leadership model:
Combined Chair / CEO Model |
Separate Chair Model |
|||||
Chair / CEO |
Lead Director |
Chair |
||||
Board Meetings | Authority to call full meetings of the board of directors |
Attends full meetings of the board of directors
Authority to call meetings of independent directors
Briefs CEO on issues arising from executive sessions |
Authority to call full meetings of the board of directors | |||
Agenda | Primary responsibility for shaping board agendas, consulting with the lead director | Collaborates with chair / CEO to set board agenda and board information | Primary responsibility for shaping board agendas, in conjunction with CEO | |||
Board Communications | Communicates with all directors on key issues and concerns outside of full board meetings | Facilitates discussion among independent directors on key issues and concerns outside of full board meetings, including contributing to the oversight of CEO and management succession planning | Facilitates discussion among independent directors on key issues and concerns outside of full board meetings, including contributing to the oversight of CEO and management succession planning |
B-6
AUDITORS AND AUDIT-RELATED ISSUES
BlackRock recognizes the critical importance of financial statements to provide a complete and accurate portrayal of a companys financial condition. Consistent with our approach to voting on boards of directors, we seek to hold the audit committee of the board responsible for overseeing the management of the audit function at a company, and may withhold votes from the audit committee members where the board has failed to facilitate quality, independent auditing. We look to the audit committee report for insight into the scope of the audit committee responsibilities, including an overview of audit committee processes, issues on the audit committee agenda, and key decisions taken by the audit committee. We take particular note of cases involving significant financial restatements or material weakness disclosures, and we expect timely disclosure and remediation of accounting irregularities.
The integrity of financial statements depends on the auditor effectively fulfilling its role. To that end, we favor an independent auditor. In addition, to the extent that an auditor fails to reasonably identify and address issues that eventually lead to a significant financial restatement, or the audit firm has violated standards of practice that protect the interests of shareholders, we may also vote against ratification. From time to time, shareholder proposals may be presented to promote auditor independence or the rotation of audit firms. We may support these proposals when they are consistent with our views as described above.
Equal voting rights
BlackRock believes that shareholders should be entitled to voting rights in proportion to their economic interests. We believe that companies that look to add or already have dual or multiple class share structures should review these structures on a regular basis or as company circumstances change. Companies should receive shareholder approval of their capital structure on a periodic basis via a management proposal on the companys proxy. The proposal should give unaffiliated shareholders the opportunity to affirm the current structure or establish mechanisms to end or phase out controlling structures at the appropriate time, while minimizing costs to shareholders.
Blank check preferred stock
We frequently oppose proposals requesting authorization of a class of preferred stock with unspecified voting, conversion, dividend distribution, and other rights (blank check preferred stock) because they may serve as a transfer of authority from shareholders to the board and as a possible entrenchment device. We generally view the boards discretion to establish voting rights on a when-issued basis as a potential anti-takeover device, as it affords the board the ability to place a block of stock with an investor sympathetic to management, thereby foiling a takeover bid without a shareholder vote.
Nonetheless, we may support the proposal where the company:
|
Appears to have a legitimate financing motive for requesting blank check authority |
|
Has committed publicly that blank check preferred shares will not be used for anti-takeover purposes |
|
Has a history of using blank check preferred stock for financings |
|
Has blank check preferred stock previously outstanding such that an increase would not necessarily provide further anti-takeover protection but may provide greater financing flexibility |
B-7
Increase in authorized common shares
BlackRock considers industry-specific norms in our analysis of these proposals, as well as a companys history with respect to the use of its common shares. Generally, we are predisposed to support a company if the board believes additional common shares are necessary to carry out the firms business. The most substantial concern we might have with an increase is the possibility of use of common shares to fund a poison pill plan that is not in the economic interests of shareholders.
Increase or issuance of preferred stock
We generally support proposals to increase or issue preferred stock in cases where the company specifies the voting, dividend, conversion, and other rights of such stock where the terms of the preferred stock appear reasonable.
Stock splits
We generally support stock splits that are not likely to negatively affect the ability to trade shares or the economic value of a share. We generally support reverse stock splits that are designed to avoid delisting or to facilitate trading in the stock, where the reverse split will not have a negative impact on share value (e.g. one class is reduced while others remain at pre- split levels). In the event of a proposal for a reverse split that would not also proportionately reduce the companys authorized stock, we apply the same analysis we would use for a proposal to increase authorized stock.
MERGERS, ASSET SALES, AND OTHER SPECIAL TRANSACTIONS
BlackRocks primary concern is the best long-term economic interests of shareholders. While merger, asset sales, and other special transaction proposals vary widely in scope and substance, we closely examine certain salient features in our analyses, such as:
|
The degree to which the proposed transaction represents a premium to the companys trading price. We consider the share price over multiple time periods prior to the date of the merger announcement. In most cases, business combinations should provide a premium. We may consider comparable transaction analyses provided by the parties financial advisors and our own valuation assessments. For companies facing insolvency or bankruptcy, a premium may not apply |
|
There should be clear strategic, operational, and / or financial rationale for the combination |
|
Unanimous board approval and arms-length negotiations are preferred. We will consider whether the transaction involves a dissenting board or does not appear to be the result of an arms-length bidding process. We may also consider whether executive and / or board members financial interests in a given transaction appear likely to affect their ability to place shareholders interests before their own |
|
We prefer transaction proposals that include the fairness opinion of a reputable financial advisor assessing the value of the transaction to shareholders in comparison to recent similar transactions |
Poison pill plans
Where a poison pill is put to a shareholder vote by management, our policy is to examine these plans individually. Although we oppose most plans, we may support plans that include a reasonable qualifying offer clause. Such clauses typically require shareholder ratification of the pill and stipulate a sunset provision whereby the pill expires unless it is renewed.
These clauses also tend to specify that an all cash bid for all shares that includes a fairness opinion and evidence of financing does not trigger the pill, but forces either a special meeting at which the offer is put to a shareholder vote, or the board to seek the written consent of shareholders where shareholders could rescind the pill at their discretion. We may also support a pill where it is the only effective method for protecting tax or other economic benefits that may be associated with limiting the ownership changes of individual shareholders.
B-8
We generally vote in favor of shareholder proposals to rescind poison pills.
Reimbursement of expenses for successful shareholder campaigns
We generally do not support shareholder proposals seeking the reimbursement of proxy contest expenses, even in situations where we support the shareholder campaign. We believe that introducing the possibility of such reimbursement may incentivize disruptive and unnecessary shareholder campaigns.
We note that there are both management and shareholder proposals related to executive compensation. We generally vote on these proposals as described below, except that we typically oppose shareholder proposals on issues where the company already has a reasonable policy in place that we believe is sufficient to address the issue. We may also oppose a shareholder proposal regarding executive compensation if the companys history suggests that the issue raised is not likely to present a problem for that company.
Advisory resolutions on executive compensation (Say on Pay)
In cases where there is a Say on Pay vote, BlackRock will respond to the proposal as informed by our evaluation of compensation practices at that particular company and in a manner that appropriately addresses the specific question posed to shareholders. In a commentary on our website, entitled BlackRock Investment Stewardships approach to executive compensation, we explain our beliefs and expectations related to executive compensation practices, our Say on Pay analysis framework, and our typical approach to engagement and voting on Say on Pay.
Advisory votes on the frequency of Say on Pay resolutions
BlackRock will generally support triennial pay frequency votes, but we defer to the board to determine the appropriate timeframe upon which pay should be reviewed. In evaluating pay, we believe that the compensation committee is responsible for constructing a plan that appropriately incentivizes executives for long-term value creation, utilizing relevant metrics and structure to ensure overall pay and performance alignment. In a similar vein, we defer to the board to establish the most appropriate timeframe for review of pay structure, absent a change in strategy that would suggest otherwise.
However, we may support an annual pay frequency vote in some situations, for example, where we conclude that a company has failed to align pay with performance. In these circumstances, we will also consider voting against the compensation committee members.
Claw back proposals
We generally favor recoupment from any senior executive whose compensation was based on faulty financial reporting or deceptive business practices. In addition to fraudulent acts, we also favor recoupment from any senior executive whose behavior caused direct financial harm to shareholders, reputational risk to the company , or resulted in a criminal investigation, even if such actions did not ultimately result in a material restatement of past results. This includes, but is not limited to, settlement agreements arising from such behavior and paid for directly by the company. We typically support shareholder proposals on these matters unless the company already has a robust claw back policy that sufficiently addresses our concerns.
Employee stock purchase plans
We believe these plans can provide performance incentives and help align employees interests with those of shareholders. The most common form of employee stock purchase plan (ESPP) qualifies for favorable tax treatment under Section 423 of the Internal Revenue Code. We will typically support qualified ESPP proposals.
B-9
Equity compensation plans
BlackRock supports equity plans that align the economic interests of directors, managers, and other employees with those of shareholders. We believe that boards should establish policies prohibiting the use of equity awards in a manner that could disrupt the intended alignment with shareholder interests (e.g. the use of stock as collateral for a loan; the use of stock in a margin account; the use of stock [or an unvested award] in hedging or derivative transactions). We may support shareholder proposals requesting the establishment of such policies.
Our evaluation of equity compensation plans is based on a companys executive pay and performance relative to peers and whether the plan plays a significant role in a pay-for-performance disconnect. We generally oppose plans that contain evergreen provisions, which allow for the unlimited increase of shares reserved without requiring further shareholder approval after a reasonable time period. We also generally oppose plans that allow for repricing without shareholder approval. We may also oppose plans that provide for the acceleration of vesting of equity awards even in situations where an actual change of control may not occur. We encourage companies to structure their change of control provisions to require the termination of the covered employee before acceleration or special payments are triggered.
Golden parachutes
We generally view golden parachutes as encouragement to management to consider transactions that might be beneficial to shareholders. However, a large potential pay-out under a golden parachute arrangement also presents the risk of motivating a management team to support a sub-optimal sale price for a company.
When determining whether to support or oppose an advisory vote on a golden parachute plan, we normally support the plan unless it appears to result in payments that are excessive or detrimental to shareholders. In evaluating golden parachute plans, BlackRock may consider several factors, including:
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Whether we believe that the triggering event is in the best interest of shareholders |
|
Whether management attempted to maximize shareholder value in the triggering event |
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The percentage of total premium or transaction value that will be transferred to the management team, rather than shareholders, as a result of the golden parachute payment |
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Whether excessively large excise tax gross-up payments are part of the pay-out |
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Whether the pay package that serves as the basis for calculating the golden parachute payment was reasonable in light of performance and peers |
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Whether the golden parachute payment will have the effect of rewarding a management team that has failed to effectively manage the company |
It may be difficult to anticipate the results of a plan until after it has been triggered; as a result, BlackRock may vote against a golden parachute proposal even if the golden parachute plan under review was approved by shareholders when it was implemented.
We may support shareholder proposals requesting that implementation of such arrangements require shareholder approval. We generally support proposals requiring shareholder approval of plans that exceed 2.99 times an executives current salary and bonus, including equity compensation.
B-10
Option exchanges
We believe that there may be legitimate instances where underwater options create an overhang on a companys capital structure and a repricing or option exchange may be warranted. We will evaluate these instances on a case -by-case basis. BlackRock may support a request to reprice or exchange underwater options under the following circumstances:
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The company has experienced significant stock price decline as a result of macroeconomic trends, not individual company performance |
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Directors and executive officers are excluded; the exchange is value neutral or value creative to shareholders; tax, accounting, and other technical considerations have been fully contemplated |
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There is clear evidence that absent repricing, the company will suffer serious employee incentive or retention and recruiting problems |
BlackRock may also support a request to exchange underwater options in other circumstances, if we determine that the exchange is in the best interest of shareholders.
Pay-for-Performance plans
In order for executive compensation exceeding $1 million USD to qualify for federal tax deductions, related to Section 162(m) of the Internal Revenue Code of 1986, the Omnibus Budget Reconciliation Act (OBRA) requires companies to link compensation for the companys top five executives to disclosed performance goals and submit the plans for shareholder approval. The law further requires that a compensation committee comprised solely of outside directors administer these plans. Because the primary objective of these proposals is to preserve the deductibility of such compensation, we generally favor approval in order to preserve net income.
Supplemental executive retirement plans
BlackRock may support shareholder proposals requesting to put extraordinary benefits contained in Supplemental Executive Retirement Plans (SERP) agreements to a shareholder vote unless the companys executive pension plans do not contain excessive benefits beyond what is offered under employee-wide plans.
ENVIRONMENTAL AND SOCIAL ISSUES
Our fiduciary duty to clients is to protect and enhance their economic interest in the companies in which we invest on their behalf. It is within this context that we undertake our corporate governance activities. We believe that well -managed companies will deal effectively with the material environmental and social (E&S) factors relevant to their businesses.
Robust disclosure is essential for investors to effectively gauge companies business practices and planning related to E&S risks and opportunities.
BlackRock expects companies to issue reports aligned with the recommendations of the Task Force on Climate -related Financial Disclosures (TCFD) and the standards put forward by the Sustainability Accounting Standards Board (SASB). We view the SASB and TCFD frameworks as complementary in achieving the goal of disclosing more financially material information, particularly as it relates to industry -specific metrics and target setting. TCFDs recommendations provide an overarching framework for disclosure on the business implications of climate change, and potentially other E&S factors. We find SASBs industry-specific guidance (as identified in its materiality map) beneficial in helping companies identify and discuss their governance, risk assessments, and performance against these key performance indicators (KPIs). Any global standards adopted, peer group benchmarking undertaken, and verification process in place should also be disclosed and discussed in this context.
B-11
BlackRock has been engaging with companies for several years on disclosure of material E&S factors. Given the increased understanding of sustainability risks and opportunities, and the need for better information to assess them, we specifically ask companies to:
1) |
Publish disclosures in line with industry specific SASB guidelines by year-end, if they have not already done so, or disclose a similar set of data in a way that is relevant to their particular business; and |
2) |
Disclose climate-related risks in line with the TCFDs recommendations, if they have not already done so. This should include the companys plan for operating under a scenario where the Paris Agreements goal of limiting global warming to less than two degrees is fully realized, as expressed by the TCFD guidelines. |
See our commentary on our approach to engagement on TCFD and SASB aligned reporting for greater detail of our expectations.
We will use these disclosures and our engagements to ascertain whether companies are properly managing and overseeing these risks within their business and adequately planning for the future. In the absence of robust disclosures, investors, including BlackRock, will increasingly conclude that companies are not adequately managing risk.
We believe that when a company is not effectively addressing a material issue, its directors should be held accountable. We will generally engage directly with the board or management of a company when we identify issues. We may vote against the election of directors where we have concerns that a company might not be dealing with E&S factors appropriately. Sometimes we may reflect such concerns by supporting a shareholder proposal on the issue, where there seems to be either a significant potential threat or realized harm to shareholders interests caused by poor management of material E&S factors. In deciding our course of action, we will assess the nature of our engagement with the company on the issue over time, including whether:
|
The company has already taken sufficient steps to address the concern |
|
The company is in the process of actively implementing a response |
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There is a clear and material economic disadvantage to the company in the near-term if the issue is not addressed in the manner requested by the shareholder proposal |
We do not see it as our role to make social, ethical, or political judgments on behalf of clients, but rather, to protect their long-term economic interests as shareholders. We expect investee companies to comply, at a minimum, with the laws and regulations of the jurisdictions in which they operate. They should explain how they manage situations where such laws or regulations are contradictory or ambiguous.
Climate risk
Within the framework laid out above, as well as our guidance on How BlackRock Investment Stewardship engages on climate risk, we believe that climate presents significant investment risks and opportunities that may impact the long- term financial sustainability of companies. We believe that the reporting frameworks developed by TCFD and SASB provide useful guidance to companies on identifying, managing, and reporting on climate-related risks and opportunities.
B-12
We expect companies to help their investors understand how the company may be impacted by climate risk, in the context of its ability to realize a long-term strategy and generate value over time. We expect companies to convey their governance around this issue through their corporate disclosures aligned with TCFD and SASB. For companies in sectors that are significantly exposed to climate-related risk, we expect the whole board to have demonstrable fluency in how climate risk affects the business and how management approaches assessing, adapting to, and mitigating that risk.
Where a company receives a shareholder proposal related to climate risk, in addition to the factors laid out above, our assessment will take into account the robustness of the companys existing disclosures as well as our understanding of its management of the issues as revealed through our engagements with the company and board members over time. In certain instances, we may disagree with the details of a climate-related shareholder proposal but agree that the company in question has not made sufficient progress on climate-related disclosures. In these instances, we may not support the proposal, but may vote against the election of relevant directors.
Corporate political activities
Companies may engage in certain political activities, within legal and regulatory limits, in order to influence public policy consistent with the companies values and strategies, and thus serve shareholders best long-term economic interests. These activities can create risks, including: the potential for allegations of corruption; the potential for reputational issues associated with a candidate, party, or issue; and risks that arise from the complex legal, regulatory , and compliance considerations associated with corporate political activity. We believe that companies which choose to engage in political activities should develop and maintain robust processes to guide these activities and to mitigate risks, including a level of board oversight.
When presented with shareholder proposals requesting increased disclosure on corporate political activities, we may consider the political activities of that company and its peers, the existing level of disclosure, and our view regarding the associated risks. We generally believe that it is the duty of boards and management to determine the appropriate level of disclosure of all types of corporate activity, and we are generally not supportive of proposals that are overly prescriptive in nature. We may decide to support a shareholder proposal requesting additional reporting of corporate political activities where there seems to be either a significant potential threat or actual harm to shareholders interests, and where we believe the company has not already provided shareholders with sufficient information to assess the companys management of the risk.
Finally, we believe that it is not the role of shareholders to suggest or approve corporate political activities; therefore we generally do not support proposals requesting a shareholder vote on political activities or expenditures.
GENERAL CORPORATE GOVERNANCE MATTERS
Adjourn meeting to solicit additional votes
We generally support such proposals unless the agenda contains items that we judge to be detrimental to shareholders best long-term economic interests.
Bundled proposals
We believe that shareholders should have the opportunity to review substantial governance changes individually without having to accept bundled proposals. Where several measures are grouped into one proposal, BlackRock may reject certain positive changes when linked with proposals that generally contradict or impede the rights and economic interests of shareholders.
B-13
Exclusive forum provisions
BlackRock generally supports proposals to seek exclusive forum for certain shareholder litigation. In cases where a board unilaterally adopts exclusive forum provisions that we consider unfavorable to the interests of shareholders, we will vote against the independent chair or lead independent director and members of the governance committee.
Multi-jurisdictional companies
Where a company is listed on multiple exchanges or incorporated in a country different from its primary listing, we will seek to apply the most relevant market guideline(s) to our analysis of the companys governance structure and specific proposals on the shareholder meeting agenda. In doing so, we typically consider the governance standards of the companys primary listing, the market standards by which the company governs itself, and the market context of each specific proposal on the agenda. If the relevant standards are silent on the issue under consideration, we will use our professional judgment as to what voting outcome would best protect the long-term economic interests of investors. We expect that companies will disclose the rationale for their selection of primary listing, country of incorporation, and choice of governance structures, in particular where there is conflict between relevant market governance practices.
Other business
We oppose giving companies our proxy to vote on matters where we are not given the opportunity to review and understand those measures and carry out an appropriate level of shareholder oversight.
Reincorporation
Proposals to reincorporate from one state or country to another are most frequently motivated by considerations of antitakeover protections, legal advantages, and / or cost savings. We will evaluate, on a case-by-case basis, the economic and strategic rationale behind the companys proposal to reincorporate. In all instances, we will evaluate the changes to shareholder protection under the new charter / articles / bylaws to assess whether the move increases or decreases shareholder protections. Where we find that shareholder protections are diminished, we may support reincorporation if we determine that the overall benefits outweigh the diminished rights.
IPO governance
We expect boards to consider and disclose how the corporate governance structures adopted upon initial public offering (IPO) are in shareholders best long-term interests. We also expect boards to conduct a regular review of corporate governance and control structures, such that boards might evolve foundational corporate governance structures as company circumstances change, without undue costs and disruption to shareholders. In our letter on unequal voting structures, we articulate our view that one vote for one share is the preferred structure for publicly-traded companies. We also recognize the potential benefits of dual class shares to newly public companies as they establish themselves; however, we believe that these structures should have a specific and limited duration. We will generally engage new companies on topics such as classified boards and supermajority vote provisions to amend bylaws, as we believe that such arrangements may not be in the best interest of shareholders in the long-term.
We will typically apply a one-year grace period for the application of certain director-related guidelines (including, but not limited to, director independence and over-boarding considerations), during which we expect boards to take steps to bring corporate governance standards in line with our expectations.
Further, if a company qualifies as an emerging growth company (an EGC) under the Jumpstart Our Business Startups Act of 2012 (the JOBS Act), we will give consideration to the NYSE and NASDAQ governance exemptions granted under the JOBS Act for the duration such a company is categorized as an EGC. We expect an EGC to have a totally independent audit committee by the first anniversary of its IPO, with our standard approach to voting on auditors and audit -related issues applicable in full for an EGC on the first anniversary of its IPO.
B-14
Amendment to charter / articles / bylaws
We believe that shareholders should have the right to vote on key corporate governance matters, including on changes to governance mechanisms and amendments to the charter / articles / bylaws. We may vote against certain directors where changes to governing documents are not put to a shareholder vote within a reasonable period of time, in particular if those changes have the potential to impact shareholder rights ( see Director elections herein). In cases where a boards unilateral adoption of changes to the charter / articles / bylaws promotes cost and operational efficiency benefits for the company and its shareholders, we may support such action if it does not have a negative effect on shareholder rights or the companys corporate governance structure.
When voting on a management or shareholder proposal to make changes to the charter / articles / bylaws, we will consider in part the companys and / or proponents publicly stated rationale for the changes, the companys governance profile and history, relevant jurisdictional laws, and situational or contextual circumstances which may have motivated the proposed changes, among other factors. We will typically support changes to the charter / articles / bylaws where the benefits to shareholders, including the costs of failing to make those changes, demonstrably outweigh the costs or risks of making such changes.
Proxy access
We believe that long-term shareholders should have the opportunity, when necessary and under reasonable conditions, to nominate directors on the companys proxy card.
In our view, securing the right of shareholders to nominate directors without engaging in a control contest can enhance shareholders ability to meaningfully participate in the director election process, stimulate board attention to shareholder interests, and provide shareholders an effective means of directing that attention where it is lacking. Proxy access mechanisms should provide shareholders with a reasonable opportunity to use this right without stipulating overly restrictive or onerous parameters for use, and also provide assurances that the mechanism will not be subject to abuse by short-term investors, investors without a substantial investment in the company, or investors seeking to take control of the board.
In general, we support market-standardized proxy access proposals, which allow a shareholder (or group of up to 20 shareholders) holding three percent of a companys outstanding shares for at least three years the right to nominate the greater of up to two directors or 20% of the board. Where a standardized proxy access provision exists, we will generally oppose shareholder proposals requesting outlier thresholds.
Right to act by written consent
In exceptional circumstances and with sufficiently broad support, shareholders should have the opportunity to raise issues of substantial importance without having to wait for management to schedule a meeting. We therefore believe that shareholders should have the right to solicit votes by written consent provided that: 1) there are reasonable requirements to initiate the consent solicitation process (in order to avoid the waste of corporate resources in addressing narrowly supported interests); and 2) shareholders receive a minimum of 50% of outstanding shares to effectuate the action by written consent. We may oppose shareholder proposals requesting the right to act by written consent in cases where the proposal is structured for the benefit of a dominant shareholder to the exclusion of others, or if the proposal is written to discourage the board from incorporating appropriate mechanisms to avoid the waste of corporate resources when establishing a right to act by written consent. Additionally, we may oppose shareholder proposals requesting the right to act by written consent if the company already provides a shareholder right to call a special meeting that we believe offers shareholders a reasonable opportunity to raise issues of substantial importance without having to wait for management to schedule a meeting.
B-15
Right to call a special meeting
In exceptional circumstances and with sufficiently broad support, shareholders should have the opportunity to raise issues of substantial importance without having to wait for management to schedule a meeting. We therefore believe that shareholders should have the right to call a special meeting in cases where a reasonably high proportion of shareholders (typically a minimum of 15% but no higher than 25%) are required to agree to such a meeting before it is called, in order to avoid the waste of corporate resources in addressing narrowly supported interests. However, we may oppose this right in cases where the proposal is structured for the benefit of a dominant shareholder to the exclusion of others. We generally believe that a right to act via written consent is not a sufficient alternative to the right to call a special meeting.
Simple majority voting
We generally favor a simple majority voting requirement to pass proposals. Therefore, we will support the reduction or the elimination of supermajority voting requirements to the extent that we determine shareholders ability to protect their economic interests is improved. Nonetheless, in situations where there is a substantial or dominant shareholder, supermajority voting may be protective of public shareholder interests and we may support supermajority requirements in those situations.
This document is provided for information or educational purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.
THE INFORMATION AND OPINIONS CONTAINED IN THIS DOCUMENT ARE AS OF JANUARY 2020 UNLESS IT IS STATED OTHERWISE AND MAY CHANGE AS SUBSEQUENT CONDITIONS VARY. THE INFORMATION AND OPINIONS CONTAINED IN THIS MATERIAL ARE DERIVED FROM PROPRIETARY AND NON-PROPRIETARY SOURCES DEEMED BY BLACKROCK TO BE RELIABLE, ARE NOT NECESSARILY ALL INCLUSIVE AND ARE NOT GUARANTEED AS TO ACCURACY.
B-16
PART C
Other Information
Item 25. |
Financial Statements And Exhibits |
The agreements included or incorporated by reference as exhibits to this Registration Statement contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties were made solely for the benefit of the other parties to the applicable agreement and (i) were not intended to be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; (ii) may have been qualified in such agreement by disclosures that were made to the other party in connection with the negotiation of the applicable agreement; (iii) may apply contract standards of materiality that are different from materiality under the applicable securities laws; and (iv) were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement.
The Registrant acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this Registration Statement not misleading.
(1) | Financial Statements | |
Part A: Financial Highlights | ||
Part B: Audited financial statements for the fiscal year ended April 30, 2019 and related Report of Independent Registered Public Accounting Firm are incorporated herein by reference to the Funds Annual Report for the year ended April 30, 2019. Unaudited financial statements for the semi-annual period ended October 31, 2019 are incorporated herein by reference to the Funds Semi-Annual Report for the period ended October 31, 2019. | ||
(2) | Exhibits |
Item 26. |
Marketing Arrangements |
The information contained under the section entitled Plan of Distribution in the Prospectus is incorporated by reference, and any information concerning any underwriters will be contained in the accompanying Prospectus Supplement, if any.
- 2 -
Item 27. |
Other Expenses Of Issuance And Distribution |
The following table sets forth the estimated expenses to be incurred in connection with the offering described in this Registration Statement:
Registration fee |
$ | 11,529 | ||
NYSE listing fee |
19,250 | |||
Accounting fees and expenses |
12,000 | |||
Legal fees and expenses |
172,500 | |||
FINRA fee |
13,824 | |||
|
|
|||
Total |
$ | 229,103 | (1) |
(1) |
Estimate is based on the aggregate estimated expenses to be incurred during a three year shelf offering period. |
Item 28. |
Persons Controlled By Or Under Common Control With The Registrant |
None.
Item 29. |
Number Of Holders Of Shares |
As of April 30, 2020:
Title Of Class |
Number Of Record Holders |
|
Common Shares of Beneficial Interest |
255 |
Item 30. |
Indemnification |
Section 2-418 of the General Corporation Law of the State of Maryland, Article VI of the Registrants Articles of Incorporation, Article IV of the Registrants Amended and Restated Bylaws and the Investment Management Agreement each provides for indemnification.
Article VI of the Registrants Articles of Incorporation provides as follows:
(3) Each director and each officer of the Corporation shall be indemnified by the Corporation to the full extent permitted by the General Laws of the State of Maryland, subject to the requirements of the Investment Company Act of 1940, as amended. No amendment of these Articles of Incorporation or repeal of any provision hereof shall limit or eliminate the benefits provided to directors and officers under this provision in connection with any act or omission that occurred prior to such amendment or repeal.
(4) To the fullest extent permitted by the General Laws of the State of Maryland, subject to the requirements of the Investment Company Act of 1940, as amended, no director or officer of the Corporation shall be personally liable to the Corporation or its security holders for money damages. No amendment of these Articles of Incorporation or repeal of any provision hereof shall limit or eliminate the benefits provided to directors and officers under this provision in connection with any act or omission that occurred prior to such amendment or repeal.
Article IV of the Registrants Amended and Restated Bylaws provides as follows:
Section 1. No Personal Liability of Directors or Officers. No Director, advisory board member or officer of the Fund shall be subject in such capacity to any personal liability whatsoever to any Person, save only liability to
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the Fund or its shareholders arising from bad faith, willful misfeasance, gross negligence or reckless disregard for his or her duty to such Person; and, subject to the foregoing exception, all such Persons shall look solely to the assets of the Fund for satisfaction of claims of any nature arising in connection with the affairs of the Fund. If any Director, advisory board member or officer, as such, of the Fund, is made a party to any suit or proceeding to enforce any such liability, subject to the foregoing exception, such person shall not, on account thereof, be held to any personal liability. Any repeal or modification of the Charter or this Article IV Section 1 shall not adversely affect any right or protection of a Director, advisory board member or officer of the Fund existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification.
Section 2. Mandatory Indemnification.
(a) The Fund hereby agrees to indemnify each person who is or was a Director, advisory board member or officer of the Fund (each such person being an Indemnitee) to the full extent permitted under the Charter. In addition, the Fund may provide greater but not lesser rights to indemnification pursuant to a contract approved by at least a majority of Directors between the Fund and any Indemnitee. Notwithstanding the foregoing no Indemnitee shall be indemnified hereunder against any liability to any person or any expense of such Indemnitee arising by reason of (i) willful misfeasance, (ii) bad faith, (iii) gross negligence, or (iv) reckless disregard of the duties involved in the conduct of the Indemnitees position (the conduct referred to in such clauses (i) through (iv) being sometimes referred to herein as Disabling Conduct). Furthermore, with respect to any action, suit or other proceeding voluntarily prosecuted by any Indemnitee as plaintiff, indemnification shall be mandatory only if the prosecution of such action, suit or other proceeding by such Indemnitee (A) was authorized by a majority of the Directors or (B) was instituted by the Indemnitee to enforce his or her rights to indemnification hereunder in a case in which the Indemnitee is found to be entitled to such indemnification.
(b) Notwithstanding the foregoing, unless otherwise provided in any agreement relating to indemnification between an Indemnitee and the Fund, no indemnification shall be made hereunder unless there has been a determination (i) by a final decision on the merits by a court or other body of competent jurisdiction before whom the issue of entitlement to indemnification hereunder was brought that such Indemnitee is entitled to indemnification hereunder or, (ii) in the absence of such a decision, by (A) a majority vote of a quorum of those Directors who are both Independent Directors and not parties to the proceeding (Independent Non-Party Directors), that the Indemnitee is entitled to indemnification hereunder, or (B) if such quorum is not obtainable or even if obtainable, if such majority so directs, a Special Counsel in a written opinion concludes that the Indemnitee should be entitled to indemnification hereunder.
(c) Subject to any limitations provided by the 1940 Act and the Charter, the Fund shall have the power and authority to indemnify and provide for the advance payment of expenses to employees, agents and other Persons providing services to the Fund or serving in any capacity at the request of the Fund to the full extent permitted for corporations organized under the corporations laws of the state in which the Fund was formed, provided that such indemnification has been approved by a majority of the Directors.
(d) Any repeal or modification of the Charter or Section 2 of this Article IV shall not adversely affect any right or protection of a Director, advisory board member or officer of the Fund existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification.
Section 3. Good Faith Defined; Reliance on Experts. For purposes of any determination under this Article IV, a person shall be deemed to have acted in good faith and in a manner such person reasonably believed to be in the best interests of the Fund, or, with respect to any criminal action or proceeding, to have had no reasonable cause to believe such persons conduct was unlawful, if such persons action is based on the records or books of account of the Fund, or on information supplied to such person by the officers of the Fund in the course of their duties, or on the advice of legal counsel for the Fund or on information or records given or reports made to the Fund by an independent certified public accountant or by an appraiser or other expert or agent selected with reasonable care by the Fund. The provisions of this Article IV Section 3 shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth in this Article IV. Each Director and officer or employee of the Fund shall, in the performance of his or her duties, be fully and completely justified and protected with regard to any act or any failure to act resulting from reliance in good faith upon the books of account or other records of the Fund, upon an opinion of counsel selected by the Board of Directors or a committee of the Directors, or upon reports made to the Fund by any of the Funds officers or
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employees or by any advisor, administrator, manager, distributor, dealer, accountant, appraiser or other expert or consultant selected with reasonable care by the Board of Directors or a committee of the Directors, officers or employees of the Fund, regardless of whether such counsel or expert may also be a Director.
Section 4. Survival of Indemnification and Advancement of Expenses. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article IV shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person.
Section 5. Insurance. The Directors may maintain insurance for the protection of the Funds property, the shareholders, Directors, officers, employees and agents in such amount as the Directors shall deem adequate to cover possible tort liability, and such other insurance as the Directors in their sole judgment shall deem advisable or is required by the 1940 Act.
Section 6. Subrogation. In the event of payment by the Fund to an Indemnitee under the Charter or these Bylaws, the Fund shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute such documents and do such acts as the Fund may reasonably request to secure such rights and to enable the Fund effectively to bring suit to enforce such rights.
Reference is also made to:
|
Sections 10 and 11 of the Registrants Investment Management Agreement, a form of which is filed as Exhibit (g)(1) of this Registration Statement. |
Additionally, the Registrant and the other funds in the BlackRock Fixed-Income Complex jointly maintain, at their own expense, E&O/D&O insurance policies for the benefit of its Directors, officers and certain affiliated persons. The Registrant pays a pro rata portion of the premium on such insurance policies.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to Directors, officers and controlling persons of the Registrant, pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a Director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such Director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
Item 31. |
Business And Other Connections Of Investment Advisor |
BlackRock Advisors, LLC, a limited liability company organized under the laws of Delaware (the Advisor), acts as investment adviser to the Registrant. The Registrant is fulfilling the requirement of this Item 31 to provide a list of the officers and directors of the Advisor, together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by the Advisor or those officers and directors during the past two years, by incorporating by reference the information contained in the Form ADV of the Advisor filed with the commission pursuant to the Investment Advisers Act of 1940 (Commission File No. 801-47710).
Item 32. |
Location Of Accounts And Records |
The Registrants accounts, books and other documents are currently located at the offices of the Registrant, c/o BlackRock Advisors, LLC, 100 Bellevue Parkway, Wilmington, DE 19809 and at the offices of State Street Bank and Trust Company, the Registrants Custodian and Administrator, at One Lincoln Street, Boston, Massachusetts 02111, The Bank of New York Mellon, the Registrants former custodian and transfer agent, at One Wall Street, New York, New York 10286, Computershare Trust Company, N.A., the Registrants Transfer Agent, at 250 Royall Street, Canton, Massachusetts 02021, and BNY Mellon Investment Servicing (US) Inc., the Registrants former administrator, at One Wall Street, New York, New York 10286.
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Item 33. |
Management Services |
Not Applicable
Item 34. |
Undertakings |
(1) |
The Registrant hereby undertakes to suspend the offering of its units until it amends its prospectus if (a) subsequent to the effective date of its registration statement, the net asset value declines more than 10 percent from its net asset value as of the effective date of the registration statement or (b) the net asset value increases to an amount greater than its net proceeds as stated in the prospectus. |
(2) |
Not applicable. |
(3) |
Any securities not taken in a rights offering by shareholders are to be reoffered to the public, and we undertake to supplement the prospectus, after the expiration of the subscription period, to set forth the results of the subscription offer, the transactions by underwriters during the subscription period, the amount of unsubscribed securities to be purchased by underwriters, and the terms of any subsequent reoffering thereof. If any public offering by the underwriters of the securities being registered is to be made on terms differing from those set forth on the cover page of the prospectus, we undertake to file a post-effective amendment to set forth the terms of such offering. |
(4) |
The securities being registered will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933. Accordingly, the Registrant undertakes: |
(a) |
to file, during and period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (1) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (2) to reflect in the prospectus any facts or events after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement; and (3) to include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. |
(b) |
that for the purpose of determining any liability under the Securities Act of 1933, 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; |
(c) |
to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering; and |
(d) |
that, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, if the Registrant is subject to Rule 430C: Each prospectus filed pursuant to Rule 497(b), (c), (d) or (e) under the Securities Act of 1933 as part of a registration statement relating to an offering, other than prospectuses filed in reliance on Rule 430A under the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. |
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(e) |
that for the purpose of determining liability of the Registrant under the Securities Act of 1933 to any purchaser in the initial distribution of securities: The undersigned Registrant undertakes that in a primary offering of securities of the undersigned Registrant pursuant to this Registration Statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned Registrant will be a seller to the purchaser and will be considered to offer or sell such securities to the purchaser: (1) any preliminary prospectus or prospectus of the undersigned Registrant relating to the offering required to be filed pursuant to Rule 497 under the Securities Act of 1933; (2) the portion of any advertisement pursuant to Rule 482 under the Securities Act of 1933 relating to the offering containing material information about the undersigned Registrant or its securities provided by or on behalf of the undersigned Registrant; and (3) any other communication that is an offer in the offering made by the undersigned Registrant to the purchaser. |
(5) |
If applicable: |
(a) |
For the purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant under Rule 497(h) under the Securities Act of 1933 shall be deemed to be part of the Registration Statement as of the time it was declared effective. |
(b) |
For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering thereof. |
(6) |
The Registrant undertakes to send by first class mail or other means designed to ensure equally prompt delivery within two business days of receipt of a written or oral request, any Statement of Additional Information constituting Part B of this Registration Statement. |
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Fund has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, and the State of New York, on the 27th day of May, 2020.
BLACKROCK MUNIASSETS FUND, INC. |
||
By: |
/s/ John M. Perlowski |
|
John M. Perlowski |
||
President and Chief Executive Officer |
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated and on the 27th day of May, 2020.
Signature |
Title |
|||
/s/ John M. Perlowski John M. Perlowski |
Director, President and Chief Executive Officer | |||
/s/ Neal J. Andrews Neal J. Andrews |
Chief Financial Officer | |||
* Richard E. Cavanagh |
Director | |||
* Karen P. Robards |
Director | |||
* Michael J. Castellano |
Director | |||
* Cynthia L. Egan |
Director | |||
* Frank J. Fabozzi |
Director | |||
* R. Glenn Hubbard |
Director | |||
* W. Carl Kester |
Director | |||
* Catherine A. Lynch |
Director |
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* Robert W. Fairbairn |
Director |
*By: |
/s/ John M. Perlowski |
|
John M. Perlowski | ||
as Attorney-in-Fact |
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EXHIBIT INDEX
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Exhibit (e)
MUNIASSETS FUND, INC.
TERMS AND CONDITIONS OF
AUTOMATIC DIVIDEND REINVESTMENT PLAN
1. Appointment of Agent. You, , will act as Agent for me, and will open an account for me under the Dividend Reinvestment Plan (the Plan) in the same name as my present shares of common stock, par value $.10 per share (Common Stock), of NEW YORK MUNIYIELD Fund, Inc. (the Fund) are registered, and will automatically put into effect for me the dividend reinvestment option of the Plan as of the first record date for a dividend or capital gains distribution (collectively referred to herein as a dividend), payable at the election of shareholders in cash or shares of Common Stock.
2. Dividends Payable in Common Stock. My participation in the Plan constitutes an election by me to receive dividends in shares of Common Stock whenever the Fund declares a dividend. In such event, the dividend amount shall automatically be made payable to me entirely in shares of Common Stock which shall be acquired by the Agent for my account, depending upon the circumstances described in paragraph 3, either (i) through receipt of additional shares of unissued but authorized shares of Common Stock from the Fund (newly issued shares) as described in paragraph 6 or (ii) by purchase of outstanding shares of Common Stock on the open market (open-market purchases) as described in paragraph 7.
3. Determination of Whether Newly-Issued Shares or Open Market Purchases. If on the payment date for the dividend (the valuation date), the net asset value per share of the Common Stock, as defined in paragraph a, is equal to or less than the market price per share of the Common Stock, as defined in paragraph 8, plus estimated brokerage commissions (such condition being referred to herein as market premium), the Agent shall invest the dividend amount in newly issued shares on my behalf as described in paragraph 6. If on the valuation date, the net asset value per share is greater than the market value (such condition being referred to herein as market discount), the Agent shall invest the dividend amount in shares acquired on my behalf in open-market purchases as described in paragraph 7.
4. Purchase Period for Open-Market Purchases. In the event of a market discount on the valuation date, the Agent shall have until the last business day before the next ex-dividend date with respect to the shares of Common Stock or in no event more than 30 days after the valuation date (the last purchase date) to invest the dividend amount in shares acquired in open-market purchases except where temporary curtailment or suspension of purchases is necessary to· comply with applicable provisions of federal securities laws.
5. Failure to Complete Open-Market Purchases During Purchase Period. If the Agent is unable to invest the full dividend amount in open-market purchases during the purchase period because the market discount has shifted to a market premium or otherwise, the Agent will invest the uninvested portion of the dividend amount in newly issued shares at the close of business on the last purchase date as described in paragraph 4; except that the Agent may not acquire newly issued shares after the valuation date under the foregoing circumstances unless it has received a legal opinion that registration of such shares is not required under the Securities Act of 1933 or unless the shares to be issued are registered under such Act.
6. Acquisition of Newly-Issued Shares. In the event that all or part of the dividend amount is to be invested in newly issued shares, you shall automatically receive such newly-issued shares of Common Stock, including fractions, for my account, and the number of additional newly-issued shares of Common Stock to be credited to my account shall be determined by dividing the dollar amount of the dividend on my shares to be invested in newly-issued shares by the net asset value per share of Common Stock on the date the shares are issued (the valuation date in the case of an initial market premium or the last purchase date in case the Agent is unable to complete open-market purchases during the purchase period): provided, that the maximum discount from the then current market price per share on the date of issuance shall not exceed 5%.
7. Manner of Making Open-Market Purchases. In the event that the dividend amount is to be invested in shares of Common Stock acquired in open-market purchases, you shall apply the amount of such dividend on my shares (less my pro rata share of brokerage commissions incurred with respect to your open-market purchases) to the purchase on the open-market of shares of the Common Stock for my account. Open-market purchases may be made on any securities exchange where the Common Stock is traded, in the over-the-counter market or in negotiated
transactions and may be on such terms as to price, delivery and otherwise as you shall determine. My funds held by you uninvested will not bear interest, and it is understood that, in any event, you shall have no liability in connection with any inability to purchase shares within 30 days after the initial date of such purchase as herein provided, or with the timing of any purchases affected. You shall have no responsibility as to the value of the Common Stock acquired for my account. For the purposes of cash investments you may commingle my funds with those of other shareholders of the Fund for whom you similarly act as Agent, and the average price (including brokerage commissions) of all shares purchased by you as Agent in the open market shall be the price per share allocable to me in connection with open-market purchases.
8. Meaning of Market Price and Net Asset Value. For all purposes of the Plan: (a) the market price of the Common Stock on a particular date shall be the last sales price on the New York Stock Exchange (the Exchange) on that date, or, if there is no sale on the Exchange on that date, then the mean between the closing bid and asked quotations for such stock on the Exchange on such date and (b) net asset value per share of the Common Stock on a particular date shall be as determined by or on behalf of the Fund.
9. Registration of Shares Acquired Pursuant to the Plan. You may hold my shares of Common Stock acquired pursuant to the Plan, together with the shares of other shareholders of the Fund acquired pursuant to the Plan, in noncertificated form in your name or that of your nominee. You will forward to me any proxy solicitation material and will vote any shares so held for me only in accordance with the proxy returned by me to the Fund. Upon my written request, you will deliver to me, without charge, a certificate or certificates for the full shares held by you for my account.
10. Confirmations. You will confirm to me each acquisition made for my account as soon as practicable but not later than 60 days after the date thereof.
11. Fractional Interests. Although I may from time to time have an undivided fractional interest (computed to three decimal places) in a share of the Fund, no certificates for a fractional share will be issued. However, dividends and distributions on fractional shares will be credited to my account. In the event of termination of my account under the Plan, you will adjust for any such undivided fractional interest in cash at the market value of the Funds shares at the time of termination less the pro rata expense of any sale required to make such an adjustment.
12. Stock Dividends or Share Purchase Rights. Any stock dividends or split shares distributed by the Fund on shares held by you for me will be credited to my account. In the event that the Fund makes available to its shareholders rights to purchase additional shares or other securities, the shares held for me under the Plan will be added to other shares held by me in calculating the number of rights to be issued to me.
13. Service Fee. Your service fee for handling capital gains distributions or income dividends will be paid by the Fund. I will be charged for my pro rata share of brokerage commissions on all open market purchases.
14. Termination of Account. I may terminate my account under the Plan by notifying you in writing. Such termination will be effective immediately if my notice is received by you not less than ten days prior to any dividend or distribution record date; otherwise such termination will be effective on the first trading day after the payment date for such dividend or distribution with respect to any subsequent dividend or distribution. The Plan may be terminated by you or the Fund upon notice in writing mailed to me at least 90 days prior to any record date for the payment of any dividend or distribution by the Fund. Upon any termination you will cause a certificate or certificates for the full shares held for me under the Plan and cash adjustment for any fraction to be delivered to me without charge. If I elect by notice to you in writing in advance of such termination to have you sell part or all of my shares and remit the proceeds to me, you are authorized to deduct brokerage commissions for this transaction from the proceeds.
15. Amendment of Plan. These terms and conditions may be amended or supplemented by you or the Fund at any time or times but, except when necessary or appropriate to comply with applicable law or the rules or policies of the Securities and Exchange Commission or any other regulatory authority, only by mailing to me appropriate written notice at least 90 days prior to the effective date thereof. The amendment or supplement shall be deemed to be accepted by me unless, prior to the effective date, thereof, you receive written notice of the termination of my account under the Plan. Any such amendment may include an appointment by you in your place and stead of a successor Agent under these terms and conditions, with full power and authority to perform all or any of the acts to be performed by the Agent under these terms and conditions. Upon any such appointment of an Agent for the purpose of receiving dividends and distributions, the Fund will be authorized to pay to such successor Agent, for my account, all dividends and distributions payable on Common Stock of the Fund held in my name or under the Plan for retention or application by such successor Agent as provided in these terms and conditions.
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16. Extent of Responsibility of Agent. You shall at all times act in good faith and agree to use your best efforts within reasonable limits to insure the accuracy of all services performed under this Agreement and to comply with applicable law, but assume no responsibility and shall not be liable tor loss or damage due to errors unless such error is caused by your negligence, bad faith, or will willful misconduct or that of your employees.
17. Governing Law. These terms and conditions shall be governed by the laws of the State of New York without regard to its conflicts of laws provisions.
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Exhibit (g)(2)
Amended and Restated Master Advisory Fee Waiver Agreement
This AMENDED AND RESTATED MASTER ADVISORY FEE WAIVER AGREEMENT (this Agreement) is made as of December 1, 2019, by and among BlackRock Advisors, LLC (the Adviser) and each investment company listed on Schedule A attached hereto (each, a Fund).
WHEREAS, each Fund is registered under the Investment Company Act of 1940, as amended (the 1940 Act), as a closed-end management company, and is organized as a statutory trust under the laws of the State of Delaware, a business trust under the laws of the Commonwealth of Massachusetts or a corporation under the laws of the State of Maryland;
WHEREAS, the Adviser and each Fund are parties to investment advisory agreements (the Advisory Agreements), pursuant to which the Adviser provides investment advisory services to each Fund in consideration of compensation as set forth in each Advisory Agreement (the Advisory Fee);
WHEREAS, the Adviser has determined that it is appropriate and in the best interests of each Fund and its interestholders to waive part of each Funds Advisory Fee as set forth in Schedule B attached hereto (the Fee Waiver). Each Fund and the Adviser, therefore, have entered into this Agreement in order to effect the Fee Waiver for each Fund at the level specified in Schedule B attached hereto on the terms and conditions set forth in this Agreement; and
WHEREAS, effective December 1, 2019, this Agreement replaces the Master Advisory Fee Waiver Agreement, dated as of December 2, 2016.
NOW, THEREFORE, in consideration of the mutual covenants set forth herein and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows:
1. Contractual Fee Waiver. During the Term (as defined in Section 3 below), the Adviser shall waive a portion of its Advisory Fee with respect to each Fund as set forth in Schedule B attached hereto.
2. Voluntary Fee Waiver/Expense Reimbursement. Nothing herein shall preclude an Adviser from contractually waiving other fees and/or reimbursing expenses of any Fund, voluntarily waiving Advisory Fees it is entitled to from any Fund or voluntarily reimbursing expenses of any Fund as the Adviser, in its discretion, deems reasonable or appropriate. Any such voluntary waiver or voluntary expense reimbursement may be modified or terminated by the Adviser at any time in its sole and absolute discretion without the approval of the Funds Board of Trustees or Board of Directors, as the case may be.
3. Term; Termination.
3.1 Term. This Agreement shall continue in effect with respect to each Fund until the close of business on the date set forth on Schedule A (or such other date as agreed to in writing between the Adviser and the Fund) unless the Fee Waiver is earlier terminated in accordance with
1
Section 3.2. The Term of the Fee Waiver with respect to a Fund may be continued from year to year thereafter provided that each such continuance is specifically approved by the Adviser and the Fund (including with respect to the Fund, a majority of the Funds Trustees or Directors, as the case may be, who are not interested persons, as defined in the 1940 Act, of the Fund (the Non-Interested Directors)). Neither the Adviser nor a Fund shall be obligated to extend the Fee Waiver with respect to the Fund.
3.2 Termination. This Agreement may be terminated prior to expiration by any Fund with respect to such Fund without payment of any penalty, upon 90 days prior written notice to the Adviser at its principal place of business (or at an earlier date as may be agreed to by both parties); provided that, such action shall be authorized by resolution of a majority of the Non-Interested Directors of such Fund or by a vote of a majority of the outstanding voting securities of such Fund.
4. Miscellaneous.
4.1 Captions. The captions in this Agreement are included for convenience of reference only and in no other way define or delineate any of the provisions hereof or otherwise affect their construction or effect.
4.2 Interpretation. Nothing herein contained shall be deemed to require a Fund to take any action contrary to the Funds Declaration of Trust or Articles of Incorporation, as the case may be, or Bylaws, or any applicable statutory or regulatory requirement to which it is subject or by which it is bound, or to relieve or deprive the Funds Board of Trustees or Board of Directors, as the case may be, of its responsibility for and control of the conduct of the affairs of the Fund.
4.3 Limitation of Liability. The obligations and expenses incurred, contracted for or otherwise existing with respect to a Fund shall be enforced against the assets of such Fund and not against the assets of any other Fund.
4.4 Definitions. Any question of interpretation of any term or provision of this Agreement, including but not limited to the computations of average daily net assets or of any Advisory Fee, and the allocation of expenses, having a counterpart in or otherwise derived from the terms and provisions of the relevant Advisory Agreement between the Adviser and the Fund or the 1940 Act, shall have the same meaning as and be resolved by reference to such Advisory Agreement or the 1940 Act, as applicable, and to interpretations thereof, if any, by the United States Courts or in the absence of any controlling decision of any such Court, by rules, regulations or orders of the Securities and Exchange Commission (SEC) issued pursuant to the 1940 Act. In addition, if the effect of a requirement of the 1940 Act reflected in any provision of this Agreement is revised by rule, regulation or order of the SEC, that provision will be deemed to incorporate the effect of that rule, regulation or order. Otherwise the provisions of this Agreement will be interpreted in accordance with the substantive laws of the State of New York.
4.5 Business Trusts. With respect to a Fund which is a business trust, this Agreement is executed by or on behalf of the trustees of the Fund solely in their capacity as such trustees, and shall not constitute their personal obligation either jointly or severally in their individual
2
capacities. In accordance with the Funds charter, no trustee, shareholder, officer, employee or agent of the Fund shall be held to any personal liability, nor shall resort be had to their private property for the satisfaction of any obligation or claim or otherwise under this Agreement and the Fund shall be solely liable therefor; all parties hereto shall look solely to the Fund property for the payment of any claim, or the performance of any obligation, hereunder.
[Signature Page Follows]
3
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by their respective officers thereunto duly authorized as of the day and year first above written.
EACH OF THE FUNDS LISTED ON SCHEDULE A ATTACHED HERETO | ||||
By: |
/s/ John M. Perlowski |
|||
Name: | John M. Perlowski | |||
Title: | President and Chief Executive Officer | |||
BLACKROCK ADVISORS, LLC | ||||
By: |
/s/ Neal J. Andrews |
|||
Name: | Neal J. Andrews | |||
Title: | Managing Director |
4
SCHEDULE A
Amended and Restated
Master Advisory Fee Waiver Agreement
(Dated as of December 1, 2019)
TICKER |
FUND |
EXPIRATION
DATE |
||||
1. | BBN | BlackRock Taxable Municipal Bond Trust | June 30, 2021 | |||
2. | BFZ | BlackRock California Municipal Income Trust | June 30, 2021 | |||
3. | BHK | BlackRock Core Bond Trust | June 30, 2021 | |||
4. | HYT | BlackRock Corporate High Yield Fund, Inc. | June 30, 2021 | |||
5. | BTZ | BlackRock Credit Allocation Income Trust | June 30, 2021 | |||
6. | DSU | BlackRock Debt Strategies Fund, Inc. | June 30, 2021 | |||
7. | BGR | BlackRock Energy and Resources Trust | June 30, 2021 | |||
8. | CII | BlackRock Enhanced Capital and Income Fund, Inc. | June 30, 2021 | |||
9. | BDJ | BlackRock Enhanced Equity Dividend Trust | June 30, 2021 | |||
10. | EGF | BlackRock Enhanced Government Fund, Inc. | June 30, 2021 | |||
11. | FRA | BlackRock Floating Rate Income Strategies Fund, Inc. | June 30, 2021 | |||
12. | BGT | BlackRock Floating Rate Income Trust | June 30, 2021 | |||
13. | BFO | BlackRock Florida Municipal 2020 Term Trust | June 30, 2021 | |||
14. | BOE | BlackRock Enhanced Global Dividend Trust | June 30, 2021 | |||
15. | BME | BlackRock Health Sciences Trust | June 30, 2021 | |||
16. | BKT | BlackRock Income Trust, Inc. | June 30, 2021 | |||
17. | BGY | BlackRock Enhanced International Dividend Trust | June 30, 2021 | |||
18. | BKN | BlackRock Investment Quality Municipal Trust, Inc. | June 30, 2021 | |||
19. | BLW | BlackRock Limited Duration Income Trust | June 30, 2021 | |||
20. | BTA | BlackRock Long-Term Municipal Advantage Trust | June 30, 2021 | |||
21. | BZM | BlackRock Maryland Municipal Bond Trust | June 30, 2021 | |||
22. | MHE | BlackRock Massachusetts Tax-Exempt Trust | June 30, 2021 |
5
TICKER |
FUND |
EXPIRATION
DATE |
||||
23. | BIT | BlackRock Multi-Sector Income Trust | June 30, 2021 | |||
24. | MUI | BlackRock Muni Intermediate Duration Fund, Inc. | June 30, 2021 | |||
25. | MNE | BlackRock Muni New York Intermediate Duration Fund, Inc. | June 30, 2021 | |||
26. | MUA | BlackRock MuniAssets Fund, Inc. | June 30, 2021 | |||
27. | BKK | BlackRock Municipal 2020 Term Trust | June 30, 2021 | |||
28. | BBK | BlackRock Municipal Bond Trust | June 30, 2021 | |||
29. | BAF | BlackRock Municipal Income Investment Quality Trust | June 30, 2021 | |||
30. | BBF | BlackRock Municipal Income Investment Trust | June 30, 2021 | |||
31. | BYM | BlackRock Municipal Income Quality Trust | June 30, 2021 | |||
32. | BFK | BlackRock Municipal Income Trust | June 30, 2021 | |||
33. | BLE | BlackRock Municipal Income Trust II | June 30, 2021 | |||
34. | BTT | BlackRock Municipal 2030 Target Term Trust | June 30, 2021 | |||
35. | MEN | BlackRock MuniEnhanced Fund, Inc. | June 30, 2021 | |||
36. | MUC | BlackRock MuniHoldings California Quality Fund, Inc. | June 30, 2021 | |||
37. | MUH | BlackRock MuniHoldings Fund II, Inc. | June 30, 2021 | |||
38. | MHD | BlackRock MuniHoldings Fund, Inc. | June 30, 2021 | |||
39. | MFL | BlackRock MuniHoldings Investment Quality Fund | June 30, 2021 | |||
40. | MUJ | BlackRock MuniHoldings New Jersey Quality Fund, Inc. | June 30, 2021 | |||
41. | MHN | BlackRock MuniHoldings New York Quality Fund, Inc. | June 30, 2021 | |||
42. | MUE | BlackRock MuniHoldings Quality Fund II, Inc. | June 30, 2021 | |||
43. | MUS | BlackRock MuniHoldings Quality Fund, Inc. | June 30, 2021 | |||
44. | MVT | BlackRock MuniVest Fund II, Inc. | June 30, 2021 | |||
45. | MVF | BlackRock MuniVest Fund, Inc. | June 30, 2021 | |||
46. | MZA | BlackRock MuniYield Arizona Fund, Inc. | June 30, 2021 | |||
47. | MYC | BlackRock MuniYield California Fund, Inc. | June 30, 2021 | |||
48. | MCA | BlackRock MuniYield California Quality Fund, Inc. | June 30, 2021 | |||
49. | MYD | BlackRock MuniYield Fund, Inc. | June 30, 2021 | |||
50. | MYF | BlackRock MuniYield Investment Fund | June 30, 2021 | |||
51. | MFT | BlackRock MuniYield Investment Quality Fund | June 30, 2021 | |||
52. | MIY | BlackRock MuniYield Michigan Quality Fund, Inc. | June 30, 2021 | |||
53. | MYJ | BlackRock MuniYield New Jersey Fund, Inc. | June 30, 2021 | |||
54. | MYN | BlackRock MuniYield New York Quality Fund, Inc. | June 30, 2021 |
6
TICKER |
FUND |
EXPIRATION
DATE |
||||
55. | MPA | BlackRock MuniYield Pennsylvania Quality Fund | June 30, 2021 | |||
56. | MQT | BlackRock MuniYield Quality Fund II, Inc. | June 30, 2021 | |||
57. | MYI | BlackRock MuniYield Quality Fund III, Inc. | June 30, 2021 | |||
58. | MQY | BlackRock MuniYield Quality Fund, Inc. | June 30, 2021 | |||
59. | BQH | BlackRock New York Municipal Bond Trust | June 30, 2021 | |||
60. | BSE | BlackRock New York Municipal Income Quality Trust | June 30, 2021 | |||
61. | BNY | BlackRock New York Municipal Income Trust | June 30, 2021 | |||
62. | BFY | BlackRock New York Municipal Income Trust II | June 30, 2021 | |||
63. | BCX | BlackRock Resources & Commodities Strategy Trust | June 30, 2021 | |||
64. | BST | BlackRock Science and Technology Trust | June 30, 2021 | |||
65. | BUI | BlackRock Utilities, Infrastructure & Power Opportunities Trust | June 30, 2021 | |||
66. | BHV | BlackRock Virginia Municipal Bond Trust | June 30, 2021 | |||
67. | BSD | The BlackRock Strategic Municipal Trust | June 30, 2021 | |||
68. | BGIO | BlackRock 2022 Global Income Opportunity Trust | June 30, 2021 | |||
69. | | BlackRock Multi-Sector Opportunities Trust | June 30, 2021 | |||
70. | | BlackRock Multi-Sector Opportunities Trust II | June 30, 2021 | |||
71. | | BlackRock Credit Strategies Fund | June 30, 2021 | |||
72. | BSTZ | BlackRock Science and Technology Trust II | June 30, 2021 |
7
Schedule B
Amended and Restated Master Advisory Fee Waiver Agreement
(Dated as of December 1, 2019)
BlackRock Advisors, LLC will waive its investment advisory fees with respect to any portion of the Funds assets estimated to be attributable to investments in equity and fixed-income mutual funds and exchange-traded funds managed by BlackRock Advisors, LLC or its affiliates.
In addition, BlackRock Advisors, LLC will waive its investment advisory fees by the amount of investment advisory fees the Fund pays to BlackRock Advisors, LLC or its affiliates indirectly through its investment in money market funds advised by BlackRock Advisors, LLC or its affiliates.
8
Exhibit (g)(3)
Amendment No. 1 to Amended and Restated Master Advisory Fee Waiver Agreement
This AMENDMENT NO. 1 (this Amendment) to the Amended and Restated Master Advisory Fee Waiver Agreement dated December 1, 2019 (the Agreement) is made as of this 24th day of January, 2020, by and among BlackRock Advisors, LLC (the Adviser) and each investment company listed on Schedule A attached hereto (each, a Fund).
WHEREAS, each Fund is registered under the Investment Company Act of 1940, as amended, as a closed-end management company;
WHEREAS, each Fund that is currently party to the Agreement is organized as a statutory trust under the laws of the State of Delaware, a business trust under the laws of the Commonwealth of Massachusetts or a corporation under the laws of the State of Maryland;
WHEREAS, BlackRock Health Sciences Trust II (the New Fund) is a newly organized statutory trust under the laws of the State of Maryland and desires to be added as a party to the Agreement; and
WHEREAS, the Adviser and the Funds desire to amend and restate Schedule A to the Agreement to reflect the addition of the New Fund as a party to the Agreement.
NOW, THEREFORE, in consideration of the mutual covenants set forth herein and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows:
1. Schedule A to the Agreement is hereby deleted in its entirety and replaced with Schedule A attached hereto.
2.
(a) Except as expressly amended and provided herein, the Agreement shall remain in full force and effect. In the event of a conflict between the terms of this Amendment with respect to the New Fund and the terms of the Agreement, this Amendment shall control.
(b) This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
[Signature Page Follows]
IN WITNESS WHEREOF, the parties have caused this Amendment to be signed by their respective officers as of the day and year first above written.
EACH OF THE FUNDS LISTED ON SCHEDULE A ATTACHED HERETO | ||
By: |
/s/ Neal J. Andrews |
|
Name: Neal J. Andrews | ||
Title: Chief Financial Officer | ||
BLACKROCK ADVISORS, LLC | ||
By: |
/s/ Neal J. Andrews |
|
Name: Neal J. Andrews | ||
Title: Managing Director |
[Signature Page to Amendment No. 1 to Amended and Restated Master Advisory Fee Waiver Agreement]
AMENDED AND RESTATED SCHEDULE A
Amended and Restated Master Advisory Fee Waiver Agreement
(Dated as of January 24, 2020)
TICKER |
FUND |
EXPIRATION
DATE |
||||
1. | BBN | BlackRock Taxable Municipal Bond Trust | June 30, 2021 | |||
2. | BFZ | BlackRock California Municipal Income Trust | June 30, 2021 | |||
3. | BHK | BlackRock Core Bond Trust | June 30, 2021 | |||
4. | HYT | BlackRock Corporate High Yield Fund, Inc. | June 30, 2021 | |||
5. | BTZ | BlackRock Credit Allocation Income Trust | June 30, 2021 | |||
6. | DSU | BlackRock Debt Strategies Fund, Inc. | June 30, 2021 | |||
7. | BGR | BlackRock Energy and Resources Trust | June 30, 2021 | |||
8. | CII | BlackRock Enhanced Capital and Income Fund, Inc. | June 30, 2021 | |||
9. | BDJ | BlackRock Enhanced Equity Dividend Trust | June 30, 2021 | |||
10. | EGF | BlackRock Enhanced Government Fund, Inc. | June 30, 2021 | |||
11. | FRA | BlackRock Floating Rate Income Strategies Fund, Inc. | June 30, 2021 | |||
12. | BGT | BlackRock Floating Rate Income Trust | June 30, 2021 | |||
13. | BFO | BlackRock Florida Municipal 2020 Term Trust | June 30, 2021 | |||
14. | BOE | BlackRock Enhanced Global Dividend Trust | June 30, 2021 | |||
15. | BME | BlackRock Health Sciences Trust | June 30, 2021 | |||
16. | BKT | BlackRock Income Trust, Inc. | June 30, 2021 | |||
17. | BGY | BlackRock Enhanced International Dividend Trust | June 30, 2021 | |||
18. | BKN | BlackRock Investment Quality Municipal Trust, Inc. | June 30, 2021 | |||
19. | BLW | BlackRock Limited Duration Income Trust | June 30, 2021 | |||
20. | BTA | BlackRock Long-Term Municipal Advantage Trust | June 30, 2021 |
A-1
TICKER |
FUND |
EXPIRATION
DATE |
||||
21. | BZM | BlackRock Maryland Municipal Bond Trust | June 30, 2021 | |||
22. | MHE | BlackRock Massachusetts Tax-Exempt Trust | June 30, 2021 | |||
23. | BIT | BlackRock Multi-Sector Income Trust | June 30, 2021 | |||
24. | MUI | BlackRock Muni Intermediate Duration Fund, Inc. | June 30, 2021 | |||
25. | MNE | BlackRock Muni New York Intermediate Duration Fund, Inc. | June 30, 2021 | |||
26. | MUA | BlackRock MuniAssets Fund, Inc. | June 30, 2021 | |||
27. | BKK | BlackRock Municipal 2020 Term Trust | June 30, 2021 | |||
28. | BBK | BlackRock Municipal Bond Trust | June 30, 2021 | |||
29. | BAF | BlackRock Municipal Income Investment Quality Trust | June 30, 2021 | |||
30. | BBF | BlackRock Municipal Income Investment Trust | June 30, 2021 | |||
31. | BYM | BlackRock Municipal Income Quality Trust | June 30, 2021 | |||
32. | BFK | BlackRock Municipal Income Trust | June 30, 2021 | |||
33. | BLE | BlackRock Municipal Income Trust II | June 30, 2021 | |||
34. | BTT | BlackRock Municipal 2030 Target Term Trust | June 30, 2021 | |||
35. | MEN | BlackRock MuniEnhanced Fund, Inc. | June 30, 2021 | |||
36. | MUC | BlackRock MuniHoldings California Quality Fund, Inc. | June 30, 2021 | |||
37. | MUH | BlackRock MuniHoldings Fund II, Inc. | June 30, 2021 | |||
38. | MHD | BlackRock MuniHoldings Fund, Inc. | June 30, 2021 | |||
39. | MFL | BlackRock MuniHoldings Investment Quality Fund | June 30, 2021 | |||
40. | MUJ | BlackRock MuniHoldings New Jersey Quality Fund, Inc. | June 30, 2021 | |||
41. | MHN | BlackRock MuniHoldings New York Quality Fund, Inc. | June 30, 2021 | |||
42. | MUE | BlackRock MuniHoldings Quality Fund II, Inc. | June 30, 2021 |
A-2
TICKER |
FUND |
EXPIRATION
DATE |
||||
43. | MUS | BlackRock MuniHoldings Quality Fund, Inc. | June 30, 2021 | |||
44. | MVT | BlackRock MuniVest Fund II, Inc. | June 30, 2021 | |||
45. | MVF | BlackRock MuniVest Fund, Inc. | June 30, 2021 | |||
46. | MZA | BlackRock MuniYield Arizona Fund, Inc. | June 30, 2021 | |||
47. | MYC | BlackRock MuniYield California Fund, Inc. | June 30, 2021 | |||
48. | MCA | BlackRock MuniYield California Quality Fund, Inc. | June 30, 2021 | |||
49. | MYD | BlackRock MuniYield Fund, Inc. | June 30, 2021 | |||
50. | MYF | BlackRock MuniYield Investment Fund | June 30, 2021 | |||
51. | MFT | BlackRock MuniYield Investment Quality Fund | June 30, 2021 | |||
52. | MIY | BlackRock MuniYield Michigan Quality Fund, Inc. | June 30, 2021 | |||
53. | MYJ | BlackRock MuniYield New Jersey Fund, Inc. | June 30, 2021 | |||
54. | MYN | BlackRock MuniYield New York Quality Fund, Inc. | June 30, 2021 | |||
55. | MPA | BlackRock MuniYield Pennsylvania Quality Fund | June 30, 2021 | |||
56. | MQT | BlackRock MuniYield Quality Fund II, Inc. | June 30, 2021 | |||
57. | MYI | BlackRock MuniYield Quality Fund III, Inc. | June 30, 2021 | |||
58. | MQY | BlackRock MuniYield Quality Fund, Inc. | June 30, 2021 | |||
59. | BQH | BlackRock New York Municipal Bond Trust | June 30, 2021 | |||
60. | BSE | BlackRock New York Municipal Income Quality Trust | June 30, 2021 | |||
61. | BNY | BlackRock New York Municipal Income Trust | June 30, 2021 | |||
62. | BFY | BlackRock New York Municipal Income Trust II | June 30, 2021 | |||
63. | BCX | BlackRock Resources & Commodities Strategy Trust | June 30, 2021 | |||
64. | BST | BlackRock Science and Technology Trust | June 30, 2021 |
A-3
TICKER |
FUND |
EXPIRATION
DATE |
||||
65. | BUI | BlackRock Utilities, Infrastructure & Power Opportunities Trust | June 30, 2021 | |||
66. | BHV | BlackRock Virginia Municipal Bond Trust | June 30, 2021 | |||
67. | BSD | The BlackRock Strategic Municipal Trust | June 30, 2021 | |||
68. | BGIO | BlackRock 2022 Global Income Opportunity Trust | June 30, 2021 | |||
69. | | BlackRock Multi-Sector Opportunities Trust | June 30, 2021 | |||
70. | | BlackRock Multi-Sector Opportunities Trust II | June 30, 2021 | |||
71. | | BlackRock Credit Strategies Fund | June 30, 2021 | |||
72. | BSTZ | BlackRock Science and Technology Trust II | June 30, 2021 | |||
73. | BMEZ | BlackRock Health Sciences Trust II | June 30, 2021 |
A-4
Exhibit (i)
THE BLACKROCK FUND COMPLEX
THIRD AMENDED AND RESTATED DEFERRED COMPENSATION PLAN
(Effective as of January 1, 2019)
The purpose of the BlackRock Fund Complex Third Amended and Restated Deferred Compensation Plan (the Plan) is to provide eligible trustees of Participating Funds the opportunity to defer the receipt of all or a portion of the amounts payable to them as compensation for services rendered as members of the Board of the respective funds. The terms and conditions applicable to Deferred Compensation that is not Grandfathered Deferred Compensation shall be governed by the terms of Appendix A attached hereto.
1. |
DEFINITIONS |
1.1 Definitions. Unless a different meaning is plainly implied by the context, the following terms as used in the Plan shall have the following meanings:
The term Administrator shall mean BlackRock Advisors, LLC, in its capacity as the administrator of the Plan on behalf of the Participating Funds; provided, that, BlackRock Advisors, LLC may hire consultants or other third parties to provide administrative services in connection with the Plan.
The term Advisor shall mean BlackRock Advisors, LLC and its affiliates.
The term Board shall mean the Board of Trustees or Board of Directors of each respective Participating Fund.
The term Deferral Share Account shall mean a book entry account maintained to reflect the number and value of shares of Eligible Investments that the Administrator determines could have been purchased with an Eligible Trustees Deferred Compensation as provided in this Plan and any earnings thereon.
The term Eligible Investment shall mean a fund managed by the Advisor and designated by the Participating Funds from time to time as an investment medium in which such Trustees Deferred Compensation shall be deemed to be invested.
The term Eligible Trustee shall mean a member of the Board who is not an interested person of a Participating Fund or the Adviser, as such term is defined under Section 2(a)(19) of the Investment Company Act of 1940, as amended (the 1940 Act).
The term Exchange shall mean the principal stock exchange on which common shares of an Eligible Investment that is a closed-end fund trade.
The term Fair Market Value shall mean, with respect to a date, on a per share basis, (a) for an Eligible Investment that is a listed closed-end fund, the closing price of such Eligible Investment, as reported on the consolidated tape of the Exchange on such date or, if the Exchange is closed on such date, the next succeeding date on which it is open and (b) for an Eligible Investment that is an open-end fund, the net asset value as determined at the close of business on the New York Stock Exchange (NYSE) (generally 4:00 p.m. Eastern time) or, if the NYSE is closed, the next succeeding date on which it is open.
The term Grandfather Deferred Compensation shall mean all Deferred Compensation amounts which were earned and vested under the Plan as of December 31, 2004. For the avoidance of doubt, neither this amendment and restatement nor any prior amendments or restatements to the Plan are intended to constitute a material modification with respect to any amount of Grandfathered Deferred Compensation for purposes of Section 409A of the Internal Revenue Code of 1986, as amended.
The term Participating Funds shall mean those registered management investment companies for which the Advisor serves or will serve in the future as investment manager, whether existing at the time of adoption of the Plan
or established at a later date, designated by each respective Board as a fund from which compensation may be deferred by an Eligible Trustee. Participating Funds shall be listed on Schedule A to the Plan from time to time, provided that failure to list a Participating Fund on Schedule A shall not affect its status as a Participating Fund.
The term Valuation Date shall mean the last business day of each calendar quarter and any other day upon which the Participating Fund makes valuations of the Deferral Share Accounts.
1.2 Trustees and Directors. Where appearing in the Plan, Trustee shall also refer to Director and Board of Trustees shall also refer to Board of Directors.
1.3 Separate Plan for each Participating Fund. The Plan is drafted, and shall be construed, as a separate Plan between each Eligible Trustee and each Participating Fund.
2. |
DEFERRALS |
2.1 Deferral Elections.
(a) An Eligible Trustee that elects to participate in the Plan (a Participant) may defer receipt of up to 50% of all annual compensation (including fees for attending meetings) earned by such Eligible Trustee for serving as a member of the Board or as a member of any committee (or subcommittee of such committee) of the Board of which such Eligible Trustee from time to time may be a member (the Deferred Compensation). Expenses of attending meetings of the Board, committees of the Board or subcommittees of such committees or other reimbursable expenses may not be deferred.
(b) Deferred Compensation shall be withheld from each payment of compensation by the Participating Fund to the Participant based upon the percentage amount elected by the Participant under Section 2.3 hereof and pursuant to the Participants Election Form.
2.2 Manner of Election.
(a) An Eligible Trustee shall elect to participate in the Plan and defer compensation by completing, signing and filing with the Participating Funds an election to defer in such written form as may be prescribed (the Election). The Election shall include:
(i) The percentage of compensation to be deferred;
(ii) The method of payment of Deferred Compensation (i.e., in a lump sum or the number of installments);
(iii) The time or times of payment of the Deferred Compensation; and
(iv) Any beneficiary(ies) designated by the Participant pursuant to Section 3.2 of the Plan.
(b) Each Participants receipt of compensation shall be deferred until the first to occur of any of the following events:
(i) The date which such Participant ceases to be a Trustee of the Participating Fund;
(ii) A date selected by such Participant as specified on the Participants Election;
(iii) A date on which some future event occurs which is not within the Participants control, as specified on the Participants Election;
(iv) Upon the death of the Participant;
(v) In the sole discretion of the Participating Fund, upon disability or financial hardship of the Participant;
(vi) The effective date of the sale or liquidation of the Participating Fund or to comply with applicable law; or
(vii) Upon termination of the Plan in accordance with Section 4.5 hereof.
- 2 -
2.3 |
Period of Deferrals. |
(a) Any Election by an Eligible Trustee pursuant to the Plan shall be irrevocable from and after the date on which such Election is filed with the Participating Fund and shall be effective to defer compensation of an Eligible Trustee as follows:
(i) As to any Eligible Trustee in office on the original effective date of the Plan (prior to any amendments or restatements) who files an Election no later than thirty (30) days after such effective date, such Election shall be effective to defer any compensation which is earned by the Eligible Trustee after the date of the filing of the Election, or such effective date of the Plan, if later;
(ii) As to any individual who becomes an Eligible Trustee after the original effective date of the Plan and who files an Election within thirty (30) days of becoming an Eligible Trustee, such Election shall be effective to defer any compensation which is earned by the Eligible Trustee after the date of the filing of the Election, or the effective date of the Plan, if later;
(iii) As to any other Eligible Trustee, the Election shall be effective to defer any compensation that is earned from and after the first day of the calendar year next succeeding the calendar year in which the Election is filed; and
(iv) Any Elections in effect on the date this Plan is amended and restated shall remain in effect so that a Participant need not execute new a Election.
(b) A Participant may revoke such Participants Election at any time by filing a written notice of termination with the Participating Fund. Any compensation earned by the Participant after receipt of the notice by the Participating Fund shall be paid currently and no longer deferred as provided in the Plan.
(c) A Participant who has filed a notice to terminate deferral of compensation may thereafter again file a new Election pursuant to Section 2.2(a) hereof effective for any calendar year subsequent to the calendar year in which the new Election is filed.
2.4 |
Valuation of Deferral Share Account. |
(a) Deferred Compensation will be deferred on the date it otherwise would have been paid to a Participant (the Deferral Date). Participating Funds from which Compensation will be deferred will establish a Deferral Share Account for each Participant that will be credited with all or a portion of the Participants Deferred Compensation from time to time in accordance with this Plan. The specific Participating Funds that maintain Deferral Share Accounts will be determined by the Administrator in its sole discretion. The amount initially credited to a Participants Deferral Share Account in connection with each Deferred Compensation amount shall be determined by reference to the number of whole shares of Eligible Investments that the Deferred Compensation could have purchased at the Fair Market Value per share of such Eligible Investments on a date on or about the Deferral Date (less any brokerage fees payable upon the acquisition of shares of such Eligible Investment in the open market). Deferred Compensation shall be credited to the Deferral Share Account as soon as reasonably practicable after the Deferral Date, as determined by the Administrator in its sole discretion. Deferred Compensation not credited to the Deferral Share Account on or about the Deferral Date (e.g., because the remaining amount is not sufficient to purchase an additional whole share of Eligible Investments or for any other reason) shall be credited to the Deferral Share Account as soon as reasonably practicable, as determined by the Administrator in its sole discretion (i.e., as soon as such amount, when taken together with other uncredited amounts, is sufficient to purchase a whole share of an Eligible Investment).
(b) On each Valuation Date, each Deferral Share Account will be credited or debited with the amount of gain or loss that would have been recognized had the Deferral Share Account been invested in the Eligible Investments. If applicable, each Deferral Share Account will be credited with the Fair Market Value of shares that would have been acquired through reinvestment of dividends and capital gains distributed as if the amount of Deferred Compensation represented by such Deferral Share Account had been invested and reinvested in shares of the Eligible Investments. Each Participating Fund shall, from time to time, further adjust the Participants Deferral Share Account to reflect the value which would have been earned as if the amount of Deferred Compensation credited to such Deferral Share Account had been invested and reinvested in shares of the Eligible Investments, as determined by the Administrator in its sole discretion in accordance with this Plan.
- 3 -
(c) The Deferral Share Account shall be debited to reflect any distributions as of the date such distributions are made in accordance with Section 3 of the Plan.
2.5 |
Investment of Deferral Share Account. |
(a) The Participating Funds shall from time to time designate one or more funds eligible for investment. A Participants deferred amounts shall be allocated among the Eligible Investments in accordance with the allocation percentages set forth on Schedule B to the Plan. If, as the result of the requirement that notional purchases of Eligible Investments be made in whole shares as set forth in Section 2.4 or for any other reason, not all of a Participants Deferred Compensation has been credited to the Deferral Share Account, the cash balance of such Deferred Compensation shall be held until the next Valuation Date on which the Administrator determines, in its sole discretion, that it is reasonably practicable to make a notional purchase (debiting the cash balance of the Participants Deferred Compensation) of one or more Eligible Investments.
(b) The Participating Funds may, from time to time, remove any fund from or add any fund to the list of Eligible Investments or amend the applicable allocation percentages set forth on Schedule B to the Plan. If the Participating Funds discontinue an Eligible Investment, the Administrator will redirect amounts deferred in the discontinued Eligible Investment to other Eligible Investments currently in effect.
3. |
DISTRIBUTIONS FROM DEFERRAL SHARE ACCOUNT |
3.1 |
Distribution Election. |
The aggregate value of a Participants Deferral Share Account and any Deferred Compensation held in cash and not yet credited to a Participants Deferral Share Account will be paid in a lump sum or in ten (10) or fewer annual installments, as specified in the Participants Election (or Elections). Distributions will be made as of the first business day of January of the calendar year following the calendar year in which the Participant ceases being a Trustee or on such other dates as the Participant may specify in such Election (or Elections), which shall not be earlier than six (6) months following the Election.
(a) If a Participant elects installment payments, the unpaid balance in the Participants Deferral Share Account shall continue to accrue earnings and dividend equivalents (as applicable), computed in accordance with the provisions of Section 2.4, and shall be prorated and paid over the installment period. The amount of the first payment shall be a fraction of the then Fair Market Value of such Participants Deferral Share Account, the numerator of which is one, and the denominator of which is the total number of installments; provided that cash not yet credited to a Participants Deferral Share Account, if any, will be added to such amount as a part of the first payment. The amount of each subsequent payment shall be a fraction of the then Fair Market Value of the Participants Deferral Share Account remaining after the prior payment, the numerator of which is one and the denominator of which is the total number of installments elected minus the number of installments previously paid.
(b) All payments shall be in cash; provided, however, if a lump sum payment is elected, the Participant may elect to receive payment in full and fractional shares of the Eligible Investments at Fair Market Value at the time of payment of the amounts credited to the Participants Deferral Share Account; provided, further, that any Deferred Compensation held in cash will be distributed in cash. Any such election shall be filed in writing by the Participant with the Participating Fund at least ten (10) business days prior to the date which such payment is to be made.
(c) A Participant may at any time, and from time to time, change any distribution election applicable to such Participants Deferral Share Account, provided that no election to change the timing of any distribution shall be effective unless it is made in writing and received by the Participating Fund at least six (6) months prior to the earlier of (i) the time at which the Participant ceases to be a Trustee or (ii) the time such distribution shall commence.
3.2 Death Prior to Complete Distribution. In the event of a Participants death prior to distribution of all amounts in such Participants Deferral Share Account, notwithstanding any Election made by the Participant and notwithstanding any other provision set forth herein, the value of such Deferral Share Account plus any Deferred
- 4 -
Compensation held in cash shall be paid in a lump sum in accordance with the provisions of the Plan as soon as reasonably possible to the Participants designated beneficiary(ies) (the Beneficiary) or, if such Beneficiary(ies) does not survive the Participant or no beneficiary is designated, to such Participants estate. Any Beneficiary(ies) so designated by a Participant may be changed at any time by notice in writing from such Participant to the Participating Fund. All payments under this Section 3.2 shall otherwise be paid in accordance with Section 3.1 hereof.
3.3 |
Payment in Discretion of Participating Funds. |
Amounts deferred hereunder, based on the then adjusted value of the Participants Deferral Share Account as of the Valuation Date next following plus any Deferred Compensation held in cash, may become payable to the Participant in the discretion of the Participating Fund:
(a) Disability. If the Participating Fund finds on the basis of medical evidence satisfactory to it that the Participant is prevented from engaging in any suitable gainful employment or occupation and that such disability will be permanent and continuous during the remainder of such Participants life, the Participating Fund shall distribute the amounts in the Participants Deferral Share Account plus any Deferred Compensation held in cash in a lump sum or in the number of installments previously selected by the Participant.
(b) Financial Hardship. If the Participant requests and if the Participant provides evidence of financial hardship, the Participating Fund may, in its sole and absolute discretion, permit a distribution of all or a portion of the Participants Deferral Share Account plus any Deferred Compensation held in cash prior to the date on which payments would have commenced under Section 3.1.
3.4 |
Acceleration of Payments. |
(a) In the event of the liquidation, dissolution or winding up of a Participating Fund or the distribution of all or substantially all of a Participating Funds assets and property to its shareholders (for this purpose a sale, conveyance or transfer of a Participating Funds assets to a trust, partnership, association or another corporation in exchange for cash, shares or other securities with the transfer being made subject to, or with the assumption by the transferee of, the liabilities of such Participating Fund shall not be deemed a termination of such Participating Fund or such a distribution), the entire unpaid balance of the Participants Deferral Share Account plus any Deferred Compensation held in cash of such Participating Fund shall be paid in a lump sum as of the effective date thereof.
(b) The Participating Funds are empowered to accelerate the payment of deferred amounts to all Participants and Beneficiaries in the event that there is a change in law which would have the effect of adversely affecting such persons rights and benefits under the Plan if acceleration did not occur.
4. |
MISCELLANEOUS |
4.1 |
Statements of Account. |
The Participating Funds will furnish each Participant with a statement setting forth the value of such Participants Deferral Share Account plus any Deferred Compensation held in cash as of the end of each calendar year and all credits and debits of such Deferral Share Account or to any Deferred Compensation held in cash during such year. Such statements will be furnished no later than sixty (60) days after the end of each calendar year.
4.2 |
Rights in Deferral Share Account. |
Credits to the Deferral Share Accounts or to any Deferred Compensation held in cash shall (i) remain part of the general assets of the Participating Funds, (ii) at all times be the sole and absolute property of the Participating Funds and (iii) in no event be deemed to constitute a fund, trust or collateral security for the payment of the Deferred Compensation to which Participants are entitled. The right of the Participant or any Beneficiary or estate to receive future payment of Deferred Compensation under the provisions of the Plan shall be an unsecured claim against the general assets of the Participating Funds, if any, available at the time of payment. A Participating Fund shall not reserve or set aside funds for the payment of its obligations hereunder by any form of trust, escrow, or similar arrangement. The arrangement described in this Plan shall be unfunded for U.S. federal income tax purposes and for purposes of the Employee Retirement Security Income Act of 1974, as amended.
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4.3 |
Non-Assignability. |
The rights and benefits of Participants under the Plan and any other person or persons to whom payments may be made pursuant to the Plan shall not be subject to alienation, assignment, pledge, transfer or other disposition, except as otherwise provided by law.
4.4 |
Interpretation and Administration. |
The Participating Funds shall have the general authority to interpret, construe and implement provisions of the Plan and to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as shall be from time to time, deemed advisable. Any determination by the Participating Funds shall be final and conclusive.
4.5 |
Amendment and Termination. |
The Participating Funds may in their sole discretion amend or terminate the Plan at any time. No amendment or termination shall adversely affect any then existing deferred amounts or rights under the Plan. Upon termination of the Plan, the remaining balance of the Participants Deferral Share Account plus any Deferred Compensation held in cash shall be paid to the Participant (or to a beneficiary, as the case may be), in a lump sum as soon as practicable but no more than thirty (30) days following termination of the Plan.
4.6 |
Incapacity. |
If the Participating Funds shall receive satisfactory evidence that the Participant or any Beneficiary entitled to receive any benefit under the Plan is, at the time when such benefit becomes payable, a minor, or is physically or mentally incompetent to receive such benefit and to give a valid release therefor, and that another person or an institution is then maintaining or has custody of the Participant or Beneficiary and that no guardian, committee or other representative of the estate of the Participant or Beneficiary shall have been duly appointed, the Participating Funds may make payment of such benefit otherwise payable to the Participant or Beneficiary to such other person or institution and the release of such other person or institution shall be a valid and complete discharge for the payment of such benefit.
4.7 |
Payments Due Missing Persons. |
The Participating Funds shall make a reasonable effort to locate all persons entitled to benefits under the Plan. However, notwithstanding any provisions of the Plan to the contrary, if, after a period of five (5) years from the date such benefit shall be due, any such persons entitled to benefits have not been located, their rights under the Plan shall stand suspended. Before this provision becomes operative, the Participating Funds shall send a certified letter to all such persons to their last known address advising them that their benefits under the Plan shall be suspended. Any such suspended amounts shall be held by the Participating Funds for a period of three (3) additional years (or a total of eight (8) years from the time the benefits first become payable) and thereafter, if unclaimed, such amounts shall be forfeited, subject to applicable laws in the jurisdiction in which the respective Participating Fund is organized.
4.8 |
Agents. |
The Participating Funds may employ agents and provide for such clerical, legal, actuarial, accounting, advisory or other services as they deem necessary to perform their duties under the Plan. The Participating Funds shall bear the cost of such services and all other expenses incurred in connection with the administration of the Plan.
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4.9 |
Governing Law. |
All matters concerning the validity, construction and administration of the Plan shall be governed by the laws of the state in which the respective Participating Fund is organized.
4.10 Non-Guarantee |
of Status. |
Nothing contained in the Plan shall be construed as a contract or guarantee of the right of the Participant to be, or remain as, a Trustee of any of the Participating Funds or to receive any, or any particular rate of, compensation from any of the Participating Funds.
4.11 Counsel. |
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The Participating Funds may consult with legal counsel with respect to the meaning or construction of the Plan, their obligations or duties hereunder or with respect to any action or proceeding or any question of law, and they shall be fully protected with respect to any action taken or omitted by them in good faith pursuant to the advice of legal counsel.
4.12 Entire |
Plan. |
The Plan contains the entire understanding between the Participating Funds and the Participant with respect to the payment of non-qualified elective deferred compensation by the Participating Funds to the Participant.
4.13 Non-liability |
of Administrator and Participating Funds. |
Interpretations of, and determinations (including factual determinations) related to, the Plan made by the Administrator or Participating Funds in good faith, including any determinations of the amounts of the Deferral Share Accounts, shall be conclusive and binding upon all parties; and the Administrator, the Participating Funds and their officers and Trustees shall not incur any liability to the Participant for any such interpretation or determination so made or for any other action taken by it in connection with the Plan in good faith.
4.14 Successors |
and Assigns. |
The Plan shall be binding upon, and shall inure to the benefit of, the Participating Funds and their successors and assigns and to the Participants and their heirs, executors, administrators and personal representatives.
4.15 Severability. |
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In the event any one or more provisions of the Plan are held to be invalid or unenforceable, such illegality or unenforceability shall not affect the validity or enforceability of the other provisions hereof and such other provisions shall remain in full force and effect unaffected by such invalidity or unenforceability.
4.16 Rule |
16b-3 Compliance. |
It is the intention of the Participating Funds that all transactions under the Plan be exempt from liability imposed by Section 16(b) of the Securities Exchange Act of 1934, as amended. Therefore, if any transaction under the Plan is found not to be in compliance with Section 16(b), the provision of the Plan governing such transaction shall be deemed amended so that the transaction does so comply and is so exempt, to the extent permitted by law and deemed advisable by the Participating Fund, and in all events the Plan shall be construed in favor of its meeting the requirements of an exemption.
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IN WITNESS WHEREOF, each Participating Fund has caused this Plan to be executed by one of its duly authorized officers, as of this day of 2018, to be effective as of January 1, 2019.
By: |
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Name: | ||
Title: |
Witness: |
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Name: | ||
Title: |
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SCHEDULE A
BLACKROCK FUND COMPLEX
THIRD AMENDED AND RESTATED DEFERRED COMPENSATION PLAN
PARTICIPATING FUNDS
Each registered management investment company advised by BlackRock Advisors, LLC and governed by the Board is a Participating Fund except as set forth below:
None
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SCHEDULE B
(Effective as of January 1, 2019)
ELIGIBLE INVESTMENTS
Equities (20% of Total; 10% to Each Eligible Investment)
1. |
BlackRock Enhanced Equity Dividend Trust (NYSE: BDJ) |
2. |
BlackRock Enhanced Capital and Income Fund, Inc. (NYSE: CII) |
Fixed Income (80% of Total; 16% to Each Eligible Investment)
1. |
BlackRock Credit Allocation Income Trust (NYSE: BTZ) |
2. |
BlackRock Limited Duration Income Trust (NYSE: BLW) |
3. |
BlackRock Total Return Fund, a series of BlackRock Bond Fund, Inc. |
4. |
BlackRock Strategic Income Opportunities Portfolio, a series of BlackRock Funds V |
5. |
BlackRock High Yield Bond Portfolio, a series of BlackRock Funds V |
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BLACKROCK FUND COMPLEX
THIRD AMENDED AND RESTATED DEFERRED COMPENSATION PLAN
Deferral Election Form
This Deferral Election Form applies to any amounts deferred for the calendar year beginning January 1, 2019.
☐ The undersigned hereby elects to participate in the BlackRock Fund Complex Third Amended and Restated Deferred Compensation Plan (Plan) in accordance with the elections made in this Deferral Election Form (Form). I understand that the percentage of my compensation set forth below will be deferred under the Plan and invested in the funds that are Eligible Investments (as defined in the Plan) in accordance with the allocation percentages set forth on Schedule B to the Plan.
☐ I do not wish to participate in the Plan. (If you checked this box, please stop here.)
1. |
Initial Enrollment in Deferred Compensation Plan |
a. |
Amount Deferred |
I hereby elect to defer up to % (not more than 50%) of the annual compensation I earn as a Director/Trustee of the Participating Funds (as defined in the Plan) in respect of the calendar year beginning January 1, 2019.
b. |
Time of Payment |
I hereby elect for amounts deferred pursuant to this Form, in respect of the calendar year beginning January 1, 2019, to be paid as follows:
☐ On the last business day in January of the calendar year following the calendar year in which I cease to be a Director/Trustee; or
☐ On the following other date:
c. |
Number of Payments |
I hereby elect to receive payment for amounts deferred pursuant to this Form, in respect of the calendar year beginning January 1, 2019:
☐ Entire amount in a lump sum; or
☐ In annual installments (not to exceed 10).
d. |
Designation of Beneficiary |
I hereby:
☐ Designate the beneficiaries reflected in Appendix A hereto; or
☐ I do not wish to designate any beneficiary.
***
I hereby relinquish and release any and all rights to receive payment of the deferred amounts except in accordance with the Plan. I hereby direct and authorize the Administrator (as defined in the Plan) to make payments of deferral amounts as it deems necessary or desirable to facilitate administration of the Plan; provided, that such payments shall be made in accordance with the Plan and the foregoing elections.
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Executed this day of , 2018.
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Print Name | ||
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Directors/Trustees Signature |
Received and accepted by each of the Eligible Investments (as defined in the Plan):
By: |
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Date: |
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BLACKROCK FUND COMPLEX
THIRD AMENDED AND RESTATED DEFERRED COMPENSATION PLAN
Deferral Election Form
This Deferral Election Form applies to any amounts deferred for the calendar year beginning January 1, 2019.
☐ The undersigned hereby elects to participate in the BlackRock Fund Complex Third Amended and Restated Deferred Compensation Plan (Plan) in accordance with the elections made in this Deferral Election Form (Form). I understand that the percentage of my compensation set forth below will be deferred under the Plan and invested in the funds that are Eligible Investments (as defined in the Plan) in accordance with the allocation percentages set forth on Schedule B to the Plan.
☐ I do not wish to participate in the Plan. (If you checked this box, please stop here.)
1. |
Continuation of Past Elections |
A copy of my Deferral Election Form from last year is attached hereto and noted below. With respect to the boxes checked below, I would like to continue with the same elections from the prior year.
☐ Amount Deferred (X%)
☐ Time of Payment (January of the calendar year following the calendar year in which I cease to be a Trustee)
☐ Number of Payments (Lump Sum Payment or Installment Payments)
☐ Designation of Beneficiary:
Primary:
Secondary:
(For any category not checked above, please complete the applicable portion of this Form below to reflect your new elections.)
2. |
Change Elections |
a. |
Amount Deferred |
I hereby elect to defer up to % (not more than 50%) of the annual compensation I earn as a Director/Trustee of the Participating Funds (as defined in the Plan) in respect of the calendar year beginning January 1, 2019.
b. |
Time of Payment |
I hereby elect for amounts deferred pursuant to this Form, in respect of the calendar year beginning January 1, 2019, to be paid as follows:
☐ On the last business day in January of the calendar year following the calendar year in which I cease to be a Director/Trustee; or
☐ On the following other date:
c. |
Number of Payments |
I hereby elect to receive payment for amounts deferred pursuant to this Form, in respect of the calendar year beginning January 1, 2019:
☐ Entire amount in a lump sum; or
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☐ In annual installments (not to exceed 10).
d. |
Designation of Beneficiary |
I hereby:
☐ Designate the beneficiaries reflected in Appendix A hereto; or
☐ I do not wish to designate any beneficiary.
***
I hereby relinquish and release any and all rights to receive payment of the deferred amounts except in accordance with the Plan. I hereby direct and authorize the Administrator (as defined in the Plan) to make payments of deferral amounts as it deems necessary or desirable to facilitate administration of the Plan; provided, that such payments shall be made in accordance with the Plan and the foregoing elections.
Executed this day of , 2018.
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Print Name | ||
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Directors/Trustees Signature |
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Received and accepted by each of the Eligible Investments (as defined in the Plan):
By: |
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Date: |
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BLACKROCK FUND COMPLEX
THIRD AMENDED AND RESTATED DEFERRED COMPENSATION PLAN
Designation of Beneficiary
The undersigned hereby designates the person or persons named below as the beneficiary(ies) of any benefits which may become due according to the terms and conditions of the BlackRock Fund Complex Third Amended and Restated Deferred Compensation Plan (the Plan) in the event of my death.
☐ To my Estate: or | ||
☐ To the following beneficiaries: | ||
Primary: |
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(Name, address and relationship) if living, or if not living at my death, to | ||
Secondary: |
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(Name, address and relationship) if living, or if not living at my death, to my Estate. |
I hereby revoke all prior beneficiary designation(s) made under the terms of the Plan by execution of this form.
Executed this day of , .
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Trustees Signature |
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Exhibit (j)
MASTER CUSTODIAN AGREEMENT
Between
Each BlackRock Entity Listed in Appendix A
And
State Street Bank and Trust Company
Dated as of December 31, 2018
TABLE OF CONTENTS
Page | ||||||
1. |
DEFINITIONS | 3 | ||||
2. |
EMPLOYMENT OF CUSTODIAN | 4 | ||||
3. |
ACTIVITIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY HELD IN THE UNITED STATES | 5 | ||||
4. |
PROVISIONS RELATING TO RULES 17F-5 AND 17F-7 | 6 | ||||
5. |
ACTIVITIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY HELD OUTSIDE THE UNITED STATES | 8 | ||||
6. |
FOREIGN EXCHANGE | 10 | ||||
7. |
TAX SERVICES | 12 | ||||
8. |
PAYMENT FOR SALES OR REDEMPTIONS OF PORTFOLIO INTERESTS | 13 | ||||
9. |
PROPER INSTRUCTIONS | 13 | ||||
10. |
ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY | 14 | ||||
11. |
[RESERVED] | 14 | ||||
12. |
RECORDS | 14 | ||||
13. |
FUNDS INDEPENDENT ACCOUNTANTS; REPORTS | 14 | ||||
14. |
CUSTODIANS STANDARD OF CARE; EXCULPATION | 14 | ||||
15. |
COMPENSATION AND INDEMNIFICATION OF CUSTODIAN; SECURITY INTEREST | 16 | ||||
16. |
EFFECTIVE PERIOD AND TERMINATION | 17 | ||||
17. |
SUCCESSOR CUSTODIAN | 18 | ||||
18. |
REMOTE ACCESS SERVICES ADDENDUM | 19 | ||||
19. |
LOAN SERVICES ADDENDUM | 19 | ||||
20. |
GENERAL | 19 |
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MASTER CUSTODIAN AGREEMENT
This Agreement is made as of December 31, 2018 (this Agreement), between each BlackRock entity identified on Appendix A and each BlackRock entity which becomes a party to this Agreement in accordance with the terms hereof (in each case, a Fund), including, if applicable, each series of the Fund identified on Appendix A and each series which becomes a party to this Agreement in accordance with the terms hereof, and State Street Bank and Trust Company, a Massachusetts trust company (the Custodian).
WITNESSETH:
WHEREAS, each Fund desires for the Custodian to provide certain custodial services relating to securities and other assets of the Fund; and
WHEREAS, the Custodian is willing to provide the services upon the terms contained in this Agreement;
SECTION 1. DEFINITIONS. In addition to terms defined in Section 4.1 (Rule 17f-5 and Rule 17f-7 related definitions) or elsewhere in this Agreement, (a) terms defined in the UCC have the same meanings herein as therein and (b) the following other terms have the following meanings for purposes of this Agreement:
1940 Act means the Investment Company Act of 1940, as amended from time to time.
Board means, in relation to a Fund, the board of directors, trustees or other governing body of the Fund.
Client Publications means the general client publications of State Street Bank and Trust Company available from time to time to clients and their investment advisers.
Deposit Account Agreement means the Deposit Account Agreement and Disclosure, as may be amended from time to time, issued by the Custodian and available on the Custodians internet customer portal, my.statestreet.com.
Domestic securities means securities held within the United States.
Foreign securities means securities primarily held outside of the United States.
Held outside of the United States means not held within the United States.
Held within the United States means (a) in relation to a security or other financial asset, the security or other financial asset (i) is a certificated security registered in the name of the Custodian or its sub-custodian, agent or nominee or is endorsed to the Custodian or its sub-custodian, agent or nominee or in blank and the security certificate is located within the United States, (ii) is an uncertificated security or other financial asset registered in the name of the Custodian or its sub-custodian, agent or nominee at an office located in the United States, or (iii) has given rise to a security entitlement of which the Custodian or its sub-custodian, agent or nominee is the entitlement holder against a U.S. Securities System or another securities intermediary for which the securities intermediarys jurisdiction is within the United States, and (b) in relation to cash, the cash is maintained in a deposit account denominated in U.S. dollars with the banking department of the Custodian or with another bank or trust companys office located in the United States.
Investment Advisor means, in relation to a Portfolio, the investment manager or investment advisor of the Portfolio.
On book currency means (a) U.S. dollars or (b) a foreign currency that, when credited to a deposit account of a customer maintained in the banking department of the Custodian or an Eligible Foreign Custodian, the Custodian maintains on its books as an amount owing as a liability by the Custodian to the customer.
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Portfolio means (a) in relation to a Fund that is a series organization, a series of the Fund and (b) in relation to a Fund that is not a series organization, the Fund itself.
Portfolio Interests means beneficial interests in a Portfolio.
Proper Instructions means instructions in accordance with Section 9 received by the Custodian from a Fund, the Funds Investment Advisor, or an individual or organization duly authorized by the Fund or the Investment Advisor. The term includes standing instructions.
SEC means the U.S. Securities and Exchange Commission.
Series organization means an organization that, pursuant to the statute under which the organization is organized, has the following characteristics: (a) the organic record of the organization provides for creation by the organization of one or more series (however denominated) with respect to specified property of the organization, and provides for records to be maintained for each series that identify the property of or associated with the series, (b) debt incurred or existing with respect to the activities of, or property of or associated with a particular series is enforceable against the property of or associated with the series only, and not against the property of or associated with the organization or of other series of the organization, and (c) debt incurred or existing with respect to the activities or property of the organization is enforceable against the property of the organization only, and not against the property of or associated with any series of the organization.
UCC means the Uniform Commercial Code of the State of New York as in effect from time to time.
Underlying Portfolios means a group of investment companies as defined in Section 12(d)(1)(G)(ii) of the 1940 Act.
Underlying Shares means shares or other securities, issued by a U.S. issuer, of Underlying Portfolios and other registered investment companies (as defined in Section 3(a)(1) of the 1940 Act), whether or not in the same group of investment companies (as defined in Section 12(d)(1)(G)(ii) of the 1940 Act).
Underlying Transfer Agent means State Street Bank and Trust Company or such other organization which may from time to time be appointed by the Fund to act as a transfer agent for the Underlying Portfolios and with respect to which the Custodian is provided with Proper Instructions.
U.S. Securities System means a securities depository or book-entry system authorized by the U.S. Department of the Treasury or a clearing corporation as defined in Section 8-102 of the UCC.
SECTION 2. EMPLOYMENT OF CUSTODIAN.
SECTION 2.1 GENERAL. Each Fund hereby employs the Custodian as a custodian of (a) securities and cash of each of the Portfolios and (b) other assets of each of the Portfolios that the Custodian agrees to treat as financial assets. Each Fund, on behalf of each of its Portfolios, agrees to deliver, or cause to be delivered, to the Custodian (i) all securities and cash of each Portfolio, (ii) all other assets of each Portfolio that the Fund desires the Custodian, and the Custodian is willing, to treat as a financial asset and (iii) all cash and other proceeds of the securities and financial assets held in custody under this Agreement. The holding of confirmation statements that identify Underlying Shares as being recorded in the Custodians name on behalf of the Portfolios will be custody for purposes of this Section 2.1. This Agreement does not require the Custodian to accept or treat any asset that is not a security or cash as a financial asset.
SECTION 2.2 SUB-CUSTODIANS. Upon receipt of Proper Instructions, the Custodian shall on behalf of a Fund appoint one or more banks, trust companies or other entities located in the United States and designated in the Proper Instructions to act as a sub-custodian for the purposes of effecting such transactions as may be designated by the Fund in the Proper Instructions. The Custodian may place and maintain each Funds foreign securities with foreign banking institution sub-custodians employed by the Custodian or foreign securities depositories, all in accordance with the applicable provisions of Sections 4 and 5. An entity acting in the capacity of Underlying Transfer Agent is not an agent or sub-custodian of the Custodian for purposes of this Agreement.
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SECTION 2.3 RELATIONSHIP. With respect to securities and other financial assets, the Custodian is a securities intermediary and the Portfolio is the entitlement holder. With respect to cash maintained in a deposit account and denominated in an on book currency, the Custodian is a bank and the Portfolio is the banks customer. If cash is maintained in a deposit account with a bank other than the Custodian and the cash is denominated in an on book currency, the Custodian is that banks customer. The Custodian agrees to treat the claim to the cash as a financial asset for the benefit of the Portfolio. The Custodian does not otherwise agree to treat cash as financial asset. The duties of the Custodian as securities intermediary and bank set forth in the UCC are varied by the terms of this Agreement to the extent that the duties may be varied by agreement under the UCC.
SECTION 3. ACTIVITIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY HELD IN THE UNITED STATES.
SECTION 3.1 HOLDING SECURITIES. The Custodian may deposit and maintain securities or other financial assets of a Portfolio in a U.S. Securities System in compliance with the conditions of Rule 17f-4 under the 1940 Act. Upon receipt of Proper Instructions on behalf of a Portfolio, the Custodian shall establish and maintain a segregated account or accounts for and on behalf of the Portfolio and into which account or accounts may be transferred cash or securities and other financial assets, including securities and financial assets maintained in a U.S. Securities System. The Custodian shall hold and physically segregate for the account of each Portfolio all securities and other financial assets held by the Custodian in the United States, including all domestic securities of the Portfolio, other than (a) securities or other financial assets maintained in a U.S. Securities System and (b) Underlying Shares maintained pursuant to Section 3.6 in an account of an Underlying Transfer Agent. The Custodian may at any time or times in its discretion appoint any other bank or trust company, qualified under the 1940 Act to act as a custodian in the United States, as the Custodians agent to carry out such of the provisions of this Section as the Custodian may from time to time direct. The appointment of any agent shall not relieve the Custodian of any of its duties hereunder and the Custodian shall be responsible for the acts and omissions of its agents hereunder as if performed by the Custodian hereunder. The Custodian may at any time or times in its discretion remove a bank or trust company as the Custodians agent.
SECTION 3.2 REGISTRATION OF SECURITIES. Domestic securities or other financial assets held by the Custodian and that are not bearer securities shall be registered in the name of the applicable Portfolio or in the name of any nominee of a Fund on behalf of the Portfolio or of any nominee of the Custodian, or in the name or nominee name of any agent or any sub-custodian permitted hereby. All securities accepted by the Custodian on behalf of the Portfolio under the terms of this Agreement shall be in street name or other good delivery form. However, if a Fund directs the Custodian to maintain securities or other financial assets in street name, the Custodian shall utilize reasonable efforts only to timely collect income due the Fund on the securities and other financial assets and to notify the Fund of relevant issuer actions including, without limitation, pendency of calls, maturities, tender or exchange offers.
SECTION 3.3 BANK ACCOUNTS. The Custodian shall open and maintain upon the terms of the Deposit Account Agreement a separate deposit account or accounts in the United States in the name of each Portfolio, subject only to draft or order by the Custodian acting pursuant to the terms of this Agreement. The Custodian shall credit to the deposit account or accounts, subject to the provisions hereof, all cash received by the Custodian from or for the account of the Portfolio, other than cash maintained by the Portfolio in a deposit account established and used in accordance with Rule 17f-3 under the 1940 Act. Funds held by the Custodian for a Portfolio may be deposited by the Custodian to its credit as Custodian in the banking department of the Custodian or in such other banks or trust companies as it may in its discretion deem necessary or desirable; provided, however, that every such bank or trust company shall be qualified to act as a custodian under the 1940 Act. The funds shall be deposited by the Custodian in its capacity as Custodian and shall be withdrawable by the Custodian only in that capacity.
SECTION 3.4 COLLECTION OF INCOME. Subject to the domestic securities or other financial assets held in the United States being registered as provided in Section 3.2, the Custodian shall collect on a timely basis all income and other payments with respect to the securities and other financial assets and to which a Portfolio shall be entitled either by law or pursuant to custom in the securities business. The Custodian shall collect on a timely basis all income and other payments with respect to bearer domestic securities if, on the date of payment by the issuer, the securities are held by the Custodian or its agent. The Custodian shall present for payment all income items requiring presentation as and when they become due and shall collect interest when due on securities and other financial assets held hereunder. The Custodian shall credit income to the Portfolio as such income is received or in accordance with the Custodians then current payable date income schedule. Any credit to the Portfolio in advance of receipt may be reversed when the Custodian determines that payment will not occur in due course, and the Portfolio may be charged at the Custodians applicable rate for time credited.
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SECTION 3.5 DELIVERY OUT. The Custodian shall release and deliver out domestic securities and other financial assets of a Portfolio held in a U.S. Securities System, or in an account at the Underlying Transfer Agent, only upon receipt of, and in accordance with, Proper Instructions on behalf of the applicable Portfolio, specifying the domestic securities or financial assets held in the United States to be delivered out and the person or persons to whom delivery is to be made. The Custodian shall pay out cash of a Portfolio upon receipt of, and in accordance with, Proper Instructions on behalf of the applicable Portfolio, specifying the amount of the payment and the person or persons to whom the payment is to be made.
SECTION 3.6 DEPOSIT OF FUND ASSETS WITH THE UNDERLYING TRANSFER AGENT. Underlying Shares of a Fund, on behalf of a Portfolio, shall be deposited and held in an account or accounts maintained with an Underlying Transfer Agent. The Custodians only responsibilities with respect to the Underlying Shares shall be limited to the following:
1) |
Upon receipt of a confirmation or statement from an Underlying Transfer Agent that the Underlying Transfer Agent is holding or maintaining Underlying Shares in the name of the Custodian (or a nominee of the Custodian) for the benefit of a Portfolio, the Custodian shall identify by book-entry that the Underlying Shares are being held by it as custodian for the benefit of the Portfolio. |
2) |
Upon receipt of Proper Instructions to purchase Underlying Shares for the account of a Portfolio, the Custodian shall pay out cash of the Portfolio as so directed to purchase the Underlying Shares and record the payment from the account of the Portfolio on the Custodians books and records. |
3) |
Upon receipt of Proper Instructions for the sale or redemption of Underlying Shares for the account of a Portfolio, the Custodian shall transfer the Underlying Shares as so directed to sell or redeem the Underlying Shares, record the transfer from the account of the Portfolio on the Custodians books and records and, upon the Custodians receipt of the proceeds of the sale or redemption, record the receipt of the proceeds for the account of such Portfolio on the Custodians books and records. |
SECTION 3.7 PROXIES. The Custodian shall cause to be promptly executed by the registered holder of domestic securities or other financial assets held in the United States of a Portfolio, if the securities or other financial assets are registered otherwise than in the name of the Portfolio or a nominee of the Portfolio, all proxies, without indication of the manner in which the proxies are to be voted, and shall promptly deliver to the Fund such proxies, all proxy soliciting materials and all notices relating to the securities or other financial assets.
SECTION 3.8 COMMUNICATIONS. Subject to the domestic securities or other financial assets held in the United States being registered as provided in Section 3.2, the Custodian shall transmit promptly to the applicable Fund for each Portfolio all written information received by the Custodian from issuers of the securities and other financial assets being held for the Portfolio. The Custodian shall transmit promptly to the applicable Fund all written information received by the Custodian from issuers of the securities and other financial assets whose tender or exchange is sought and from the party or its agent making the tender or exchange offer. The Custodian shall also transmit promptly to the applicable Fund for each Portfolio all written information received by the Custodian regarding any class action or other collective litigation relating to Portfolio securities or other financial assets issued in the United States and then held, or previously held, during the relevant class-action period during the term of this Agreement by the Custodian for the account of the Fund for the Portfolio, including, but not limited to, opt-out notices and proof-of-claim forms. The Custodian does not support class-action participation by a Fund beyond such forwarding of written information received by the Custodian, except as may otherwise be mutually agreed to in writing between the Custodian and a Fund.
SECTION 4. PROVISIONS RELATING TO RULES 17F-5 AND 17F-7.
SECTION 4.1. DEFINITIONS. As used in this Agreement, the following terms have the following meanings:
Country Risk means all factors reasonably related to the systemic risk of holding Foreign Assets in a particular country. The factors include but are not limited to risks arising from the countrys political environment, economic
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and financial infrastructure (including any Eligible Securities Depository operating in the country); prevailing or developing custody, tax and settlement practices; nationalization, expropriation or other government actions; currency restrictions, devaluations or fluctuations; market conditions affecting the orderly execution of securities transactions or the value of assets; the regulation of the banking and securities industries, including changes in market rules; and laws and regulations applicable to the safekeeping and recovery of Foreign Assets held in custody in that country.
Covered Foreign Country means a country listed on Schedule A, which list of countries may be amended from time to time at the request of any Fund and with the agreement of the Foreign Custody Manager.
Eligible Foreign Custodian has the meaning set forth in Section (a)(1) of Rule 17f-5.
Eligible Securities Depository has the meaning set forth in section (b)(1) of Rule 17f-7.
Foreign Assets means, in relation to a Portfolio, any of the Portfolios securities or other investments (including foreign currencies) for which the primary market is outside the United States, and any cash and cash equivalents that are reasonably necessary to effect transactions of the Portfolio in those investments.
Foreign Custody Manager has the meaning set forth in section (a)(3) of Rule 17f-5.
Foreign Securities System means an Eligible Securities Depository listed on Schedule B.
Rule 17f-5 means Rule 17f-5 promulgated under the 1940 Act.
Rule 17f-7 means Rule 17f-7 promulgated under the 1940 Act.
SECTION 4.2. THE CUSTODIAN AS FOREIGN CUSTODY MANAGER.
4.2.1 DELEGATION. Each Fund, by resolution adopted by its Board, has delegated to the Custodian, subject to Section (b) of Rule 17f-5, the responsibilities set forth in this Section 4.2 with respect to Foreign Assets of the Portfolios held outside the United States. The Custodian hereby accepts such delegation (the Custodian, in such delegated capacity, the Foreign Custody Manager). By giving at least 30 days prior written notice to the Fund, the Foreign Custody Manager may withdraw its acceptance of the delegated responsibilities generally or with respect to a Covered Foreign Country designated in the notice. Following the withdrawal, the Custodian shall have no further responsibility in its capacity as Foreign Custody Manager to the Fund generally or, as the case may be, with respect to the Covered Foreign Country so designated.
4.2.2 EXERCISE OF CARE AS FOREIGN CUSTODY MANAGER. The Foreign Custody Manager shall exercise reasonable care, prudence and diligence such as a person having responsibility for the safekeeping of the Foreign Assets would exercise in performing the delegated responsibilities.
4.2.3 FOREIGN CUSTODY ARRANGEMENTS. The Foreign Custody Manager shall be responsible for performing the delegated responsibilities only with respect to Covered Foreign Countries. The Foreign Custody Manager shall list on Schedule A for a Covered Foreign Country each Eligible Foreign Custodian selected by the Foreign Custody Manager to maintain the Foreign Assets of the Portfolios with respect to the Covered Foreign Country. The list of Eligible Foreign Custodians may be amended by the Foreign Custody Manager from time to time upon notice to the Funds in the sole discretion of the Foreign Custody Manager. This Agreement constitutes a Proper Instruction by a Fund, on behalf of each applicable Portfolio, to open an account, and to place and maintain Foreign Assets, for the Portfolio in each applicable Covered Foreign Country. The Fund, on behalf of the Portfolios, shall satisfy the account opening requirements for the Covered Foreign Country, and the delegation with respect to the Portfolio for the Covered Foreign Country will not be considered to have been accepted by the Custodian until that satisfaction. If the Foreign Custody Manager receives from the Fund Proper Instructions directing the Foreign Custody Manager to close the account, the delegation shall be considered withdrawn, and the Custodian shall immediately cease to be the Foreign Custody Manager with respect to the Portfolio for the Covered Foreign Country.
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4.2.4 SCOPE OF DELEGATED RESPONSIBILITIES: Subject to the provisions of this Section 4.2, the Foreign Custody Manager may place and maintain Foreign Assets in the care of an Eligible Foreign Custodian selected by the Foreign Custody Manager in each applicable Covered Foreign Country. The Foreign Custody Manager shall determine that (a) the Foreign Assets will be subject to reasonable care, based on the standards applicable to custodians in the country in which the Foreign Assets will be held by the Eligible Foreign Custodian, after considering all factors relevant to the safekeeping of such assets, including, without limitation the factors specified in Rule 17f-5(c)(1) and (b) the contract between the Foreign Custody Manager and the Eligible Foreign Custodian governing the foreign custody arrangements will satisfy the requirements of Rule 17f-5(c)(2). The Foreign Custody Manager shall establish a system to monitor (i) the appropriateness of maintaining the Foreign Assets with the Eligible Foreign Custodian and (ii) the performance of the contract governing the custody arrangements. The liability of the Foreign Custody Manager with respect to the acts or omissions of an Eligible Foreign Custodian is addressed in Section 14.4. If the Foreign Custody Manager determines that the custody arrangements with an Eligible Foreign Custodian are no longer appropriate, the Foreign Custody Manager shall so notify the Fund.
4.2.5 REPORTING REQUIREMENTS. The Foreign Custody Manager shall (a) report the withdrawal of Foreign Assets from an Eligible Foreign Custodian and the placement of Foreign Assets with another Eligible Foreign Custodian by making available to the Fund an amended Schedule A at the end of the calendar quarter in which the action has occurred, and (b) after the occurrence of any other material change in the foreign custody arrangements of the Portfolios described in this Section 4.2, make a written report to the Board containing a notification of the change.
4.2.6 REPRESENTATIONS. The Foreign Custody Manager represents to each Fund that it is a U.S. Bank as defined in Section (a)(7) of Rule 17f-5. Each Fund represents to the Custodian that its Board has (a) determined that it is reasonable for the Board to rely on the Custodian to perform the responsibilities delegated pursuant to this Agreement to the Custodian as the Foreign Custody Manager of the Portfolios and (b) considered and determined to accept such Country Risk as is incurred by placing and maintaining the Foreign Assets of each Portfolio in each Covered Foreign Country.
4.2.7 TERMINATION BY A PORTFOLIO OF THE CUSTODIAN AS FOREIGN CUSTODY MANAGER. By giving at least 30 days prior written notice to the Custodian, a Fund, on behalf of a Portfolio, may terminate the delegation to the Custodian as the Foreign Custody Manager for the Portfolio. Following the termination, the Custodian shall have no further responsibility in its capacity as Foreign Custody Manager to the Portfolio.
SECTION 4.3 MONITORING OF ELIGIBLE SECURITIES DEPOSITORIES. The Custodian shall (a) provide the Fundor its Investment Advisor with an analysis of the custody risks associated with maintaining assets with the Eligible Securities Depositories set forth on Schedule B in accordance with Section (a)(1)(i)(A) of Rule 17f-7 and (b) monitor such risks on a continuing basis and promptly notify the Fund or its Investment Advisor of any material change in such risks, in accordance with Section (a)(1)(i)(B) of Rule 17f-7.
SECTION 5. ACTIVITIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY HELD OUTSIDE THE UNITED STATES.
SECTION 5.1. HOLDING SECURITIES. Foreign securities and other financial assets held outside of the United States shall be maintained in a Foreign Securities System in a Covered Foreign Country through arrangements implemented by the Custodian or an Eligible Foreign Custodian, as applicable, in the Covered Foreign Country. The Custodian shall identify on its books as belonging to the Portfolios the foreign securities and other financial assets held by each Eligible Foreign Custodian or Foreign Securities System, and shall provide or make available information to a Portfolio and such other persons as a Portfolio may designate with respect to the registration status of each Funds securities and a record of securities held by each Portfolio and such Portfolios respective interest therein. The Custodian may hold foreign securities and other financial assets for all of its customers, including the Portfolios, with any Eligible Foreign Custodian in an account that is identified as the Custodians account for the benefit of its customers; provided however, that (a) the records of the Custodian with respect to foreign securities or other financial assets of a Portfolio maintained in the account shall identify those securities and other financial assets as belonging to the Portfolio and (b) to the extent permitted and customary in the market in which the account is maintained, the Custodian shall require that securities and other financial assets so held by the Eligible Foreign Custodian be held separately from any assets of the Eligible Foreign Custodian or of other customers of the Eligible Foreign Custodian.
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SECTION 5.2. REGISTRATION OF FOREIGN SECURITIES. Foreign securities and other financial assets held outside of the United States maintained in the custody of an Eligible Foreign Custodian and that are not bearer securities shall be registered in the name of the applicable Portfolio or in the name of the Custodian or in the name of any Eligible Foreign Custodian or in the name of any nominee of any of the foregoing. Each Fund on behalf of a Portfolio agrees to hold any such nominee harmless from any liability as a holder of record of the foreign securities or other financial assets. The Custodian or an Eligible Foreign Custodian reserves the right not to accept securities or other financial assets on behalf of a Portfolio under the terms of this Agreement unless the form of the securities or other financial assets and the manner in which they are delivered are in accordance with local market practice.
SECTION 5.3. INDEMNIFICATION BY ELIGIBLE FOREIGN CUSTODIANS. Each contract pursuant to which the Custodian employs an Eligible Foreign Custodian shall, to the extent possible, require the Eligible Foreign Custodian to indemnify and hold harmless the Custodian from and against any loss, cost or expense arising out of or in connection with the Eligible Foreign Custodians performance of its obligations. At a Funds election, a Portfolio shall be entitled to be subrogated to the rights of the Custodian with respect to any claims against an Eligible Foreign Custodian as a consequence of any such loss, cost or expense if and to the extent that the Portfolio has not been made whole for the loss, cost or expense. In no event shall the Custodian be obligated to bring suit in its own name or to allow suit to be brought in its name with respect to an Eligible Foreign Custodian.
SECTION 5.4 BANK ACCOUNTS.
5.4.1 GENERAL. The Custodian shall identify on its books as for the account of the applicable Portfolio the amount of cash (including cash denominated in foreign currencies) deposited with the Custodian. The Custodian shall maintain cash deposits in on book currencies on its balance sheet. The Custodian shall be liable for such balances. If the Custodian is unable to maintain, or market practice does not facilitate the maintenance for the Portfolio of a cash balance in a currency as an on book currency, a deposit account shall be opened and maintained by the Custodian outside the United States on behalf of the Portfolio with an Eligible Foreign Custodian. The Custodian shall not maintain such cash deposit on its balance sheet. The Eligible Foreign Custodian will be liable for such balance directly to the Portfolio. All deposit accounts referred to in this Section shall be subject only to draft or order by the Custodian or, if applicable, the Eligible Foreign Custodian acting pursuant to the terms of this Agreement. Cash maintained in a deposit account and denominated in an on book currency will be maintained under and subject to the laws of the State of New York. The Custodian will not have any deposit liability for deposits in any currency that is not an on book currency.
5.4.2 NON-U.S. BRANCH AND NON-U.S. DOLLAR DEPOSITS. In accordance with the laws of the Commonwealth of Massachusetts, the Custodian shall not be required to repay any deposit made at a non-U.S. branch of the Custodian or any deposit made with the Custodian and denominated in a non-U.S. dollar currency, if repayment of the deposit or the use of assets denominated in the non-U.S. dollar currency is prevented, prohibited or otherwise blocked due to (a) an act of war, insurrection or civil strife; (b) any action by a non-U.S. government or instrumentality or authority asserting governmental, military or police power of any kind, whether such authority be recognized as a de facto or a de jure government, or by any entity, political or revolutionary movement or otherwise that usurps, supervenes or otherwise materially impairs the normal operation of civil authority; or (c) the closure of a non-U.S. branch in order to prevent, in the reasonable judgment of the Custodian, harm to the employees or property of the Custodian.
SECTION 5.5. COLLECTION OF INCOME. The Custodian shall use reasonable commercial efforts to collect all income and other payments with respect to the Foreign Assets held hereunder to which a Portfolio shall be entitled. If extraordinary measures are required to collect the income or payment, the Fund and the Custodian shall consult as to such measures and as to the compensation and expenses of the Custodian relating to such measures. The Custodian shall credit income to the applicable Portfolio as such income is received or in accordance with the Custodians then current payable date income schedule. Any credit to the Portfolio in advance of receipt may be reversed when the Custodian determines that payment will not occur in due course, and the Portfolio may be charged at the Custodians applicable rate for time credited. Income on securities or other financial assets loaned other than from the Custodians securities lending program shall be credited as received.
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SECTION 5.6. TRANSACTIONS IN FOREIGN CUSTODY ACCOUNT.
5.6.1 DELIVERY OUT. The Custodian or an Eligible Foreign Custodian shall release and deliver foreign securities or other financial assets held outside of the United States owned by a Portfolio and held by the Custodian or such Eligible Foreign Custodian, or in a Foreign Securities System account, only upon receipt of, and in accordance with, Proper Instructions, specifying the foreign securities to be delivered and the person or persons to whom delivery is to be made. The Custodian shall pay out, or direct the respective Eligible Foreign Custodian or the respective Foreign Securities System to pay out, cash of a Portfolio only upon receipt of, and in accordance with, Proper Instructions specifying the amount of the payment and the person or persons to payment is to be made.
5.6.2 MARKET CONDITIONS. Notwithstanding any provision of this Agreement to the contrary, settlement and payment for Foreign Assets received for the account of the Portfolios and delivery of Foreign Assets maintained for the account of the Portfolios may be effected in accordance with the customary established securities trading or processing practices and procedures in the country or market in which the transaction occurs, including, without limitation, delivering Foreign Assets to the purchaser thereof or to a dealer therefor (or an agent for such purchaser or dealer) with the expectation of receiving later payment for the Foreign Assets from such purchaser or dealer.
5.6.3 SETTLEMENT PRACTICES. The Custodian shall provide to the Fundor its Investment Advisor the information with respect to custody and settlement practices in countries in which the Custodian employs an Eligible Foreign Custodian described on Schedule C at the time or times set forth on the Schedule. The Custodian may revise Schedule C from time to time, but no revision shall result in a Board being provided with substantively less information than had been previously provided on Schedule C.
SECTION 5.7 SHAREHOLDER OR BONDHOLDER RIGHTS. The Custodian shall use reasonable commercial efforts to facilitate the exercise of voting and other shareholder and bondholder rights, including delivery to the Fund of any proxies, proxy soliciting materials and all applicable notices, with respect to foreign securities and other financial assets held outside the United States, subject always to the laws, regulations and practical constraints that may exist in the country where the securities or other financial assets are issued. The Custodian may utilize Broadridge Financial Solutions, Inc. or another proxy service firm of recognized standing as its delegate to provide proxy services for the exercise of shareholder and bondholder rights. Local conditions, including lack of regulation, onerous procedural obligations, lack of notice and other factors may have the effect of severely limiting the ability of a Fund to exercise shareholder and bondholder rights.
SECTION 5.8. COMMUNICATIONS. The Custodian shall transmit promptly to the applicable Fund written information with respect to materials received by the Custodian through Eligible Foreign Custodians from issuers of the foreign securities and other financial asset assets being held outside the United States for the account of a Portfolio. The Custodian shall transmit promptly to the applicable Fund written information with respect to materials so received by the Custodian from issuers of foreign securities whose tender or exchange is sought or from the party or its agent making the tender or exchange offer. The Custodian shall also transmit promptly to the Fund all written information received by the Custodian through Eligible Foreign Custodians from issuers of the foreign securities or other financial assets issued outside of the United States and being held for the account of the Portfolio regarding any class action or other collective litigation relating to the Portfolios foreign securities or other financial assets issued outside the United States and then held, or previously held, during the relevant class-action period during the term of this Agreement by the Custodian via an Eligible Foreign Custodian for the account of the Fund for the Portfolio, including, but not limited to, opt-out notices and proof-of-claim forms. The Custodian does not support class-action participation by a Fund beyond such forwarding of written information received by the Custodian, except as may otherwise be mutually agreed to in writing between the Custodian and a Fund.
SECTION 6. FOREIGN EXCHANGE.
SECTION 6.1. GENERALLY. Upon receipt of Proper Instructions, which for purposes of this section may also include security trade advices, the Custodian shall facilitate the processing and settlement of foreign exchange transactions. Such foreign exchange transactions do not constitute part of the services provided by the Custodian under this Agreement.
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SECTION 6.2. FUND ELECTIONS. Each Fund (or its Investment Advisor acting on its behalf) may elect to enter into and execute foreign exchange transactions with third parties that are not affiliated with the Custodian, with State Street Global Markets, which is the foreign exchange division of State Street Bank and Trust Company and its affiliated companies (SSGM), or with a sub-custodian. Where the Fund or its Investment Advisor gives Proper Instructions for the execution of a foreign exchange transaction using an indirect foreign exchange service described in the Client Publications, the Fund (or its Investment Advisor) instructs the Custodian, on behalf of the Fund, to direct the execution of such foreign exchange transaction to SSGM or, when the relevant currency is not traded by SSGM, to the applicable sub-custodian. The Custodian shall not have any agency (except as contemplated in preceding sentence), trust or fiduciary obligation to the Fund, its Investment Advisor or any other person in connection with the execution of any foreign exchange transaction. The Custodian shall have no responsibility under this Agreement for the selection of the counterparty to, or the method of execution of, any foreign exchange transaction entered into by the Fund (or its Investment Advisor acting on its behalf) or the reasonableness of the execution rate on any such transaction.
SECTION 6.3. FUND ACKNOWLEDGEMENT Each Fund acknowledges that in connection with all foreign exchange transactions entered into by the Fund (or its Investment Advisor acting on its behalf) with SSGM or any sub-custodian, SSGM and each such sub-custodian:
(i) |
shall be acting in a principal capacity and not as broker, agent or fiduciary to the Fund or its Investment Advisor; |
(ii) |
shall seek to profit from such foreign exchange transactions, and are entitled to retain and not disclose any such profit to the Fund or its Investment Advisor; and |
(iii) |
shall enter into such foreign exchange transactions pursuant to the terms and conditions, including pricing or pricing methodology, (a) agreed with the Fund or its Investment Advisor from time to time or (b) in the case of an indirect foreign exchange service, (i) as established by SSGM and set forth in the Client Publications with respect to the particular foreign exchange execution services selected by the Fund or the Investment Advisor or (ii) as established by the sub-custodian from time to time. |
SECTION 6.4. TRANSACTIONS BY STATE STREET. The Custodian or its affiliates, including SSGM, may trade based upon information that is not available to the Fund (or its Investment Advisor acting on its behalf), and may enter into transactions for its own account or the account of clients in the same or opposite direction to the transactions entered into with the Fund (or its Investment Advisor), and shall have no obligation, under this Agreement, to share such information with or consider the interests of their respective counterparties, including, where applicable, the Fund or the Investment Advisor.
SECTION 6A. CONTRACTUAL SETTLEMENT SERVICES (PURCHASE/SALES).
SECTION 6A.1 GENERAL. The Custodian shall, in accordance with the terms set out in this Section 6A, debit or credit the appropriate deposit account of each Portfolio on a contractual settlement basis in connection with the purchase of securities or other financial assets for the Portfolio or the receipt of the proceeds of the sale or redemption of securities or other financial assets.
SECTION 6A.2 PROVISION OF SERVICES. The services described in Section 6A.1 (the Contractual Settlement Services) shall be provided for the securities and other financial assets and in such markets as the Custodian may advise from time to time. The Custodian may terminate or suspend any part of the provision of the Contractual Settlement Services at its sole discretion immediately upon notice to the applicable Fund on behalf of each Portfolio, including, without limitation, in the event of force majeure events affecting settlement, any disorder in markets, or other changed external business circumstances affecting the markets or the Fund.
SECTION 6A.3 PURCHASE CONSIDERATION. The consideration payable in connection with a purchase transaction shall be debited from the appropriate deposit account of the Portfolio as of the time and date that funds would ordinarily be required to settle the transaction in the applicable market in accordance with prevailing standards for transactions by institutions. The Custodian shall promptly recredit the amount at the time that the Portfolio or the Fund notifies the Custodian by Proper Instruction that the transaction has been canceled.
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SECTION 6A.4 SALES AND REDEMPTIONS. A provisional credit of an amount equal to the net sale price for a sale or redemption of securities or other financial assets shall be made to the account of the Portfolio as if the amount had been received as of the close of business on the date on which good funds would ordinarily be immediately available in the applicable market in accordance with prevailing standards for transactions by institutions. The provisional credit will be made conditional upon the Custodian having received Proper Instructions with respect to, or reasonable notice of, the transaction, as applicable; and the Custodian or its agent having possession of the securities of other financial assets (excluding financial assets subject to any third party lending arrangement entered into by a Portfolio) associated with the transaction in good deliverable form and not being aware of any facts which would lead the Custodian or its agent to believe that the transaction will not settle in the time period ordinarily applicable to such transactions in the applicable market.
SECTION 6A.5. REVERSALS OF PROVISIONAL CREDITS OR DEBITS. The Custodian shall have the right to reverse any provisional credit or debit given in connection with the Contractual Settlement Services at any time when the Custodian believes, in its reasonable judgment, that such transaction will not settle in accordance with its terms or amounts due pursuant thereto, will not be collectable or where the Custodian has not been provided Proper Instructions with respect thereto, as applicable. The Portfolio shall be responsible for any costs or liabilities resulting from such reversal. Upon such reversal, a sum equal to the credited or debited amount shall become immediately payable by the Portfolio to the Custodian and may be debited from any deposit or other account held for benefit of the Portfolio.
SECTION 7. TAX SERVICES.
SECTION 7.1 FUND INFORMATION. Each Fund will provide documentary evidence of its tax domicile, organizational specifics and other documentation and information as may be required by the Custodian from time to time for tax purposes, including, without limitation, information relating to any special ruling or treatment to which the Fund may be entitled that is not applicable to the general nationality and category of person to which the Fund belongs under general laws and treaty obligations and documentation and information required in relation to countries where the Fund engages or proposes to engage in investment activity or where Portfolio assets are or will be held. The provision of such documentation and information shall be deemed to be a Proper Instruction, upon which the Custodian shall be entitled to rely and act. In giving such documentation and information, the Fund represents and warrants that it is true and correct in all material respects and that it will promptly provide the Custodian with all necessary corrections or updates upon becoming aware of any changes or inaccuracies in the documentation or information supplied.
SECTION 7.2 TAX RESPONSIBILITY. The Fund shall be liable for all taxes (including Taxes, as defined below) relating to its investment activity, including with respect to any cash or securities held by the Custodian on behalf of the Fund or any transactions related thereto. Subject to compliance by the Fund with its obligations under Section 7.1, the Custodian shall withhold (or cause to be withheld) the amount of any Tax which is required to be withheld under applicable law in connection with the collection on behalf of the Fund pursuant to this Agreement of any dividend, interest income or other distribution with respect to any security and the proceeds or income from the sale or other transfer of any security held by the Custodian. If any Taxes become payable with respect to any prior payment made to the Fund by the Custodian or otherwise, the Custodian may apply any credit balance in the Funds deposit account to the extent necessary to satisfy such Tax obligation. The Fund shall remain liable for any tax deficiency. The Custodian is not liable for any tax obligations relating to the Portfolio or the Fund, other than those Tax services as set out specifically in this Section 7. The Fund agrees that the Custodian is not, and shall not be deemed to be, providing tax advice or tax counsel. The capitalized terms Tax or Taxes means any withholding or capital gains tax, stamp duty, levy, impost, charge, assessment, deduction or related liability, including any addition to tax, penalty or interest imposed on or in respect of (i) cash or securities, (ii) the transactions effected under this Agreement, or (iii) the Fund.
SECTION 7.3 TAX RELIEF. The Custodian will provide tax relief services in relation to designated markets as may be specified from time to time in the Client Publications. Subject to the preceding sentence and compliance by the Fund with its obligations under Section 7.1, the Custodian will apply for a reduction of withholding tax and refund of any tax paid or tax credits which apply in each applicable market in respect of income payments on securities for the benefit of the Fund. The Custodian shall provide information on reduction at source and tax reclaim processing in its Tax Entitlement Service Overview made available to the Fund on the Custodians customer portal,
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my.statestreet.com. The Custodian shall maintain tax entitlement accruals for possible tax benefits available in markets of investment and monitor tax entitlements and tax reclaim accruals based on existing situations in markets of investment with respect to the Funds entitlements. The Custodian shall facilitate communications to the Funds local tax consultants and Eligible Foreign Custodians with respect to reporting, payment and filing requirements regarding capital gains processing. Unless otherwise informed by the Fund, the Custodian shall be entitled to categorize a Fund in the relevant tax category according to its nationality, particulars of its organization and other relevant details supplied by the Fund.
SECTION 8. PAYMENTS FOR SALES OR REDEMPTIONS OF PORTFOLIO INTERESTS.
SECTION 8.1 PAYMENT FOR PORTFOLIO INTERESTS ISSUED. The Custodian shall receive from the distributor of Portfolio Interests of a Fund or from the Funds transfer agent (the Transfer Agent) and deposit into the account of the Portfolio such payments as are received for Portfolio Interests issued or sold from time to time by the Fund. The Custodian will provide timely notification to the Fund on behalf of the Portfolio and the Transfer Agent of any receipt of the payments by the Custodian.
SECTION 8.2 PAYMENT FOR PORTFOLIO INTERESTS REDEEMED. Upon receipt of instructions from the Transfer Agent, the Custodian shall set aside funds of a Portfolio to the extent available for payment to holders of Portfolio Interests who have delivered to the Transfer Agent a request for redemption of their Portfolio Interests. The Custodian is authorized upon receipt of instructions from the Transfer Agent to wire funds to or through a commercial bank designated by the redeeming interest holders. If the Custodian furnishes a check to a holder in payment for the redemption of the holders Portfolio Interests and the check is drawn on the Custodian, the Custodian shall honor the check so long as the check is presented to the Custodian in accordance with the Deposit Account Agreement and such procedures and controls as are mutually agreed upon from time to time between the Fund and the Custodian.
SECTION 9. PROPER INSTRUCTIONS.
SECTION 9. 1 FORM AND SECURITY PROCEDURES. Proper Instructions may be in writing signed by the authorized individual or individuals or may be in a tested communication or in a communication utilizing access codes effected between electro-mechanical or electronic devices or may be by such other means and utilizing such intermediary systems and utilities as may be agreed to from time to time by the Custodian and the individual or organization giving the instruction, provided that the Fund has followed any security procedures agreed to from time to time by the applicable Fund and the Custodian. The Custodian may agree to accept oral instructions, and in such case oral instructions will be considered Proper Instructions. The Fund shall cause all oral instructions to be confirmed in writing, but the Funds failure to do so shall not affect the Custodians authority to rely on the oral instructions.
Section 9.2 RELIANCE ON OFFICERS CERTIFICATE. Concurrently with the execution of this Agreement, and from time to time thereafter, as appropriate, each Fund shall deliver to the Custodian an officers certificate setting forth the names, titles, signatures and scope of authority of all individuals authorized to give Proper Instructions or any other notice, request, direction, instruction, certificate or instrument on behalf of the Fund. The certificate may be accepted and conclusively relied upon by the Custodian and shall be considered to be in full force and effect until receipt by the Custodian of a similar certificate to the contrary and the Custodian has had a reasonable time to act thereon.
Section 9.3 UNTIMELY PROPER INSTRUCTIONS. If the Custodian is not provided with reasonable time to execute a Proper Instruction (including any Proper Instruction not to execute, or any other modification to, a prior Proper Instruction), the Custodian will use good faith efforts to execute the Proper Instruction but will not be responsible or liable if the Custodians efforts are not successful (including any inability to change any actions that the Custodian had taken pursuant to the prior Proper Instruction). The inclusion of a statement of purpose or intent (or any similar notation) in a Proper Instruction shall not impose any additional obligations on the Custodian or condition or qualify its authority to effect the Proper Instruction. The Custodian will not assume a duty to ensure that the stated purpose or intent is fulfilled and will have no responsibility or liability when it follows the Proper Instruction without regard to such purpose or intent.
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SECTION 10. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY.
The Custodian may in its discretion, without express authority from the applicable Fund on behalf of each Portfolio:
1) |
Make payments to itself or others for normal and routine expenses to facilitate the settlement of securities transactions that are customary in the markets in which the Fund is trading and relating to the Custodians duties under this Agreement; provided that all such payments shall be accounted for to the Fund on behalf of the Portfolio; |
2) |
Surrender securities or other financial assets in temporary form for securities or other financial assets in definitive form; |
3) |
Endorse for collection, in the name of the Portfolio, checks, drafts and other negotiable instruments; and |
4) |
In general, attend to all non-discretionary details in connection with the sale, exchange, substitution, purchase, transfer and other dealings with the securities and other financial assets of the Portfolio except as otherwise directed by the applicable Board. |
SECTION 11. RESERVED.
SECTION 12. RECORDS.
The Custodian shall with respect to each Portfolio create and maintain all records relating to its activities and obligations under this Agreement in such manner as will meet the obligations of each Fund under the 1940 Act, with particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder. All such records shall be the property of the Fund and shall at all times during the regular business hours of the Custodian be open for inspection by duly authorized officers, employees or agents of the Fund and employees and agents of the SEC. The Custodian shall, at the Funds request, supply the Fund with a tabulation of securities owned by each Portfolio and held by the Custodian and shall, when requested to do so by the Fund and for such compensation as shall be agreed upon between the Fund and the Custodian, include certificate numbers in such tabulations. In the event that the Custodian is requested or authorized by a Fund, or required by subpoena, administrative order, court order or other legal process, applicable law or regulation, or required in connection with any investigation, examination or inspection of the Fund by state or federal regulatory agencies, to produce the records of the Fund or the Custodians personnel as witnesses, the Fund agrees to pay the Custodian for the Custodians reasonable time and expenses, as well as the reasonable fees and expenses of the Custodians counsel, incurred in responding to such request, order or requirement. The Custodian shall, to the extent permitted by law, provide notice to the applicable Fund promptly after receipt of any request for records by an entity other than such Fund. Upon request, the Custodian shall provide the applicable Fund with an update on the fees and expenses incurred in responding to any such requests for records.
SECTION 13. FUNDS INDEPENDENT ACCOUNTANTS; REPORTS.
SECTION 13.1 OPINIONS. The Custodian shall take all reasonable action, as a Fund with respect to a Portfolio may from time to time request, to obtain from year to year favorable opinions from the Funds independent accountants with respect to its activities hereunder in connection with the preparation of the Funds Form N-1A or Form N-2, as applicable, and other annual reports to the SEC and with respect to any other requirements thereof.
SECTION 13.2 REPORTS. Upon reasonable request of a Fund, the Custodian shall provide the Fund with a copy of the Custodians Service Organizational Control (SOC) 1 reports prepared in accordance with the requirements of AT section 801, Reporting on Controls at a Service Organization (formerly Statement on Standards for Attestation Engagements (SSAE) No. 16). The Custodian shall use commercially reasonable efforts to provide the Fund with such reports as the Fund may reasonably request or otherwise reasonably require to fulfill its duties under Rule 38a-1 of the 1940 Act or similar legal and regulatory requirements.
SECTION 14. CUSTODIANS STANDARD OF CARE; EXCULPATION.
14.1 STANDARD OF CARE. In carrying out the provisions of this Agreement, the Custodian shall act (i) with reasonable care and diligence and in good faith, (ii) without negligence, fraud, willful misconduct, willful omission or bad faith, and at least at the same standard of care as the Custodian provides for itself and its affiliates (Affiliates) with respect to similar services, and (iii) with the level of skill and care which would be expected from
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a reasonably skilled and experienced professional provider of services similar to the services provided under this Agreement. Subject to the terms of the Agreement, including any exculpatory language, the Custodian shall have no liability for any error of judgment or mistake of law or for any loss or damage resulting from the performance or nonperformance of its duties hereunder unless and to the extent the Custodian fails to exercise such standard of care. Upon the occurrence of any event that causes or that the Custodian believes or a Portfolio reasonably believes will imminently cause any loss, damage or expense to any Portfolio, the Custodian (i) shall take and (ii) shall take all reasonable steps to cause any applicable sub-custodian to take all commercially reasonable steps (to the extent consistent with the Custodians obligations pursuant to Rules 17f-5 and 17f-7, as applicable) to mitigate the effects of such event and to avoid continuing harm to a Portfolio.
14.2 RELIANCE ON PROPER INSTRUCTIONS. The Custodian shall be entitled conclusively to rely and act upon Proper Instructions until the Custodian has received notice of any change from the Fund and has had a reasonable time to act thereon. The Custodian may act on a Proper Instruction if it reasonably believes that it contains sufficient information and may refrain from acting on any Proper Instructions until such time that it has determined, in its sole discretion, that is has received any required clarification or authentication of Proper Instructions. The Custodian may rely upon and shall be protected in acting upon any Proper Instruction or any other instruction, notice, request, consent, certificate or other instrument or paper reasonably believed by it in good faith to be genuine and to have been properly executed by or on behalf of the applicable Fund.
14.3 OTHER RELIANCE. The Custodian is authorized and instructed to rely upon the information that the Custodian receives from the Fund or any third party on behalf of the Fund. The Custodian shall have no responsibility to review, confirm or otherwise assume any duty with respect to the accuracy or completeness of any information supplied to it by or on behalf of any Fund. The Custodian shall have no liability in respect of any loss, cost or expense incurred or sustained by the Fund arising from the performance of the Custodians duties hereunder in reliance upon records that were maintained for the Fund by any individual or organization, other than the Custodian, prior to the Custodians appointment as custodian hereunder. The Custodian shall be entitled to rely on and may act upon reasonable advice of reputable counsel (who may be counsel for the Fund) on all matters and shall be without liability for any action reasonably taken or omitted in good faith pursuant to the advice; provided, however, that with respect to the reliance on such reasonable advice and the performance of any action or omission of any action upon such advice, the Custodian shall be required to conform to the standard of care set forth above. The Custodian and the applicable Funds shall mutually agree as to which entity will bear the cost of such advice of counsel.
14.4 LIABILITY FOR FOREIGN CUSTODIANS AND U.S. SUB-CUSTODIANS. The Custodian shall be liable for the acts or omissions of an Eligible Foreign Custodian and of any domestic sub-custodian selection by the Custodian to the same extent as if the action or omission were performed by the Custodian itself, taking into account the facts and circumstances and the established local market practices and laws prevailing in the particular jurisdiction in which the Fund elects to invest. If a Fund directs the Custodian to appoint a specific domestic sub-custodian, the Custodian shall, with respect to such domestic sub-custodian, be responsible only for losses arising from its own failure to meet the standard of care set forth in Section 14.1.
14.5 INSOLVENCY AND COUNTRY RISK. The Custodian shall in no event be liable for (a) the insolvency of any Eligible Foreign Custodian or U.S. sub-custodian, (b) the insolvency of any depositary bank maintaining in a deposit account cash denominated in any currency other than an on book currency, or (c) any loss, cost or expense incurred or sustained by a Fund or Portfolio resulting from or caused by Country Risk.
14.6 FORCE MAJEURE AND THIRD PARTY ACTIONS. The Custodian shall be without responsibility or liability to any Fund or Portfolio for: (a) events or circumstances beyond the reasonable control of the Custodian, including, without limitation, the interruption, suspension or restriction of trading on or the closure of any currency or securities market or system, power or other mechanical or technological failures or interruptions, computer viruses or communications disruptions, work stoppages, natural disasters, acts of war, revolution, riots or terrorism or other similar force majeure events or acts; (b) errors by any Fund, its Investment Advisor or any other duly authorized person in their instructions to the Custodian; (c) the insolvency of or acts or omissions by a U.S. Securities System, Foreign Securities System, Underlying Transfer Agent or a domestic sub-custodian designated by a Fund pursuant to Section 2.2; (d) the failure of any Fund, its Investment Advisor, Portfolio or any duly authorized individual or organization to adhere to the Custodians operational policies and procedures; (e) any delay or failure of any broker,
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agent, securities intermediary or other intermediary, central bank or other commercially prevalent payment or clearing system to deliver to the Custodians sub-custodian or agent securities or other financial assets purchased or in the remittance or payment made in connection with securities or other financial assets sold; (f) any delay or failure of any organization in charge of registering or transferring securities or other financial assets in the name of the Custodian, any Fund, any Portfolio, the Custodians sub-custodians, nominees or agents including non-receipt of bonus, dividends and rights and other accretions or benefits; (g) delays or inability to perform its duties due to any disorder in market infrastructure with respect to any particular security, other financial asset, U.S. Securities System or Foreign Securities System; and (h) the effect of any provision of any law or regulation or order of the United States of America, or any state thereof, or any other country, or political subdivision thereof or of any court of competent jurisdiction.
14.7 INDIRECT/SPECIAL/CONSEQUENTIAL DAMAGES. Notwithstanding any other provision set forth herein, in no event shall the Custodian be liable for any special, indirect, incidental, punitive or consequential damages of any kind whatsoever (including, without limitation, lost profits) with respect to the services provided pursuant to this Agreement, regardless of whether either party has been advised of the possibility of such damages.
14.8 DELIVERY OF PROPERTY. The Custodian shall not be responsible for any securities or other assets of a Portfolio which are not received by the Custodian or which are delivered out in accordance with Proper Instructions. The Custodian shall not be responsible for the title, validity or genuineness of any securities or other assets or evidence of title thereto received by it or delivered by it pursuant to this Agreement.
14.9 NO INVESTMENT ADVICE. The Custodian has no responsibility to monitor or oversee the investment activity undertaken by a Fund or its Investment Advisor or by a Portfolio. The Custodian has no duty to ensure or to inquire whether an Investment Advisor complies with any investment objectives or restrictions agreed upon between a Fund and the Investment Advisor or whether the Investment Advisor complies with its legal obligations under applicable securities laws or other laws, including laws intended to protect the interests of investors. The Custodian shall neither assess nor take any responsibility or liability for the suitability or appropriateness of the investments made by a Fund or a Portfolio or on its behalf.
14.10 COMMUNICATIONS. Subject to Section 14.1, the Custodian shall not be liable for any untimely exercise of any tender, exchange or other right or power in connection with securities or other financial assets of a Portfolio at any time held by the Custodian unless (a) the Custodian or the Eligible Foreign Custodian is in actual possession of such securities or other financial assets, (b) the Custodian receives Proper Instructions with regard to the exercise of the right or power, and (c) both of the conditions referred to in the foregoing clauses (a) and (b) have been satisfied at least three business days prior to the date on which the Custodian is to take action to exercise the right or power.
14.11 LOANED SECURITIES. Income due to each Portfolio on securities or other financial assets loaned shall be the responsibility of the applicable Fund. The Custodian will have no duty or responsibility in connection with loaned securities or other financial assets, other than to provide the Fund with such information or data as may be necessary to assist the Fund in arranging for the timely delivery to the Custodian of the income to which the Portfolio is entitled, except as may otherwise be mutually agreed to in writing between the Custodian and a Fund.
14.12 TRADE COUNTERPARTIES. A Funds receipt of securities or other financial assets from a counterparty in connection with any of its purchase transactions and its receipt of cash from a counterparty in connection with any sale or redemption of securities or other financial assets will be at the Funds sole risk, and the Custodian shall not be obligated to make demands on the Funds behalf if the Funds counterparty defaults. If a Funds counterparty fails to deliver securities, other financial assets or cash, the Custodian will, as its sole responsibility, notify the Funds Investment Advisor of the failure within a reasonable time after the Custodian became aware of the failure.
SECTION 15. COMPENSATION AND INDEMNIFICATION OF CUSTODIAN; SECURITY INTEREST.
SECTION. 15.1 COMPENSATION. The Custodian shall be entitled to reasonable compensation for its services and expenses as agreed upon from time to time between each Fund on behalf of each applicable Portfolio and the Custodian.
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SECTION 15.2 INDEMNIFICATION. Each Portfolio severally and not jointly agrees to indemnify the Custodian and to hold the Custodian harmless from and against any loss, cost or expense sustained or incurred by the Custodian in acting or omitting to act under or in respect of this Agreement in a manner consistent with the standard of care set forth in Section 14.1, including, without limitation, (a) the Custodians compliance with Proper Instructions and (b) in connection with the provision of services to a Fund pursuant to Section 7, any obligations, including taxes, withholding and reporting requirements, claims for exemption and refund, additions for late payment, interest, penalties and other expenses, that may be assessed against the Fund, the Portfolio or the Custodian as custodian of the assets of the Fund or the Portfolio. If a Fund on behalf of a Portfolio instructs the Custodian to take any action with respect to securities or other financial assets, and the action involves the payment of money or may, in the opinion of the Custodian, result in the Custodian or its nominee assigned to the Fund or the Portfolio being liable therefor, the Fund on behalf of the Portfolio, as a prerequisite to the Custodian taking the action, shall provide to the Custodian at the Custodians request such further indemnification in an amount and form satisfactory to the Custodian.
SECTION 15.3 SECURITY INTEREST. Each Fund hereby grants to the Custodian, to secure the payment and performance of the Funds obligations under this Agreement, whether contingent or otherwise, a security interest in and right of recoupment and setoff against all cash and all securities and other financial assets at any time held for the account of a Portfolio by or through the Custodian. The obligations include, without limitation, the Funds obligations to reimburse the Custodian if the Custodian or any of its Affiliates, subsidiaries or agents advances cash or securities or other financial assets to the Fund for any purpose (including but not limited to settlements of securities or other financial assets, foreign exchange contracts and assumed settlement), or in the event that the Custodian or its nominee shall incur or be assessed any taxes, charges, expenses, assessments, claims or liabilities in connection with the performance of this Agreement, except such as may arise from its or its nominees own negligence, as well as the Funds obligation to compensate the Custodian pursuant to Section 15.1 or indemnify the Custodian pursuant to Section 15.2. Should the Fund fail to reimburse or otherwise pay the Custodian any obligation under this Agreement promptly, the Custodian shall have the rights and remedies of a secured party under this Agreement, the UCC and other applicable law, including the right to utilize available cash and to sell or otherwise dispose of the Portfolios assets to the extent necessary to obtain payment or reimbursement. The Custodian may at any time decline to follow Proper Instructions to deliver out cash, securities or other financial assets if the Custodian determines in its reasonable discretion that, after giving effect to the Proper Instructions, the cash, securities or other financial assets remaining will not have sufficient value fully to secure the Funds payment or reimbursement obligations, whether contingent or otherwise.
SECTION 16. EFFECTIVE PERIOD AND TERMINATION.
SECTION 16.1 TERM. This Agreement shall remain in full force and effect for an initial term of one (1) year from the effective date (the Initial Term). After the expiration of the Initial Term, this Agreement shall automatically renew for successive one (1) year terms. Following the Initial Term, this Agreement may be terminated by any Fund or Portfolio upon no less than ninety (90) days prior written notice to the Custodian, or by the Custodian upon no less than 180 days prior written notice to the applicable Fund or Portfolio.
SECTION 16.2 TERMINATION. Either party may terminate this Agreement as to a Fund or a Portfolio: (a) in the event of the other partys material breach of a material provision of this Agreement that the other party has either failed to cure, or failed to establish a remedial plan to cure that is reasonably acceptable to the non-breaching party, within 60 days written notice being given by the non-breaching party of the breach, or (b) in the event of the appointment of a conservator or receiver for the other party, the commencement by or against the other party of a bankruptcy or insolvency case or proceeding, or upon the happening of a like event to the other party at the direction of an appropriate agency or court of competent jurisdiction.
SECTION 16.3 PAYMENTS OWING TO THE CUSTODIAN. Upon termination of this Agreement pursuant to Section 16.1 or 16.2 with respect to any Fund or Portfolio, the applicable Fund shall pay to the Custodian any compensation then due and shall reimburse the Custodian for its other fees, expenses and charges. In the event of: (a) any Funds termination of this Agreement with respect to such Fund or a Portfolio of the Fund in any manner other than as set forth in Section 16.1 or 16.2 or (b) a transaction not in the ordinary course of business pursuant to which the Custodian is not retained to continue providing services hereunder to a Fund or Portfolio (or its respective successor), the applicable Fund shall pay to the Custodian any compensation due through the end of the then-current
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term (based upon the average monthly compensation previously earned by the Custodian with respect to the Fund or Portfolio) and shall reimburse the Custodian for its other fees, expenses and charges. Upon receipt of such payment and reimbursement, the Custodian will deliver the Funds or Portfolios cash and its securities and other financial assets as set forth in Section 17.
SECTION 16.4 EXCLUSIONS. No full term payment will be required pursuant to clause (b) of Section 16.3 in the event of any transaction consisting of (a) the liquidation or dissolution of a Fund or a Portfolio and distribution of the Funds or Portfolios assets as a result of the Boards determination in its reasonable business judgment that the Fund or Portfolio is no longer viable or that the liquidation is in the best interest of the Fund or such Portfolio, (b) a merger of a Fund or Portfolio into, or the consolidation of a Fund or Portfolio with, another organization or series, or (c) the sale by a Fund or Portfolio of all or substantially all of its assets to another organization or series and, in the case of a transaction referred to in the foregoing clause (b) or (c) the applicable Funds provide 90 days prior written notice in advance of the closing date of any such transactions.
SECTION 16.5 EFFECT OF TERMINATION. Termination of this Agreement with respect to any one particular Fund or Portfolio shall in no way affect the rights and duties under this Agreement with respect to any other Fund or Portfolio. Following termination with respect to a Fund or Portfolio, the Custodian shall have no further responsibility to forward information under Section 3.8 or 5.8. The provisions of Sections 7, 14, 15 and 17 of this Agreement shall survive termination of this Agreement.
SECTION 17. SUCCESSOR CUSTODIAN.
SECTION 17.1 SUCCESSOR APPOINTED. If a successor custodian shall be appointed for a Portfolio by its Board, the Custodian shall, upon termination of this Agreement and receipt of Proper Instructions, deliver to the successor custodian at the office of the Custodian, duly endorsed and in the form for transfer, all cash and all securities and other financial assets of the Portfolio then held by the Custodian hereunder and shall transfer to an account of the successor custodian all of the securities and other financial assets of the Portfolio held in a U.S. Securities System or Foreign Securities System or at the Underlying Transfer Agent.
SECTION 17.2 NO SUCCESSOR APPOINTED. If no such successor custodian shall be appointed, the Custodian shall, in like manner, upon receipt of Proper Instructions, deliver at the office of the Custodian and transfer the cash and the securities and other financial assets of the Portfolio in accordance with the Proper Instructions.
SECTION 17.3 NO SUCCESSOR APPOINTED AND NO PROPER INSTRUCTIONS. If no successor custodian has been appointed and no Proper Instructions have been delivered to the Custodian on or before the termination of this Agreement, then the Custodian shall have the right to deliver to a bank or trust company, which is a bank as defined in the 1940 Act, doing business in Boston, Massachusetts, or New York, New York, of its own selection, all cash and all securities and other financial assets of the Portfolio then held by the Custodian hereunder, and to transfer to an account of the bank or trust company all of the securities and other financial assets of the Portfolio held in any U.S. Securities System or Foreign Securities System or at the Underlying Transfer Agent. The transfer will be on such terms as are contained in this Agreement or as the Custodian may otherwise reasonably negotiate with the bank or trust company. Any compensation payable to the bank or trust company, and any cost or expense incurred by the Custodian, in connection with the transfer shall be for the account of the Portfolio.
SECTION 17.4 REMAINING PROPERTY. If any cash or any securities or other financial assets of the Portfolio held by the Custodian hereunder remain held by the Custodian after the termination of this Agreement owing to the failure of the applicable Fund to provide Proper Instructions, the Custodian shall be entitled to fair compensation for its services during such period as the Custodian holds the cash or the securities or other financial assets (the existing agreed-to compensation at the time of termination shall be one indicator of what is considered fair compensation). The provisions of this Agreement relating to the duties, exculpation and indemnification of the Custodian shall apply in favor of the Custodian during such period.
SECTION 17.5 RESERVES. Notwithstanding the foregoing provisions of this Section 17, the Custodian may retain cash or securities or other financial assets of the Fund or Portfolio as a reserve reasonably established by the Custodian to secure the payment or performance of any obligations of the Fund or Portfolio secured by a security interest or right of recoupment or setoff in favor of the Custodian.
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SECTION 18. REMOTE ACCESS SERVICES ADDENDUM. The Custodian and each Fund agree to be bound by the terms of the Remote Access Services Addendum hereto.
SECTION 19. LOAN SERVICES ADDENDUM. If a Fund directs the Custodian in writing to perform loan services, the Custodian and the Fund will be bound by the terms of the Loan Services Addendum attached hereto. The Fund shall reimburse Custodian for its fees and expenses related thereto as agreed upon from time to time in writing by the Fund and the Custodian.
SECTION 20. GENERAL.
SECTION 20.1 GOVERNING LAW. Any and all matters in dispute between the parties hereto, whether arising from or relating to this Agreement, shall be governed by and construed in accordance with laws of the State of New York, without giving effect to any conflict of laws rules.
SECTION 20.2 [RESERVED]
SECTION 20.3 PRIOR AGREEMENTS; AMENDMENTS. This Agreement supersedes all prior agreements between each Fund on behalf of each of the Funds Portfolios and the Custodian relating to the custody of the Funds assets. This Agreement may be amended at any time in writing by mutual agreement of the parties hereto.
SECTION 20.4 ASSIGNMENT; DELEGATION. This Agreement may not be assigned by (a) any Fund without the written consent of the Custodian or (b) the Custodian without the written consent of each applicable Fund. Notwithstanding the foregoing, the Custodian may assign this Agreement to a successor of all or a substantial portion of its business, or to an Affiliate of the Custodian upon ninety (90) days prior written notice to the Fund. The Custodian shall retain the right to employ its Affiliates to provide or assist it in the provision of any part of the services described herein or the discharge of any other obligations or duties under this Agreement without the consent or approval of any Fund. The Custodian may employ other agents, subcontractors, consultants and other third parties (each a Delegate) to provide the services stated herein to the Funds upon the prior written consent of the Funds. Except as otherwise provided below, the Custodian shall be responsible for the acts and omissions of any such Delegate or Affiliate so employed as if the Custodian had committed such acts and omissions itself. The Custodian shall be responsible for the compensation of its Delegates and Affiliates. Notwithstanding the foregoing, in no event shall the term Delegate include sub-custodians, Eligible Foreign Custodians, U.S. Securities Systems and Foreign Securities Systems, consultants, authorized data sources, suppliers of Custodians third party technology, providers of market infrastructure, and other non-affiliated entities that provide similar assistance to the Custodian in its performance of its duties under this Agreement, and the Custodian shall have no liability for their acts or omissions except as otherwise expressly provided elsewhere in this Agreement. The liability of the Custodian for the acts and omissions of sub-custodians, Eligible Foreign Custodians, U.S. Securities Systems and Foreign Securities Systems shall be as set forth in Section 14 above.
SECTION 20.5 INTERPRETIVE AND ADDITIONAL PROVISIONS. In connection with the operation of this Agreement, the Custodian and each Fund on behalf of each of the Portfolios, may from time to time agree on such provisions interpretive of or in addition to the provisions of this Agreement as may in their joint opinion be consistent with the general tenor of this Agreement. Any such interpretive or additional provisions shall be in a writing signed by all parties, provided that no such interpretive or additional provisions shall contravene any applicable laws or regulations or any provision of a Funds organic record and Prospectus. No interpretive or additional provisions made as provided in the preceding sentence shall be an amendment of this Agreement.
SECTION 20.6 ADDITIONAL FUNDS AND PORTFOLIOS.
20.6.1 ADDITIONAL FUNDS. If any management investment company in addition to those listed on Appendix A desires the Custodian to render services as custodian under the terms of this Agreement, the management investment company shall so notify the Custodian in writing. If the Custodian agrees in writing to provide the services, the management investment company shall become a Fund hereunder and be bound by all terms and conditions and provisions hereof including, without limitation, the representations and warranties set forth in Section 20.7 below.
20.6.2 ADDITIONAL PORTFOLIOS. If any Fund establishes a series in addition to the Portfolios set forth on Appendix A with respect to which the Fund desires the Custodian to render services as custodian under the terms of this Agreement, the Fund shall so notify the Custodian in writing. If the Custodian agrees in writing to provide the services, the series shall become a Portfolio hereunder.
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SECTION 20.7 THE PARTIES; REPRESENTATIONS AND WARRANTIES. All references in this Agreement to the Fund are to each of the management investment companies listed on Appendix A, and each management investment company made subject to this Agreement in accordance with Section 20.6 above, individually, as if this Agreement were between the individual Fund and the Custodian. In the case of a series organization, all references in this Agreement to the Portfolio are to the individual series of the series organization on behalf of the individual series. Any reference in this Agreement to the parties shall mean the Custodian and such other individual Fund as to which the matter pertains.
20.7.1 FUND REPRESENTATIONS AND WARRANTIES. Each Fund hereby represents and warrants that (a) it is duly organized and validly existing in good standing in its jurisdiction of organization; (b) it has the requisite power and authority under applicable law and its organic record to enter into and perform this Agreement; (c) all requisite proceedings have been taken to authorize it to enter into and perform this Agreement; (d) no legal or administrative proceedings have been instituted or threatened which would materially impair the Funds ability to perform its duties and obligations under this Agreement; and (e) its entering into this Agreement shall not cause a material breach or be in material conflict with any other agreement or obligation of the Fund or any law or regulation applicable to it.
20.7.2 CUSTODIAN REPRESENTATIONS AND WARRANTIES. The Custodian hereby represents and warrants that (a) it is a trust company, duly organized and validly existing under the laws of the Commonwealth of Massachusetts; (b) it has the requisite power and authority to carry on its business in the Commonwealth of Massachusetts; (c) all requisite proceedings have been taken to authorize it to enter into and perform this Agreement; (d) no legal or administrative proceedings have been instituted or threatened which would materially impair the Custodians ability to perform its duties and obligations under this Agreement; (e) its entering into this Agreement shall not cause a material breach or be in material conflict with any other agreement or obligation of the Custodian or any law or regulation applicable to it; and (f) it has and will maintain at least the minimum qualifications required by Section 17(f)(1) of the 1940 Act to act as custodian of the portfolio securities of each Portfolio.
SECTION 20.8 NOTICES. Any notice, instruction or other communication required to be given hereunder will, unless otherwise provided in this Agreement, be in writing and may be sent by hand, or by facsimile transmission, or overnight delivery by any recognized delivery service, to the parties at the following addresses or such other addresses as may be notified by any party from time to time.
To any Fund: | c/o BLACKROCK FINANCIAL MANAGEMENT, INC. | |
100 Bellevue Parkway | ||
Wilmington, DE 19809-3700 | ||
Attention: Neal Andrews | ||
Telephone: 302-797-6179 | ||
To the Custodian: | STATE STREET BANK AND TRUST COMPANY | |
100 Summer Street | ||
Boston, MA 02110 | ||
Attention: Anthony Ostler | ||
Telephone: 617-664-9797 | ||
with a copy to: |
||
STATE STREET BANK AND TRUST COMPANY | ||
Legal Division Global Services Americas | ||
One Lincoln Street | ||
Boston, MA 02110 | ||
Attention: Senior Vice President and Senior Managing Counsel |
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SECTION 20.9 COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original, and all such counterparts taken together shall constitute one and the same Agreement. Counterparts may be executed in either original or electronically transmitted form (e.g., faxes or emailed portable document format (PDF) form), and the parties hereby adopt as original any signatures received in electronically transmitted form.
SECTION 20.10 SEVERABILITY; NO WAIVER. If any provision of this Agreement shall be held to be invalid, unlawful or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired. The failure of a party hereto to insist upon strict adherence to any term of this Agreement on any occasion or the failure of a party hereto to exercise or any delay in exercising any right or remedy under this Agreement shall not constitute a waiver of any the term, right or remedy or a waiver of any other rights or remedies, and no single or partial exercise of any right or remedy under this Agreement shall prevent any further exercise of the right or remedy or the exercise of any other right or remedy.
SECTION 20.11 CONFIDENTIALITY. All information provided under this Agreement by a party (the Disclosing Party) to the other party (the Receiving Party) regarding the Disclosing Partys business and operations shall be treated as confidential. Subject to Section 20.12 below, all confidential information provided under this Agreement by Disclosing Party shall be used, including disclosure to third parties, by the Receiving Party, or its agents or service providers, solely for the purpose of performing or receiving the services and discharging the Receiving Partys other obligations under the Agreement or managing the business of the Receiving Party and its Affiliates, including financial and operational management and reporting, risk management, legal and regulatory compliance and client service management. The foregoing shall not be applicable to any information (a) that is publicly available when provided or thereafter becomes publicly available, other than through a breach of this Agreement, (b) that is independently derived by the Receiving Party without the use of any information provided by the Disclosing Party in connection with this Agreement, (c) that is disclosed to comply with any legal or regulatory proceeding, investigation, audit, examination, subpoena, civil investigative demand or other similar process, (d) that is disclosed as required by operation of law or regulation or as required to comply with the requirements of any market infrastructure that the Disclosing Party or its agents direct the Custodian or its Affiliates to employ (or which is required in connection with the holding or settlement of instruments included in the assets subject to this Agreement), or (e) where the party seeking to disclose has received the prior written consent of the party providing the information, which consent shall not be unreasonably withheld.
SECTION 20.12 USE OF DATA.
(a) In connection with the provision of the services and the discharge of its other obligations under this Agreement, the Custodian (which term for purposes of this Section 20.12 includes each of its Affiliates) may collect and store information regarding the Funds or Portfolios (Fund Information) and share such Fund Information with its Affiliates, agents, delegates and service providers in order and to the extent reasonably necessary (i) to carry out the provision of services contemplated under this Agreement and other agreements between a Fund and the Custodian or any of its Affiliates and (ii) to carry out the internal management of its businesses, including, but not limited to, financial and operational management and reporting, risk management, legal and regulatory compliance.
(b) Except as expressly contemplated by this Agreement, nothing in this Section 20.12 shall limit the confidentiality and data-protection obligations of the Custodian and its Affiliates under this Agreement and applicable law. The Custodian shall cause any Affiliate, agent or service provider to which it has disclosed Data pursuant to this Section 20.12 to comply at all times with confidentiality and data-protection obligations as if it were a party to this Agreement.
SECTION 20.13 DATA PRIVACY. The Custodian will implement and maintain a written information security program that contains appropriate security measures to safeguard the personal information of the Funds shareholders, employees, directors and officers that the Custodian receives, stores, maintains, processes or otherwise accesses in connection with the provision of services hereunder. The term, personal information, as used in this
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Section, means (a) an individuals name (first initial and last name or first name and last name), address or telephone number plus (i) Social Security number, (ii) drivers license number, (iii) state identification card number, (iv) debit or credit card number, (v) financial account number or (vi) personal identification number or password that would permit access to a persons account, or (b) any combination of any of the foregoing that would allow a person to log onto or access an individuals account. The term does not include information that is lawfully obtained from publicly available information, or from federal, state or local government records lawfully made available to the general public.
SECTION 20.14 LIMITATION ON LIABILITY OF TRUSTEES. Notice is hereby given that this Agreement is not executed on behalf of any directors or trustees of any Fund as individuals, and the obligations of this Agreement are not binding on any of the directors, trustees, officers, shareholders or partners of any Fund individually, but are binding only upon the property of each Fund or Portfolio. In relation to each Fund which is a business trust, this Agreement is executed and made by the Trustees of the Fund not individually, but as trustees under the Declarations of Trust of the Fund and the obligations of this Agreement are not binding upon any of such Trustees or upon any of the shareholders of the Fund individually, but bind only the trust estate of the Fund. The Custodian agrees that no shareholder, director, trustee, officer or partner of any Fund may be held personally liable or responsible for any obligations of any Fund arising out of this Agreement.
SECTION 20.15 REPRODUCTION OF DOCUMENTS. This Agreement and all schedules, addenda, exhibits, appendices, attachments and amendments hereto may be reproduced by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process. Any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding, whether or not the original is in existence and whether or not such reproduction was made by a party in the regular course of business, and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence.
SECTION 20.16 REGULATION GG. Each Fund represents and warrants that it does not engage in an Internet gambling business, as such term is defined in Section 233.2(r) of Federal Reserve Regulation GG (12 CFR 233) and covenants that it shall not engage in an Internet gambling business. In accordance with Regulation GG, each Fund is hereby notified that restricted transactions, as such term is defined in Section 233.2(y) of Regulation GG, are prohibited in any dealings with the Custodian pursuant to this Agreement or otherwise between or among any party hereto.
SECTION 20.17 SHAREHOLDER COMMUNICATIONS ELECTION. SEC Rule 14b-2 requires banks that hold securities, as that term is used in federal securities laws, for the account of customers to respond to requests by issuers of securities for the names, addresses and holdings of beneficial owners of securities of that issuer held by the bank unless the beneficial owner has expressly objected to disclosure of this information. In order to comply with the rule, as may be applicable, the Custodian needs each Fund to indicate whether it authorizes the Custodian to provide such Funds name, address, and share position to requesting companies whose securities the Fund owns. If a Fund tells the Custodian no, the Custodian will not provide this information to requesting companies. If a Fund tells the Custodian yes or does not check either yes or no below, the Custodian is required by the rule, as applicable, to treat the Fund as consenting to disclosure of this information for all securities owned by the Fund or any funds or accounts established by the Fund. For a Funds protection, the Rule, as applicable, prohibits the requesting company from using the Funds name and address for any purpose other than corporate communications. Please indicate below whether the Fund consents or objects by checking one of the alternatives below.
YES ☐ The Custodian is authorized to release the Funds name, address, and share positions.
NO ☒ The Custodian is not authorized to release the Funds name, address, and share positions.
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SIGNATURE PAGE
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed in its name and behalf by its duly authorized representative under seal as of the date first above-written.
EACH OF ENTITIES
SET FORTH ON APPENDIX A HERETO
By: |
/s/ Neal J. Andrews |
|
Name: | Neal J. Andrews | |
Title: | Chief Financial Officer |
STATE STREET BANK AND TRUST COMPANY
By: |
/s/ Andrew Erickson |
|
Name: | Andrew Erickson | |
Title: | Executive Vice President |
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APPENDIX A
TO
MASTER CUSTODIAN AGREEMENT
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Exhibit (k)(1)
Transfer Agency and Service Agreement
Among
Each of the BlackRock Closed-End Investment Companies
Listed Herein on Appendix A
and
Computershare Trust Company, N.A.
and
Computershare Inc.
Table of Contents
Section 1. |
Certain Definitions |
3 | ||||
Section 2. |
Appointment of Agent |
4 | ||||
Section 3. |
Standard Services |
5 | ||||
Section 4. |
Fees and Expenses |
5 | ||||
Section 5. |
Representations and Warranties of Transfer Agent |
6 | ||||
Section 6. |
Representations and Warranties of Customer |
7 | ||||
Section 7. |
Indemnification/Limitation of Liability |
7 | ||||
Section 8. |
Service Fee Credits; Service Levels |
8 | ||||
Section 9. |
Damages |
9 | ||||
Section 10. |
Responsibilities of the Transfer Agent |
9 | ||||
Section 11. |
Covenants of the Customer and Transfer Agent |
10 | ||||
Section 12. |
Addition or Deletion of a Fund |
10 | ||||
Section 13. |
Audits and Site Visits |
10 | ||||
Section 14. |
Confidentiality |
11 | ||||
Section 15. |
Privacy |
13 | ||||
Section 16. |
Term and Termination |
13 | ||||
Section 17. |
Assignment |
15 | ||||
Section 18. |
Unaffiliated Third Parties |
15 | ||||
Section 19. |
Disaster Recovery |
15 | ||||
Section 20. |
Miscellaneous |
16 | ||||
Appendix A Fund List |
||||||
Appendix B Form of CFTC Compliance Letter |
||||||
Appendix C Form of New Fund Confirmation Letter |
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TRANSFER AGENCY AGREEMENT
This Transfer Agency Agreement (this Agreement) is made as of January 1, 2015, by and among each of the BlackRock closed-end investment companies listed on Appendix A, as amended from time to time, having a principal office and place of business at 100 Bellevue Parkway, Wilmington, Delaware 19809 (each a Customer or a Fund), Computershare Inc., a Delaware corporation, and its fully owned subsidiary Computershare Trust Company, N.A., a federally chartered trust company (Trust Company), both doing business at 250 Royall Street, Canton, Massachusetts 02021 (collectively the Transfer Agent or Computershare).
WHEREAS, the Customer desires to appoint Trust Company as its sole transfer agent, registrar and dividend disbursing agent for the Shares, and administrator of dividend reinvestment plans, and Computershare Inc. as processor of all payments received or made by Customer under this Agreement;
WHEREAS, Trust Company and Computershare Inc. will each separately provide specified services covered by this Agreement and, in addition, Trust Company may arrange for Computershare Inc. to act on behalf of Trust Company in providing certain of its services covered by this Agreement;
WHEREAS, Trust Company and Computershare Inc. desire to accept such respective appointments and perform the services related to such appointments; and
WHEREAS, the Board of Directors or Trustees, as applicable, of each Customer has approved the appointment of the Transfer Agent and the form of this Agreement.
NOW THEREFORE, in consideration of the premises and mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree to the statements made in the preceding paragraphs and as follows:
Section 1. Certain Definitions.
1933 Act means the Securities Act of 1933, as amended.
1934 Act means the Securities Exchange Act of 1934, as amended.
1940 Act means the Investment Company Act of 1940, as amended.
Account or Accounts means the account of each Shareholder which account shall hold any full or fractional Shares held by such Shareholder, outstanding funds or reportable tax information.
Additional Services means any and all services which are not Services, but performed by Transfer Agent upon request of a Customer.
Agreement means this agreement and any and all appendices, exhibits or Schedules and any and all amendments or modifications, which may from time to time be executed.
Board of Directors means the Board of Directors or the Board of Trustees, as the case may be, of each Customer.
Dividend Reinvestment Plan means any dividend reinvestment plan, direct stock purchase plan, or other investment programs administered by the Trust Company for Customer, the services for which are as set forth in the Service Schedule.
Effective Date means the date first stated above.
Electronic Transmission means any form of communication, not directly involving the physical transmission of paper, which creates a record that may be retained, retrieved and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process.
Fee Letter means the fee letter attached to the Side Agreement as Schedule 1, as may be amended from time to time.
Initial Term means the term commencing on the Effective Date and continuing for a period of one (1) year from such date.
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KPI Document means the KPI document describing the agreed to service levels attached to the Side Agreement as Schedule 3, as may be amended from time to time.
Schedule or Schedules means each schedule attached hereto, separately or collectively as the context requires, as the same may be amended from time to time.
SEC means the U.S. Securities and Exchange Commission.
Securities Laws means the 1933 Act and the 1934 Act as applicable to the Transfer Agent.
Service Schedule means the service schedule attached to the Side Agreement as Schedule 2.
Services means any and all services as further described herein and in the Service Schedule or the Schedules.
Share means common units of beneficial interest or common stock, as the case may be, of each Customer authorized by the Customers respective Declaration of Trust or Articles of Incorporation, as the case may be.
Side Agreement means the Side Agreement for Transfer Agency Services between the Customer and Transfer Agent dated as of January 1, 2015.
Shareholder means the holder of record of one or more Shares.
U.S. means the states of the United States of America, the District of Columbia, Guam, Puerto Rico, U.S. Virgin Islands and any territory or commonwealth of the United States of America with a formal local government substantially equivalent to a state government. Each will be referred to as a State.
Section 2. Appointment of Agent.
2.1 |
Appointment. The Fund hereby appoints the Trust Company to serve as sole transfer agent and registrar for the Shares, Shareholder servicing agent to the Fund and administrator of the Dividend Reinvestment Plans in accordance with the terms and conditions thereof and appoints Computershare Inc. as the service provider to the Trust Company and as processor of all payments received or made by or on behalf of Customer under this Agreement, and the Trust Company and Computershare Inc. accept such respective appointments and agree in connection with such appointments to furnish the Services expressly set forth in this Agreement. Computershare represents that it is currently registered with the SEC as a transfer agent and will remain so registered during the effectiveness of this Agreement. |
2.2 |
Documents. In connection with the appointment of the Trust Company as the transfer agent and registrar for a Customer, the Customer will provide or has previously provided the following documents to the Transfer Agent: |
(a) |
Copies of Registration Statements and amendments thereto, filed with the Securities and Exchange Commission for initial public offerings; and |
(b) |
Specimens of the Signatures of the officers of the Customer authorized to sign written instructions and requests. |
2.3 |
Records. The books and records pertaining to the Customer required by Securities Laws and the 1940 Act which are in the possession or under the control of Computershare shall be the property of the Customer. Agent will prepare and maintain such books and records as required by Securities Laws, or as otherwise mutually agreed by the parties, subject to additional fees. Such books and records shall, to the extent practicable, be maintained separately for each Fund. Upon the reasonable request of the Fund, copies of any such books and records shall be provided by Computershare to an Authorized Person, and may be subject to a reasonable fee to be agreed upon by the parties. Transfer Agent may adopt as part of its records all lists of Shareholders, records of the Customers Shares, books, documents and records which have been employed by any former agent of the Customer for the maintenance of the ledgers for the Customers Shares, provided such ledger is certified by an officer of Customer or the prior transfer agent to be true, authentic and complete. |
2.4 |
Shares. The Customer shall, if applicable, inform Transfer Agent as to (i) the existence or termination of any restrictions on the transfer of Shares and in the application to or removal from any book entry interest of stock of any legend restricting the transfer of such Shares or the substitution for such book entry interest of a book entry interest without such legend, (ii) any authorized but unissued Shares reserved for specific purposes, (iii) any outstanding shares which are exchangeable for Shares and the basis for exchange, (iv) reserved Shares subject to option and the details of such reservation and (v) special instructions regarding dividends and information of foreign holders. |
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2.5 |
Customers Agent. Transfer Agent represents that it is engaged in an independent business and will perform its obligations under this Agreement as an agent of the Customer. |
2.6 |
Certificates. No physical certificates will be issued while this Agreement is in effect. All Shares issued while this Agreement is in effect shall be represented by book entry notations only. |
Section 3. Standard Services.
3.1 |
Services. Computershare shall perform the Services set forth in the Service Schedule. |
3.2 |
Information Security and Data Protection. Computershare shall comply with the provisions of Schedules 9 and 10 of the Side Agreement. |
3.3 |
Reports and Information. Computershare shall provide the Funds with the reports specified in Schedule 6 of the Side Agreement within the periods of time prescribed in Schedule 6 of the Side Agreement and at no additional cost to the Funds. |
3.4 |
Internet Services. Transfer Agent shall make available to Customer and Shareholders, through www.computershare.com (Web Site), online access to certain Account and Shareholder information and certain transaction capabilities (Internet Services), subject to Transfer Agents security procedures and the terms and conditions set forth herein and on the Web Site. Transfer Agent provides Internet Services on an as available basis as set forth in Schedule 2 of the Side Agreement, and hereby specifically disclaims any and all representations or warranties, express or implied, regarding such Internet Services, including any implied warranty of merchantability or fitness for a particular purpose and implied warranties arising from course of dealing or course of performance. Notwithstanding the foregoing, Transfer Agent shall ensure that content as posted to Web Site by Transfer Agent is an accurate and complete reflection of information contained in Transfer Agents records database. |
3.5 |
Proprietary Information. Customer agrees that the databases, programs, screen and report formats, interactive design techniques, Internet Services, software (including methods or concepts used therein, source code, object code, or related technical information) and documentation manuals furnished to Customer by Transfer Agent as part of the Services are under the control and ownership of Transfer Agent or a third party (including its affiliates) and constitute copyrighted, trade secret, or other proprietary information (collectively, Proprietary Information). In no event shall Proprietary Information be deemed Shareholder data. Customer agrees that Proprietary Information is of substantial value to Transfer Agent or other third party and will treat all Proprietary Information as confidential in accordance with Section 14 of this Agreement. Customer shall take reasonable efforts to advise its relevant employees and agents of its obligations pursuant to this Section 3.5. Subject to this Section 3.5, Transfer Agent grants to Customer a nonexclusive, nontransferable, royalty free license to use any Proprietary Information solely for the internal business purposes of Customer. Any rights to the Proprietary Information not expressly licensed hereunder are reserved by Transfer Agent. |
3.6 |
Third Party Content. Transfer Agent may provide real-time or delayed quotations and other market information and messages (Market Data), which Market Data is provided to Transfer Agent by certain third parties who may assert a proprietary interest in Market Data disseminated by them but do not guarantee the timeliness, sequence, accuracy or completeness thereof. Customer agrees and acknowledges that Transfer Agent shall not be liable in any way for any loss or damage arising from or occasioned by any inaccuracy, error, delay in, omission of, or interruption in any Market Data or the transmission thereof. |
3.7 |
Compliance with Laws. The Customer agrees the Transfer Agent is obligated to and the Transfer Agent agrees to comply with all applicable U.S. federal, state and local laws and regulations, codes, order and government rules in the performance of its duties under this Agreement. |
Section 4. Fees and Expenses.
4.1 |
Fee Letters. As compensation for Services rendered by Computershare during the term of this Agreement, the Fund will pay to Computershare such fees and charges and reimburse Computershare for such expenses, as set forth in the Fee Letter or as may otherwise be agreed to from time to time in writing by the Fund and Computershare. |
- 5 -
4.2 |
Adjustments. Notwithstanding Section 4.1 above, fees may be changed from time to time as agreed upon in writing between the Transfer Agent and the Customer. |
4.3 |
Invoices. The Customer agrees to pay all fees and reimbursable expenses within forty-five (45) days of receipt of the respective billing notice, except for any fees or expenses that are subject to good faith dispute. In the event of such a dispute, the Customer may only withhold that portion of the fee or expense subject to the good faith dispute. The Customer shall notify the Transfer Agent within forty-five (45) days following the receipt of each billing notice if the Customer is disputing any amounts in good faith. If the Customer does not provide such notice of dispute within the required time, the billing notice will be deemed accepted by the Customer. The Customer shall settle such disputed amounts within a reasonable time following the day on which the parties agree on the amount to be paid by payment of the agreed amount. If no agreement is reached, then such disputed amounts shall be settled as may be required by law or legal process. |
4.4 |
Late Payments. |
(a) If any undisputed amount in an invoice of the Transfer Agent (for fees or reimbursable expenses) is not paid when due, the Customer shall pay the Transfer Agent interest thereon (from the due date to the date of payment) at a per annum rate equal to one percent (1.0%) plus the Prime Rate (that is, the base rate on corporate loans posted by large domestic Transfer Agents) published by The Wall Street Journal (or, in the event such rate is not so published, a reasonably equivalent published rate selected by Customer on the first day of publication during the month when such amount was due. Notwithstanding any other provision hereof, such interest rate shall be no greater than permitted under applicable provisions of Massachusetts law.
(b) The failure by Customer to pay an invoice within forty-five (45) days after written and telephonic notice to Customer that payment is overdue or the failure by the Customer to timely pay two consecutive invoices shall constitute a material breach pursuant to Section 16.3(a) below. Transfer Agent will provide notice by writing and telephone forty-five (45) days after payment is past due. The Transfer Agent may terminate this Agreement for such material breach immediately and shall not be obligated to provide the Customer with thirty (30) days to cure such breach.
4.5 |
Taxes. Customer shall pay all sales or use taxes in lieu thereof with respect to the Services (if applicable) provided by the Transfer Agent under this Agreement. |
Section 5. Representations and Warranties of Transfer Agent.
5.1 |
Governance. Computershare Trust Company, N.A. is a federally chartered limited purpose national bank duly organized under the laws of the U.S. and Computershare Shareholder Services Inc. is a corporation validly existing and in good standing under the laws of the State of Delaware and they have full corporate power, authority and legal right to execute, deliver and perform this Agreement. The execution, delivery and performance of this Agreement by Computershare has been duly authorized by all necessary corporate action and constitutes the legal valid and binding obligation of Computershare enforceable against Computershare in accordance with its terms. |
5.2 |
Compliance. The execution, delivery and performance of the Agreement by Computershare will not violate, conflict with or result in the breach of any material term, condition or provision of, or require the consent of any other party to, (i) any existing law, ordinance, or governmental rule or regulation to which Computershare is subject, (ii) any judgment, order, writ, injunction, decree or award of any court, arbitrator or governmental or governmental or regulatory official, body or authority which is applicable to Computershare, (iii) the incorporation documents or by-laws of, or any material agreement to which Computershare is a party. |
5.3 |
Facilities. The Transfer Agent has and will continue to have access to the necessary facilities, equipment and personnel to perform its duties and obligations under this Agreement. |
5.4 |
Insurance. The Transfer Agent shall procure and maintain in effect all insurance coverages required by law, and further, shall procure and maintain the policies of insurance (regardless of whether such insurance is required by law) covering claims and liabilities arising from this Agreement as identified in Schedule 8 of the Side Agreement. |
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Section 6. Representations and Warranties of Customer.
6.1 |
Each Customer severally and not jointly represents and warrants to the Transfer Agent that: |
(a) |
Organization. It is a corporation or Trust duly organized and existing and in good standing under the laws of the jurisdiction of its organization; |
(b) |
Governance. It is empowered under applicable laws and by its charter documents to enter into and perform this Agreement. All corporate proceedings required by said charter documents and applicable law have been taken to authorize it to enter into and perform this Agreement. The execution, delivery and performance of this Agreement by each Customer has been duly authorized by all necessary corporate or trust action and constitutes the legal valid and binding obligation of each Customer enforceable against each Customer in accordance with its terms; |
(c) |
A registration statement under the 1933 Act has been filed and is currently effective, or will be effective prior to the sale of any Shares, and will remain so effective, and all appropriate state securities law filings have been made with respect to all the Shares of each Customer outstanding or being offered for sale except for any Shares which are offered in a transaction or series of transactions which are exempt from the registration requirements of the 1933 Act and state securities laws; information to the contrary will result in immediate notification to the Transfer Agent. |
Section 7. Indemnification/Limitation of Liability.
7.1 |
Standard of Care. The Transfer Agent shall at all times act in good faith and agrees to use its best efforts within reasonable time limits to insure the accuracy of all Services performed under this Agreement, but assumes no responsibility and shall not be liable for loss or damage unless said loss or damage is caused by its negligence, bad faith or willful misconduct or that of its employees as set forth or breach of any representation or warranty of the Transfer Agent hereunder and subject to the limitations set forth hereunder in Section 7.4 7.3 below. |
7.2 |
Customer Indemnity. The Transfer Agent shall not be responsible for, and the Customer shall indemnify and hold the Transfer Agent harmless from and against, any and all claims, losses, damages, costs, charges, payments, expenses, liability and, court costs, fees and expenses of attorneys, expert witnesses, and other professionals reasonably acceptable to Customer arising out of or attributable to: |
(a) |
All actions of the Transfer Agent or its agents or subcontractors required to be taken pursuant to this Agreement, provided such actions are taken in good faith and without negligence or willful misconduct; |
(b) |
The Customers bad faith, negligence or willful misconduct or the material breach of any representation or warranty of the Customer hereunder; |
(c) |
The reliance or use by the Transfer Agent or its agents or subcontractors of information, records and documents which (i) are received by the Transfer Agent or its agents or subcontractors and furnished to it by or on behalf of the Customer, and (ii) have been prepared and /or maintained by the Customer or any other person or firm on behalf of the Customer; |
(d) |
The reliance or use by the Transfer Agent or its agents or subcontractors of any paper or document reasonably believed to be genuine and to have been signed by the proper person or persons including Shareholders; |
(e) |
The reliance on, or the carrying out by the Transfer Agent or its agents or subcontractors of any instructions or requests of the Customers representatives, provided such actions are taken in good faith and without negligence or willful misconduct; and |
(f) |
The offer or sale of Shares in violation of any federal or state securities laws requiring that such shares be registered or in violation of any stop order or other determination or ruling by any federal or state agency with respect to the offer or sale of such Shares. |
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7.3 |
Instructions. From time to time, the Customer may provide Transfer Agent with instructions concerning the Services. In addition, at any time the Transfer Agent may apply to any officer of the Customer for instruction, and may consult with legal counsel reasonably acceptable to Customer with respect to any matter arising in connection with the services to be performed by the Transfer Agent under this Agreement, and Transfer Agent and its agents and subcontractors shall not be liable and shall be indemnified by the Customer for taking action or omitting to take action by it in reliance upon such instructions or upon the advice or opinion of such counsel provided that when the action is taken it is performed in good faith and without negligence or willful misconduct. The Transfer Agent, its agents and subcontractors shall be protected and indemnified in acting upon any paper or document reasonably believed to be genuine and to have been signed by the proper person or persons, or upon any instruction, information, data, records or documents provided the Transfer Agent or its agents or subcontractors by telephone, in person, machine readable input, telex, CRT data entry or similar means authorized by the Customer or the Fund, and shall not be held to have notice of any change of authority of any person, until receipt of written notice thereof from the Customer. The Transfer Agent, its agents and subcontractors shall also be protected and indemnified in recognizing stock certificates which are reasonably believed to bear the proper manual or facsimile signatures of officers of the Customer, and the proper countersignature of any former transfer agent or former registrar, or of a co-transfer agent or co-registrar. |
7.4 |
Transfer Agent Indemnification/Limitation of Liability. Transfer Agent shall be responsible for and shall indemnify and hold the Customer harmless from and against any and all claims, losses, damages, costs, charges, payments, expenses, liability, court costs, and reasonable fees and expenses of attorneys, expert witnesses, and other professionals, arising out of or attributable to Transfer Agents refusal or failure to comply with the terms of this Agreement, or which arise out of Transfer Agents bad faith, negligence or willful misconduct or which arise out of the breach of any representation or warranty of Transfer Agent hereunder, for which Transfer Agent is not entitled to indemnification under this Agreement. Any liability of the Transfer Agent shall be limited as set forth in Schedule 11 of the Side Agreement. |
7.5 |
Events Beyond Reasonable Control. Neither party nor its affiliates shall be liable for any loss (including loss caused by delays, failure, errors, interruption or loss of data) or breach hereunder occurring directly or indirectly by reason of any event or circumstance, whether foreseeable or unforeseeable, which despite the taking of commercially reasonable measures is beyond its reasonable control, including without limitation: natural disasters, such as floods, hurricanes, tornados, earthquakes and wildfires; epidemics; action or inaction of civil or military authority; war, terrorism, riots or insurrection; criminal acts; job action by organized labor; interruption, loss or malfunction of utilities, transportation, computer or communications capabilities; nonperformance by third parties (other than subcontractors of Transfer Agent for duties or obligations described herein, except to the extent that such non-performance would be an Event Beyond Reasonable Control of Transfer Agent if Transfer Agent was itself the non-performing party and the event(s) referenced above had affected Transfer Agent); or functions or malfunctions of the internet, firewalls, encryption systems or security devices caused by any of the foregoing (all and any of the foregoing being an Event Beyond Reasonable Control). Upon the occurrence of an Event Beyond Reasonable Control, the affected party shall be excused from any non-performance caused by the Event Beyond Reasonable Control for so long such affected party continues to use commercially reasonable efforts to attempt to perform the obligation so impacted. |
7.6 |
Notice. In order that the indemnification provisions contained in this Section 7 shall apply, upon the assertion of a claim for which one party may be required to indemnify the other, the party seeking indemnification shall promptly notify the other party of such assertion, and shall keep the other party advised with respect to all developments concerning such claim. The indemnifying party shall have the option to participate with the indemnified party in the defense of such claim or to defend against said claim in its own name or the name of the indemnified party. The indemnified party shall in no case confess any claim or make any compromise in any case in which the indemnifying party may be required to indemnify it except with the indemnifying partys prior written consent. |
Section 8. Service Fee Credits; Service Levels.
8.1 |
The KPI Document sets forth provisions applicable to the determination and assessment of Service Fee Credits, as such term is defined in the KPI Document. Service Fee Credits shall not be an exclusive remedy for any loss incurred as a result of breach conduct (which may be claimable as damages pursuant to the terms of this Agreement), but are intended to be a form of recompense to the Fund for failure by the Transfer Agent to |
- 8 -
deliver the Services in a proper, timely and consistent manner, in view of the key significance that the service levels have to the Fund. The application of Service Fee Credits shall be without prejudice to any rights of the Fund under this Agreement including the right of the Fund to terminate this Agreement pursuant to the terms of the Agreement or to claim damages from Transfer Agent, pursuant to the terms of the Agreement, as a result of any matter constituting breach conduct that contributes to circumstances that cause Service Fee Credits that accrue to the Customer. |
8.2 |
The Services provided by Computershare to the Fund shall be provided in accordance with the terms of the KPI Document, as relevant. The KPI Document is subject to change, as agreed in writing between the parties. |
Section 9. Damages.
9.1 |
NOTWITHSTANDING ANY OTHER PROVISION OF THE AGREEMENT, IN NO EVENT SHALL ANY PARTY, ITS AFFILIATES OR ANY OF ITS OR THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR SUBCONTRACTORS BE LIABLE UNDER ANY THEORY OF TORT, CONTRACT, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY FOR LOST PROFITS, FOR EXEMPLARY, PUNITIVE, SPECIAL, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES, OR FOR ANY OTHER DAMAGES WHICH ARE NOT DIRECT DAMAGES REGARDLESS OF WHETHER SUCH DAMAGES WERE OR SHOULD HAVE BEEN FORESEEABLE AND REGARDLESS OF WHETHER ANY ENTITY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, ALL AND EACH OF WHICH DAMAGES IS HEREBY EXCLUDED BY AGREEMENT OF THE PARTIES. FOR PURPOSES OF CLARIFICATION: NO OTHER PROVISION OF THIS AGREEMENT SHALL BE INTERPRETED TO CONDITION, LIMIT, MODIFY, NULLIFY OR OTHERWISE PREVAIL IN WHOLE OR IN PART OVER THIS SECTION 9. |
Section 10. Responsibilities of the Transfer Agent.
10.1 |
The Transfer Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Customer, by its acceptance hereof, shall be bound: |
(a) |
Whenever in the performance of its duties hereunder the Transfer Agent shall deem it necessary or desirable that any fact or matter be proved or established prior to taking or suffering any action hereunder, such fact or matter may be deemed to be conclusively proved and established by a certificate signed by the Chairman of the Board, the President, any Vice President, the Treasurer, any Assistant treasurer, the Secretary any Assistant Secretary or Chief Financial Officer of the Customer and delivered to the Transfer Agent. Such certificate shall be full authorization to the Transfer Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate provided the action taken is without negligence, bad faith or willful misconduct. |
(b) |
The Customer agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Transfer Agent for the carrying out, or performing by the Transfer Agent of the provisions of this Agreement. |
(c) |
Transfer Agent, any of its affiliates or subsidiaries, and any stockholder, director, officer or employee of the Transfer Agent may buy, sell or deal in the securities of the Customer or become pecuniary interested in any transaction in which the Customer may be interested, or contract with or lend money to the Customer or otherwise act as fully and freely as though it were not appointed as agent under this Agreement. Nothing herein shall preclude the Transfer Agent from acting in any other capacity for the Customer or for any other legal entity. |
(d) |
No provision of this Agreement shall require the Transfer Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of its rights if it shall believe in good faith that repayment of such funds or adequate indemnification against such risk or liability is not reasonably assured to it. |
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Section 11. Covenants of the Customer and Transfer Agent.
11.1 |
Customer Corporate Authority. The Customer has previously furnished or shall furnish to the Transfer Agent the following: |
(a) |
A copy of the Articles of incorporation and By-Laws of the Customer; |
(b) |
Copies of all material amendments to its Articles of Incorporation or By-Laws made after the date of this Agreement, promptly after such amendments are made; and |
(c) |
A certificate of the Customer as to the Shares authorized, issued and outstanding, as well as a description of all reserves of unissued shares relating to the exercise of options, warrants or a conversion of debentures or otherwise. |
11.2 |
Transfer Agent Facilities. The Transfer Agent hereby agrees to establish and maintain facilities and procedures consistent with industry standards for the safekeeping of check forms and facsimile signature imprinting devices, if any, and for the preparation, use, and recordkeeping of such forms and devices. |
11.3 |
Notification. Customer shall notify the Transfer Agent as soon as possible in advance of any stock split, stock dividend or any similar event which may affect the Shares and any bankruptcy, insolvency, moratorium or other proceeding regarding Customer affecting the enforcement of creditors rights. Notwithstanding any other provision of the Agreement to the contrary, the Transfer Agent will have no obligation to perform any Services under the Agreement subsequent to the commencement of any bankruptcy, insolvency, moratorium or other proceeding regarding Customer affecting the enforcement of creditors rights unless the Transfer Agent receives assurance satisfactory to it that it will receive full payment for such services. Further, Customer may not assume the Agreement after the filing of a bankruptcy petition without the Transfer Agents written consent. |
11.4 |
Summary of Policies and Procedures. Transfer Agent shall upon request provide Customer with a summary of any of its policies and procedures relating to Services or this Agreement and provide prompt summary e-mail notification of material changes to such policies and procedures |
Section 12. Addition or Deletion of a Fund.
12.1 |
The parties shall cooperate to update Appendix A (e.g.,add or remove a Fund) within thirty (30) days of the end of each calendar quarter to reflect the addition or deletion of any Fund receiving Services pursuant to this Agreement. |
12.2 |
The parties agree that Appendix A may be amended for purposes of Section 12.1 and otherwise without an executed written amendment if (a) any member of the BlackRock Relationship Team (as identified in Schedule 4 of the Side Agreement) delivers by email to the Transfer Agent Senior Customer Service Officer or a Transfer Agent Customer Service Officer (all as identified in Schedule 4 of the Side Agreement) (i) a copy of an amended and restated Appendix A, dated as of the date such amended and restated Appendix A is intended to be effective, and (ii) to the extent a Fund is being added, a letter substantially in the format stated in Appendix C signed by an authorized officer of such Fund confirming the addition of such Fund as a party to the Agreement, and (b) the Transfer Agent Senior Customer Service Officer or a Transfer Agent Customer Service Officer, as the case may be, receiving the email message and attachment(s) acknowledges in a responding email that the amended and restated Appendix A has been received. |
12.3 |
The parties agree that Funds listed on Appendix A, as it may be amended from time to time, automatically agree to be bound by the terms of the Side Agreement. |
12.4 |
Notwithstanding the foregoing, if Transfer Agent determines and advises the Customer that additions or revisions to the SCRIP System are necessary in order to accommodate any such new fund the Customer shall be deemed to have submitted a request for an amendment to the Agreement. |
Section 13. Audits and Site Visits.
13.1 |
Subject to the further provisions of this Section 13, a reasonable number of representatives of the Customer together, if applicable, with auditors associated with a firm of certified independent public accountants (Auditor Firms) may, during normal weekday business hours, upon giving the Transfer Agent at least |
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twenty (20) days advance notice, no more frequently than once per year (unless required by Customers regulators or in response to a previously-identified deficiency, in which event the additional audit will only relate to such deficiency), except that, at mutually agreed dates, and subject to the Transfer Agents reasonable security, privacy and confidentiality policies and procedures inspect the Transfer Agent premises principally utilized to perform the Services and related operations, and (ii) examine on-site any books and records required to be maintained by the Transfer Agent in connection with the performance of the Services and the written procedures utilized by the Transfer Agent in performing the Services, solely to determine the Transfer Agents compliance with this Agreement. |
13.2 |
During the annual site visit by the BlackRock Relationship Team at mutually agreed dates, and subject to the Transfer Agents reasonable security, privacy and confidentiality policies and procedures the Customer may, subject to the further provisions of this Section 13, (i) inspect the Transfer Agent premises principally utilized to perform the Services and related operations, and (ii) request the Transfer Agent provide system and transaction processing demonstrations, and (iii) make available employees with knowledge about the Services performed to conduct discussions with the Customer and answer reasonable questions of the Customer about such subjects. |
13.3 |
Subject to the further provisions of this Section 13, and Transfer Agents reasonable security, privacy and confidentiality policies and procedures. Transfer Agent will give regulatory authorities with jurisdiction over the Customer, upon reasonable advance written notice and during normal weekday business hours, the ability to (i) inspect the Transfer Agent premises principally utilized to perform the Services and related operations, and (ii) examine on-site any books and records required to be maintained by the Transfer Agent in connection with the performance of the Services. |
13.4 |
Transfer Agent shall not be required in connection with any site visits under this Section 13 to engage in any conduct that would significantly interfere with or disrupt the normal business operations of the Transfer Agent. The Transfer Agent may, in its sole discretion, prohibit the Customer, personnel of Auditor Firms, and regulators of the Customer from entering certain areas of its facilities for security reasons, in which case the Transfer Agent will provide the Customer with alternative access to the books and records, information or personnel in such restricted area, to the extent reasonably possible. Audits shall not include penetration testing. Any audit under this Section 13 includes the right to inspect the books and records of the Transfer Agent on-site at Transfer Agents office, but not the right to copy any records. The Customer will provide the Transfer Agent with a written scope of work including a mutually agreed level of detail, at least ten (10) business days in advance of commencement of any audit. Personnel of Auditor Firms or regulators of the Customer, who in the sole judgment of the Transfer Agent will have access to customer, confidential, proprietary or other privileged information of the Transfer Agent, must prior to the site visit if so requested by the Transfer Agent execute confidentiality agreements containing terms reasonably satisfactory to the Transfer Agent. The Transfer Agent shall not under any circumstances be obligated to divulge any information that is prohibited by law or by a confidentiality agreement with a third party. |
13.5 |
The Customer will compensate the Transfer Agent for all out of pocket expenses incurred in connection with any audit under this Section 13, and will also compensate the Transfer Agent, in accordance with the Transfer Agents fee schedule in effect at the time of such audit, for the time of each of the Transfer Agents employees required to assist with such audit; provided, however, that in no event shall the Customer be charged for the time incurred by the Transfer Agents Relationship Management employees required to assist with such audit. |
Section 14. Confidentiality.
14.1 |
Each party shall keep the Confidential Information (as defined in below) of the other party in confidence and will not use or disclose or allow access to or use of such Confidential Information except as set forth in Section 14.4 below. Each party acknowledges that the Confidential Information of the disclosing party will remain the sole property of such party. In complying with the first sentence of this Section 14.1, each party will use at least the same degree of care it uses to protect its own confidential information, but in no event less than a commercially reasonable degree of care. |
14.2 |
Subject to Sections 14.3 and 14.4 below, Confidential Information means (i) except to the extent disclosure may be required by the Securities Laws or the 1940 Act, the terms and conditions (but not the existence of) this |
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Agreement, all compensation agreements, arrangements and understandings (including waivers) respecting this Agreement, disputes pertaining to the Agreement, and information about a partys exercise of rights hereunder, performance of obligations hereunder or other conduct of a party in connection with the Agreement, in whatever form, and (ii) information and data of, owned by or about a disclosing party or its affiliates, customers, or subcontractors that may be provided to the other party or become known to the other party in the course of the relationship established by this Agreement, regardless of form or content, including but not limited to (A) competitively sensitive material, and not generally known to the public, including, but not limited to, studies, plans, reports, surveys, summaries, documentation and analyses, regardless of form, information about product plans, marketing strategies, finances, operations, customer relationships, customer profiles, customer lists, sales estimates, business plans, and internal performance results relating to the past, present or future business activities of the Fund or Computershare, their respective subsidiaries and Affiliates and the customers, clients and suppliers of any of them; (B) scientific, technical or technological information, a design, process, procedure, formula, or improvement that is commercially valuable and secret in the sense that its confidentiality affords the Fund or Computershare a competitive advantage over its competitors; (C) a confidential or proprietary concept, Proprietary Information, documentation, report, data, specification, computer software, source code, object code, flow chart, database, invention, know how, trade secret, whether or not patentable or copyrightable; (D) information related to security, disaster recovery, business continuity and any other operational plans, procedures, practices and protocols, and (E) anything designated as confidential. |
14.3 |
Information or data that would otherwise constitute Confidential Information under Section 14.2 shall not constitute Confidential Information to the extent it: |
(a) |
is already known to the receiving party at the time it is obtained; |
(b) |
is or becomes publicly known or available through no wrongful act of the receiving party; |
(c) |
is rightfully received from a third party who, to the receiving partys knowledge, is not under a duty of confidentiality; |
(d) |
is released by the protected party to a third party without restriction; or |
(e) |
has been or is independently developed or obtained by the receiving party without reference to the Confidential Information provided by the protected party. |
14.4 |
Confidential Information of a disclosing party may be used or disclosed by the receiving party in the circumstances set forth below but except for such permitted use or disclosure shall remain Confidential Information subject to all applicable terms of this Agreement: |
(a) |
in connection with activities contemplated by this Agreement; |
(b) |
as required by law or regulation or pursuant to a court order, subpoena, order or request of a governmental or regulatory or self-regulatory authority or agency, or binding discovery request in pending litigation (provided that, other than for requests to the Transfer Agent for Shareholder records pursuant to standard subpoenas from state or federal government authorities (e.g., divorce and criminal actions) the receiving party will provide the other party written notice of such requirement or request, to the extent such notice is permitted, and subject to proper jurisdiction, if applicable); |
(c) |
in connection with inquiries, examinations, audits or other reviews by a governmental, regulatory or self-regulatory authority or agency, audits by independent auditors or requests for advice or opinions from counsel; |
(d) |
the information or data is relevant and material to any claim or cause of action between the parties or the defense of any claim or cause of action asserted against the receiving party; or |
(e) |
as otherwise agreed in writing between the parties. |
14.5 |
Subject to the exceptions in Section 14.4, each party agrees not to publicly disseminate Confidential Information of the other party or mutual Confidential Information. |
14.6 |
Notwithstanding Section 20.8 (Survival) of this Agreement, the provisions of this Section 14 shall survive termination of this Agreement for a period of three (3) years after such termination. |
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Section 15. Privacy.
15.1 |
Computershare agrees to implement and maintain appropriate security measures to protect personal information, as that term is defined in 201 CMR 17.00: Standards For The Protection Of Personal Information Of Residents Of The Commonwealth (Massachusetts Privacy Regulation), consistent with the Massachusetts Privacy Regulation and any applicable federal regulations. Computershare shall treat non-public personal information of Shareholders as confidential, and shall not disclose such information except in connection with carrying out the Services set forth in this Agreement, as required by law or regulation, or as allowed in this Agreement. |
Section 16. Term and Termination.
16.1 |
Term. This Agreement shall be effective from the Effective Date and shall remain in full force and effect and continue through to the end of the Initial Term and shall, upon the expiration thereof, be automatically renewed thereafter for successive one (1) year terms, unless terminated pursuant to Section 16. |
16.2 |
Termination for Convenience. Either party may terminate this Agreement by providing a written notice of termination to the other party, specifying the date this Agreement will terminate as follows: (a) if terminated by Customer, at least ninety (90) days and not more than 365 days in advance of the termination date so specified in the notice, or (b) if terminated by Computershare, at least 180 days and not more than 365 days in advance of the termination date so specified in the notice. |
16.3 |
Termination for Cause. Without prejudice to its other rights under this Agreement, a party (the Terminating Party) shall be entitled to terminate this Agreement if: |
(a) |
the other party commits a material breach of the Agreement which is capable of being remedied but, following receipt of written notice of such material breach from the Terminating Party, the breaching party does not remedy the material breach within ninety (90) days of receiving such notice (or within such other period as the Customer and the Transfer Agent may agree upon following receipt of such notice). In such case, the Terminating Party may terminate this Agreement by providing a written notice of termination to the breaching party, specifying the date as of which this Agreement will terminate, which may be any date, including the date such written notice is provided, however, the failure by the Customer to pay an invoiced Fee which is subject to a good faith dispute shall not constitute a material breach of the Agreement; |
(b) |
a party commits a material breach of the Agreement which is not capable of being remedied. In such case, the Terminating Party may terminate this Agreement by providing a written notice of termination to the breaching party, specifying the date as of which this Agreement will terminate, which may be any date ninety (90) days from the date such written notice is provided; |
(c) |
In the case of Transfer Agent assigning this Agreement pursuant to Section 17.1, Customer may terminate this Agreement. Customer must exercise its right to terminate pursuant to this Section 16.3(c) within sixty (60) days from the date Customer receives notice of such assignment and must provide the Transfer Agent with not less than ninety (90) days prior written notice of termination. |
(d) |
a party ceases to maintain a regulatory license, registration, permission or authorization that, in the case of the Transfer Agent materially impairs its ability to provide the Services or any material portion thereof or in the case of the Customer, materially alters its ability to perform its obligations under this Agreement; or |
(e) |
the other party becomes the subject of a significant action (such as an enforcement action or investigation) by a regulatory authority with jurisdiction over that party that materially impacts, in the case of the Transfer Agent, its ability to provide Services and, in the case of the Customer, its ability to perform its obligations under this Agreement. |
16.4 |
Regulatory Necessity. In the event the Customer, is required by the written directive an applicable provincial or federal regulatory or self-regulatory organization with jurisdiction over the Customer (the Issuing Regulator) to terminate this Agreement or to cease to receive or procure one or more Services from the Transfer Agent or to cease to carry on the business for the purpose of which it requires the Services due to any |
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circumstance relating specifically to the Transfer Agent (a Termination Directive), the Customer shall provide the Transfer Agent with a copy of the Termination Directive as promptly as permitted by such Termination Directive, if permitted, and thereafter be entitled to terminate the Agreement or impacted Services in accordance with the requirements of the Termination Directive. |
16.5 |
Termination by the Customer. The Customer may terminate this Agreement by providing a written notice of termination to the Transfer Agent, specifying the date as of which this Agreement will terminate, which may be any date, including the date such written notice is provided, provided the circumstances described below giving rise to the termination right are continuing at the time of the Transfer Agents receipt of such written notice, if as a result of an Event Beyond Reasonable Control: |
(a) |
The Transfer Agent is prevented from performing the whole or substantially the whole of the Services, or of any key elements of the Services, for a continuous period in excess of sixty (60) days; or |
(b) |
The Transfer Agent is prevented from performing the whole or substantially the whole of the Services, or of any key elements of the Services for a continuous period in excess of fourteen (14) days and during that period it has not used all commercially reasonable efforts to: find a solution by which its obligations under this Agreement may be performed despite the continuance of the Event Beyond Reasonable Control; or attempt to perform the impacted obligations, including by implementing its business continuity and disaster recovery plan. |
16.6 |
Insolvency. |
(a) |
Notwithstanding any other provision of this Agreement, the Customer or the Transfer Agent may in their or its sole discretion terminate this Agreement immediately by sending notice thereof to the other party upon the happening of any of the following to such other party: |
(i) |
such party commences as debtor any case or proceeding under any bankruptcy, insolvency or similar law, or there is commenced against such party any such case or proceeding; |
(ii) |
such party commences as debtor any case or proceeding seeking the appointment of a receiver, conservator, trustee, custodian or similar official for such party or any substantial part of its property or there is commenced against such party any such case or proceeding; |
(iii) |
such party makes a general assignment for the benefit of creditors; or |
(iv) |
such party states in any medium, written, electronic or otherwise, any public communication or in any other public manner its inability to pay debts as they come due. |
(b) |
Each of the Customer, and the Transfer Agent may exercise its termination right under Section 16 at any time after the occurrence of any of the foregoing events notwithstanding that such event may cease to be continuing prior to such exercise, and any delay in exercising this right shall not be construed as a waiver or other extinguishment of that right. Any exercise by the Customer or the Transfer Agent of its termination right under Section 16 shall be without any prejudice to any other remedies or rights available to such party and shall not be subject to any fee or penalty, whether monetary or equitable. Notwithstanding anything to the contrary in this Agreement, notice of termination under this Section 16 shall be considered given and effective when given, not when received. |
16.7 |
Each party will notify the other party promptly of any occurrence of the circumstances specified in Sections 16.2, 16.3, 16.4, 16.5, and 16.6. No failure or delay by a party to give any such notice will prejudice or limit the rights of the other party to terminate this Agreement (whether arising out of, in connection with or relating to this Agreement or otherwise). |
16.8 |
Records. Upon receipt of written notice of termination, the parties will use commercially practicable efforts to effect an orderly termination of this Agreement. Subject to the provisions in Schedule 7 of the Side Agreement, the Transfer Agent will deliver promptly to the Customer electronically or in other media, in Computershares industry standard format, all stockholder and other records, files and data supplied to or compiled by the Transfer Agent on behalf of the Customer, subject to applicable law and Transfer Agents records management policy. |
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Section 17. Assignment.
17.1 |
Affiliates. Upon thirty (30) days prior written notice to Customer, the Transfer Agent may, without further consent of the Customer assign its right and obligations hereunto to any affiliated and registered transfer agent under Rule 17Ac2-1 promulgated under the 1934 Act. The Transfer Agent will not assign its rights and obligations to any other person without the Customers prior written consent. |
17.2 |
Sub-contractors. The Transfer Agent may, without further consent of the Customer, subcontract with (a) any affiliates, or (b) unaffiliated subcontractors such services as may be required from time to time (e.g., lost shareholder searches, escheatment, telephone and mailing services); provided, however, that the Transfer Agent shall be as fully responsible to the Customer for the acts and omissions of any subcontractor as it is for its own acts and omissions. |
Section 18. Unaffiliated Third Parties.
18.1 |
Nothing herein shall impose any duty upon the Transfer Agent in connection with or make the Transfer Agent liable for the actions or omissions to act of unaffiliated third parties such as, by way of example and not limitation, airborne services, the U.S. mails and telecommunication companies, provided, if the Transfer Agent selected such company, the Transfer Agent shall have exercised due care in selecting the same. |
Section 19. Disaster Recovery.
19.1 |
Computershare shall maintain or arrange with third parties for back-up facilities (Back-Up Facilities) to the primary operations and data centers used by Computershare to provide the Services (Primary Facilities). The Back-Up Facilities will be capable of providing the Services in the event an incident to the Primary Facilities significantly interrupts the delivery of a significant Service. In the event of equipment failures, Computershare shall, at no additional expense to the Fund, take reasonable steps to minimize service interruptions, including using the Back-Up Facilities where appropriate. |
19.2 |
Computershare shall develop and maintain a business continuity plan containing disaster recovery procedures for its data centers and operations facilities (Business Continuity Plan). Computershare will provide business continuity and disaster recovery services in accordance with its Business Continuity Plan. Computershares Business Continuity Plan will at a minimum contain: |
(a) |
Crisis management procedures for command and control during a disaster; |
(b) |
Emergency notification process; |
(c) |
Activation procedures including assignment of the authority to activate; |
(d) |
Recovery process; |
(e) |
Procedures and accommodations for the recovery of systems, applications and networks; and |
(f) |
Identification of external service providers required for recovery, including but not limited to, disaster recovery service providers, equipment maintenance, transportation, salvage and building maintenance. |
19.3 |
Annually, or upon the Funds reasonable request, Computershare will certify that its Business Continuity Plan complies with the provisions of this Section 19 and Schedule 5 of the Side Agreement. |
19.4 |
Attached to the Side Agreement as Schedule 5 is an executive summary of the Business Continuity Plan as the Business Continuity Plan was constituted on the Effective Date which sets forth in reasonable detail the characteristics of the Business Continuity Plan. Computershare shall annually provide the Fund with an executive summary in written form of the Business Continuity Plan, updated as necessary to incorporate into the executive summary, as of the date provided, summaries of any changes to the Business Continuity Plan since the Effective Date, or the date of the last executive summary of the Business Continuity Plan provided to the Fund, as the case may be. |
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Section 20. Miscellaneous.
20.1 Notices.
All notices or other communications required to be given pursuant to this Agreement shall be in writing, including by Electronic Transmission, and shall be deemed given when (i) delivered in person, by overnight delivery through a commercial courier service, or by registered or certified mail or (ii) delivered by electronic mail directed to the electronic mail address set out in this Section 20. Notices shall be addressed to each party at its address set forth below, or such other address as the recipient may have specified by earlier notice to the sender.
If to the Customer:
c/o BlackRock Advisors, LLC
100 Bellevue Parkway
Wilmington, Delaware 19809
Attn: TA Oversight
E-mail: Matthew.luongo@blackrock.com
If to the Transfer Agent:
Computershare Trust Company, N.A.
250 Royall Street
Canton, MA 02021
Attn: Client Services
E-mail: Jennifer.bridges@computershare.com
The Transfer Agent and the Customer may, by notice to the other, designate additional or different addresses for subsequent notices or communications.
20.2 Successors.
All the covenants and provisions of this Agreement by or for the benefit of the Customer or the Transfer Agent shall bind and inure to the benefit of their respective successors and assigns hereunder.
20.3 Amendments.
This Agreement may be amended or modified by a written amendment executed by both parties hereto and, to the extent required by Customer, authorized or approved by a resolution of the Board of Directors of the Customer, subject to the provisions of Section 12.
20.4 Severability.
If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provision, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated.
20.5 Governing Law.
This Agreement shall be governed by the laws of The Commonwealth of Massachusetts.
20.6 Descriptive Headings.
Descriptive headings of the several sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof.
20.7 Third Party Beneficiaries.
The provisions of this Agreement are intended to benefit only the Transfer Agent, the Customer and their respective permitted successors and assigns. No rights shall be granted to any other person by virtue of this Agreement, and there are no third party beneficiaries hereof.
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20.8 Survival.
All provisions regarding indemnification, warranty, liability and limits thereon, and confidentiality and protection of proprietary rights and trade secrets shall survive the termination of this Agreement.
20.9 Merger of Agreement.
This Agreement constitutes the entire agreement between the parties hereto and supersedes any prior agreement with respect to the subject matter hereof, whether oral or written.
20.10 Priorities.
In the event of any conflict, discrepancy, or ambiguity between the terms and conditions contained in this Agreement and any schedules or attachments hereto, the terms and conditions contained in this Agreement shall take precedence.
20.11 Counterparts.
This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. A signature to this Agreement transmitted electronically shall have the same authority, effect, and enforceability as an original signature.
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IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed by one of its officers thereunto duly authorized, all as of the date first written above.
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Appendix A
Fund List
Coy (Legacy Co Code) |
Company Name | |
BAF | BlackRock Municipal Income Investment Quality Trust | |
BBF | BlackRock Municipal Income Investment Trust | |
BBK | BlackRock Municipal Bond Trust | |
BBN | BlackRock Build America Bond Trust | |
BCX | BlackRock Resources & Commodities Strategy Trust | |
BDJ | BlackRock Enhanced Equity Dividend Trust | |
BFK | BlackRock Municipal Income Trust | |
BFO | BlackRock Florida Municipal 2020 Term Trust | |
BFY | BlackRock New York Municipal Income Trust II | |
BFZ | BlackRock California Municipal Income Trust | |
BGRT | BlackRock Energy & Resources Trust | |
BGT | BlackRock Floating Rate Income Trust | |
BGY | BlackRock International Growth & Income Trust | |
BHK | BlackRock Core Bond Trust | |
BHL | BlackRock Defined Opportunity Credit Trust | |
BHV | BlackRock Virginia Municipal Bond Trust | |
BIE | BlackRock Municipal Bond Investment Trust | |
BIT | BlackRock Multi-Sector Income Trust | |
BJZ | BlackRock California Municipal 2018 Term Trust | |
BKK | BlackRock Municipal 2020 Term Trust | |
BKN | BlackRock Investment Quality Municipal Trust |
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Coy (Legacy Co Code) |
Company Name | |
BKT | BlackRock Income Trust, Inc. | |
BLE | BlackRock Municipal Income Trust II | |
BLH | BlackRock New York Municipal 2018 Term Trust | |
BLJ | BlackRock New Jersey Municipal Bond Trust | |
BLW | BlackRock Limited Duration Income Trust | |
BME | BlackRock Health Sciences Trust | |
BNJ | BlackRock New Jersey Municipal Income Trust | |
BNY | BlackRock New York Municipal Income Trust | |
BOE | BlackRock Global Opportunities Equity Trust | |
BPK | BlackRock Municipal 2018 Term Trust | |
BPS | BlackRock Pennsylvania Strategic Municipal Trust | |
BQH | BlackRock New York Municipal Bond Trust | |
BSD | BlackRock Strategic Municipal Trust | |
BSE | BlackRock New York Municipal Income Quality Trust | |
BST | BlackRock Science and Technology Trust | |
BTA | BlackRock Long-Term Municipal Advantage Trust | |
BTT | BlackRock Municipal Target Term Trust | |
BTZ | BlackRock Credit Allocation Income Trust | |
BUI | BlackRock Utility and Infrastructure Trust | |
BYM | BlackRock Municipal Income Quality Trust | |
BZM | BlackRock Maryland Municipal Bond Trust | |
CII | BlackRock Enhanced Capital & Income Fund, Inc. | |
DSU | BlackRock Debt Strategies Fund, Inc. | |
EGF | BlackRock Enhanced Government Fund, Inc. |
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Coy (Legacy Co Code) |
Company Name | |
FRA | BlackRock Floating Rate Income Strategies Fund, Inc. | |
HYT | BlackRock Corporate High Yield Fund, Inc. | |
MCA | BlackRock MuniYield California Quality Fund, Inc. | |
MEN | BlackRock MuniEnhanced Fund, Inc. | |
MFL | BlackRock MuniHoldings Investment Quality Fund | |
MFT | BlackRock MuniYield Investment Quality Fund | |
MHD | BlackRock MuniHoldings Fund, Inc. | |
MHE | BlackRock Massachusetts Tax-Exempt Trust | |
MHN | BlackRock MuniHoldings New York Quality Fund, Inc. | |
MIY | BlackRock MuniYield Michigan Quality Fund, Inc. | |
MJI | BlackRock MuniYield New Jersey Quality Fund, Inc. | |
MNE | BlackRock Muni New York Intermediate Duration Fund | |
MPA | BlackRock MuniYield Pennsylvania Quality Fund | |
MQT | BlackRock MuniYield Quality Fund II, Inc. | |
MQY | BlackRock MuniYield Quality Fund, Inc. | |
MUA | BlackRock MuniAssets Fund, Inc. | |
MUC | BlackRock MuniHoldings California Quality Fund, Inc. | |
MUE | BlackRock Muniholdings Quality Fund II, Inc. | |
MUH | BlackRock MuniHoldings Fund II, Inc. | |
MUI | BlackRock Muni Intermediate Duration Fund, Inc. | |
MUJ | BlackRock MuniHoldings New Jersey Quality Fund, Inc. | |
MUS | BlackRock MuniHoldings Quality Fund, Inc. | |
MVF | BlackRock MuniVest Fund, Inc. | |
MVT | BlackRock MuniVest Fund II, Inc. |
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Coy (Legacy Co Code) |
Company Name | |
MYCF | BlackRock MuniYield California Fund, Inc. | |
MYD | BlackRock MuniYield Fund, Inc. | |
MYFD | BlackRock MuniYield Investment Fund | |
MYI | BlackRock MuniYield Quality Fund III, Inc. | |
MYJ | BlackRock MuniYield New Jersey Fund, Inc. | |
MYM | BlackRock MuniYield Michigan Quality Fund II, Inc. | |
MYN | BlackRock MuniYield New York Quality Fund, Inc. | |
MZA | BlackRock MuniYield Arizona Fund, Inc. |
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Appendix B
Form of CFTC Compliance Letter
[DATE]
BlackRock
100 Bellevue Parkway
Wilmington, DE 19809
Re: Retention of Books and Records
Dear Sir or Madam:
This letter is provided with respect to the BlackRock Core Bond Trust (NYSE: BHK) and BlackRock Income Trust, Inc. (NYSE: BKT) (each a Fund and together the Funds) that are regulated by the Commodity Futures Trading Commission (CFTC) as commodity pools. BlackRock Advisors, LLC (the Advisor) is a registered commodity pool operator acting as the investment advisor and commodity pool operator of the Funds.
The Funds are party to an agreement with Computershare Trust Company, N.A. and Computershare Inc. (together, Computershare) pursuant to which Computershare Trust Company, N.A. has been appointed as the transfer agent for the Funds. As part of that agreement, Computershare maintains the transfer agency records of the Funds at 250 Royall St, Canton, MA 02021.
At the request of the Advisor and the Funds, Computershare hereby acknowledges the following:
(i) |
The Advisor intends that Computershare keep and maintain certain records of ownership for record holders of Fund shares reflecting the name and address of the holder, and share transactions in the account (the required books and records); |
(ii) |
Computershare shall endeavor to keep and maintain books and records required in accordance with CFTC regulation 1.31 as further discussed below; and |
(iii) |
Computershare agrees to keep such required books and records open to inspection by any representative of the CFTC or the United States Department of Justice in accordance with CFTC Regulation 1.31 and agrees to make such required books and records available to pool participants in accordance with CFTC Regulation 4.23. |
Please note that the full application of CFTC Regulation 1.31 in the context contemplated by this letter is not clear at this time. The books and records of the Fund are currently maintained in accordance with the rules and regulations under the Investment Act of 1940 as applicable to Computershare.
- 23 -
Computershare shall not be deemed to be acting as a commodity pool operator, and the Advisor shall remain fully responsible for compliance with the Commodity Exchange Act and CFTC rules regarding the maintenance of the Funds books and records.
COMPUTERSHARE TRUST COMPANY, N.A. | ||
By: | ||
Name: | Tyler Haynes | |
Title: | Vice President |
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Appendix C
Form of New Fund Confirmation Letter
[DATE]
Computershare Trust Company, N.A.
250 Royall Street
Canton, MA 02021
Attention: Jennifer Bridges
Re: Addition of Fund to Agreement
Dear Jennifer:
Reference is made to the Transfer Agency and Service Agreement among certain BlackRock Closed-End Investment Companies, Computershare Trust Company, N.A., and Computershare Inc. dated as of January 1, 2015 (Agreement). [New Fund Name] hereby confirms that as of [Effective Date of New Fund Being Added to Agreement], it is added to the Agreement as a party and will be included in the definition of Fund and Customer as such terms are defined in the Agreement.
[NEW FUND NAME] | ||
By: |
|
|
Name: | ||
Title: |
- 25 -
SIDE AGREEMENT
This Side Agreement for Transfer Agency Services (Side Agreement) is made and effective as of January 1, 2015, by and among each of the BlackRock closed-end investment companies listed on Appendix A, as may be amended from time to time, of the Agreement (defined below) and having a principal office and place of business at 100 Bellevue Parkway, Wilmington, Delaware, 19809 (each a Customer or a Fund), Computershare Inc., a Delaware corporation, and its fully owned subsidiary Computershare Trust Company, N.A., a federally chartered trust company, both doing business at 250 Royall Street, Canton, Massachusetts, 02021 (collectively, Agent).
WHEREAS, Customer and Agent are parties to that certain Transfer Agency Agreement dated as of the date hereof, inclusive of all appendices, schedules, exhibits and attachments and as may be amended from time to time (Agreement);
WHEREAS, all capitalized terms used but not defined in this Side Agreement shall have the meanings ascribed to such terms in the Agreement;
WHEREAS, Customer and Agent wish to set forth certain other terms and conditions in connection with the Agreement; and
NOW THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows:
1. |
Schedules. Schedules 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, and 11, each as respectively referenced in the Agreement, are all attached hereto and incorporated herein. |
2. |
Termination. This Side Agreement will terminate automatically upon termination of the Agreement. |
3. |
Incorporation by Reference. All terms and conditions set forth in the Agreement, as amended from time to time, not otherwise modified by this Side Agreement, shall be incorporated by reference herein, and are made a part of this Side Agreement as fully as if set forth herein. |
- 26 -
IN WITNESS WHEREOF, the parties hereto have executed this Side Agreement by their duly authorized officers as of the day and year above written.
EACH OF THE BLACKROCK CLOSED-
END INVESTMENT COMPANIES LISTED ON APPENDIX A OF THE AGREEMENT |
||
By: |
/s/ Neal J. Andrews |
|
Name: | Neal J. Andrews | |
Title: | Chief Financial Officer | |
COMPUTERSHARE TRUST COMPANY, N.A. and COMPUTERSHARE INC. (on behalf of both entities) | ||
By: |
/s/ Martin J. McHale, Jr. |
|
Name | Martin J. McHale, Jr. | |
Title: | President, U.S. Equity Services |
- 27 -
SCHEDULE 1
FEE LETTER
FOR STOCK TRANSFER SERVICES
between
EACH OF THE BLACKROCK CLOSED-END INVESTMENT COMPANIES
LISTED ON APPENDIX A OF THE AGREEMENT
and
COMPUTERSHARE TRUST COMPANY, N.A.
and
COMPUTERSHARE INC.
This Fee Letter (Fee Letter) is by and between Computershare Trust Company, N. A. and Computershare Inc. (collectively, Transfer Agent or Computershare) and each of the BlackRock closed-end investment companies listed on Appendix A of the Agreement (each, a Fund and hereinafter collectively referred to as the Customer) and is an exhibit to the Side Agreement. Unless specifically defined in this Fee Letter, capitalized terms used in this Fee Letter shall have the meaning assigned to them in the Agreement.
TERM
The term of this Fee Letter shall be for a period of three (3) years, commencing from January 1, 2015, the effective date of the Side Agreement. From the date of its effectiveness, this Fee Letter supersedes all other fee letters in place for the Funds or the Customer with the Transfer Agent for the services listed in Schedule 2 of the Side Agreement.
FEES AND SERVICES
Transfer Agent and Registrar Fee
$610.00 Monthly Administrative Fee, Per Fund
DRP and DTC Fees:
$ 1.00 | For each Dividend Reinvestment per participant | |||
$250.00 | DTC Participation Monthly fee, per Fund |
Includes the standard Transfer Agent and Registrar services as stated in the following sections: (the services listed apply to each Fund)
Lost Shareholder Search Services
SEC Electronic Database Search | $2.00 per Account searched |
ITEMS NOT COVERED
Additional Services
Items not included in the fees and services set forth in this Fee Letter including, but not limited to, services associated with the payment of a stock dividend, stock split, corporate reorganization, or any services associated with a special project are to be billed separately, based on a statement of work from the Transfer Agent that has been approved by the Customer.
- 28 -
Services required by legislation or regulatory fiat which become effective after the date of acceptance of this Fee Letter shall not be a part of the Standard Services and may be subject to additional fees to be mutually agreed by the parties.
Out Of Pocket Expenses
All direct out-of-pocket expenses listed on Schedule A will be billed as incurred. Expenses associated with the bank accounts referenced in Schedule 2 of the Side Agreement will not be billed to Customer.
ACCEPTANCE
In witness whereof, the parties hereto have caused this Fee Letter to be executed by their respective officers, hereunto duly agreed and authorized, as of the effective date of this Fee Letter.
On behalf of the BlackRock Closed-End
Investment Companies listed on Appendix A of the Agreement |
||
By: |
/s/ Neal J. Andrews |
|
Name: | Neal J. Andrews | |
Title: | Chief Financial Officer | |
Date: | ||
COMPUTERSHARE TRUST COMPANY, N.A. and COMPUTERSHARE INC. | ||
On Behalf of Both Entities | ||
By: |
/s/ Martin J. McHale, Jr. |
|
Name: | Martin J. McHale, Jr. | |
Title: | President, U.S. Equity Services | |
Date: | 1-7-15 |
- 29 -
Schedule A
Out of Pocket Expenses
Out of pocket expenses associated with, but not limited to, the following are not included in the fees quoted in this Fee Letter and are billable as incurred.
Postage (Outgoing and Business Reply)
Envelopes
Labels
Forms, Stationery and Proxy Cards
Fulfillment
Proxy Proof Set-up
Printing
Enclosing
Record Retention
Insurance Premiums (Mailing certificates)
Delivery and Freight charges (including overnight delivery; Airborne Express, FedEx, etc.)
Typesetting (proxy cards, due diligence mailings, etc.)
Destruction of excess/obsolete material
DTC trade transactions expenses (Treasury buybacks, etc.)
Custody Settlement charges
Telephone usage and line expenses
Please Note:
Other out of pocket expenses could be incurred depending on the services utilized.
Good funds to cover postage expenses in excess of $5,000 for Shareholder mailings must be received in full by 12:00 p.m. Eastern Time on the scheduled mailing date. Postage expenses less than $5,000 will be billed as incurred.
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SCHEDULE 2
SERVICE SCHEDULE
Section 1. Standard Services.
1.1 |
General Services. The Transfer Agent shall perform the following services in accordance with procedures established from time to time by agreement between the Customer and the Transfer Agent: |
(a) |
issue and record the appropriate number of Shares as authorized and hold such Shares in the appropriate Shareholder account; |
(b) |
maintain Shareholder accounts, including but not limited to (i) establishing new accounts (ii) preparing and mailing W-9 solicitations for new accounts that do not have Tax Identification Numbers (iii) processing address changes (iv) processing Tax Identification Number changes (v) processing routine and non-routine transfers of ownership upon receipt of appropriate documentation (vi) posting debit and credit transactions (vii) responding to written Shareholder communications (viii) responding to Shareholder telephone inquiries (ix) placing and releasing stop transfers (x) Online access to Shareholder account information and services and (xi) Dividend Reinvestment Plan accounts and establish new participant accounts; |
(c) |
Computershare Inc. will prepare and transmit payments for dividends and distributions declared by the Customer, provided good funds for said dividends or distributions are received by Computershare Inc. on or prior to the scheduled payable date on or about 11:00 a.m. ET for said dividends or distributions; |
(d) |
act as agent for Shareholders pursuant to the Dividend Reinvestment Plan, and other investment programs, if any, as amended from time to time in accordance with the terms of the agreements relating thereto to which the Transfer Agent is or will be a party; |
(e) |
issue replacement book entry shares for those certificates alleged to have been lost, stolen or destroyed upon receipt from the respective Shareholder by the Transfer Agent of an open penalty surety bond satisfactory to it and holding it and the Customer harmless, absent notice to the Customer and the Transfer Agent that such certificates have been acquired by a bona fide purchaser. The Transfer Agent, at its option, may issue replacement book entry shares in place of mutilated stock certificates upon presentation thereof without such indemnity. Further, the Transfer Agent may at its sole option accept indemnification from a Customer to issue replacement book entry shares for those certificates alleged to have been lost, stolen or destroyed in lieu of an open penalty bond; |
(f) |
Computershare Inc. will issue replacement checks and place a stop payment order on original checks based on a Shareholders representation that a check was not received or was lost, once the check has been verified as outstanding; |
(g) |
Execute and deliver the letter substantially in the form attached hereto as Appendix B of the Agreement, annually upon demand of the Funds; |
(h) |
At the Customers request, prepare and deliver standard reports; |
(i) |
Support and implement Customer corporate action instructions, issuance or distribution of Shares to Shareholders (e.g., instructions relating to Fund mergers, liquidations, name changes, etc.) (may be subject to additional fees); |
(j) |
Perform any other services typically provided by a transfer agent, dividend disbursing agent, dividend reinvestment plan agent, and other investment programs consistent with those requirements in effect as of the date of the Agreement; |
(k) |
Computershare Inc. will prepare, mail and file tax filings relating to the Services or the subject thereof, with the IRS and the States; and |
(1) |
Provide Additional Services to the Customer pursuant to the Agreement as shall be agreed in writing between the Customer and Computershare from time to time. |
- 31 -
In connection with the appointment set forth in the Agreement, Computershare shall ensure that (i) all of its operations utilized in providing Services and (ii) the provision of the Services, shall comply with the provisions of Schedules 9 and 10 of the Side Agreement.
1.2 |
Reports and Information. Computershare shall provide the Funds with the reports specified in Schedule 6 of the Side Agreement within the periods of time prescribed in Schedule 6 of the Side Agreement and at no additional cost to the Funds, subject to the following limitations: |
(a) |
Addressing, enclosing and mailing to registered Shareholders Customer-provided materials three (3) times per annum |
(b) |
Preparing six (6) standard reports at the Customers discretion per annum |
Report distributions in excess of these limits may accrue additional costs.
1.3 |
Communications to Shareholders. |
(a) |
Subject to receipt by Computershare of timely written instructions as appropriate, Computershare shall mail all communications by the Customer to Shareholders, including but not limited to: |
(i) |
Annual and semi-annual reports to Shareholders; |
(ii) |
Confirmations of sales of Shares; |
(iii) |
Monthly and/or quarterly statements including but not limited to cash and Dividend Reinvestment Plan detail statements, which shall be prepared by Computershare; |
(iv) |
Dividend(s) and distribution notices including Section 19 notices, which shall be prepared by Computershare Inc.; and |
(v) |
Tax form information including but not limited to Form 1099s, 1042 and State filings, which shall be prepared by Computershare Inc. |
(b) |
Computershare shall provide electronic delivery of the Shareholder communications listed in Section 1.3(a) above to individual Shareholders, with the exception of Sections 1.3(a)(i) and (v), upon the satisfaction by individual Shareholders of all pre-requisite requirements for electronic delivery. |
(c) |
Computershare shall answer such correspondence from Shareholders, securities brokers and others relating to its duties hereunder and such other correspondence pursuant to written procedures. |
(d) |
Computershare Inc. will in accordance with IRS regulations, utilizing relevant information provided to Computershare in the ordinary course of performing the services provided for in the Agreement, report cost basis information to Shareholders on a first in, first out (FIFO) basis by tax year and Shares, except when a Shareholder requests such reporting to occur on another basis. |
(e) |
Computershare Inc. will in accordance with the Code, prepare and deliver year-end and other Federal tax forms to Shareholders based on transactions in Fund Shares and related actions taken by Shareholders with respect to their Fund accounts and file the related Federal tax reports with the IRS. |
1.4 |
Dividend Disbursing Services. |
(a) |
Declaration of Dividends. Upon receipt by Computershare Inc. of written instructions containing all requisite information that may be reasonably requested by Computershare Inc., including payment directions and authorization, Computershare Inc. shall issue Shares in payment of the dividend or distribution, or, upon Shareholder election, pay such dividend or distribution in cash, if provided for in the Funds prospectus. |
(b) |
Tax Withholding. Computershare Inc. is authorized to deduct from all dividends declared by the Fund and disbursed by Computershare Inc., as dividend disbursing agent, the tax required to be withheld pursuant to Sections 1441, 1442 and 3406 of the Internal Revenue Code of 1986, as amended, or by any Federal or State statutes subsequently enacted, and to make the necessary return and payment of such tax in connection therewith. |
- 32 -
(c) |
Bank Accounts. All funds received by Computershare Inc. under the Agreement that are to be distributed or applied by Computershare Inc. in the performance of Services (the Funds) shall be held by Computershare Inc. as agent for Customer and deposited in one or more bank accounts to be maintained by Computershare Inc. in its name as agent for Customer. Until paid pursuant to the Agreement, Computershare Inc. may hold or invest the Funds through such accounts in: (a) obligations of, or guaranteed by, the U.S.; or (b) AAA rated money market funds that comply with Rule 2a-7 of the Investment Company Act of 1940. Customer shall have no responsibility or liability for any diminution of the Funds that may result from any deposit or investment made by Computershare Inc. in accordance with this paragraph, including any losses resulting from a default by any bank or financial institution. Computershare Inc. may from time to time receive interests, dividends or other earnings in connection with such deposits or investments. Computershare Inc. shall not be obligated to pay such interest, dividends or earnings to Customer, any Shareholder or any other party. |
(d) |
In connection with dividend disbursing services, Computershare Inc. shall perform the following, as required from time to time: |
(i) |
reconciling paid and outstanding checks; |
(ii) |
All funds must be received by Computershare Inc. before or on dividend payable date on or about 11:00 a.m. Eastern Time via Federal Funds Wire. |
(iii) |
Dividend checks will be drawn on a Direct Deposit Account (DDA) set up by Computershare Inc. on behalf of the Customer. The funds received from the Customer will be immediately available on mailing date. |
(iv) |
processing and recordkeeping of accumulated uncashed dividends; and |
(v) |
performing the following duties listed below: |
(1) |
Withholding taxes from funds issued in connection with Shareholder Accounts as required by United States government regulations; |
(2) |
Reconciling and reporting taxes withheld, including additional 1099 reporting requirements, to the IRS; |
(3) |
Responding to Shareholder inquiries regarding taxes withheld; |
(4) |
Mailing to new accounts which have had taxes withheld, to inform them of procedures to be followed to curtail subsequent back-up withholding; |
(5) |
Performing Shareholder file adjustments to reflect certification of Accounts; |
(6) |
Providing sample 1099 DIVs to Customer for review, prior to mailing; |
(7) |
Providing signoff to Customer that mailing occurred prior to IRS imposed deadlines; |
(8) |
Responding to IRS notices and inquiries upon receipt from Customer; and |
(9) |
Preparing and filing applications for extension of time to file withholding tax forms with the IRS (if necessary). |
1.5 |
Dividend Reinvestment Services. As administrator of the Customers original issue Dividend Reinvestment Plan, Trust Company shall: |
(a) |
Invest Dividend Reinvestment Plan purchases, up to fourteen (14) per annum, and execute reinvestment transactions of Dividend Reinvestment Plan participant accounts; |
(b) |
Process the termination and withdrawal requests; |
(c) |
Act as certificate depository; and |
(d) |
Execute market trades or issue shares within the timing allowed by the Funds Dividend Reinvestment Plan. Provide reporting to Customer for approval, as soon as practical after completion of the process. |
- 33 -
1.6 |
Unclaimed Property and Lost Shareholders. The Transfer Agent shall report unclaimed property to each state in compliance with state law. The Transfer Agent shall direct filing of abandoned property by: |
(a) |
Processing and mailing due diligence notices to all qualifying Shareholder accounts in accordance with Computershares schedule of States due diligence and abandoned property filing requirements, also known as the State Filing Matrix; |
(b) |
Processing returned due diligence notices and remitting property to Shareholders prior to escheatment; |
(c) |
Preparing and filing preliminary and final abandoned property reports; |
(d) |
Preparing and filing payments for each State covering unclaimed funds as per a particular States requirements; |
(e) |
Issuing and filing book entry shares registered to the applicable State(s) representing returned (RPO) certificates and underlying share certificates; and |
(f) |
Retaining, or returning to the Customer upon the termination of the Agreement, as required by law or otherwise, records of property escheated to the several States and responding, after appropriate research, to Shareholder, Customer or state or federal regulator inquiries relating to same. |
1.7 |
Lost Shareholder Services. The Transfer Agent shall perform the following services and shall comply with Rule17Ad-17 promulgated under the 1934 Act for Lost Shareholders and Unresponsive Payees. |
(a) |
Code Shareholder Accounts as lost when mail has been returned as undeliverable by the United States Postal Service |
(b) |
Identify lost Accounts eligible for SEC Mandated Searches |
(c) |
Perform electronic database searches in accordance with SEC requirements |
(d) |
Update Shareholder Account with a new address provided by search firm and remove lost status |
(e) |
Send SEC ADDRESS VERIFICATION NOTICE to Shareholders when a new address has been applied to the Account |
(f) |
Send SEC ADDRESS VERIFICATION NOTICE to Shareholders when the address search has provided the Account address of record as the most current (lost status not removed) |
(g) |
Reissue unclaimed property to Shareholders upon receipt of signed verification notice |
(h) |
Identify a Shareholder as an Unresponsive Payee if a check is sent to the Shareholder and is not negotiated: |
(i) |
before the earlier of the paying agents sending the next regularly scheduled check or |
(ii) |
the elapsing of six (6) months (or 180 days) after the sending of the not yet negotiated check |
(i) |
Provide written notification to each Unresponsive Payee with a non-negotiated check outstanding more than 180 days and valued at $25 or more, stating that the Unresponsive Payee has been sent a check that has not yet been negotiated. That notification must be provided no later than seven (7) months (or 210 days) after the sending of the not yet negotiated check. |
1.8 |
In-Depth Shareholder Search. |
Pursuant to Section 7.3 of the Agreement, Customer hereby authorizes and instructs Transfer Agent to provide a Shareholder file or list of those Shareholders not located following the required Rule 17Ad-17 searches to any service provider administering any in-depth shareholder location program on behalf of, and authorized by, Customer. If Customer selects a locating service provider other than one selected by Transfer Agent, then Transfer Agent shall not be responsible for the terms of any agreement between such provider and Customer and additional fees that apply will be charged to the service provider.
1.9 |
Proxy/Annual Meeting Services. The Transfer Agent shall perform the following services in accordance with procedures established from time to time by agreement between the Customer and the Transfer Agent: |
(a) |
Prepare one (1) set of files per fund per annum for delivery to the solicitation/proxy vendor selected by the Funds (the Solicitation/Proxy Vendor). |
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(b) |
Receive back from the Solicitation/Proxy Vendor a file containing last contact date and/or address updates. |
(c) |
If files are to be delivered to a non-Computershare entity the then set fees per fund for sending and receiving files will be charged to the Customer. |
1.10 |
Online Services. The on-line systems, described below, shall be available at least 23 hours a day, Monday Friday (subject to Section B(3) of the KPI Document) provided further that the potential daily downtime shall not occur during normal business hours. Evening (6:00 p.m. to 8:00 a.m.) and weekend availability subject additionally to scheduled maintenance windows). Computershare shall: |
(a) |
Provide availability to Issuer Online, which provides access to Customer and Shareholder information administered by Computershare, which permits data management including accessing standard reports such as Top 10 - 200 Shareholder lists, submitting real-time inquiries such as an issued capital query, and reporting by holding range. |
(b) |
Provide availability to Investor Centre, which provides Shareholder Account information, transaction capabilities, downloadable forms and FAQs. |
(c) |
Provide on-demand reporting to allow Customer to generate non-standard reports. |
1.11 |
Correspondence and Complaints. |
(a) |
Retain electronic copies of manual correspondence letter output on Computershare Image system and make a copy available to Customer within 2 Business Days of a request. |
(b) |
Notify Customer of any complaint addressed to a Computershare or Customer executive, or from any regulatory agency (Complaint) within 2 Business Days of its identification. |
1.12 |
Automated Clearinghouse (ACH) Services |
(a) |
Review data for accuracy and completeness |
(b) |
Mail cure letter to Shareholders with incomplete information |
(c) |
Code Accounts for ACH and performing pre-note test |
(d) |
Identify rejected ACH transmissions, mail dividend check and explanation letter to Shareholders with rejected transmissions |
(e) |
Respond to Shareholder inquiries concerning the ACH Program |
(f) |
Calculate on a monthly/quarterly basis the Share breakdown for ACH vs. other dividend payments and notifying the Company of funding amount for ACH transmissions and other payable date funds |
(g) |
Credit ACH designated bank accounts automatically on dividend payable date |
(h) |
Maintenance of ACH participant file, including coding new ACH Accounts |
(i) |
Process termination requests |
(j) |
Keep adequate records including retention of ACH documents |
1.13 |
Direct Registration System Services |
(a) |
Register, issue and transfer DRS book-entry Shares |
(b) |
Issue DRS statements of holding |
(c) |
Provide Shareholders with the ability to sell Shares in accordance with the terms and conditions, including applicable fees, of the DRS Sales Facility |
(d) |
Process sales requests within the appropriate timeframe based on the type of service requested, in accordance with the terms of the DRS sales facility |
- 35 -
(e) |
Coordinate the issuance, payment and reconcilement for any proceeds stemming from the use of the DRS sales facility, in accordance with the terms and conditions of the facility |
(f) |
Coordinate the mailing of advices to Shareholders |
(g) |
Accept and cancel certificated Shares and credit such Shares into a DRS position |
1.14 |
Compliance with Laws. The Customer agrees the Transfer Agent is obligated to and the Transfer Agent agrees to comply with all applicable federal, state and local laws and regulations, codes, order and government rules in the performance of its duties under the Agreement. |
1.15 |
U.S. Government List Matching Services. |
(a) |
Computershare will compare, as frequently as is consistent with industry best practice, Appropriate List Matching Data (as defined in Section 1.15(c) below) contained in Computershare databases which are maintained for the Fund pursuant to the Agreement (Fund Data) to U.S. Government Lists, which is hereby defined to mean the following: |
(i) |
data promulgated in connection with the list of Specially Designated Nationals published by the Office of Foreign Asset Control of the U.S. Department of the Treasury (OFAC) and any other sanctions lists or programs administered by OFAC to the extent such lists or programs remain operative and applicable to the Fund (OFAC Lists); |
(ii) |
data promulgated in connection with the list of Non-Cooperative Countries and Territories (NCCT List) published by the Financial Action Task Force; |
(iii) |
data promulgated in connection with determinations by the Director (the Director) of the Financial Crimes Enforcement Network of the U.S. Department of the Treasury that a foreign jurisdiction, institution, class of transactions, type of account or other matter is a primary money laundering concern (PMLC Determination); and |
(iv) |
data promulgated in connection with any other lists, programs or determinations (A) which Computershare determines to be substantially similar in purpose to any of the foregoing lists, programs or determinations, or Section 1.15(b) which Computershare and the Fund agree in writing to add to the service described in this Section 1.15(a). |
(b) |
In the event that following a comparison of Fund Data to a U.S. Government List as described in Section 1.15 (a) Computershare determines that any Fund Data constitutes a match with the U.S. Government List in accordance with the criteria applicable to the particular U.S. Government List, Computershare: |
(i) |
will notify the Fund of such match; |
(ii) |
will send any other notifications required by applicable law or regulation by virtue of the match; |
(iii) |
if a match to an OFAC List, will to the extent required by applicable law or regulation assist the Fund in taking appropriate steps to block any transactions or attempted transactions to the extent such action may be required by applicable law or regulation; |
(iv) |
if a match to the NCCT List or a PMLC Determination, will to the extent required by applicable law or regulation conduct a suspicious activity review of accounts related to the match and if suspicious activity is detected will deliver a suspicious activity referral to the Fund; |
(v) |
if a match to a PMLC Determination, will assist the Fund in taking the appropriate special measures imposed by the Director; and |
(vi) |
will assist the Fund in taking any other appropriate actions required by applicable law or regulation. |
- 36 -
(c) |
Appropriate List Matching Data means (i) account registration and alternate payee data, to the extent made appropriate by statutes, rules or regulations governing the U.S. Government Lists, (ii) data determined by Computershare in light of statutes, rules or regulations governing the U.S. Government Lists to be necessary to provide the services described in this Section 1.15(c), and (iii) data the parties agree in writing to be necessary to provide the services described in this Section 1.15(c). |
1.16 |
Red Flags Services. |
(a) |
The provisions of this Section 1.16 (the Red Flags Section) shall apply in the event the Fund elects to receive the Red Flags Services, which are hereby defined to mean the following services: |
(i) |
Computershare will maintain written controls reasonably designed to detect the occurrence of Red Flags (as defined below) in connection with: |
(1) |
account opening and other account activities and transactions conducted directly through Computershare with respect to Direct Accounts (as defined below), and |
(2) |
transactions effected directly through Computershare by Covered Persons (as defined below) in Covered Accounts (as defined below). Such controls, as they may be revised from time to time hereunder, are referred to herein as the Controls. Solely for purposes of the Red Flags Section, the capitalized terms below will have the respective meaning ascribed to each: |
Red Flag means a pattern, practice, or specific activity or a combination of patterns, practices or specific activities that may indicate the possible existence of Identity Theft (as defined below) affecting a Registered Owner (as defined below) or a Covered Person.
Identity Theft means a fraud committed or attempted using the identifying information of another person without authority.
Registered Owner means the owner of record of a Direct Account on the books and records of the Fund maintained by Computershare as registrar of the Fund (the Fund Registry).
Covered Person means the owner of record of a Covered Account on the Fund Registry.
Direct Account means an Account established directly with and through Computershare as a registered account on the Fund Registry and through which the owner of record has the ability to directly conduct account and transactional activity with and through Computershare.
Covered Account means an Account established by a financial intermediary for another as the owner of record on the Fund Registry and through which such owner of record has the ability to conduct transactions in Fund shares directly with and through Computershare.
Account means (1) an account holding Fund Shares with respect to which a natural person is the owner of record, and (2) any other account holding Fund Shares with respect to which there is a reasonably foreseeable risk to the particular account owners customers from identity theft, including financial, operational, compliance, reputation, or litigation risks.
(ii) |
Computershare will provide the Fund with a copy of the policy and procedures and controls. |
(iii) |
Computershare will notify the Fund of Red Flags that it detects and reasonably determines to indicate a significant risk of Identity Theft to a Registered Owner or Covered Person (Possible Identity Theft) and assist the Fund in determining the appropriate response of the Fund to the Possible Identity Theft. |
(iv) |
Computershare will (A) engage an independent auditing firm or other similar flint of independent examiners to conduct an annual evaluation of the Controls and issue a report on the results of the evaluation (the Evaluation Report), and (B) furnish a copy of the Evaluation Report to the Fund; and |
(v) |
On a Quarterly basis issue a certification in a form determined to be appropriate by Computershare in its reasonable discretion, certifying to Computershares continuing compliance with the Controls after the date of the most recent Evaluation Report. |
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(b) |
The Fund agrees it is responsible for complying with and determining the applicability to the Fund of Section 615 (e) of the Fair Credit Reporting Act of 1970, as amended in 2010, and regulations promulgated thereunder by the SEC (the Red Flags Requirements), for determining the extent to which the Red Flags Services assist the Fund in complying with the Red Flags Requirements, and for furnishing any supplementation or augmentation to the Red Flags Services it determines to be appropriate, and that Computershare has given no advice and makes no representations with respect to such matters. This Red Flags Section shall not be interpreted in any manner which imposes a duty on Computershare to act on behalf of the Fund or otherwise, including any duty to take any action upon the occurrence of a Red Flag, other than as expressly provided for in this Red Flags Section. The Controls and the Red Flags Services may be changed at any |
time and from time to time by Computershare in its reasonable sole discretion to include commercially reasonable provisions appropriate to the Red Flags Requirements, as they may be constituted from time to time and Computershare shall provide notice to the Fund of such changes as soon as reasonably practicable under the circumstances.
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SCHEDULE 3
KEY PERFORMANCE INDICATORS
Unless specifically defined in this Schedule 3 or specifically defined by reference to an Appendix or Schedule, capitalized terms used in this Schedule 3 shall have the meaning assigned to them in the Agreement.
A) |
Certain Definitions. |
BlackRock means, as the context requires, all Funds considered collectively or the Fund or Funds relevant to the particular context.
BlackRock Legal and Compliance means the group of individuals designated by the Funds and communicated to Computershares Customer Service Officer in writing as responsible for the oversight of the Funds related programs under the USA PATRIOT Act.
Business Day means a day the NYSE is open for business.
Emergency Service means Computershares performance of a service, activity or conduct requested by one or more Funds which is not provided for in the Agreement.
Financial Transactions means a redemption received by Computershare in good order.
Green Zone means the performance level in the column of the KPI Table titled Green Zone.
Impacted Service Performance has the meaning set forth in Section B(3) of this KPI Document.
KPI Component means a service level standard component outlined in the KPI Table in Section C of this KPI document.
KPI Document means this Key Performance Indicators document.
Month means a calendar month.
Monthly Applicable Fees means with respect to a given Month, the aggregate fees owed by the Funds pursuant to the section of the Fee Letter entitled Transfer Agent and Registrar Fee for that Month.
Monthly Minimum means the minimum number of transactions per Month that must be processed in each KPI Component in order to be eligible for the Service Fee Credit in Section D of this KPI document, to the extent noted in the KPI Table
Non-Financial Transactions means the certificate stops, certificate replacement via book entry shares and addition of information or changes to information in Fund accounts of Shareholders.
Non-Routine Correspondence means correspondence types not defined by the SEC as regulated pursuant to Rule 17Ad-5.
Non-Routine Transactions means transfer types which require, include, or involve any of the conditions defined by Rule 17Ad-1(i)(1)-(8).
NYSE means the New York Stock Exchange.
Red Zone means the performance level in the column of the KPI Table titled Red Zone.
Routine Correspondence means correspondence types defined by the SEC as regulated pursuant to Rule 17Ad-5.
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Routine Transactions means transfer types which do not require, include, or involve any of the conditions defined by 17Ad-1 (i)(1)-(8).
Service Fee Credit has the meaning set forth in Section D(1) of this KPI Document.
Subsequent Invoice means, in connection with a Service Fee Credit, the invoice sent by Computershare to the Funds for the Month after the Service Fee Credit Amount is owed.
Transactions means Financial Transactions and Non-Financial Transactions, collectively.
Yellow Zone means the performance level in the column of the KPI Table titled Yellow Zone.
B) |
General Terms and Conditions. |
1) |
All times expressed in this KPI Document are Eastern Time. |
2) |
The words the Funds when used in this KPI Document shall mean, without further specification or clarification of any nature, the Funds considered collectively as a whole and not individually. |
3) |
If the occurrence of any of the events, circumstances, or conduct listed immediately below adversely impacts Computershares performance of a KPI Component listed in the KPI Table in Section C, below (such as by causing interference with or delaying Computershares normal performance of an activity, increasing demand for resources or reducing the availability of resources) and Computershare provides reasonable proof of such adverse impact (an Impacted Service Performance), then if in the Month that the Impacted Service Performance occurs, Computershares performance of the KPI Component represented by the Impacted Service Performance falls within the Red Zone for the relevant KPI Component as a result of that/those Impacted Service Performance (s), then the Month shall be skipped (deemed not to have occurred) for purposes of determining Service Fee Credits, provided that, with respect to (iv) no such Month shall be skipped unless the parties have agreed in writing in advance of such occurrences for the KPI or KPIs that may be so impaired; |
i) |
Any breaches of the Agreement by a Fund, any negligent conduct or errors of a Fund, or any failure of a Fund to perform in accordance with standard for the mutual fund industry or which is needed for the performance by Computershare of any KPI Component in accordance with applicable performance standards; |
ii) |
An Event Beyond Reasonable Control (as defined in Section 7 of the Agreement), provided Computershare satisfies the condition specified in the last sentence of Section 7.5 of the Agreement; |
iii) |
Errant Data; |
iv) |
Any performance by Computershare of an Emergency Service; and/or |
v) |
The average volume of transactions or inquiries significantly increases as a result of outside factors or unforeseen circumstances for which Computershare is not the proximate cause. |
4) |
Computershare acknowledges that the Funds regard KPI performance in the Yellow Zone to be less than satisfactory to the Funds, and in the event performance of a KPI is reported within that KPIs Yellow Zone, Computershare will increase its oversight of the performance of that KPI activity with the goal of increasing performance to that KPI s Green Zone level. |
C) |
KPI Table. |
The service level standards in the following table (the KPI Table) will be monitored and measured on a Monthly basis and all KPI metrics will be reported to BlackRock (including KPIs that do not meet the Monthly Minimum set forth in the KPI Table). For KPIs that include multiple process measurements to calculate the KPI percentage, if one of the process measurements does not meet the applicable monthly minimum, then the calculation is based solely on the remaining process measurement for that specific KPI, if such remaining process measurement meets the applicable monthly minimum.
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KPI# |
KPI Description |
Service Description |
Monthly
|
Calculation |
Green
|
Yellow
|
Red
Zone |
|||||||||
1 |
Telephone inquiries abandoned rate | Achieve abandoned call rate on average each Month. | N/A | Calls abandoned over 20 seconds, divided by total calls in Month. | £2% | >2 to £2.5% | >2.5 | % | ||||||||
2 |
Telephone customer service level | Achieve telephone customer service level on average each Month | N/A | Calls answered under 20 seconds + calls abandoned under 20 seconds, divided by total calls in Month. | ³85% | <85% to >80% | £80 | % | ||||||||
3 |
Processing of Financial Transactions in a timely manner | Financial Transaction timeliness. Processed within 5 Business Days of receipt. | 35 | Number of Financial Transactions processed within 5 Business Days divided by number of Financial Transactions received for the Month. | ³98% | <98 to ³97% | <97 | % | ||||||||
4 |
Distribution Output |
ACH payments released by Computershare on Payable Date Checks mailed on Payable Date |
N/A |
Total percentage of distribution ACH payments released on Payable Date per month. Total percentage of distribution checks mailed on Payable Date per month. The final KPI percentage is a combined average of the above. |
=100% | <100 to £99% | <99 | % | ||||||||
5 |
Non-Financial Transactions Timeliness | Non-Financial Transactions processed within 5 Business Days | 35 | Number of Non-Financial Transactions processed within 5 Business Days divided by total number of Non-Financial Transactions received for the Month. | >99% | <99% to ³97% | <97 | % | ||||||||
6 |
Routine Transactions | Routine Transactions processed within 3 Business Days | 35 | Number of Routine Transactions processed within 3 Business days divided by total number of Routine Transactions received for the Month. | ³98% | <98 to ³97% | <97 | % | ||||||||
Number of Non-Routine Transactions processed within 10 Business days divided by total number of Non-Routine Transactions received for the Month. |
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Non-Routine Transactions | Non-Routine Transactions processed within 10 Business Days | 35 | The final KPI percentage is a combined average of the above. | |||||||||||||
SEC Routine Correspondence | 35 | Number of Routine Correspondence items processed within 5 Business days divided by total number of Routine Correspondence items received for the Month. | ||||||||||||||
7 |
Routine Correspondence processed within 5 Business Days | Number of Non-Routine Correspondence items processed within 10 Business days divided by total number of Non-Routine Correspondence items received for the Month. | ³98% | <98 to ³97% | <97 | % | ||||||||||
SEC Non-Routine Correspondence | Non-Routine Correspondence processed within 10 Business Days | 35 | The final KPI percentage is a combined average of the above. | |||||||||||||
8 |
Shareholder communications |
Make the Shareholder statements available online within 5 Business Days from statement production end period category for Month. Complete the Shareholder Regulatory Report Mailings within 5 Business Days of receipt of the reports. BlackRock to provide expected receipt date in advance. |
N/A |
The number of mailing items completed for each category in the target timeframe divided by the total mailing items for each The final KPI percentage is a combined average of the above. |
100% |
100% to ³95% |
<95 | % |
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Complete Year-end 1099DIV tax form mailings by the IRS deadlines. Complete Check mailings for redemptions on T+4
Complete Shareholder letters mailing within the agreed upon timeframe for each mailing |
||||||||||||||||
9 | Regulatory Reporting Oversight | Notice of OFAC matches provided to BlackRock Legal and Compliance as generated within 2 reports sent within the | N/A | Total number of regulatory items provided within the specified timeframes divided by the total number of regulatory items and or Business Days. Month. | 100 | % | <100% to ³95% | <95% | ||||||||
10 | System availability | Ensure SCRIP system is available for update of Shareholder records and trade processing. | N/A | Availability shall be measured by dividing the aggregate time of Unscheduled Outage periods (defined below) for a given Month by the total amount of Committed Time (defined below) available for that Month. An Unscheduled Outage shall mean any outage that is not a Scheduled Outage. Committed Time shall mean, as to each Business Day, one hour before the trading session for that day is scheduled to open on the NYSE and one hour after the trading session on the NYSE for that day finally closes, but excluding the following periods of Scheduled Outage (defined below). A Scheduled Outage shall mean (1) those time periods from 12 AM Saturday to 6:00 AM Sunday each week and 11:00 PM to 12:00 AM daily, during which Computershares System maybe unavailable due to routine maintenance; and (2) any time period as to which Company has received prior notice. | ³99.5 | % | <99.5% to ³98% | <98% |
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D) |
Service Fee Credits. |
1) |
Service Fee Credits. |
Except as otherwise provided in this KPI Document, BlackRock shall be entitled to a Service Fee Credit applied against the Monthly Applicable Fees when Computershare fails to meet any 1 (or more) of the KPI Components set forth in the Red Zone detailed as follows:
Number of continuous Months the same KPI Component set forth in the Red Zone has not been met |
Credit of Monthly fees (per KPI Component in Red
Zone) |
|||
1 |
$ | 0 | ||
2 |
$ | 1,500 | ||
3 or more |
$ | 2,500 |
a. |
A service fee credit owed by Computershare under Section D(1) of this KPI Document is referred to herein as a Service Fee Credit. |
b. |
Computershares obligation to pay any Service Fee Credits shall be determined, and if owed, calculated, with respect to individual Months. With respect to any Month, if Computershare shall owe a Service Fee Credit amount pursuant to the terms of this KPI Document, such Service Fee Credit(s) shall be included on the Subsequent Invoice. |
2) |
Service Fee Credits shall not apply to the first three full Months that the Agreement is effective. |
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SCHEDULE 4
GOVERNANCE
1. |
GENERAL MATTERS. |
1.1 |
Unless specifically defined in this Schedule 4 or specifically defined by reference to an Appendix or Schedule, capitalized terms used in this Schedule 4 shall have the meaning assigned to them in the Agreement. |
1.2 |
The Fund and Computershare acknowledge that meaningful interactions between senior members of their respective organizations, in addition to the meetings set forth in Section 3, may be mutually advantageous. |
1.3 |
This Schedule 4 is intended to set out a process by which the Fund may: |
(i) |
Discuss the activities of Computershare contemplated by the Agreement, including without limitation: |
(A) |
performance of the Services generally and performance of Services subject to the service level standards included in the KPI Table (as defined in Schedule 3); |
(B) |
activities that occur in accordance with Schedule 2 but solely to assist the Fund Agent (as defined in Schedule 2) in performing the role of Fund Agent; and |
(C) |
issues and concerns arising in connection with such activities; |
(ii) |
Disseminate information to Computershare above and beyond that furnished to Computershare in the ordinary course of business that may be useful to Computershare in performing its obligations under the Agreement; and |
(iii) |
Discuss potential improvements and refinements to the Services, including the development of new or improved technologies and processes that could be implemented. |
2. |
RELATIONSHIP TEAMS |
2.1 |
Certain Definitions: |
Blackrock Oversight Team means the individuals listed in the table at Section 2.2 (including as it may be revised pursuant to Section 2.3) as the Head of Domestic Shareholder Services and TA Oversight Director for the Funds.
BlackRock Relationship Team means the individuals listed in the table at Section 2.2 (including as it may be revised pursuant to Section 2.3) under the heading BlackRock Relationship Team.
Computershare Relationship Team means the individuals listed in the table at Section 2.2 (including as it may be revised pursuant to Section 2.3) under the heading Computershare Relationship Team.
Computershare Service Team means the individuals listed in the table at Section 2.2 (including as it may be revised pursuant to Section 2.3) as the Relationship Executive, the Senior Customer Service Officer and the Customer Service Officers of Computershare.
Relationship Teams means the BlackRock Relationship Team and the Computershare Relationship Team considered collectively, whether used in the singular or the plural number.
2.2 |
Each Fund hereby authorizes each individual member of the BlackRock Relationship Team to represent the Fund on all matters reasonably related to this Schedule 4, and, on its behalf, to communicate with Computershare; Computershare may rely on any communication from an individual member of the BlackRock Relationship Team as a communication directly from a Fund and may rely on this authorization. Furthermore, the Fund may provide Computershare with lists of other authorized persons from time to time and shall indicate the authority granted to each such person in sufficient detail to provide reasonable guidance to Computershare. |
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Relationship Teams
BlackRock Relationship Team
Fund Position |
Name of Individual Filling Position |
|
Global Head of TA Services | Daniel J. Schwieger | |
Head of Domestic Shareholder Services | Lisa A. Hill | |
TA Oversight Director | John Sebulsky | |
Lead for Global Provider Services | Georgia A. Plevritis, Dawn Ferrotta, Jennifer Scharnitz, Matthew Luongo, Sharman Fleming, Sharon Fucci, Lynn Louie, Fran Gero, Paul Mickle | |
Computershare Relationship Team | ||
Computershare Position |
Name of Individual Filling Position |
|
Business Head | Steven Rothbloom | |
Business Executive | Jay McHale | |
Relationship Executive | Mike Lang | |
Senior Customer Service Officer | Tyler Haynes | |
Customer Service Officers | Jen Bridges, Jeff Almeida, Angela Dray |
2.3 |
Each party will promptly notify the other party in writing of any changes to their respective Relationship Teams. |
2.4 |
Any of Computershares Customer Service Officers shall constitute the initial escalation points for the Fund to seek prompt attention to significant issues relating to the delivery of the Services. |
2.5 |
Computershare agrees to consider any evaluations of the members of its Relationship Team provided to it in writing by the Fund but retains the right to appoint members of its Relationship Team in its sole and absolute discretion. |
3. |
GOVERNANCE MEETINGS |
Without modifying in any manner any provision of the Agreement that requires the parties to communicate in a particular manner:
3.1 |
Periodic Review Meetings. |
(a) |
Such members of the BlackRock Relationship Team and the Computershare Relationship Team as may reasonably be deemed appropriate by agreement of the parties, shall meet periodically, either in person or telephonically, (such meeting being the Review Meeting) to discuss the matters that the Fund or Computershare may reasonably request to include in the agenda for the particular meeting, including without limitation the following: |
(i) |
Computershares performance of Services generally and of the Services subject to the service level standards included in the KPI Table (as defined in Schedule 3); |
(ii) |
Issues that may impact Computershares performance, or the Funds receipt, of the Services or other issues affecting the relationship of Computershare and the Fund generally; |
(iii) |
Financial management of the Agreement; |
(iv) |
Service Fee Credits (as defined in Schedule 3) and issues arising from them; |
(v) |
Matters arising under any Schedule; |
(vi) |
Performance of each partys respective obligations and responsibilities under and in accordance with the Agreement. |
- 46 -
(b) |
If a relevant member of a Relationship Team is unable to attend a particular Review Meeting, the party that person represents may send another person (to be designated in advance) in such persons place. In these circumstances, the parties agree to send only representatives who have the necessary power and authority to conduct and advance discussions in good faith at the appropriate level with respect to matters on the agenda for such Review Meeting. |
(c) |
The parties will use reasonable efforts at each Review Meeting to agree upon the date and time for the next Review Meeting. |
(d) |
The parties will use reasonable efforts to submit proposed agenda items to each other reasonably in advance of each scheduled Review Meeting. |
(e) |
The parties will use reasonable efforts to submit draft papers and appropriate supporting documents, as relevant, to each other reasonably in advance of each scheduled Review Meeting. |
(f) |
Computershare shall, to the extent agreed upon by the parties at the particular Review Meeting, take notes on major discussion points that occurred at the meeting on matters mutually designated by the parties, including without limitation, to the extent mutually identified, action items and timelines with major milestones, and distribute the notes to all participants in the particular Review Meeting within a reasonable period following the meeting. Computershare shall discuss the distributed notes to the extent reasonably requested by the Fund, shall revise the distributed notes following such discussions to the extent it determines in its discretion to do so, and shall distribute any notes so revised to all participants in the particular Review Meeting. The Fund may distribute to all participants in the particular Review Meeting its own notes with respect to matters addressed by Computershares notes. |
(g) |
Reasonably in advance of a scheduled Review Meeting, Computershare shall distribute an agenda for the particular Review Meeting (with respect to Fund agenda items, to the extent it has received such from the Fund), materials reasonably requested by the Fund or reasonably determined by Computershare to be appropriate for the meeting, and, to the extent required by agreement of the parties at the prior Review Meeting, information that describes in reasonable detail the status of specified action items. The Fund may distribute to all participants in a scheduled Review Meeting materials that it reasonably determines to be appropriate for the meeting. |
3.2 |
Operational Meetings. |
(a) |
As mutually agreed upon, the parties will meet by conference telephone to discuss any day-to-day operational matter of interest (the Operational Meeting) that the Fund or Computershare may reasonably request to include in the agenda for the particular meeting, including without limitation the following: |
(i) |
As reasonably requested by the Fund giving it an opportunity to ask questions, give information and provide opinions with respect to the day- to-day services provided by Computershare, support needs of the Fund, and activities contemplated by Schedule 2. |
(ii) |
Computershares capacity and capabilities for expanding and enhancing the Services; |
(iii) |
Fund priorities and strategy; and |
(iv) |
Changes in Applicable Law and other regulatory issues; |
(b) |
In the event the Fund or Computershare requests of the other party that it meet other than in a meeting described elsewhere in this Section 3 on urgent operational or service-related matters and the other party agrees, then: |
(i) |
The meetings will involve the Fund and Computershare representatives as agreed upon by the parties with appropriate levels of knowledge and seniority to discuss the matters with respect to which the meeting will be held and to make commitments (in his or her sole discretion) on behalf of the party represented; |
- 47 -
(ii) |
The parties will use reasonable efforts provide relevant information reasonably requested by the other party prior to or at the meeting; |
(iii) |
Subsequent to each meeting the parties will use reasonable efforts to distribute all materials they agreed to provide during the meeting within the time periods they agreed to provide them, including for example a list of the issues, discussion points, action items and timelines. |
3.3 |
Other Meetings. |
(a) |
Annual Due Diligence Meeting. Once each calendar year the parties will meet to provide the Fund an opportunity to ask questions, give information and provide opinions with respect to, and to examine to the extent expressly granted by the Agreement: regulatory and operating risk issues, Computershares controls framework, on-going compliance of the Services and any significant breaches or trends about which the Fund or Computershare are concerned. |
(b) |
User Group Meetings. To the extent Computershare plans and holds meetings between the personnel who manage its technology products and the clients who use particular technology products, if applicable Computershare will provide the Fund with reasonable advance notice of such meetings and invite the Fund to attend. |
(c) |
Chief Compliance Officer (CCO) Forum. To the extent Computershare plans and holds meetings between its clients and the personnel who manage its compliance services and other support services of interest to Chief Compliance Officers of its clients, Computershare will provide the Fund with reasonable advance notice of such meetings and invite the Fund to attend. |
(d) |
Computershare Service Team and BlackRock Oversight Team. Such members of the BlackRock Oversight Team and the Computershare Relationship Team as may reasonably be deemed appropriate by agreement of the parties will, upon the reasonable request of the other, meet to discuss in good faith operational matters. |
(e) |
Facilitated Contact. BlackRocks TA Oversight Director and Computershares Relationship Executive will, upon the reasonable request of the other, facilitate direct contact between appropriate Fund personnel and appropriate Computershare personnel with respect to operational matters that both individuals reasonably agree require direct contact between operational personnel in addition to that which occurs in the ordinary course of business. |
3.4 |
High Level Contacts. Both parties agree to communication between BlackRocks Head of Domestic Shareholder Services and Computershares Business Executive on an as-needed basis. |
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SCHEDULE 5
BUSINESS CONTINUITY PLANNING/DISASTER RECOVERY
1. |
Business Continuity Plans/Disaster Recovery |
Computershare shall maintain a Business Continuity Plan for the Services and execute the Business Continuity Plan in the event of any unplanned or anticipated interruption of the Services consistent with the provisions set forth in this Schedule 5 (Schedule). Computershare shall provide BlackRock with a summary of the business continuity process, Exhibit A of this Schedule, in accordance with Section 19 of the Agreement. Computershare shall provide BlackRock with its periodic disaster recovery exercise attestation letters as soon as available, and at a minimum at least annually.
If Computershare fails to reinstate the Services within the recovery times set forth in this Schedule, BlackRock may, in addition to other remedies available hereunder, at its sole discretion, immediately terminate the Agreement as a non-curable default under Section 16.3(b) of the Agreement. The force majeure and Section 7.5 terms of the Agreement do not remove or diminish Computershares obligation to deliver the recovery service levels described herein.
2. |
Business Continuity Service Levels |
Computershare will comply with all Recovery Time Objectives (RTO) and Recovery Point Objectives (RPO) as defined in this Schedule.
Recovery capacity shall equal the normal service levels defined in the Agreement.
The continuity service levels apply regardless of the number of other customers
Computershare is obligated to service during any such interruption of Service.
3. |
Business Continuity Plan Maintenance and Exercising |
Review and testing of Computershares business continuity plans shall occur at least annually Computershare shall develop a plan to remedy any failures or anomalies identified during testing.
4. |
Notification |
Computershare shall promptly notify the Fund (i) in the event the Business Continuity Plan is executed for any Services or work locations supporting the Fund, or (ii) Computershares Customer Service Officer (as defined in Schedule 4 of the Side Agreement) becomes aware that it is reasonably likely that the Business Continuity Plan will be executed. Each party shall maintain at all times identified points of contact for the purpose of requesting information and obtaining the detailed, up-to-date status of the other partys progress and ongoing actions during disasters which require execution of the Business Continuity Plan (Plan Contacts). Computershares lead Customer Service Officer (as defined in Schedule 4 of the Side Agreement) for the Fund shall be responsible for coordinating Computershares communication with the Fund regarding the Business Continuity Plan, including, without limitation, recovery testing and implementation of recovery procedures. Each party shall notify the Plan Contacts of the other party in writing (e-mail shall constitute a writing for this purpose) of any changes to the Plan Contacts or any updates to their contact information.
Annually or upon request of the Fund as part of any annual site visit conducted by the Fund, Computershare will provide the following documentation to the Fund to evidence compliance of the Business Continuity Plan with the requirements of this Agreement:
(a) |
a written summary schedule of Business Continuity Testing Events (as defined immediately below); |
(b) |
a written summary of testing performed, including, but not limited to, identification of any significant challenges experienced in the testing and actions taken or planned to address such challenges; and |
- 49 -
(c) |
a written summary of any material changes to the Business Continuity Plan or related procedures reasonably expected to be implemented during the year following the site visit. Business Continuity Testing Events means an annual call tree test, annual alternate site recovery and semi-annual application test for recovery objective. |
5. |
Business Continuity Service Levels |
Recovery Time Objective (RTO) is the time period (objective) it takes to switch over to the disaster recovery site once Computershare makes the decision to switch over. The aim is to have a fully functional system within that time frame.
Recovery Point Objective (RPO) is the point in time before the disaster that Computershare can recover to. Computershare will comply with all Recovery Time Objectives (RTO) and Recovery Point Objectives (RPO) provided by the Customer Service Officer from time to time. The RTO and RPO as of the Effective date are set forth below:
|
RPO recovery time will be within four (4) hours, subject to Computershares ability to access at least one (1) of its data centers. |
|
RTO recovery time will be within twenty-four (24) hours, subject to Computershares ability to access at least one (1) of its data centers. |
Recovery capacity shall equal the normal service levels defined in the Agreement. The continuity service levels apply regardless of the number of other customers Computershare is obligated to service during a disaster.
6. |
In the event that the Fund (or the Funds investment adviser) implements or updates its business continuity and/or disaster recovery plan, Computershare shall provide all reasonable assistance to the Fund as may be requested. |
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EXHIBIT A (CPU Executive Summary)
- 51 -
SCHEDULE 6
REPORTS AND INFORMATION
Report |
Frequency |
|||
1. | Distribution Funding Grids | By the 5th Business day after record date, but no later than 1 Business Day before payable date | ||
2. | DRP Trade Summaries | Daily during DRIP cycle | ||
3. | DRP Recap Report | Daily during the DRP cycle, as funds issue shares and finish purchasing | ||
4. | Late Term Report | On Payable + 1 | ||
5. | DRP Analysis Grid | As soon as practical after all funds have completed the DRP process | ||
6. | Shares Outstanding Report | Weekly, every Monday, as of the previous business day and on month end | ||
7. | Number of Registered accounts | Monthly by the 5th Business Day | ||
8. | Affiliate Reporting | Monthly by the 5th Business Day | ||
9. | Monthly Score Card | Monthly by the 15th Business Day | ||
10. | 38a-1 Certification | Quarterly | ||
11. | Pre-escheatment list of at risk accounts | With commercially reasonable advance notice of each escheatment cycle |
* |
Computershare agrees to provide such other reports (including but not limited to ad hoc reports) as shall be requested by the Fund from time to time. |
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SCHEDULE 7
POST-TERMINATION SERVICES EXTENSION AND DECONVERSION SERVICES
1. |
GENERAL TERMS. |
1.1 |
Unless specifically defined in this Schedule 7 or specifically defined by reference to a Schedule, capitalized terms used in this Schedule 7 shall have the meaning assigned thereto in the Agreement. |
1.2 |
Computershare shall communicate on all Deconversion matters solely with the Deconversion Fund, Computershare shall not be obligated to act on any communication relating to a Deconversion matter if the communication does not come directly from the Deconversion Fund, and Computershare may rely on any communication from the Deconversion Fund as a communication directly from the Fund. On all Deconversion matters, the Fund hereby authorizes the Deconversion Fund to communicate with Computershare on its behalf and to enter into legally binding agreements with Computershare regarding Deconversion matters and Computershare may rely on this authorization. |
1.3 |
The Deconversion Fund and Computershares Customer Service Officer (as defined in Schedule 4 of the Side Agreement) shall constitute the principle points of contact between the Deconversion Fund and Computershare with respect to Deconversion matters. |
1.4 |
Notices required or permitted to be given under this Schedule 7 shall be governed by Section 20.1 of the Agreement, unless specifically provided otherwise in this Schedule 7. |
2. |
CERTAIN DEFINITIONS. |
Deconversion means the collaborative process of transferring Shareholder files and records related to the Funds from the Computershare system to the processing system of the Replacement Provider.
Deconversion Activities means any activities of Computershare, including without limitation all Deconversion Services, associated with any transfer or movement of files, records, materials or information or a conversion thereof to the Replacement provider.
Deconversion Commencement Date means the date that Computershare begins sending files regarding the Deconversion Fund to the Replacement Provider.
Deconversion End Date means the final expiration date of the Agreement with respect to a Deconversion Fund.
Deconversion Fund means the particular Fund or Funds that are deconverting.
Deconversion Services means the Computershare services described by Sections 4.2 through 4.7, as may be amended from time to time.
Funds Termination Notice means a termination notice sent by the Fund pursuant to Section 16 of the Agreement satisfying all terms of the provision pursuant to which it was sent.
Computershare Termination Notice means a termination notice sent by Computershare pursuant to Section 16 of the Agreement satisfying all terms of the provision pursuant to which it was sent.
Replacement Provider means the entity designated by the Deconversion Fund in a written notice received by a Customer Service Officer as the successor service Provider for such Deconversion Fund.
Termination Notice means a Funds Termination Notice or a Computershare Termination Notice.
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3. |
NOTIFICATIONS REGARDING DECONVERSIONS. |
3.1 |
Deconversion Services. |
(a) |
In the event Computershare receives a Funds Termination Notice or the Fund receives a Computershare Termination Notice, Computershare shall provide Deconversion Services with respect to termination of the Agreement or Services being terminated, as the case may be, subject to the particular Termination Notice. |
(b) |
A Deconversion Notice shall in all cases be conclusively presumed to request that the Deconversion Activities be completed as of the Deconversion End Date. |
4. |
THE DECONVERSION SERVICES. |
4.1 |
Computershare shall undertake commercially reasonable efforts, subject to the further provisions of Section 5, to perform the Deconversion Services subject to the good faith and commercially reasonable cooperation of the Replacement Provider and the Deconversion Fund in such efforts. |
4.2 |
Computershare will cooperate in good faith with the Deconversion Fund and Replacement Provider to advise them with respect to their creation of a Deconversion plan, including without limitation advice with respect to objectives, feasible timelines and significant milestones, specifications and requirements supported by Computershare, master files and balancing reports typically furnished by Computershare in deconversions, and to reasonably assist in the manner customary for terminating service providers in the execution of reasonable action items in the Deconversion plan. |
4.3 |
Computershare will provide a certification letter on the first business day following the Deconversion End Date verifying key system totals including: |
(i) |
Total Issued and outstanding shares |
(ii) |
Current year distributions, and withholding |
4.4 |
Computershare will reasonably cooperate with the Deconversion Fund and Replacement Provider in their efforts, as may be requested, to create a document which maps the transfer of responsibility for applicable transfer agent functions from Computershare to the Replacement Provider, including, but not limited to: |
(i) |
Uncashed checks |
(ii) |
Shareholder mail |
(iii) |
ACH returns |
(iv) |
Misdirected wires |
(v) |
Open control reconciliation items |
(vi) |
RPO and escheat items |
(vii) |
Civil penalties |
(viii) |
W-9 forms and W-8 forms |
(ix) |
Tax reporting |
(x) |
Shareholder confirmations and statements |
(xi) |
Research items |
(xii) |
Correspondence items |
(xiii) |
Fulfillment items |
(xiv) |
Adjustments |
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(xv) |
Shareholder servicing (call center) |
(xvi) |
Control reporting and settlement |
4.5 |
In connection with a reasonable number of a dress rehearsals or mock deconversions reasonably requested by the Replacement Provider prior to the Deconversion End Date, Computershare will provide a master file and balancing report for each Deconversion Fund customary for a deconversion to the Replacement Provider in closed-end fund/equity transfer agent format and specifications, and provide the Replacement Provider with the customary assistance of a transferring service provider in such dress rehearsals or mock deconversions. The Customer shall pay for each individual file created by Computershare in connection with such dress rehearsals or mock deconversions in accordance with the fee schedule of Computershare for such services in place at the time of the dress rehearsals or mock deconversions. |
4.6 |
In connection with the Deconversion of each Deconversion Fund, Computershare will provide a master file and balancing report customary for a deconversion to the Replacement Provider in closed-end fund/equity transfer agent format and specifications, with data relating to the Deconversion Fund as of the Deconversion End Date and provide the Replacement Provider with the customary assistance of a transferring service provider in deconversions. |
4.7 |
Notwithstanding anything in this Schedule 7 to the contrary, nothing herein contained will be construed to require Computershare to share any of its Confidential Information or its Proprietary Information with any entity which is a competitor of Computershare. |
5. |
ADDITIONAL TERMS GOVERNING SERVICES EXTENSIONS AND DECONVERSION SERVICES |
5.1 |
Computershare will have no obligation to furnish the Services after the termination date of the Agreement. |
5.2 |
Computershare will have no obligation to provide Deconversion Services until Computershare receives notification of termination of the Deconversion Fund. |
5.3 |
Computershare will use commercially reasonable efforts to commence the Deconversion and perform the Deconversion Services by the applicable termination date, but Computershare makes no warranties, covenants, guarantees or representations that it will or be able to commence the Deconversion or complete all Deconversion Services by such date. Provided that, in the event Computershare is not able to commence the Deconversion or complete all Deconversion Services by the termination date, including as the result of any delays relating to the preparations for such Deconversion by the Replacement Provider or the Deconversion Fund, the parties agree to work together in good faith to mutually determine a new termination date for such Deconversion Fund, including cooperating on any subsequent changes to such date as are required to complete the Deconversion. |
5.4 |
All obligations of Computershare with respect to the performance of Service and Service Levels shall remain in effect until the Deconversion Commencement Date; provided, however, any failure of Computershare to perform a Service at a Service Level included in the KPI Table (as defined in the KPI Document) or otherwise in accordance with the Agreement that is reasonably attributable to the performance of Deconversion Activities, based on supporting materials or written reports furnished by Computershare, shall not be considered a breach of the Agreement or a Service Level and shall not be included in any determination of Service Fee Credits (as defined in the KPI Document). |
5.5 |
In connection with any termination of the Agreement, upon request of the other party, each party will either return to the other party no later than the Deconversion End Date, or destroy, all Confidential Information of the other party, and upon the request of the other party will certify that it has complied with its obligations under this Section 5.5 with respect to the other partys Confidential Information, except that a party may retain the other partys Confidential Information subject to the confidentiality obligations of the Agreement to the extent (and for the limited period) that the party is required to do so for the purposes of compliance with applicable recordkeeping laws, rules or regulations; provided, however, notwithstanding the foregoing, Computershare may retain, subject to the confidentiality obligations set forth in the Agreement, copies of all data, information, files and records of whatsoever nature received, processed or created in connection with its activities under the |
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Agreement that it reasonably determines to be appropriate to document its compliance with the Agreement, to protect its rights under the Agreement, or to comply with legal, regulatory, audit, accounting or similar business requirements provided it does so in accordance with its information security policies and document destruction and retention policies. |
6. |
DECONVERSION FEES. |
6.1 |
in connection with any termination under Section 16 of the Agreement involving Deconversion Services, the Fund shall pay to Computershare the amounts described in clauses (i) through (iii) below, in advance of the Deconversion Commencement Date: |
(i) |
any Fees and reimbursable expenses that may be owed pursuant to Section 4 of the Agreement for services performed by Computershare pursuant to the Agreement through the Deconversion End Date, as appropriate (whether or not previously invoiced); |
(ii) |
all fees and out of pocket expenses associated with the movement of records and materials to the Funds or the Replacement Provider, including fees such as, but not limited to, data files and reports, in accordance with the fee schedule of Computershare in place at the time of the Deconversion End Date, and any out of pockets incurred, including but no limited to freight; |
(iii) |
the amount estimated in good faith by Computershare (Good Faith Estimate) for the reasonable out-of-pocket expenses expected to be incurred in performing any services to be provided by Computershare following the dates with respect to which the compensation contemplated by clauses (i) and (ii) above has been calculated that constitute services provided for by the Agreement or that may relate to a cessation of operations or the winding up of the affairs covered by the Agreement, including by way of example and not limitation, answering general shareholder inquiries, furnishing historical shareholder account information to authorized parties, providing tax services with respect to transactions occurring before the termination such as the filing of final tax forms, maintaining a service account for checks not yet cleared, and compliance with record retention requirements (Reimbursable Trailing Expenses); and |
(iv) |
Computershares obligation to perform any Deconversion Activities is expressly conditioned on the prior performance by the Fund, to Computershares reasonable satisfaction, of the Funds obligations set forth in the Agreement. |
6.2 |
Within 120 days following the appropriate Deconversion End Date: |
(i) |
Computershare shall determine any (A) amounts that should have been paid pursuant to Section 6.1 or otherwise but could not or was not determined, invoiced or estimated by Computershare and have not been paid, and (B) any amounts paid pursuant to Section 6.1 or otherwise that are in excess of amounts actually owed; |
(ii) |
Computershare shall net the amounts determined in accordance with clause (i) above and notify the Fund whether Computershare owes money to the Fund or the Fund owes money to Computershare and the amount owed; and |
(iii) |
Within seven (7) Business Days following the notice in accordance with Section 6.2(ii), Computershare will pay the Fund any amount it owes the Fund or the Fund shall pay Computershare any amount it owes Computershare. |
(iv) |
Computershare will perform any tax or regulatory required mailings that may occur outside 120 days, as mutually agreed upon by the parties. |
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SCHEDULE 8
INSURANCE
Section 1. |
General Matters. Unless specifically defined in this Schedule 8 or specifically defined by reference to an Appendix or Schedule, capitalized terms used in this Schedule 8 shall have the meaning assigned to them in the Agreement. |
Section 2. |
Minimum Coverage Requirements. Computershare shall at its sole cost and expense, during the term of the Agreement, procure and maintain in effect the insurance coverage covering the risks, claims and liabilities arising from or in connection with the performance of work under the Agreement by Computershare, its agents, representatives, employees or, where applicable, subcontractors, as specified in this Exhibit.. All insurance shall be procured from reputable insurers (rated A-, VIII or better by A.M. Best & Company) that are licensed, approved or admitted to do business in the state. |
Section 3. |
Insurance Coverage. |
(i) Insurance covering Computershares employees for injuries arising out of their employment for services provided under the Agreement in an amount that will be sufficient to meet all applicable statutory requirements to cover Computershares employees (commonly referred to as Workers Compensation Insurance).
(ii) Insurance covering all sums Computershare shall become legally obligated to pay because of bodily injury by accident or disease sustained by any employee of Computershare arising out of their employment for services provided under the Agreement (commonly referred to as Employers Liability Insurance) in amounts not less than (a) $1,000,000 each accident for bodily injury by accident; (b) $1,000,000 each employee for bodily injury by disease; and (c) $1,000,000 policy limit for bodily injury by disease;
(iii) Insurance covering all sums Computershare shall be legally obligated to pay because of claims for bodily injury and property damage arising out of premises, operations, products and completed operations; and advertising and personal injury (commonly referred to as Commercial General Liability Insurance or Public Liability Insurance) in amounts not less than (a) $1,000,000 per occurrence and $1,000,000 in aggregate; and (b) $10,000,000 per occurrence of Umbrella Liability Insurance scheduling the Commercial General Liability Insurance or Public Liability Insurance. This insurance shall include: (a) contractual liability covering Computershares liability under the Agreement; and (b) a severability of interest clause.
(iv) If automobiles or other vehicles are used in connection with the performance or provision of the services under the Agreement, insurance covering all sums Computershare shall be legally obligated to pay because of claims for bodily injury or property damage arising out of the use of owned, hired, and non-owned automobiles in the rendering of Services to be provided under the Agreement (commonly referred to as Automobile Liability Insurance) in an amount not less than (a) $1,000,000 combined single limit for bodily injury and property damage per accident and in aggregate.
(v) Insurance covering loss resulting from dishonest or fraudulent acts committed by Computershares employees, its agents and, where applicable, subcontractors; forgery and alteration and including coverage of third party property; and computer crime as further described in (vii) (commonly referred to as Crime Insurance or Fidelity Bond) in an amount not less than $10,000,000 per claim.
(vi) Insurance covering all sums Computershare shall be legally obligated to pay because of claims for wrongful acts, negligent errors or negligent omissions committed by Computershare, its agents and employees arising from the Services to be provided under the Agreement (commonly referred to as Professional Liability Insurance or Errors & Omissions Insurance) in an amount not less than $10,000,000 per claim. If coverage is written on a claims-made basis, the retroactive date must be shown, and must be on or before the commencement of the services or work.
(vii) Insurance covering all sums Computershare shall be legally obligated to pay because of claims alleging a security failure (including but not limited to failure of a computer system, unauthorized access / use of a computer system, virus transmission, denial of service, physical theft of hardware) or a privacy event (including but not
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limited to failure to protect confidential information) (commonly referred to as Cyber Liability Insurance or Network Security and Privacy Liability Insurance or alternatively afforded by Comprehensive Crime and Computer Electronic Crime insurance) in an amount not less than $10,000,000 per claim. If coverage is written on a claims-made basis, the retroactive date must be shown, and must be on or before the commencement of the services or work.
Section 4. |
Effect. The insurance requirements under the Agreement are not intended and shall not be construed to modify, limit, increase, or reduce the indemnification obligations made in the Agreement by Computershare to Customer or to modify, limit, increase or reduce Computershares liability as set forth in the Agreement. |
Section 5. |
No warranty is made by Customer that the coverage or limits set forth herein are adequate to cover and protect the interests of Computershare for Computershares operations. |
Section 6. |
Evidence of Insurance Coverage. Prior to the execution of the Agreement, Computershare shall furnish Customer with a certificate of insurance that evidences all the insurance required in the Agreement and thereafter at the request of Customer. Computershares failure to deliver evidence of coverage in form and substance reasonably satisfactory to Customer or its designee shall not be construed as a waiver of that partys obligation to provide the required insurance coverage. Receipt by Customer of a non-conforming certificate of insurance does not constitute acceptance. |
Section 7. |
Notifications. Computershare shall provide for at least 30 days prior written notice to be given to Customer in the event coverage is materially changed, cancelled or non-renewed. Computershare shall not take or omit to take any reasonable action or (insofar as it is reasonably within its power) permit anything to occur in relation to the insurance policies indicated above as would entitle the relevant insurer to refuse to pay any claim under the policies. |
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SCHEDULE 9
CUSTOMER INFORMATION SECURITY
Adherence to Standards of Protection.
In fulfilling its obligations under this Schedule 9 (Schedule), Computershare may utilize methods, processes, or procedures concerning information security (Processes) similar to and substantially conforming to certain terms herein. Computershare shall at all times ensure that any such Processes are no less rigorous in their protection to Customer than (i) the standards reflected in this Exhibits terms set forth below, and (ii) the Processes by which Computershare maintains the integrity and efficacy of its own information security. In all cases Computershares Processes shall provide safeguards no less protective than those of the terms of this Exhibit in all material respects. Unless specifically defined in this Schedule, or specifically defined by reference to an Appendix or Schedule to the Agreement or Side Agreement, capitalized terms used in this Schedule shall have the meaning assigned to them in the Agreement.
(i) |
Definitions. |
a. |
Customer Confidential Information means Confidential Information of the Customer provided to Computershare. |
b. |
Firewall is an integrated collection of security measures used to protect against unauthorized electronic access to a networked computer system. |
c. |
Encryption is a process of using an algorithm to transform data into coded information in order to protect confidentiality. |
d. |
Intrusion Detection Process (or IDP) is a method of reviewing system logs and processes in near real time and, without unreasonable delay, alerting management to known patterns of behavior that indicate an intrusion is occurring or is likely to take place soon. |
(ii) |
Breach Notification and Remediation. |
In the event of an actual security breach incident involving Computershares systems or network that has resulted in unauthorized access to or disclosure of, or have any material adverse effect on, Customer Confidential Information (Incident), Computershare shall:
a. |
Within two business days after the confirmation by Computershare of the occurrence of an Incident, notify a Lead for Global Provider Services (as defined in Schedule 4 of the Side Agreement) by telephone and subsequently in writing. Notice shall include the approximate date and time of the Incident and a summary of all relevant facts along with the actions taken to rectify the Processes and address the Incidents effects. An Incident may include, but is not limited to, instances in which Computershares personnel (Computershare Personnel) access systems in excess of their user rights or otherwise use the systems inappropriately; |
b. |
Immediately implement commercially reasonable measures necessary to ensure the security of Computershares systems and restore the security of Customer Confidential Information. If such measures include temporarily restricting access to any of Computershares information, network or systems in order to mitigate against further breaches, Computershare shall notify Customer of the restricted access, in advance of such restriction when possible but in all cases as soon as possible. Customer may request additional steps of Computershare relating to Computershares Processes and to address the Incidents effects. In the event of an Incident, Computershare shall reasonably cooperate with Customer in order for Customer to verify Computershares compliance with its obligations under this section (ii)(b). |
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(iii) |
Independent Control Attestations. |
Computershare shall:
a. |
Computershare will engage a certified public accounting film to conduct a SSAE 16, AT 101, or equivalent audit of the control environment and activities of Computershare and prepare a report on an annual basis. Computershare shall make available to Customer a copy of each such report prepared in connection with each such audit, within a reasonable amount of time after receipt. Customer will pay a fee for each such report in accordance with Computershares fees in effect at such time; and |
b. |
Penetration Testing. For Computershare systems that host or process Customer Confidential Information, Computershare shall at least annually engage at its own expense a third party service provider for penetration testing and provide Customer with an executive overview of such testing. The method of test scoring and issue ratings shall follow standard industry practice, such as the latest Common Vulnerability Scoring System (CVSS) published by the US National Institute of Standards and Technology (NIST). For any material findings (critical, priority, or high risk), Computershare shall within thirty (30) days from its receipt of penetration test results produce a remediation plan detailing the actions and dates by when these security issues shall be fully resolved. Computershares failure to prepare and schedule a remediation plan within sixty (60) days of the penetration test report represents sufficient grounds for Customer to terminate the Agreement for cause. |
(iv) |
Data Management. |
Computershare shall:
a. |
Information Classification. Unless otherwise indicated by Customer, consider all Customer Confidential Information to be classified as Confidential and handle accordingly. |
b. |
Encryption of Information. Use industry-standard encryption techniques (for example, public encryption algorithms such as 3DES, RC4 RC5, IDEA, RSA and AES) at cipher strengths no less than 128-bit or equivalent for Customer Confidential Information. Computershare shall use industry standard authentication practices for Customer Confidential Information. |
c. |
Cryptographic Key Management. Ensure that cryptographic keys are managed securely at all times, in accordance with documented control requirements and procedures which are consistent with good industry practice, and shall ensure that Customer Confidential Information is protected against unauthorized access or destruction. Computershare shall ensure that if public key infrastructure (PKI) is used, it shall be protected by hardening the underlying operating system(s). |
d. |
Transmission. If transferred across the Internet, any wireless network (e.g., cellular, 802.11x, or similar technology), or other public or shared networks, data must be protected using cryptography consistent with good industry practice. Computershares policies do not allow for the copying of Confidential Information to Removable Media (defined below). |
e. |
Data Backups. In connection with the performance of Services, Computershare shall create backup records of Customers information, including but not limited to server files (backup files) at least daily. Computershare will not create backup files on Removable Media. Any Computershare storage or retention of backup files is subject to all terms of this Section (iv). |
f. |
Event Logging. For Computershares systems directly utilized for providing services to Customer and/or processing or storing Customer Confidential Information, Computershare shall maintain logs of key events that may affect the confidentiality, integrity, and/or availability of the Service to Customer and that may assist in the identification or investigation of material incidents and/or security breaches occurring in relation to Computershare systems. Computershare shall retain the log for at least 12 months and protect the log against unauthorized changes (including, unauthorized amending or deleting a log). Computershare shall regularly review the logs of all key events within Computershare systems (preferably using automated tools) and notify Customer upon identification of any Incidents in accordance with Section (ii)(a) of this Schedule. |
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g. |
Software Updates. Computershare shall (i) use the most current version of software required to support the performance of Services, including anti-virus and other security software, (ii) regularly review its software applications and systems in light of new products or software releases providing enhanced functionality, and (iii) replace or patch existing software as enhancements become available as determined appropriate by Computershare and consistent with good industry practice. |
h. |
Removable Media. For purposes of this Schedule , Removable Media means portable or removable hard disks, floppy disks, USB memory drives, zip disks, optical disks, CDs, DVDs, digital film, memory cards (e.g., Secure Digital (SD), Memory Sticks (MS), CompactFlash (CF), SmartMedia (SM), MultiMediaCard (MMC), and xD-Picture Card (xD)), magnetic tape, and all other removable data storage media whether owned by Customer or Computershare. |
i. |
Media Disposal and Servicing. In the event any hardware, storage media or Removable Media used in connection with the Services must be disposed of or transported for servicing, Computershare shall ensure all Customer Confidential Information has been deleted and is not accessible from such hardware and/or media using methods such as, burning, shredding, pulping, melting, mutilation, chemical decomposition, or pulverizing. Crosscut shredders shall be designed to produce residue particle size not exceeding 1/32 inch in width (with a 1/64 inch tolerance by 1/2 inch in length). Classified material in microform; that is, microfilm, microfiche, or similar high data density material may be destroyed by burning or chemical decomposition. Industry best practices should be deployed, such as those of the U.S. National Institute of Standards and Technology (NIST). |
(v) |
Computer & Network Security. |
a. |
Server Security. Access to any of Computershares computer servers used to perform development Services for Customer shall be limited to only Computershare Personnel performing Services. Computershare will back-up the server files daily |
b. |
Internal Network Segment Security. All data entering Computershares internal data network from any external source (including, without limitation, the Internet), must pass through Firewalls to enforce secure connections between internal and external systems and such Firewalls shall only allow specific types of data to pass through. |
c. |
External Segment Security. Computershares external connections to the Internet or direct connections to Customer shall (i) have commercially reasonable security measures and controls applied to its routers, and (ii) include an IDP that will monitor all data within the external segment and information coming from routers to the Firewalls. Computershare shall disable unnecessary network access points to prevent unauthorized devices from accessing the Customer VLAN. Computershare Personnel may not use PDAs to access devices with the Customer VLAN. |
d. |
Network and Systems Monitoring. Computershare shall actively monitor all of its networks and systems (including but not limited to IDP, Local Area Network/Wide Area Network (LAN/WAN) equipment and systems and all servers) to detect deviation from access control policies and actual or attempted intrusions or other unauthorized acts. |
e. |
Data Leakage. Computershare shall deploy data leakage tools to detect any unauthorized transfers of Customer Confidential Information outside Computershare systems and any unauthorized external transfers of such information. |
f. |
Instant Messaging and Email. Computershare shall ensure that its instant messaging and email services are protected by both policy and technical application controls, configuring all commercially reasonable methods for Computershares related infrastructure. To the extent Computershare Personnel will have access to external email or the Internet Computershare will have policies or systems to monitor its usage. |
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g. |
User Authentication. Computershare shall implement processes designed to authenticate the identity of all network users through the following means: |
i. |
User ID. Each user of an application containing Customer Confidential Information shall be assigned a unique identification code (User ID). |
ii. |
Passwords. Each user on Computershares network should use a unique password to access applications containing Customer Confidential information. Passwords should be at least eight (8) alphanumeric characters, using mixed upper and lower case, numbers and special characters. Passwords and PINs must be different than User IDs and must be updated at least every ninety (90) calendar days. The use of passwords that are easily discerned shall be avoided (e.g., passwords made up from users birthdays, street addresses, childrens names, etc.) and shall align with ISO/EIC 27001:2005 and BS7799-2:2005. Computershare shall require users to update, at least every sixty (60) calendar days, PINs and passwords which control access to applications or systems containing Customer Confidential Information. |
iii. |
Secure tokens. Remote access to applications containing Customer Confidential Information shall require the use of security codes that are made available to users via a key fob or other token device issued by Computershare to each user. |
iv. |
Deactivation. Computershare applications shall automatically deactivate a User ID after a specified number of unsuccessful log-in attempts. Sessions must be restricted or timed out after a defined period of inactivity and require Users to re-authenticate. User IDs for Computershare Personnel with access to Customer Confidential Information shall be deactivated immediately upon changes in job responsibilities that render such access unnecessary, or upon termination of employment. |
h. |
Privileged Access. Computershare shall ensure that: |
i. |
Privileged user access accounts are not provided for use in day-to-day operations. |
ii. |
Users provided with privileged user access have such access terminated within two days following the relevant user leaving Computershares employment. |
i. |
Anti-virus Protection. Computershare shall: |
i. |
Scan incoming files. Computershare shall use industry-accepted anti-virus tools to scan all incoming files that may be stored or processed with files containing Customer Confidential Information. |
ii. |
Use commercially reasonable efforts to protect against any Unauthorized Code. Unauthorized Code means any virus, Trojan horse, worm or other software routines or equipment components whose effect is to permit unauthorized access or to disable, erase or otherwise harm software, equipment or data, or to perform any other actions not authorized by Customer. |
iii. |
Use commercially reasonable efforts to protect against transferring Unauthorized Code to Customer or Customers systems via email or other electronic transmission. |
iv. |
Use commercially reasonable efforts to protect against any Self-Help Codes. Self-Help Codes means any back door, time bomb, drop-dead device, or other software routine whose effect is to disable a computer program automatically with the passage of time or under the positive control of an unauthorized person. Self-Help Codes do not include software routines whose effect is to permit an owner or authorized user of the computer program to obtain access to a Customers computer system (s) (e.g., remote access via modem) solely for purposes of maintenance or technical support. |
(vi) |
System Development |
a. |
Development Methodology and Installation Process. |
i. |
For systems directly providing services to Customer and/or processing or storing Customer Confidential Infonnation, Computershare shall ensure that development activities are carried out in accordance with a documented system development methodology. |
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ii. |
Computershare shall ensure that new systems and changes to existing systems are deployed to the live environment strictly in accordance with a documented process. |
b. |
Development Environments. Computershare shall ensure that system development is performed in distinct environments segregated from the production environment, and protected against unauthorized disclosure of Customer Confidential Information. |
c. |
Capacity and Performance Planning. For systems directly providing services to Customer, Computershare shall ensure that the likelihood and impact of system failures or outages are minimized, through the use of effective capacity and performance planning practices. For systems used to process Customer transactions and/or to manage Customer assets, Computershare shall maintain capacity plans and conduct performance monitoring in accordance with good industry practice. |
d. |
Testing Process. Computershare shall ensure that all elements of a system (i.e. application software packages, system software, hardware and services) shall be tested at all stages of the systems development lifecycle before the system is promoted its live environment. |
e. |
Live Data in Test Environments. Computershare shall ensure that Customer Confidential Information (including Personal Data) is never used within test environments without documented controls needed to protect such information, including but not limited to the scrambling and obfuscating of such Customer Confidential Information in accordance with commercially reasonable standards. |
f. |
Secure Coding Practices. Computershare shall have secure development practices, including the definition, testing, and deployment of security requirements. |
(vii) |
General Security. |
a. |
Point of Contact. Computershare shall designate a point of contact to coordinate and be accountable for the continued security of all Customer Confidential Information and related systems in Computershares possession or to which Computershare has access. |
b. |
Facilities. All Services involving the processing of Customer Confidential Information shall be (i) developed in Computershare facilities, and (ii) housed in secure areas and protected by perimeter security such as barrier access controls (e.g., the use of guards and entry badges) that provide a physical environment secure from unauthorized access, damage, and interference (the Dedicated Facilities). Additional requirements specific to the Dedicated Facilities are: |
i. |
All access points are designed to restrict entry and limit access to certain designated areas to authorized personnel and peimitted visitors. |
ii. |
Computershare shall implement and maintain personnel and physical security policies, including, without limitation, a clean desk policy. In addition, the Dedicated Facilities must contain shredders and confidential bins for disposing of documents containing Customer Confidential Information or related to the Services, and all papers discarded in such bins must be shredded. |
iii. |
Computershare has installed closed circuit television (CCTV) systems and CCTV recording systems to monitor and record access to controlled areas. |
iv. |
All Computershare Personnel shall be issued and shall display an identification badge showing the bearers name and photographic likeness. |
v. |
Each location shall maintain procedures for validating visitor identity and authorization to enter the premises, including but not limited to an identification check, issuance of an identification badge, validation of host identity, purpose of visit and recorded entry and departure time. |
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c. |
Change and Patch Management |
i. |
Computershare shall ensure that changes to applications, any part of Computershares IT infrastructure, and the network shall be tested, reviewed and applied using a documented change management process. |
ii. |
Computershare shall ensure that emergency fixes, including security patches, are implemented when available and approved, unless this introduces higher business risks. Computershare systems that for any reason cannot be updated shall have security measures installed to fully protect the vulnerable system. All changes must be undertaken in accordance with Computershares approved change management process. |
iii. |
Patch Management. Computershare shall develop and implement a patch management strategy that is supported by management controls and patch management procedures and operational documentation. Within a reasonable time, Computershare will review newly available security patches and determine whether to implement a particular patch and the timing of any such implementation based upon risks to Computershare or its customers and such other factors as Computershare deems relevant. |
iv. |
Computershare shall have a documented process to identify and remediate security vulnerabilities in any software provided to Customer and provide these updates to Customer within a reasonable time after their becoming available, if applicable. |
d. |
Training of Computershare Personnel. |
Computershare shall at least annually supply all Computershare Personnel with appropriate ongoing training regarding Computershares Processes, including, without limitation, procedures to ensure all Computershare Personnel promptly report Incidents and suspected security breach incidents. Such training shall be provided within one (1) month of Computershare Personnel being engaged in the provision of Services or prior to Computershare Personnel being given access to Customer Confidential Information. Computershare shall be responsible for retaining documentation that annual training has been completed for each Computershare Personnel engaged in the provision of Services.
(viii) |
Data Center Controls. |
a. |
Base Requirements. Any Computershare data center supporting the Services shall possess the following minimum requirements: |
i. |
Adequate physical security and access controls; |
ii. |
Professional HVAC & environmental controls; |
iii. |
Professional network/cabling environment; |
iv. |
Professional fire detection/suppression capability; and |
v. |
A comprehensive business continuity plan. |
b. |
Enhanced Requirements. Computershares data center shall possess all requirements and capabilities of a highly-available, redundant N+1 data center, where multiple components each have at least one independent backup component to ensure that system functionality continues at acceptable performance levels in the event of a system failure, except as may be otherwise provided in the Agreement. |
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SCHEDULE 10
DATA PROTECTION: PERSONAL DATA SUPPLEMENT
1. |
Definitions. |
a. |
Data Protection Legislation means, to the extent applicable to Computershare in the provision of any Services under the Agreement, the EU Data Protection Directive 95/46/EC (Directive), the EU Directive on Privacy and Electronic Communications 2002/58/EC, Commission decisions. |
b. |
Personal Data has the meaning given to that term by the Directive. |
c. |
Process(ing) has the meaning given to that term by the Directive and Processed shall have a corresponding meaning. |
2. |
Other Terms. |
a. |
Computershare and Customer acknowledge that for the purposes of the Directive, Customer is the Controller and Computershare is the data processor of any Personal Data. Computershare shall, at all times, comply with its obligations and ensure that its personnel (Computershare Personnel) comply with their obligations under Data Protection Legislation in relation to all Personal Data that is Processed by it in the course of performing its obligations under the Agreement, including by maintaining any valid and up-to-date registration or notification required under Data Protection Legislation. |
b. |
Computershare shall process the Personal Data only to the extent, and in such a manner, as is necessary for the purposes specified in the Agreement and shall not process the Personal Data for any purpose other than those expressly authorized by Customer herein. Computershare will keep a record of any processing of personal data it carries out on behalf of Customer. |
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SCHEDULE 11
LIMITATION OF LIABILITY
In accordance with Section 7.4 of the Agreement, Transfer Agents aggregate liability during any annual term of the Agreement with respect to, arising from, or arising in connection with the Agreement, or as a result of any Services provided or omitted to be provided under the Agreement, whether in contract, or in tort, or otherwise, is limited to, and shall not exceed, the following amounts: (a) amounts paid hereunder by the Customer to Transfer Agent as fees and charges, but not including reimbursable expenses, during the thirty-six (36) calendar months immediately preceding the event for which recovery from the Transfer Agent is being sought which arises out of the Transfer Agents negligence, and (b) amounts paid hereunder by the Customer to Transfer Agent as fees and charges, but not including reimbursable expenses, during the sixty (60) calendar months immediately preceding the event for which recovery is being sought which arises out of the Transfer Agents gross negligence. For the avoidance of doubt, the Transfer Agents aggregate liability during any term of the Agreement with respect to, arising from, or arising in connection with the Agreement, or as a result of any Services provided or omitted to be provided under the Agreement, whether in contract, or in tort, or otherwise, which arises out of the Transfer Agents bad faith of willful misconduct shall not be subject to the foregoing limitations.
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Exhibit (k)(2)
ADMINISTRATION AND FUND ACCOUNTING SERVICES AGREEMENT
Between
Each BlackRock Management Investment Company Listed in Schedule A
And
State Street Bank and Trust Company
Dated as of December 31, 2018
TABLE OF CONTENTS
Page | ||||||
1. |
APPOINTMENT OF ADMINISTRATOR |
4 | ||||
2. |
DELIVERY OF DOCUMENTS |
4 | ||||
3. |
REPRESENTATIONS AND WARRANTIES OF THE ADMINISTRATOR |
5 | ||||
4. |
REPRESENTATIONS AND WARRANTIES OF THE FUNDS |
5 | ||||
5. |
ADMINISTRATION SERVICES |
6 | ||||
6. |
COMPENSATION OF ADMINISTRATOR; EXPENSE REIMBURSEMENT; FUND EXPENSES |
6 | ||||
7. |
INSTRUCTIONS AND ADVICE |
6 | ||||
8. |
STANDARD OF CARE; LIMITATION OF LIABILITY AND INDEMNIFICATION |
7 | ||||
9. |
CONFIDENTIALITY |
8 | ||||
10. |
USE OF DATA |
8 | ||||
11. |
COMPLIANCE WITH GOVERNMENTAL RULES AND REGULATIONS; RECORDS |
9 | ||||
12. |
SERVICES NOT EXCLUSIVE |
9 | ||||
13. |
EFFECTIVE PERIOD AND TERMINATION |
9 | ||||
14. |
DELEGATION |
10 | ||||
15. |
INTERPRETIVE AND ADDITIONAL PROVISIONS |
10 | ||||
16. |
NOTICES |
11 | ||||
17. |
AMENDMENT |
11 | ||||
18. |
ASSIGNMENT |
11 | ||||
19. |
SUCCESSORS |
11 | ||||
20. |
DATA PROTECTION |
11 | ||||
21. |
ENTIRE AGREEMENT |
12 | ||||
22. |
WAIVER |
12 | ||||
23. |
SEVERABILITY |
12 | ||||
24. |
GOVERNING LAW |
12 | ||||
25. |
REPRODUCTION OF DOCUMENTS |
12 | ||||
26. |
LIMITATION OF LIABILITY OF TRUSTEES |
12 | ||||
27. |
COUNTERPARTS |
12 |
- 2 -
TABLE OF CONTENTS
(continued)
SCHEDULE A |
LISTING OF FUNDS AND PORTFOLIOS |
|
SCHEDULE B |
LIST OF SERVICES |
|
SCHEDULE B1 |
FUND ADMINISTRATION TREASURY SERVICES |
|
SCHEDULE B2 |
FUND ADMINISTRATION TAX SERVICES |
|
SCHEDULE B5 |
FUND ADMINISTRATION MONEY MARKET FUND SERVICES |
|
SCHEDULE B6 |
FUND ADMINISTRATION FORM N-PORT AND FORM N-CEN SUPPORT SERVICES |
|
SCHEDULE B7 |
FUND ACCOUNTING SERVICES |
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ADMINISTRATION AND FUND ACCOUNTING SERVICES AGREEMENT
This Administration and Fund Accounting Services Agreement (Agreement) dated and effective as of December 31, 2018, is by and between State Street Bank and Trust Company, a Massachusetts trust company (the Administrator), and each management investment company identified on Schedule A hereto, together with each management investment company which becomes a party to this Agreement in accordance with the terms hereof (each a Fund and collectively, the Funds).
WHEREAS, each Fund is, unless otherwise noted, an open-end or closed-end, management investment company, and may be currently comprised of different series (each, a Portfolio and collectively, the Portfolios), and is registered with the U.S. Securities and Exchange Commission (SEC) by means of a registration statement (Registration Statement) under the Investment Company Act of 1940, as amended (the 1940 Act), and in most instances, the Securities Act of 1933, as amended (1933 Act); and
WHEREAS, each Fund desires to retain the Administrator to furnish certain administrative services to the Funds, and the Administrator is willing to furnish such services, on the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the parties hereto agree as follows:
1. |
APPOINTMENT OF ADMINISTRATOR |
Each Fund hereby appoints the Administrator to act as administrator to such Fund for purposes of providing certain administrative services for the period and on the terms set forth in this Agreement. The Administrator accepts such appointment and agrees to render the services stated herein.
Certain Funds currently consist of the Portfolios as listed in Schedule A to this Agreement. In the event that a Fund establishes one or more additional Portfolio(s) with respect to which it wishes to retain the Administrator to act as administrator hereunder, the Fund shall notify the Administrator in writing. Upon written acceptance by the Administrator, such Portfolio(s) shall become subject to the provisions of this Agreement to the same extent as the existing Portfolios, except to the extent that such provisions (including those relating to compensation and expenses payable) may be modified with respect to such Portfolio in writing by the Fund and the Administrator at the time of the addition of such Portfolio.
2. |
DELIVERY OF DOCUMENTS |
Each Fund has or will promptly deliver, or make available electronically, to the Administrator copies of each of the following documents and all future amendments and supplements, if any:
a. |
The Funds Charter Documents (Governing Documents); |
b. |
The Funds currently effective Registration Statement under the 1933 Act (if applicable) and the 1940 Act and each Prospectus and Statement of Additional Information (SAI) relating to the Portfolio(s) and all amendments and supplements thereto as in effect from time to time; |
c. |
Copies of the resolutions of the Board of Directors/Trustees of each Fund (the Board) certified by such Funds Secretary authorizing (1) the Fund to enter into this Agreement and (2) certain individuals on behalf of the Fund to (a) give instructions to the Administrator pursuant to this Agreement and (b) sign checks and pay expenses; |
d. |
A copy of the investment advisory agreement between each Fund, on behalf of itself or each Portfolio, and its investment adviser; and |
e. |
Such other certificates, documents or opinions which the Administrator may, in its reasonable discretion, deem necessary or appropriate in the proper performance of its duties. |
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3. |
REPRESENTATIONS AND WARRANTIES OF THE ADMINISTRATOR |
The Administrator represents and warrants to the Funds that:
a. |
It is a Massachusetts trust company, duly organized and existing under the laws of The Commonwealth of Massachusetts; |
b. |
It has the requisite power and authority to carry on its business in The Commonwealth of Massachusetts; |
c. |
All requisite corporate proceedings have been taken to authorize it to enter into and perform this Agreement; |
d. |
No legal or administrative proceedings have been instituted or threatened which would have a material effect on the Administrators ability to perform its duties and obligations under this Agreement; and |
e. |
Its entrance into this Agreement shall not cause a material breach or be in material conflict with any other agreement or obligation of the Administrator or any law or regulation applicable to it. |
4. |
REPRESENTATIONS AND WARRANTIES OF THE FUNDS |
Each Fund represents and warrants to the Administrator that:
a. |
It is a corporation, business trust or statutory trust, as the case may be, duly organized, existing and in good standing under the laws of its state of formation; |
b. |
It has the requisite power and authority under applicable laws and by its Governing Documents to enter into and perform this Agreement; |
c. |
All requisite proceedings have been taken to authorize it to enter into and perform this Agreement; |
d. |
A Registration Statement has been filed and, with respect to Funds that are open-end management investment companies, will be effective and remain effective during the term of this Agreement. Each Fund also warrants to the Administrator that as of the effective date of this Agreement, all necessary filings under the securities laws of the states in which the Fund offers or sells its shares have been made; |
e. |
No legal or administrative proceedings have been instituted or threatened which would have a material effect on a Funds ability to perform its duties and obligations under this Agreement; |
f. |
Its entrance into this Agreement will not cause a material breach or be in material conflict with any other agreement or obligation of the Funds or any law or regulation applicable to it; and |
g. |
Where information provided by the Funds or the Funds shareholders includes information about an identifiable individual (Personal Information), each Fund represents and warrants that it has obtained all consents and approvals, as required by all applicable laws, regulations, by-laws and ordinances that regulate the collection, processing, use or disclosure of Personal Information, necessary to disclose such Personal Information to the Administrator, and as required for the Administrator to use and disclose such Personal Information in connection with the performance of the services hereunder. Each Fund acknowledges that the Administrator may perform any of the services, and may use and disclose Personal Information outside of the jurisdiction in which it was initially collected by the Funds, including the United States, solely in connection with the performance of the services set out in this Agreement and that information relating to the Funds, including Personal Information may be accessed by national security authorities, law enforcement and courts. The Administrator shall be kept indemnified by and be without liability to the Funds for any action taken or omitted by it in reliance upon this representation and warranty, including without limitation, any liability or costs in connection with claims or complaints for failure to comply with any applicable law that regulates the collection, processing, use or disclosure of Personal Information. |
- 5 -
5. |
ADMINISTRATION SERVICES |
The Administrator shall provide the services as listed on Schedule B, subject to the authorization and direction of the Funds and, in each case where appropriate, the review and comment by the Funds independent accountants and legal counsel and in accordance with procedures which may be established from time to time between the Funds and the Administrator.
The Administrator shall perform such other services for the Funds that are mutually agreed to in writing by the parties from time to time, for which the Funds will pay such fees as may be mutually agreed upon in writing, including the Administrators reasonable out-of-pocket expenses. The provision of such services shall be subject to the terms and conditions of this Agreement, unless otherwise modified in writing.
The Administrator shall provide the office facilities and the personnel determined by it to perform the services contemplated herein.
6. |
COMPENSATION OF ADMINISTRATOR; EXPENSE REIMBURSEMENT; FUND EXPENSES |
The Administrator shall be entitled to reasonable compensation for its services and expenses, as agreed upon from time to time in writing between the Funds on behalf of each applicable Portfolio and the Administrator.
The Funds agree to promptly reimburse, or cause to be reimbursed, the Administrator for any equipment and supplies specially ordered by or for the Funds through the Administrator and for any other reasonable expenses not contemplated by this Agreement that the Administrator may incur on the Funds behalf at the Funds request or with the Funds consent.
Each Fund will bear all expenses that are incurred in its operation and not specifically assumed by the Administrator. For the avoidance of doubt, Fund expenses not assumed by the Administrator include, but are not limited to: organizational expenses; cost of services of independent accountants and outside legal and tax counsel (including such counsels review of the Registration Statement, Form N-CSR, Form N-Q or Form N-PORT (as applicable), Form N-PX, Form N-MFP, Form N-SAR or Form N-CEN (as applicable), proxy materials, federal and state tax qualification as a regulated investment company and other notices, registrations, reports, filings and materials prepared by the Administrator under this Agreement, as applicable); cost of any services contracted for by the Funds directly from parties other than the Administrator; cost of trading operations and brokerage fees, commissions and transfer taxes in connection with the purchase and sale of securities for the Funds; investment advisory fees; taxes, insurance premiums and other fees and expenses applicable to its operation; costs incidental to any meetings of shareholders including, but not limited to, legal and accounting fees, proxy filing fees and the costs of preparation (e.g., typesetting, XBRL-tagging, page changes and all other print vendor and EDGAR charges, collectively referred to herein as Preparation), printing, distribution and mailing of any proxy materials; costs incidental to Board meetings, including fees and expenses of Board members; the salary and expenses of any officer, director/trustee or employee of the Funds; costs of Preparation, printing, distribution and mailing, as applicable, of the Funds Registration Statements and any amendments and supplements thereto; printing, distribution and mailing of shareholder reports; cost of Preparation and filing of the Funds tax returns, Form N-1A, Form N-2, Form N-CSR, Form N-Q or Form N-PORT (as applicable), Form N-PX, Form N-MFP and Form N-SAR or Form N-CEN (as applicable), and all notices, registrations and amendments associated with applicable federal and state tax and securities laws; all applicable registration fees and filing fees required under federal and state securities laws; the cost of fidelity bond and D&O/E&O liability insurance; and the cost of independent pricing services used in computing the Portfolio(s) net asset value.
7. |
INSTRUCTIONS AND ADVICE |
At any time, the Administrator may apply to any officer of the Funds or his or her designee for instructions or the independent accountants for the Funds, with respect to any matter arising in connection with the services to be performed by the Administrator under this Agreement. The Administrator shall be entitled to rely on and may act upon reasonable advice of reputable counsel (who may be counsel for the Funds) on all matters, and shall be without liability for any action reasonably taken or omitted in good faith pursuant to such advice; provided, however, that with respect to the reliance of such reasonable advice and performance of any action or omission of any action upon such advice, the Administrator shall be required to conform to the standard of care set forth in Section 8. The Administrator and the applicable Funds shall mutually agree as to which entity will bear the cost of such advice of counsel.
- 6 -
Subject to the standard of care set forth in Section 8, the Administrator shall not be liable, and shall be indemnified by the Funds, for any action taken or omitted by it in good faith in reliance upon any such instructions or advice or upon any paper or document reasonably believed by it to be genuine and to have been signed by the proper person or persons. The Administrator shall not be held to have notice of any change of authority of any person until receipt of written notice thereof from the Fund(s). The Administrator shall provide written confirmation of receipt of such notice promptly after receipt.
Pursuant to other agreements (the Other State Street Agreements) now or at any time in effect between a Fund (or its investment manager or investment advisor, on its behalf) and the Administrator or its affiliates (Affiliates) in any capacity other than as the Administrator hereunder (in such other capacities, the Bank), the Bank may be in possession of certain information and data relating to a Fund and/or a Portfolio that is necessary to provide the Services, including the Services described in Schedule B6. The Funds hereby acknowledge and agree that this Section 7 of the Agreement serves as its consent and instruction for itself and on behalf of each Fund/Portfolio under and pursuant to such Other State Street Agreements for the Bank to provide or otherwise make available (including via platforms such as my.statestreet.com) to the Administrator, Funds and Portfolios information such as net asset values and information relating to the net assets of the Funds/Portfolios, holdings and liquidity reports, market value and other information and data related to the Funds/Portfolios that is necessary to provide the Services and subject to Section 9 hereof.
8. |
STANDARD OF CARE; LIMITATION OF LIABILITY AND INDEMNIFICATION |
In carrying out the provisions of this Agreement, the Administrator shall act (i) with reasonable care and diligence and in good faith, (ii) without negligence, fraud, willful misconduct, willful omission or bad faith, and at least at the same standard of care as the Administrator provides for itself and its Affiliates with respect to similar services, and (iii) with the level of skill and care which would be expected from a reasonably skilled and experienced professional provider of services similar to the services provided under this Agreement. The Administrator shall have no liability for any error of judgment or mistake of law or for any loss or damage resulting from the performance or nonperformance of its duties hereunder unless and to the extent that the Administrator fails to exercise such standard of care. The Administrator shall be responsible for the performance only of such duties as are set forth in this Agreement and, except as otherwise provided under Section 14, shall have no responsibility for the actions or activities of any other party, including other service providers. The Administrator shall have no liability in respect of any loss, damage or expense suffered by the Funds insofar as such loss, damage or expense arises from the performance of the Administrators duties hereunder in reliance upon records that were maintained for the Funds by entities other than the Administrator prior to the Administrators appointment as administrator for the Funds. The Administrator shall not be liable for any special, indirect, incidental, punitive or consequential damages, including lost profits, of any kind whatsoever (including, without limitation, attorneys fees) under any provision of this Agreement or for any such damages arising out of any act or failure to act hereunder, each of which is hereby excluded by agreement of the parties regardless of whether such damages were foreseeable or whether either party or any entity had been advised of the possibility of such damages. Except as may otherwise be agreed to by the parties, the Administrators cumulative liability for each calendar year (a Liability Period) with respect to the Funds under this Agreement regardless of the form of action or legal theory shall be limited to its total annual compensation earned and fees payable hereunder during the preceding Compensation Period, as defined herein, for any liability or loss suffered by the Funds including, but not limited to, any liability relating to qualification of the Funds as a regulated investment company or any liability relating to the Funds compliance with any federal or state tax or securities statute, regulation or ruling during such Liability Period. Compensation Period shall mean the calendar year ending immediately prior to each Liability Period in which the event(s) giving rise to the Administrators liability for that period have occurred.
Neither party shall be responsible or liable for any failure or delay in performance of its obligations under this Agreement arising out of or caused, directly or indirectly, by circumstances beyond its control, including without limitation, work stoppage, power or other mechanical failure, computer virus, natural disaster, governmental action or communication disruption.
- 7 -
Each Fund severally and not jointly shall indemnify and hold the Administrator and its directors, officers, employees and agents harmless from all loss, cost, damage and expense, including reasonable fees and expenses for counsel, incurred by the Administrator resulting from any claim, demand, action or suit in connection with the Administrators acceptance of this Agreement, any action or omission by it in the performance of its duties hereunder, or as a result of acting upon any instructions reasonably believed by it to have been duly authorized by the Funds or upon reasonable reliance on information or records given or made by the Funds or its investment adviser, provided that this indemnification shall not apply to actions or omissions of the Administrator, its agents, delegates, officers or employees in cases of its or their own negligence, fraud, willful misconduct, willful omission or bad faith.
The limitation of liability and indemnification contained herein shall survive the termination of this Agreement.
9. |
CONFIDENTIALITY |
All information provided under this Agreement by a party (the Disclosing Party) to the other party (the Receiving Party) regarding the Disclosing Partys business and operations shall be treated as confidential. Subject to Section 10 below, all confidential information provided under this Agreement by Disclosing Party shall be used, including disclosure to third parties, by the Receiving Party, or its agents, delegates or service providers, solely for the purpose of performing or receiving the services and discharging the Receiving Partys other obligations under the Agreement or managing the business of the Receiving Party and its affiliates, including financial and operational management and reporting, risk management, legal and regulatory compliance and client service management. The foregoing shall not be applicable to any information (a) that is publicly available when provided or thereafter becomes publicly available, other than through a breach of this Agreement, (b) that is independently derived by the Receiving Party without the use of any information provided by the Disclosing Party in connection with this Agreement, or (c) where the party seeking to disclose has received the prior written consent of the party providing the information. Notwithstanding the foregoing, the Receiving Party shall be permitted to disclose any confidential information provided under this Agreement by the Disclosing Party (i) to comply with any legal or regulatory proceeding, investigation, audit, examination, subpoena, civil investigative demand or other similar process or (ii) as required by operation of law or regulation or as required to comply with the requirements of any market infrastructure that the Disclosing Party or its agents direct the Administrator or its Affiliates to employ (or which is required in connection with the holding or settlement of instruments included in the assets subject to this Agreement), provided that the Receiving Party take reasonable steps to otherwise maintain the confidential nature of such information.
10. |
USE OF DATA |
(a) In connection with the provision of the services and the discharge of its other obligations under this Agreement, the Administrator (which term for purposes of this Section 10 includes each of its Affiliates) may collect and store information regarding the Funds or Portfolios (Fund Information) and share such Fund Information with its Affiliates, agents, delegates and service providers in order and to the extent reasonably necessary (i) to carry out the provision of services contemplated under this Agreement and other agreements between the Funds and the Administrator or any of its Affiliates and (ii) to carry out the internal management of its businesses, including, but not limited to, financial and operational management and reporting, risk management, legal and regulatory compliance.
(b) Except as expressly contemplated by this Agreement, nothing in this Section 10 shall limit the confidentiality and data-protection obligations of the Administrator and its Affiliates under this Agreement and applicable law. The Administrator shall cause any Affiliate, agent, delegate or service provider to which it has disclosed Data pursuant to this Section 10 to comply at all times with confidentiality and data-protection obligations as if it were a party to this Agreement.
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11. |
COMPLIANCE WITH GOVERNMENTAL RULES AND REGULATIONS; RECORDS |
Each Fund assumes full responsibility for complying with all securities, tax, commodities and other laws, rules and regulations applicable to it.
In compliance with the requirements of Rule 31a-3 under the 1940 Act, the Administrator agrees that all records which it maintains for the Funds shall at all times remain the property of the Funds, shall be readily accessible during normal business hours, and shall be promptly surrendered upon the termination of the Agreement or otherwise on written request except as otherwise provided in Section 13. The Administrator further agrees that all records that it maintains for the Funds pursuant to Rule 31a-1 under the 1940 Act will be preserved for the periods prescribed by Rule 31a-2 under the 1940 Act unless any such records are earlier surrendered as provided above. Records may be surrendered in either written or machine-readable form, at the option of the Administrator. In the event that the Administrator is requested or authorized by the Funds, or required by subpoena, administrative order, court order or other legal process, applicable law or regulation, or required in connection with any investigation, examination or inspection of the Funds by state or federal regulatory agencies, to produce the records of the Funds or the Administrators personnel as witnesses or deponents, the Funds agrees to pay the Administrator for the Administrators reasonable time and expenses, as well as the reasonable fees and expenses of the Administrators counsel incurred in such production. The Administrator shall, to the extent permitted by law, provide notice to the applicable Fund promptly after receipt of any request for records by an entity other than such Fund. Upon request, the Administrator shall provide the applicable Fund with an update on the fees and expenses incurred in responding to any such requests for records.
12. |
SERVICES NOT EXCLUSIVE |
The services of the Administrator are not to be deemed exclusive, and the Administrator shall be free to render similar services to others. The Administrator shall be deemed to be an independent contractor and shall, unless otherwise expressly provided herein or authorized by the Funds from time to time, have no authority to act or represent the Funds in any way or otherwise be deemed an agent of the Funds.
13. |
EFFECTIVE PERIOD AND TERMINATION |
(a) |
Term. This Agreement shall remain in full force and effect for an initial term ending one (1) year from the effective date (the Initial Term). After the expiration of the Initial Term, this Agreement shall automatically renew for successive one (1) year terms. Following the Initial Term, this Agreement may be terminated by any Fund or Portfolio upon no less than ninety (90) days prior written notice to the Administrator, or by the Administrator upon no less than 180 days prior written notice to the applicable Fund or Portfolio. |
(b) |
Termination. During the Initial Term and thereafter, either party may terminate this Agreement: (i) in the event of the other partys material breach of a material provision of this Agreement that the other party has either failed to cure or failed to establish a remedial plan to cure that is reasonably acceptable, in each case within 60 days written notice of such breach, or (ii) in the event of the appointment of a conservator or receiver for the other party or upon the happening of a like event to the other party at the direction of an appropriate agency or court of competent jurisdiction. |
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(c) |
Payments Owing to the Administrator. Upon termination of this Agreement pursuant to Section 13(a) or 13(b) with respect to the Funds or any Portfolio, the Funds or applicable Portfolio shall pay Administrator its compensation due as of the date of such termination and shall reimburse Administrator for its costs, expenses and disbursements. In the event of: (i) the Funds termination of this Agreement with respect to the Funds or their Portfolio(s) in any manner other than as set forth in Section 13(a) and 13(b) or (ii) a transaction not in the ordinary course of business pursuant to which the Administrator is not retained to continue providing services hereunder to the Funds or a Portfolio (or its respective successor), the Fund or applicable Portfolio shall pay the Administrator any compensation due through the end of the then-current term (based upon the average monthly compensation previously earned by the Administrator with respect to the Fund or Portfolio) and shall reimburse the Administrator for its costs, expenses and disbursements. Upon receipt of such payment and reimbursement, the Administrator will deliver the Funds or such Portfolios records as set forth herein. |
(d) |
Exclusions. For the avoidance of doubt, no full term payment will be required pursuant to clause (ii) of Section 13(c) in the event of any transaction such as (i) the liquidation or dissolution of the Funds or a Portfolio and distribution of the Funds or such Portfolios assets as a result of the Boards determination in its reasonable business judgment that the Funds or such Portfolio is no longer viable or that the liquidation is in the best interest of the Funds or such Portfolio, (ii) a merger of the Funds or a Portfolio into, or the consolidation of the Funds or a Portfolio with, another entity, or (iii) the sale by the Funds or a Portfolio of all, or substantially all, of the Funds or Portfolios assets to another entity, in each of (ii) and (iii) where the applicable Funds provide ninety (90) days prior written notice in advance of the closing date of any such transactions. |
(e) |
Effect of Termination. Termination of this Agreement with respect to any one particular Portfolio shall in no way affect the rights and duties under this Agreement with respect to the Funds or any other Portfolio. |
14. |
DELEGATION |
The Administrator shall retain the right to employ its Affiliates to provide or assist it in the provision of any part of the services stated herein or the discharge of any other obligations or duties under this Agreement without the consent or approval of any Fund. The Administrator may employ other agents, subcontractors, consultants and other third parties (each a Delegate) to provide the services stated herein to the Funds upon the prior written consent of the Funds. The Administrator shall be responsible for the acts and omissions of any such Delegate or Affiliate so employed as if the Administrator had committed such acts and omissions itself. The Administrator shall be responsible for the compensation of its Delegates and Affiliates. Notwithstanding the foregoing, in no event shall the term Delegate include consultants, authorized data sources, suppliers of Administrators third party technology, providers of market infrastructure, and other non-affiliated entities that provide similar assistance to the Administrator in the performance of its duties under this Agreement, and the Administrator shall have no liability for their acts or omissions except as otherwise expressly provided elsewhere in this Agreement.
15. |
INTERPRETIVE AND ADDITIONAL PROVISIONS |
In connection with the operation of this Agreement, the Administrator and the Funds on behalf of each of the Portfolios, may from time to time agree on such provisions interpretive of or in addition to the provisions of this Agreement as may in their joint opinion be consistent with the general tenor of this Agreement. Any such interpretive or additional provisions shall be in a writing signed by all parties, provided that no such interpretive or additional provisions shall contravene any applicable laws or regulations or any provision of the Funds Governing Documents. No interpretive or additional provisions made as provided in the preceding sentence shall be deemed to be an amendment of the Agreement.
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16. |
NOTICES |
Any notice, instruction or other instrument required to be given hereunder will be in writing and may be sent by hand, or by facsimile transmission, or overnight delivery by any recognized delivery service, to the parties at the following address or such other address as may be notified by any party from time to time:
If to the Funds:
C/O BLACKROCK ADVISORS, LLC
100 Bellevue Parkway
Wilmington, DE 19809-3700
Attention: Neal Andrews
Telephone: 302-797-6179
If to the Administrator:
100 Summer Street
Boston, MA 02110
Attention: Anthony Ostler
Telephone: 617-664-9797
with a copy to:
STATE STREET BANK AND TRUST COMPANY
Legal Division Global Services Americas
One Lincoln Street
Boston, MA 02111
Attention: Senior Vice President and Senior Managing Counsel
17. |
AMENDMENT |
This Agreement may be amended at any time in writing by mutual agreement of the parties hereto.
18. |
ASSIGNMENT |
This Agreement may not be assigned by (a) the Funds without the written consent of the Administrator or (b) the Administrator without the written consent of the Funds. Notwithstanding the foregoing, the Administrator may assign this Agreement to a successor of all or a substantial portion of its business or to an Affiliate of the Administrator upon ninety (90) days written notice to the Fund.
19. |
SUCCESSORS |
This Agreement shall be binding on and shall inure to the benefit of the Funds and the Administrator and their respective successors and permitted assigns.
20. |
DATA PROTECTION |
The Administrator shall implement and maintain a comprehensive written information security program that contains appropriate security measures to safeguard the personal information of each Funds shareholders, employees, directors and/or officers that the Administrator receives, stores, maintains, processes or otherwise accesses in connection with the provision of services hereunder. For these purposes, personal information shall mean (i) an individuals name (first initial and last name or first name and last name), address or telephone number plus (a) social security number, (b) drivers license number, (c) state identification card number, (d) debit or credit card number, (e) financial account number or (f) personal identification number or password that would permit access to a persons account or (ii) any combination of the foregoing that would allow a person to log onto or access an individuals account. Notwithstanding the foregoing personal information shall not include information that is lawfully obtained from publicly available information, or from federal, state or local government records lawfully made available to the general public.
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21. |
ENTIRE AGREEMENT |
This Agreement contains the entire understanding between the parties hereto with respect to the subject matter hereof and supersedes all previous representations, warranties or commitments regarding the services to be performed hereunder whether oral or in writing.
22. |
WAIVER |
The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver nor shall it deprive such party of the right thereafter to insist upon strict adherence to that term or any term of this Agreement or the failure of a party hereto to exercise or any delay in exercising any right or remedy under this Agreement shall not constitute a waiver of any such term, right or remedy or a waiver of any other rights or remedies, and no single or partial exercise of any right or remedy under this Agreement shall prevent any further exercise of the right or remedy or the exercise or any other right or remedy. Any waiver must be in writing signed by the waiving party.
23. |
SEVERABILITY |
If any provision or provisions of this Agreement shall be held to be invalid, unlawful or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired.
24. |
GOVERNING LAW |
This Agreement shall be construed and the provisions thereof interpreted under and in accordance with the laws of the State of New York, without regard to its conflicts of laws rules.
25. |
REPRODUCTION OF DOCUMENTS |
This Agreement and all schedules, exhibits, attachments and amendments hereto may be reproduced by any photographic, xerographic, photostatic, microfilm, micro-card, miniature photographic or other similar process. The parties hereto all/each agree that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding, whether or not the original is in existence and whether or not such reproduction was made by a party in the regular course of business, and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence.
26. |
LIMITATION ON LIABILITY OF TRUSTEES |
In relation to each Fund which is a business trust, this Agreement is executed and made by the Trustees of the Fund not individually, but as trustees under the Declarations of Trust of the Fund and the obligations of this Agreement are not binding upon any of such Trustees or upon any of the shareholders of the Fund individually, but bind only the trust estate of the Fund.
27. |
COUNTERPARTS |
This Agreement may be executed in several counterparts, each of which shall be deemed to be an original, and all such counterparts taken together shall constitute one and the same Agreement. Counterparts may be executed in either original or electronically transmitted form (e.g., faxes or emailed portable document format (PDF) form), and the parties hereby adopt as original any signatures received via electronically transmitted form.
[Remainder of page intentionally left blank.]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers designated below as of the date first written above.
EACH MANAGEMENT INVESTMENT COMPANY IDENTIFIED ON SCHEDULE A HERETO |
||
By: |
/s/ Neal J. Andrews |
|
Name: | Neal J. Andrews | |
Title: | Chief Financial Officer | |
STATE STREET BANK AND TRUST COMPANY | ||
By: |
/s/ Andrew Erickson |
|
Name: | Andrew Erickson | |
Title: | Executive Vice President |
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Exhibit (k)(3)
SIXTH AMENDED AND RESTATED
SECURITIES LENDING AGENCY AGREEMENT
This Sixth Amended and Restated Agreement, dated as of January 1, 2020, between each investment company, severally and not jointly, identified on Schedule A, as such schedule may be amended from time to time (each a Client), acting on behalf of itself or the funds listed on Schedule A hereto and any future series of a Client (each, a Fund), by and through BlackRock Advisors, LLC (BlackRock), not in its individual capacity but as agent and investment advisor, and BlackRock Investment Management, LLC (the Lending Agent), a Delaware limited liability company.
WHEREAS, each Client is registered as an open-end management investment company or closed end management investment company under the Investment Company Act of 1940, as amended (the 1940 Act);
WHEREAS, the Lending Agent acts as the agent for each Client and its corresponding Funds, as applicable, for the purpose of lending securities pursuant to a Fifth Amended and Restated Securities Lending Agency Agreement dated January 1, 2019;
WHEREAS, the parties to this Agreement desire to amend and restate such agreement on the terms set forth herein; and
WHEREAS, the Directors or Trustees, as the case may be, of each Client have authorized each Client and its corresponding Funds, as applicable, to lend securities to Approved Borrowers (as defined below); and
WHEREAS, the Directors or Trustees, as the case may be, of each Client have approved the appointment of the Lending Agent as each Clients securities lending agent and coordinator of each Clients securities lending program, subject to the terms and conditions set forth herein.
NOW, THEREFORE, for and in consideration of the mutual promises contained herein, the parties hereto agree as follows:
1. Appointment. The Client, on behalf of its Funds, as applicable, appoints BlackRock Investment Management, LLC as its lending agent to perform the duties and responsibilities set forth in this Agreement in its capacity as Lending Agent, and BlackRock Investment Management, LLC accepts such appointment. The Lending Agent will act solely as a directed agent of the Client hereunder, and the Lending Agent shall have no duties or responsibilities in respect of securities lending transactions except those expressly set forth in this Agreement.
2. Authorizations. The Client authorizes the Lending Agent to act as agent as set forth in this Section.
2.1 |
Lending of Available Securities. The Client authorizes the Lending Agent to lend, on the Clients behalf, those securities (Available Securities) which are held in accounts maintained under the supervision of the Clients custodian (the Custodian) or any sub-custodian (each a Custody Account), other than |
1
securities which the Clients investment advisor (the Advisor), on behalf of the Client, specifically notifies the Lending Agent are not available for lending. With respect to the Clients identified on Schedule A as Closed-End Funds, except as otherwise agreed by the Client and the Advisor, the Lending Agent shall lend Available Securities only when the lending spread with respect to such Available Securities is equal to or greater than 300 basis points, determined at the time such loan is entered into (Threshold Lending Securities). For purposes of this Agreement, lending spread shall mean the difference between the rebate rate (interest rate) owed to the Approved Borrower and the risk free rate (typically Fed Funds Target). The Client warrants to the Lending Agent that it will give appropriate instructions to the Advisor and the Custodian sufficient to permit the Lending Agent to arrange and settle loan transactions on the Clients behalf as contemplated by this Agreement. |
2.2 |
Lending to Approved Borrowers. The Client authorizes the lending of Available Securities to any one or more of the institutions approved by the Client, the Clients Board of Directors/Trustees and/or the Clients Advisor, in accordance with the Funds Guidelines and Procedures for Lending of Securities (Securities Lending Guidelines) (each, an Approved Borrower). The Clients Advisor, on behalf of the Client, may request that the Lending Agent change the Approved Borrowers by delivering an updated list to the Lending Agent, provided that the Advisor shall report to the Board of Directors/Trustees at its next quarterly meeting any addition or removal of an Approved Borrower to or from the approved list made by the Advisor since the Board of Directors/Trustees prior quarterly meeting. |
2.3 |
Securities Loan Agreement. The Lending Agent is authorized to execute securities loan agreements (each an SLA) as the Clients agent on a disclosed basis with Approved Borrowers. The SLA will be in substantially a form or forms set forth in Schedule B hereto, as such form or forms may be materially amended from time to time with prior written approval of the Client. The Client specifically approves such form of agreement and agrees, upon request of the Lending Agent, to cause the Advisor to promptly furnish to the Lending Agent the Clients financial statements or other documents or information reasonably requested by the Lending Agent in order to enable the Lending Agent to satisfy reasonable credit and legal requests by Approved Borrowers in connection with any SLA or loan transaction. |
2.4 |
Lending under Approved Terms. All loans arranged by the Lending Agent on behalf of a Client shall comply with applicable Securities and Exchange Commission (SEC) guidelines for securities lending, any applicable SEC exemptive orders, no-action positions taken by the staff of the SEC with respect to securities lending transactions, and the investment restrictions and/or guidelines for the Client, all of which shall be provided to the Lending Agent by the Client or the Advisor, and shall be subject to the terms of an SLA substantially similar to Schedule B. The Client may, at the request of the Lending Agent, approve changes to the approved terms by delivering an amended Schedule B to the Lending Agent. The Lending Agent shall negotiate on behalf of the Client with each Approved Borrower all terms of a securities loan, including the amounts or fees to be received |
2
or paid pursuant to the applicable SLA. The Lending Agent may prepare a transactional confirmation in respect of each loan effected pursuant to an SLA, setting forth the securities borrowed and the material terms of the loan, and may transmit such confirmation to the Approved Borrower in accordance with such SLA. The Client understands and agrees that the identity of the Client will be disclosed by the Lending Agent to the Approved Borrower in accordance with the SLA. |
2.5 |
Authorizations by Client. The Client authorizes and empowers the Lending Agent to execute in the Clients name all agreements and documents as may be necessary or appropriate in the Lending Agents judgment to carry out the purposes of this Agreement. It is understood and agreed that the Lending Agent is authorized to supply any information regarding the Client that is required by an SLA or under applicable law, subject to Section 10.1 hereof. |
3. Loan of Securities. During the term of any securities loan, the Client shall permit the loaned securities to be transferred, pursuant to an SLA, into the name of an Approved Borrower.
3.1 |
Limits on Return of Loaned Securities. The Client acknowledges that, under the applicable SLA, Approved Borrowers will not be required to return loaned securities immediately upon receipt of notice from the Lending Agent terminating the applicable loan, but instead will be required to return such loaned securities within the earlier of (i) such period of time following such notice which is the standard settlement period for trades of the loaned securities entered into on the date of such notice in the principal market therefor, or from the giving of such notice or (ii) the third business day following such notice. |
3.2 |
Recall of Loaned Securities. Upon receiving a notice from the Advisor that Available Securities which have been lent to an Approved Borrower should no longer be considered Available Securities (whether because of the sale of such securities or otherwise), the Lending Agent shall notify promptly thereafter the Approved Borrower which has borrowed such securities that the loan of such securities is terminated and that such securities are to be returned within the time specified by the applicable SLA, provided that the Lending Agent may alternatively determine that it is in the best interests of another lending client of the Lending Agent to renew and restate such loan transaction on behalf, and in the name, of such other lending client and cause to be delivered to the Client an equivalent amount of such security from the assets of such other lending client (in which event such renewal and restatement of the loan shall constitute separate transactions between each lending client of the Lending Agent and the borrower and shall not be construed as a transaction between such lending clients). |
3.3 |
Notification of Sales of Loaned Securities. The Client acknowledges its obligation to the Lending Agent, as applicable, to cause and require the Advisor to provide notification of any sale of securities which are out on loan by the close of business, in the principal market therefor, on trade date of such sale. |
3
3.4 |
Termination. The Lending Agent is authorized in its discretion to terminate any securities loan entered into with an Approved Borrower without prior notice to the Client, subject to the conditions of the relevant SLA. The Advisor, on behalf of a Client, may instruct the Lending Agent to terminate any loan on any date, subject to the conditions of the relevant SLA. The Lending Agent agrees to comply with any such instruction. |
3.5 |
Lending Agent Subject to Supervision of Advisor. The Lending Agent shall at all times be subject to the supervision of the Advisor. |
3.6 |
Compliance with Securities Lending Guidelines. The Lending Agent hereby acknowledges receipt of the current Securities Lending Guidelines. The Client shall promptly notify the Lending Agent of any changes to the Securities Lending Guidelines. The Lending Agent acknowledges and agrees that it shall only lend Securities on behalf of the Client and its Funds in accordance with the conditions of the Securities Lending Guidelines applicable to the Lending Agent. |
4. Loan Collateral. For each loan of securities, the Approved Borrower shall pledge at all times during the term of the loan collateral in the form of one or more of the following items: (a) cash in U.S. dollars or foreign currency (Cash Collateral), or (b) securities issued or fully guaranteed by the United States government or any agencies or instrumentalities thereof or such other collateral as may be then permitted by applicable law, regulation and/or interpretation, and the Securities Lending Guidelines (Non-Cash Collateral and, collectively with Cash Collateral, Collateral) in the aggregate having a market value (as determined by the Lending Agent pursuant to the applicable SLA) at least equal to the market value of the loaned securities (as determined by the Lending Agent pursuant to the applicable SLA).
4.1 |
Receipt of Collateral. At the commencement of any loan, the Lending Agent shall instruct the Approved Borrower to transfer to the Lending Agent the required Collateral. Collateral will be received from an Approved Borrower prior to or simultaneous with delivery of the securities loaned. If the Approved Borrower does not provide Collateral to the Lending Agent, as previously agreed, then the Lending Agent will cancel the corresponding loan instruction prior to delivery. |
4.2 |
Holding and Administration of Collateral. |
(a) |
Cash Collateral. All Cash Collateral shall be received, held and administered by the Lending Agent for the benefit of the Client in the applicable account maintained for the Lending Agent. The Lending Agent is hereby authorized and directed, without obtaining any further approval from the Client or the Advisor, to invest and reinvest all Cash Collateral in accordance with the Securities Lending Guidelines (Permitted Investments). |
(b) |
Non-Cash Collateral. All Non-Cash Collateral shall be received, held and administered by the Lending Agent for the benefit of the Client in the applicable account established for the purpose of holding Non-Cash Collateral. |
4
4.3 |
Maintenance of Collateral Margin. In respect of loans of securities entered into on behalf of the Client, the Lending Agent will value on a daily basis under policies consistent with the valuation policies of the Client, in accordance with the applicable SLA, the loaned securities and all Collateral and, where applicable, the Lending Agent shall, in accordance with the provisions of the applicable SLA, request the Approved Borrower to deliver sufficient additional Collateral to the Client by 12:00 noon on the next business day to satisfy the applicable margin requirement. If, as a result of marking-to-market, Collateral is required to be returned to the Approved Borrower under the SLA, the Lending Agent will return such Collateral to the Approved Borrower. |
4.4 |
Substitution of Collateral. To the extent the Clients Board of Directors/Trustees permits the use of Non-Cash Collateral, the Client acknowledges and agrees that, pursuant to any SLA, the Lending Agent may permit an Approved Borrower to substitute Collateral of any type specified in Section 4 hereof during the term of any loan so long as the required margin in respect of such loan continues to be satisfied at the time of such substitution. |
4.5 |
Return of Collateral. Upon termination of the loan, the Lending Agent shall instruct the Approved Borrower to return the loaned securities to the applicable Custody Account. The Lending Agent will instruct any custodian or sub-custodian of the Client to accept such return delivery of loaned securities. The Lending Agent shall monitor the return of loaned securities. Once the Lending Agent has confirmed settlement of the return of the loaned securities, the Lending Agent shall effect, on behalf of the Client, the redemption of any Permitted Investment, if applicable, and effect the return of Collateral due the Approved Borrower in accordance with the Approved Borrowers transfer instructions with respect thereto, without obtaining any further approval from the Client. |
5. Investment of Cash Collateral. Pursuant to the SLA, the Client shall have the right to invest Cash Collateral received in respect of any loan, subject to an obligation, upon the termination of the loan, to return to the Approved Borrower the amount of cash initially pledged (as adjusted for any interim marks-to-market).
5.1 |
Cash Collateral Investment Direction. The Client authorizes and directs the Lending Agent, subject to oversight by the Advisor, to cause to be invested, on the Clients behalf and at the Clients sole risk, all Cash Collateral by effecting purchases and sales and/or subscriptions and redemptions of such Collateral in accordance with the Securities Lending Guidelines. The Lending Agent shall, where applicable, send timely instructions to the transfer agent of the Permitted Investment with respect to any cash transfers required to be completed in conjunction with any subscription or redemption in a Permitted Investment, and cause the Advisor and the Custodian to be notified of such investment. To facilitate the Lending Agents ability to effect investments of Cash Collateral authorized by |
5
this Agreement, the Client appoints the Lending Agent as its true and lawful attorney-in-fact, with full power of substitution and revocation, in its name, place and stead to take action in the Clients name to the extent necessary or desirable to fulfill the purposes of this Agreement, including, without limitation, (i) to establish trading accounts in a Clients name, (ii) to execute and deliver such contracts and other documents on a Clients behalf as the Lending Agent, in its discretion, deems necessary or desirable to establish such trading accounts or otherwise to effect investments on the Clients behalf that are authorized by this Agreement, and (iii) to act, in the Lending Agents discretion, in the Clients name to enforce the Clients rights and remedies under such contracts or documents. |
5.2 |
Cash Collateral Investment Risk. Any investment of Cash Collateral shall be at the sole risk of the Client. Any income or gains and losses from investing and reinvesting any Cash Collateral delivered by an Approved Borrower pursuant to an SLA shall be at the Clients risk, and the Client agrees that to the extent any such losses reduce the amount of cash below the amount required to be returned to the Approved Borrower upon the termination of any loan (including any Cash Collateral Fee as defined in the SLA), the Client will, on demand of the Lending Agent, immediately pay or cause to be paid to such Approved Borrower an equivalent amount in cash. |
6. Borrower Default. In the event of default by a Borrower with respect to any loan entered into pursuant to an SLA, the Lending Agent will take such actions as agent for the Client as are set forth in the applicable SLA. In addition, the following provisions shall apply.
6.1 |
Replacement of Loaned Securities. If the Lending Agent declares an event of default pursuant to the SLA with a Borrower (a Default Event), then the Lending Agent shall use the Collateral or the proceeds of the liquidation of Collateral to purchase for the affected Clients account, for settlement in the normal course, replacement securities of the same issue, type, class and series as that of the loaned securities (Buy-In). The Lending Agent shall purchase an amount of replacement securities having a value equal to the value of the securities on loan for which a Default Event has been declared. If the cost of fully replacing the loaned securities is greater than the value of the Collateral (or liquidated damages calculated under Section 6.2), the Lending Agent shall be responsible for using its funds, at its expense, to satisfy the shortfall, but only to the extent that such shortfall is not due to any diminution in the value of the Collateral due to reinvestment risk that is borne by the Client pursuant to Section 5 of this Agreement. For purposes of this Section, value of the Collateral shall be calculated as follows: |
6.1.1 |
Value of Cash Collateral. In the case of loans collateralized solely by Cash Collateral, the value of the Collateral shall be the market value of such Cash Collateral. |
6.1.2 |
Value of Securities Collateral. In the case of loans collateralized solely by securities Collateral, the value of the Collateral shall be the market value of such Collateral. |
6
6.1.3 |
Valuation Date. The value of the Collateral shall be determined on the date of the Buy-In (or the payment made pursuant to Section 6.2 below). |
6.1.4 |
Market Value. Market value shall be determined by the Lending Agent, where applicable, based upon the valuation policies adopted by the Clients Board of Directors/Trustees. |
6.1.5 |
Multiple Forms of Collateral. Where a loan is collateralized by more than one type of Collateral, the aggregate market value of Collateral securing such loan (for the purpose of computing the indemnity) shall be the sum of the market values for each relevant type of Collateral. |
6.2 |
Impossibility of Replacement/Liquidated Damages. If the Lending Agent determines that a Buy-In is commercially impracticable (for any reason other than price), the Lending Agent shall, in lieu of effecting a Buy-In, pay to the affected Client an amount equal to the market value of the loaned securities determined at the close of business on the date of the Default Event to be reduced by any shortfall diminution in the value of the Collateral due to reinvestment risk that is borne by the Client pursuant to Section 5. |
6.3 |
Replacement of Distributions. In addition to making the purchases or payments required above, the Lending Agent shall pay from the proceeds of Collateral to the Client the value of all distributions on the Loaned Securities, the record dates for which occur before the date that the Lending Agent executes a Buy-In or makes the payments to the Client required pursuant to Section 6.2 and that have not otherwise been credited to the Clients applicable account. For purposes of this Section, the value of such distributions shall be calculated net of taxes, expenses or other deductions that would normally accrue to such distributions. The Lending Agent shall use Collateral or the proceeds of such Collateral to the extent available to make such payments of distributions. |
6.4 |
Collateral not in Possession or Control of the Lending Agent. If, on the date of the Default Event, by reason of the Clients request or actions, the Lending Agent is not in possession or control of the Collateral allocated to the defaulted Loan, the Client shall promptly cause such Collateral to be transferred to the Lending Agent for application against the cost of any Buy-In. In such event, the replacement provisions of this Section 6 shall not apply, and the compensation of the Client shall be limited to the value of the Collateral on the date that Buy-In or replacement payment may be affected. |
6.5 |
Subrogation and Assignment of Rights in Collateral. In the event that the Lending Agent is required to perform or make any payment under this Section, the Client agrees that, to the extent of such performance or payment, the Lending Agent shall be subrogated to the Client, and the Client shall assign, and be deemed to have assigned, to the Lending Agent all of such Clients rights in, to and against the Borrower in respect of the related loan, any Collateral pledged by such Borrower in respect of such loan and all proceeds of such Collateral to the extent permitted |
7
by applicable law. In the event that the Client receives or is credited with any payment, benefit or value from or on behalf of the Borrower in respect of rights to which the Lending Agent is subrogated as provided herein, the Client shall promptly remit or pay to the Lending Agent the same (or, where applicable, its United States dollar equivalent). |
7. Income, Corporate Actions and Substitute Payments. Income, corporate actions and Substitute Payments (as defined in Sections 7.1 and 7.2) shall be dealt with as provided in this Section 7.
7.1 |
Income and Related Payments to Borrower. Payments to an Approved Borrower shall be made in accordance with the terms of the applicable SLA. |
7.2 |
Income and Related Payments to Client. The Lending Agent shall instruct each Approved Borrower which is a party to an SLA to remit any payment in-lieu-of the interest or other distribution on loaned securities (Loan Substitute Payment) for the account of the Client. The Lending Agent shall also instruct each Approved Borrower which is a party to an SLA to remit any other fees payable on loaned securities to the Lending Agent for the account of the Client, and the Lending Agent shall receive, hold and administer the same for the account of the Client. |
7.3 |
Corporate Actions and Proxy Rights. The Client acknowledges that, with respect to securities which are out on loan over the applicable record date for such action, unless otherwise agreed hereto, it will not be entitled to participate in any dividend reinvestment program or vote any proxies; provided, however, that the Client may recall such securities upon sufficient notice to exercise proxy rights. Corporate actions will otherwise be processed in accordance with the SLA. |
8. Reports and Statements. The Lending Agent shall furnish the Client with the reports and statements set forth in the Securities Lending Guidelines or as otherwise agreed from time to time.
9. SIPC Coverage. THE PARTIES ACKNOWLEDGE THAT THE PROVISIONS OF THE SECURITIES INVESTOR PROTECTION ACT OF 1970 (SIPA) OR THE DODD-FRANK ACT OF 2010 (DFA) MAY NOT PROTECT THE FUND WITH RESPECT TO THE SECURITIES LOAN TRANSACTION AND THAT, THEREFORE, THE COLLATERAL DELIVERED BY AN APPROVED BORROWER TO THE FUND MAY CONSTITUTE THE ONLY SOURCE OF SATISFACTION OF THE OBLIGATION OF THE APPROVED BORROWER IN THE EVENT THE APPROVED BORROWER (OR ITS AGENT) FAILS TO RETURN THE SECURITIES. THE LENDING AGENT SHALL NOT BE RESPONSIBLE FOR ANY LOSSES INCURRED OR LIABILITIES WHICH ARISE SOLELY DUE TO THE APPLICATION OF SIPA OR DFA TO THE SECURITIES LENDING TRANSACTIONS DESCRIBED HEREIN.
10. Client Information. The Client covenants and agrees to promptly furnish to the Lending Agent any information regarding the Client which is necessary to effect transactions on behalf of the Client, including, but not limited to, any limitations imposed pursuant to any applicable law, regulation, authority, charter, by-law, statute or other instrument. The Lending Agent agrees to comply with such restrictions and limitations.
8
10.1 |
The Lending Agent may not disclose or supply any information regarding the Client or Fund unless required by any law or governmental regulation now or hereafter in effect or requested to do so by the Client; provided that the Lending Agent may disclose or supply information regarding the Client and/or Fund and any transactions authorized by this Agreement as necessary in the sole discretion of the Lending Agent in order to facilitate, effect or continue any securities loans hereunder or to assist in the analysis of the performance of the securities lending program. |
11. Tax Treatment. The Client acknowledges that the tax treatment of Substitute Payments may differ from the tax treatment of the interest or dividend to which such payment relates and that the Client has made its own determination as to the tax treatment of any securities loan transactions undertaken pursuant to this Agreement and of any dividends, distributions, remuneration or other funds received hereunder. The Client also acknowledges that, to the extent that either the Client or the Approved Borrower is a non-U.S. resident, the Lending Agent may be required to withhold tax on amounts payable to or by the Client pursuant to a securities loan and may at any time claim from the Client any shortfall in the amount so withheld.
12. Responsibility of the Lending Agent. Except as otherwise set forth herein, and subject to the requirements of applicable law, the Lending Agent shall not be liable with respect to any losses incurred by the Client in connection with this securities lending program or under any provision hereof, except to the extent that such losses result from the Lending Agents willful misfeasance, bad faith, negligence or reckless disregard in the performance of its duties under this Agreement. The Lending Agent shall not be liable for losses, costs, expenses or liabilities caused by or resulting from the acts or omissions of the Client or of any agent or third party custodian of the Client. The Lending Agent shall not be responsible for any special, punitive, indirect or consequential damages, whether or not the Lending Agent has been apprised of the likelihood of such damages.
13. Standard of Care: Indemnification.
13.1 |
Subject to Section 6, the Client shall indemnify and hold harmless the Lending Agent (which, for purposes of this paragraph shall include its respective officers, directors, partners, managers, employees and agents) from and against any and all claims, damages, liabilities, losses, costs or expenses, including the reasonable fees and expenses of counsel (each, a Loss) incurred, suffered or sustained by the Lending Agent, which arise from the Lending Agents actions or failure to act, in either case taken in good faith in performance of this Agreement, except to the extent that such claims, damages, liabilities, losses, costs or expenses were caused by the willful misfeasance, bad faith, negligence or reckless disregard of the Lending Agent, provided that the Clients indemnification obligation with respect to the acts or omissions of the Advisor shall not exceed the indemnification provided by such Advisor to the Client. This indemnity shall survive the termination of this Agreement and the resignation or removal of the Lending Agent as agent. |
9
13.2 |
The Lending Agent shall indemnify and hold harmless the Client and each Fund, its Board of Directors/Trustees and the Advisor (which for purposes of this paragraph shall include its officers, directors, partners, managers, employees and agents) and any other investment advisor for the Clients and Funds from any and all Losses to the extent that any such Loss arises out of the material breach of this Agreement by or the willful misfeasance, bad faith, negligence or reckless disregard of the Lending Agent, its officers, directors or employees in connection with the securities lending activities undertaken pursuant to this Agreement, provided that the Lending Agents indemnification obligation with respect to the acts or omissions of its subcustodians shall not exceed the indemnification provided by the applicable subcustodian to the Lending Agent. This indemnity shall survive the termination of this Agreement and the resignation or removal of the Lending Agent. |
14. Representations and Warranties. Each party represents and warrants to the other that (i) it has due authority to enter into and perform this Agreement and any transactions contemplated thereby; (ii) the execution and performance of this Agreement and any transaction contemplated thereby has been duly authorized by all necessary action, corporate or otherwise, and does not violate any law, regulation, charter, by-law or other instrument, restriction or provision applicable to it; and (iii) this Agreement constitutes such partys legal, valid and binding obligation enforceable in accordance with its terms. In addition, the Client represents that: (a) any loan authorized hereunder and the performance of this Agreement in respect of such loan is authorized by the prospectus and other constitutive documents of the Client (including any limits as to the aggregate amount of authorized lending under such documents); and (b) as to any securities lent at any time and from time to time on behalf of the Client, the Client shall be the owner thereof with clear title thereto and no lien, charge or encumbrance upon such securities shall exist.
15. Non-Exclusivity of Agency Service and Similar Matters. The Client acknowledges that the Lending Agent, acting on behalf of other lending clients, may effect transactions with or for the same Approved Borrowers to which loans of securities may be made hereunder, which transactions may give rise to potential conflict of interest situations. Lending opportunities among Approved Borrowers shall be allocated at the discretion of the Lending Agent in an equitable manner.
16. Force Majeure. The Lending Agent shall not be responsible or liable for any failure or delay in the performance of its obligations under this Agreement arising out of, or caused directly or indirectly by, circumstances beyond its control, including without limitation, acts of God; earthquakes; fires; floods; wars; civil or military disturbances; sabotage; epidemics; riots; interruptions, loss or malfunctions of utilities, transportation, computer (hardware or software) or communications service; accidents; labor disputes; acts of civil or military authority; governmental actions; or inability to obtain labor, material, equipment or transportation. Without limiting the foregoing, but subject to Section 6, the Lending Agent shall not be responsible for economic, political or investment risks incurred through the Clients participation in this securities lending program.
10
17. Reliance on Client Communications. The Lending Agent shall be entitled to conclusively rely upon any certification, notice or other communication (including by facsimile or email) reasonably believed by it to be genuine and correct and to have been signed or sent by or on behalf of an approved person of the party sending such certification, notice or other communication. The Lending Agent reserves the right to notify the Client of any restrictions (self-imposed or otherwise) concerning its activities worldwide. The Lending Agent and the Client shall each have the right to consult with counsel with respect to their respective rights and duties hereunder and shall not be liable for actions taken or not taken in reliance on such advice.
18. Compensation. In connection with the lending of Available Securities, a Fund shall pay to the Lending Agent a percentage (the Lending Agent Fee Percentage) of the net amount earned from securities lending activities, consisting of income earned on the investment and reinvestment of Cash Collateral plus any Securities Loan Fees otherwise paid by the Authorized Borrowers. For purposes of this Agreement, Securities Loan Fees shall mean the amount payable by an Authorized Borrower to the Lending Agent, as agent to the Fund, pursuant to the applicable SLA in connection with the loan of Available Securities, if any, collateralized by collateral other than Cash Collateral. The net amount to be paid to the Lending Agent shall be computed after deducting (a) any applicable rebate due to the Authorized Borrowers under the applicable SLA and (b) Cash Management Costs. Cash Management Costs shall mean the expenses incurred in connection with the management and investment of a Funds Cash Collateral in accordance with Section 5 of this Agreement, including any fees payable to the Lending Agent, the Advisor or any other affiliate of the Lending Agent as a result of the investment of Cash Collateral in any joint account, fund or similar vehicle. The Lending Agent, upon mutual agreement with the Client, may determine to cap the Cash Management Costs. Any such cap on the Cash Management Costs shall be set forth in Appendix A, Appendix B or Appendix C hereto, as applicable, as each such Appendix may be amended from time to time. The Lending Agent Fee Percentage shall be such percentage as may from time to time be agreed upon by the Board of Directors/Trustees of the Client and the Lending Agent and shall be set forth in writing. The Lending Agent Fee Percentage for each Fund is set forth in Appendix A, Appendix B or Appendix C hereto, as applicable, as each such Appendix may be amended from time to time. The Client authorizes and directs the Lending Agent to deduct amounts equal to such compensation from the Custody Account and to retain such amounts as compensation. The Lending Agent shall notify the Client, on or about the 10th (tenth) day of each month, of the amount of fees due the Lending Agent hereunder and, promptly upon receipt of such notice, the Client shall effect the requisite payment to the Lending Agent in immediately available funds of U.S. dollars. The Lending Agent shall be responsible for all transaction fees and all other operational costs relating to securities lending activities, other than Cash Management Costs as described above and extraordinary expenses (e.g., litigation and indemnification expenses), each to be borne by the respective Fund.
19. Termination. This Agreement may be terminated at any time upon mutual written agreement of the Lending Agent and the Client or upon sixty (60) days prior written notice to the other party; provided that the indemnification obligations in Section 13 shall survive any such termination.
20. Action on Termination. It is agreed that (a) upon receipt of notice of termination, no further loans shall be made hereunder by the Lending Agent and (b) the Lending Agent shall, as promptly as possible after termination of this Agreement, terminate any and all outstanding
11
loans but continue to administer to any outstanding loans as necessary to effect their termination and remit and deliver to the Custody Account all securities, earnings and other items due to the Client. The provisions hereof shall continue in full force and effect in all other respects until all loans have been terminated and all obligations satisfied as herein provided. Both parties shall take all commercially reasonable steps to cooperate to provide a smooth transition in the event of a termination.
21. Notices. All notices, demands and other communications hereunder shall be in writing and delivered or transmitted (as the case may be) by registered mail, facsimile, email, courier, or be effected by telephone promptly confirmed in writing and delivered or transmitted as aforesaid, to the intended recipient as provided below. Notices shall be effective upon receipt.
21.1 |
Any notice or other instrument in writing, authorized or required by this Agreement to be given to the Lending Agent, shall be sufficiently given if addressed to BlackRock Investment Management, LLC and received by it at its offices at 1 University Square Drive, Princeton, NJ 08540, Attention: Securities Lending Department, with a copy to BlackRock Investment Management, LLC, 400 Howard Street, San Francisco, CA 94105, Attention: Securities Lending Department, or at such other place as the Lending Agent may from time to time designate in writing. |
21.2 |
Any notice or other instrument in writing, authorized or required by this Agreement to be given to the Client shall be sufficiently given if addressed to the Client and received by it at: Mutual Fund Administration, c/o BlackRock Advisors, LLC, 100 Bellevue Parkway, Wilmington, Delaware 19809, with a copy to: Legal Department, or at such other place as the Client may from time to time designate in writing. |
22. Governing Law and Jurisdiction. This agreement shall be governed by and construed in accordance with the laws of the State of New York without reference to conflict of law provisions thereof. The parties hereto hereby irrevocably consent to the exclusive jurisdiction of (and waive dispute of venue in) the courts of the State of New York and the federal courts located in New York City in the Borough of Manhattan.
23. Entire Agreement. This Agreement supersedes any other agreement between the parties hereto concerning loans of securities owned by the Client. This Agreement constitutes the entire understanding of the parties hereto with respect to the subject matter hereof. This Agreement together with any other written agreements between the parties entered into in connection with this Agreement contain the entire agreement between the parties with respect to the transactions contemplated hereby and supersede all previous oral or written negotiations, commitments and understandings related thereto.
24. Assignment. This Agreement shall not be assigned by any party without the prior written consent of the other party.
25. Capitalized Terms. Capitalized terms not otherwise defined herein shall have the meanings provided in the SLA.
12
26. Amendment. This Agreement may not be amended or modified in any respect, without the written agreement of both parties.
27. Waiver. No provision of this Agreement may be waived, without the written agreement of both parties. No waiver by one party of any obligation of the other hereunder shall be considered a waiver of any other obligation of such party. The failure of a party to this Agreement to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement.
28. Remedies. All remedies hereunder shall survive the termination of this Agreement.
29. Severability. In the event any provision of this Agreement is adjudicated to be void, illegal, invalid, or unenforceable, the remaining terms and provisions of this Agreement shall not be affected thereby, and each of such remaining terms and provisions shall be valid and enforceable to the fullest extent permitted by law, unless a party demonstrates by a preponderance of the evidence that the invalidated provision was an essential economic term of the Agreement.
30. Further Assurances. Each party hereto shall execute and deliver such other documents or agreements as may be necessary or desirable for the implementation of this Agreement and the consummation of the transactions contemplated hereby.
31. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which taken together shall be deemed one and the same instrument.
32. Headings. The headings of sections herein are included solely for convenience and shall have no effect on the meaning of this Agreement.
33. Separate Agreement. Execution of this Agreement by more than one Client or on behalf of itself and more than one Fund shall not create any contractual or other obligation between or among such Clients or Funds, and this Agreement shall constitute a separate agreement between the Lending Agent and each Client on behalf of itself and each respective Fund. Every reference to Client or Fund shall be construed to be a reference solely to the particular Client or Fund that is a party to the relevant transaction. Each of the parties agrees that under no circumstances shall any rights, obligations, remedies or liabilities of a particular Client or Fund, or with respect to transactions to which a particular Client or Fund is a party, be deemed to constitute rights, obligations, remedies or liabilities applicable to any other Client or Fund or to transactions to which other Clients or Funds are parties, and the Lending Agent shall have no right to set off claims of any Client or Fund against property or liabilities of any other Client or Fund. All transactions are entered into in reliance on the fact that this Agreement constitutes a separate agreement between the Lending Agent and the Client or Fund.
34. Additional Parties. The Lending Agent agrees that additional Clients may be added as parties to this Agreement from time to time upon written notice to the Lending Agent and upon written consent of the Lending Agent to the addition of any such additional Client.
13
35. Business Trust. With respect to a Client which is a business trust, the Lending Agent acknowledges and agrees that this Agreement is executed by such Client on behalf of the trustees of such Client as trustees and not individually; and no trustee, shareholder, officer, employee or agent of such business trust shall be held to any personal liability, nor shall resort be had to their property (other than the applicable trust property) for the satisfaction of the Clients obligations under this Agreement, and such obligations are binding only upon the applicable trust property held by such trustee.
36. Series Trusts. The parties acknowledge that the Client is an investment company, whose assets may be allocated to two or more series. In such case, the Lending Agent agrees to seek satisfaction of all obligations of such Client hereunder solely out of the assets of the series on whose behalf the Transaction(s) giving to the obligations was entered into. If the Client establishes two or more series, the Client shall so indicate on Schedule A or otherwise give notice thereof and identify such series, and from such time the liability of such series shall be limited as set forth above, as though and to the same extent as if such series was a separate and distinct Client hereunder.
14
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed in its name and behalf as of the day and year first set forth above.
BLACKROCK ADVISORS, LLC, | ||
on behalf of each investment company indicated on Schedule A |
||
By: |
|
|
Name: | ||
Title: | ||
BLACKROCK INVESTMENT MANAGEMENT, LLC, | ||
as Lending Agent | ||
By: |
|
|
Name: | ||
Title: |
15
Schedule A: Clients and Funds
Fixed-Income Complex Closed-End Funds
BlackRock 2022 Global Income Opportunity Trust
BlackRock California Municipal Income Trust
BlackRock Core Bond Trust
BlackRock Corporate High Yield Fund, Inc.
BlackRock Credit Allocation Income Trust
BlackRock Credit Strategies Fund
BlackRock Debt Strategies Fund, Inc.
BlackRock Energy and Resources Trust
BlackRock Enhanced Capital and Income Fund, Inc.
BlackRock Enhanced Equity Dividend Trust
BlackRock Enhanced Global Dividend Trust
BlackRock Enhanced Government Fund, Inc.
BlackRock Enhanced International Dividend Trust
BlackRock Floating Rate Income Strategies Fund, Inc.
BlackRock Floating Rate Income Trust
BlackRock Florida Municipal 2020 Term Trust
BlackRock Health Sciences Trust
BlackRock Income Trust, Inc.
BlackRock Investment Quality Municipal Trust, Inc.
BlackRock Limited Duration Income Trust
BlackRock Long-Term Municipal Advantage Trust
BlackRock Maryland Municipal Bond Trust
BlackRock Massachusetts Tax-Exempt Trust
BlackRock Multi-Sector Income Trust
BlackRock Multi-Sector Opportunities Trust
BlackRock Multi-Sector Opportunities Trust II
BlackRock Muni Intermediate Duration Fund, Inc.
BlackRock Muni New York Intermediate Duration Fund, Inc.
BlackRock MuniAssets Fund, Inc.
BlackRock Municipal 2020 Term Trust
BlackRock Municipal 2030 Target Term Trust
BlackRock Municipal Bond Trust
BlackRock Municipal Income Investment Quality Trust
BlackRock Municipal Income Investment Trust
BlackRock Municipal Income Quality Trust
BlackRock Municipal Income Trust
BlackRock Municipal Income Trust II
BlackRock MuniEnhanced Fund, Inc.
BlackRock MuniHoldings California Quality Fund, Inc.
BlackRock MuniHoldings Fund II, Inc.
BlackRock MuniHoldings Fund, Inc.
BlackRock MuniHoldings Investment Quality Fund
BlackRock MuniHoldings New Jersey Quality Fund, Inc.
Schedule A-1
BlackRock MuniHoldings New York Quality Fund, Inc.
BlackRock MuniHoldings Quality Fund II, Inc.
BlackRock MuniHoldings Quality Fund, Inc.
BlackRock MuniVest Fund II, Inc.
BlackRock MuniVest Fund, Inc.
BlackRock MuniYield Arizona Fund, Inc.
BlackRock MuniYield California Fund, Inc.
BlackRock MuniYield California Quality Fund, Inc.
BlackRock MuniYield Fund, Inc.
BlackRock MuniYield Investment Fund
BlackRock MuniYield Investment Quality Fund
BlackRock MuniYield Michigan Quality Fund, Inc.
BlackRock MuniYield New Jersey Fund, Inc.
BlackRock MuniYield New York Quality Fund, Inc.
BlackRock MuniYield Pennsylvania Quality Fund
BlackRock MuniYield Quality Fund II, Inc.
BlackRock MuniYield Quality Fund III, Inc.
BlackRock MuniYield Quality Fund, Inc.
BlackRock New York Municipal Bond Trust
BlackRock New York Municipal Income Quality Trust
BlackRock New York Municipal Income Trust
BlackRock New York Municipal Income Trust II
BlackRock Resources & Commodities Strategy Trust
BlackRock Science and Technology Trust
BlackRock Science and Technology Trust II
BlackRock Taxable Municipal Bond Trust
BlackRock Utilities, Infrastructure & Power Opportunities Trust
BlackRock Virginia Municipal Bond Trust
The BlackRock Strategic Municipal Trust
Multi-Asset Complex Open-End Funds Group A
BlackRock Advantage U.S. Total Market Fund, Inc.
BlackRock Advantage Global Fund, Inc.
BlackRock Asian Dragon Fund, Inc.
BlackRock Balanced Capital Fund, Inc.
BlackRock Basic Value Fund, Inc.
BlackRock Capital Appreciation Fund, Inc.
BlackRock Emerging Markets Fund, Inc.
BlackRock Equity Dividend Fund
BlackRock EuroFund
BlackRock Financial Institutions Series Trust
BlackRock Summit Cash Reserves Fund
Schedule A-2
BlackRock FundsSM
BlackRock Advantage ESG U.S. Equity Fund
BlackRock Advantage Emerging Markets Fund
BlackRock Advantage International Fund
BlackRock Advantage Large Cap Growth Fund
BlackRock Advantage Small Cap Core Fund
BlackRock Advantage Small Cap Growth Fund
BlackRock All-Cap Energy & Resources Portfolio
BlackRock China A Opportunities Fund
BlackRock Commodity Strategies Fund
BlackRock Emerging Markets Equity Strategies Fund
BlackRock Energy & Resources Portfolio
BlackRock Exchange Portfolio
BlackRock Global Long/Short Equity Fund
BlackRock Health Sciences Opportunities Portfolio
BlackRock High Equity Income Fund
BlackRock International Dividend Fund
BlackRock Liquid Environmentally Aware Fund
BlackRock Mid-Cap Growth Equity Portfolio
BlackRock Money Market Portfolio
BlackRock Real Estate Securities Fund
BlackRock Short Obligations Fund
BlackRock Tactical Opportunities Fund
BlackRock Technology Opportunities Fund
BlackRock Total Emerging Markets Fund
BlackRock Total Factor Fund
BlackRock Funds II
BlackRock 20/80 Target Allocation Fund
BlackRock 40/60 Target Allocation Fund
BlackRock 60/40 Target Allocation Fund
BlackRock 80/20 Target Allocation Fund
BlackRock Dynamic High Income Portfolio
BlackRock Global Dividend Portfolio
BlackRock LifePath® Smart Beta 2025 Fund
BlackRock LifePath® Smart Beta 2030 Fund
BlackRock LifePath® Smart Beta 2035 Fund
BlackRock LifePath® Smart Beta 2040 Fund
BlackRock LifePath® Smart Beta 2045 Fund
BlackRock LifePath® Smart Beta 2050 Fund
BlackRock LifePath® Smart Beta 2055 Fund
BlackRock LifePath® Smart Beta 2060 Fund
BlackRock LifePath® Smart Beta 2065 Fund
BlackRock LifePath® Smart Beta Retirement Fund
BlackRock Managed Income Fund
BlackRock Multi-Asset Income Portfolio
BlackRock Global Allocation Fund, Inc.
BlackRock Large Cap Focus Growth Fund, Inc.
Schedule A-3
BlackRock Large Cap Series Funds, Inc.
BlackRock Advantage Large Cap Core Fund
BlackRock Advantage Large Cap Value Fund
BlackRock Event Driven Equity Fund
BlackRock Latin America Fund, Inc.
BlackRock Liquidity Funds
California Money Fund
Federal Trust Fund
FedFund
MuniCash
MuniFund
New York Money Fund
TempCash
TempFund
T-Fund
Treasury Trust Fund
BlackRock Long-Horizon Equity Fund
BlackRock Mid Cap Dividend Series, Inc.
BlackRock Mid Cap Dividend Fund
BlackRock Natural Resources Trust
BlackRock Series, Inc.
BlackRock International Fund
BlackRock Series Fund, Inc.
BlackRock Advantage Large Cap Core Portfolio
BlackRock Balanced Capital Portfolio
BlackRock Capital Appreciation Portfolio
BlackRock Global Allocation Portfolio
BlackRock Government Money Market Portfolio
BlackRock Variable Series Funds, Inc.
BlackRock 60/40 Target Allocation ETF V.I. Fund
BlackRock Advantage Large Cap Core V.I. Fund
BlackRock Advantage Large Cap Value V.I. Fund
BlackRock Advantage U.S. Total Market V.I. Fund
BlackRock Basic Value V.I. Fund
BlackRock Capital Appreciation V.I. Fund
BlackRock Equity Dividend V.I. Fund
BlackRock Global Allocation V.I. Fund
BlackRock Government Money Market V.I. Fund
BlackRock International V.I. Fund
BlackRock International Index V.I. Fund
BlackRock Large Cap Focus Growth V.I. Fund
BlackRock Managed Volatility V.I. Fund
BlackRock S&P 500 Index V.I. Fund
BlackRock Small Cap Index V.I.
Schedule A-4
Funds For Institutions Series
BlackRock Premier Government Institutional Fund
BlackRock Select Treasury Strategies Institutional Fund
BlackRock Treasury Strategies Institutional Fund
FFI Government Fund
FFI Treasury Fund
Managed Account Series
BlackRock GA Disciplined Volatility Equity Fund
BlackRock GA Dynamic Equity Fund
Master Advantage U.S. Total Market LLC
Master Focus Growth LLC
Master Institutional Money Market LLC
Master Premier Government Institutional Portfolio
Master Treasury Strategies Institutional Portfolio
Master Large Cap Series LLC
Master Advantage Large Cap Core Portfolio
Master Advantage Large Cap Value Portfolio
Ready Assets Government Liquidity Fund
Ready Assets U.S. Treasury Money Fund
Retirement Series Trust
Retirement Reserves Money Fund
Fixed-Income Complex Open-End Funds Group B
BlackRock Allocation Target Shares
BATS: Series A Portfolio
BATS: Series C Portfolio
BATS: Series E Portfolio
BATS: Series M Portfolio
BATS: Series P Portfolio
BATS: Series S Portfolio
BlackRock Bond Fund, Inc.
BlackRock Total Return Fund
BlackRock California Municipal Series Trust
BlackRock California Municipal Opportunities Fund
BlackRock Funds IV
BlackRock Global Long/Short Credit Fund
BlackRock Impact Bond Fund
BlackRock Systematic Multi-Strategy Fund
BlackRock Funds V
BlackRock Core Bond Portfolio
BlackRock Credit Strategies Income Fund
BlackRock Emerging Markets Bond Fund
BlackRock Emerging Markets Flexible Dynamic Bond Portfolio
BlackRock Floating Rate Income Portfolio
BlackRock GNMA Portfolio
Schedule A-5
BlackRock High Yield Bond Portfolio
BlackRock Inflation Protected Bond Portfolio
BlackRock Low Duration Bond Portfolio
BlackRock Strategic Income Opportunities Portfolio
BlackRock U.S. Government Bond Portfolio
BlackRock Multi-State Municipal Series Trust
BlackRock New Jersey Municipal Bond Fund
BlackRock New York Municipal Opportunities Fund
BlackRock Pennsylvania Municipal Bond Fund
BlackRock Municipal Bond Fund, Inc.
BlackRock High Yield Municipal Fund
BlackRock National Municipal Fund
BlackRock Short-Term Municipal Fund
BlackRock Municipal Series Trust
BlackRock Strategic Municipal Opportunities Fund
BlackRock Series Fund II, Inc.
BlackRock High Yield Portfolio
BlackRock U.S. Government Bond Portfolio
BlackRock Strategic Global Bond Fund, Inc.
BlackRock Variable Series Funds II, Inc.
BlackRock High Yield V.I. Fund
BlackRock Total Return V.I. Fund
BlackRock U.S. Government Bond V.I. Fund
Managed Account Series II
BlackRock U.S. Mortgage Portfolio
Master Bond LLC
Master Total Return Portfolio
Schedule A-6
Schedule B: Forms of Securities Loan Agreement
Schedule B-1
Appendix A
Closed-End Funds: Threshold Lending Program
1. |
For the Funds in the Fixed-Income Complex identified on Schedule A as Fixed-Income Complex Closed-End Funds (collectively, the Closed-End Funds), the Lending Agent Fee Percentage is eighteen percent (18%). The Fixed-Income Complex refers to all of the Funds currently or in the future overseen by a board of directors/trustees consisting of the same individuals who comprise the members of the boards of directors/trustees of the Closed-End Funds, the Fixed-Income Complex Open-End Funds Group B (the Group B Funds) listed on Schedule A and the funds listed on Appendix D hereto. |
2. |
Notwithstanding paragraph 1 above, if at any point during a calendar year, the aggregate gross revenues earned by the funds in the Fixed-Income Complex prior to payment of compensation to the applicable lending agent exceed $3,150,000 (the Fixed-Income Complex Breakpoint), the Lending Agent Fee Percentage shall be reduced to fifteen percent (15%) in allocating net income after the gross revenues for the calendar year equal the Fixed-Income Complex Breakpoint. The adjusted allocation shall become effective on incremental gross income starting on the next business day after the Fixed-Income Complex Breakpoint is reached. |
3. |
The Client and the Lending Agent agree and acknowledge that no advisory fee is payable with respect to management and investment of a Funds Cash Collateral in any joint account, fund or similar vehicle. The Lending Agent has agreed to cap the Cash Management Costs in respect of the investment of Cash Collateral in Money Market Series on an annualized basis at 0.04% of the daily net asset value of Money Market Series. The cap on the Cash Management Costs may be raised or reduced upon mutual agreement between the Lending Agent and the Client. In the event that a Fund directly or indirectly bears any Cash Management Costs, as computed at least monthly by the Lending Agent or its designee, in excess of such cap, then such excess shall, without limitation, be deemed a transaction fee or other operational cost for which the Lending Agent shall be responsible. |
App. A-1
Appendix B
Group A Funds: Full Program
1. |
For the Funds in the Multi-Asset Complex identified on Schedule A as Multi-Asset Complex Open-End Funds Group A (the Group A Funds), the Lending Agent Fee Percentage shall be as set forth below: |
a. |
With respect to a Group A Fund that is identified as a U.S. Equity Fund in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage is twenty-five percent (25%). |
b. |
With respect to a Group A Fund that is identified as an International Equity Fund in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage is eighteen percent (18%). |
c. |
With respect to a Group A Fund that is identified as a Fund of Funds in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage is eighteen percent (18%). |
d. |
With respect to a Group A Fund that is identified as a Fixed Income Fund in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage is eighteen percent (18%). |
The Multi-Asset Complex refers to all of the Funds currently or in the future overseen by a board of directors/trustees consisting of the same individuals who comprise the members of the boards of directors/trustees of the Group A Funds listed on Schedule A and the funds listed on Appendix E hereto.
2. |
Notwithstanding the foregoing, if at any point during a calendar year, the aggregate gross revenues earned by the funds in the Multi-Asset Complex prior to payment of compensation to the applicable lending agent exceed $29,780,000 (the Multi-Asset Complex Breakpoint), the Lending Agent Fee Percentage shall be reduced as follows in allocating net income after the gross revenues for the calendar year equal the Multi-Asset Complex Breakpoint: |
a. |
With respect to a Group A Fund that is identified as a U.S. Equity Fund in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage shall be twenty percent (20%). |
b. |
With respect to a Group A Fund that is identified as an International Equity Fund in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage shall be fifteen percent (15%). |
App. B-1
c. |
With respect to a Group A Fund that is identified as a Fund of Funds in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage shall be fifteen percent (15%). |
d. |
With respect to a Group A Fund that is identified as a Fixed Income Fund in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage shall be fifteen percent (15%). |
The adjusted allocation shall become effective on incremental gross income starting on the next business day after the Multi-Asset Complex Breakpoint is reached.
3. |
The Client and the Lending Agent agree and acknowledge that no advisory fee is payable with respect to management and investment of a Group A Funds Cash Collateral in any joint account, fund or similar vehicle. The Lending Agent has agreed to cap the Cash Management Costs in respect of the investment of Cash Collateral in Money Market Series on an annualized basis at 0.04% of the daily net asset value of Money Market Series. The cap on the Cash Management Costs may be raised or reduced upon mutual agreement between the Lending Agent and the Client. In the event that a Group A Fund directly or indirectly bears any Cash Management Costs, as computed at least monthly by the Lending Agent or its designee, in excess of such cap, then such excess shall, without limitation, be deemed a transaction fee or other operational cost for which the Lending Agent shall be responsible. |
4. |
Notwithstanding any of the foregoing, if the fee calculated pursuant to paragraphs 1, 2 and 3 of this Appendix B would result in an effective fee split for a Group A Fund of less than seventy percent (70%) of the sum of such Group A Funds securities lending income (after deducting the rebate to the Approved Borrowers) and Cash Management Costs for any day (the Group A Funds Effective Fee Split Floor), then the Lending Agents fees for such day shall be reduced to the extent necessary to provide such Group A Fund with the Group A Funds Effective Fee Split Floor. |
App. B-2
Appendix C
Group B Funds: Full Program
1. |
For the Funds in the Fixed-Income Complex identified on Schedule A as Fixed-Income Complex Open-End Funds Group B (the Group B Funds), the Lending Agent Fee Percentage shall be as set forth below: |
a. |
With respect to a Group B Fund that is identified as a U.S. Equity Fund in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage is twenty-five percent (25%). |
b. |
With respect to a Group B Fund that is identified as an International Equity Fund in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage is eighteen percent (18%). |
c. |
With respect to a Group B Fund that is identified as a Fund of Funds in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage is eighteen percent (18%). |
d. |
With respect to a Group B Fund that is identified as a Fixed Income Fund in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage is eighteen percent (18%). |
The Fixed-Income Complex refers to all of the Funds currently or in the future overseen by a board of directors/trustees consisting of the same individuals who comprise the members of the boards of directors/trustees of the Closed-End Funds, the Group B Funds listed on Schedule A, and the funds listed on Appendix D hereto.
2. |
Notwithstanding the foregoing, if at any point during a calendar year, the aggregate gross revenues earned by the funds in the Fixed-Income Complex prior to payment of compensation to the applicable lending agent exceed $3,150,000 (the Fixed-Income Complex Breakpoint), the Lending Agent Fee Percentage shall be reduced as follows in allocating net income after the gross revenues for the calendar year equal the Fixed-Income Complex Breakpoint: |
a. |
With respect to a Group B Fund that is identified as a U.S. Equity Fund in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage shall be twenty percent (20%). |
b. |
With respect to a Group B Fund that is identified as an International Equity Fund in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage shall be fifteen percent (15%). |
App. C-1
c. |
With respect to a Group B Fund that is identified as a Fund of Funds in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage shall be fifteen percent (15%). |
d. |
With respect to a Group B Fund that is identified as a Fixed Income Fund in accordance with a methodology agreed to between the Lending Agent and the Client, the Lending Agent Fee Percentage shall be fifteen percent (15%). |
The adjusted allocation shall become effective on incremental gross income starting on the next business day after the Fixed-Income Complex Breakpoint is reached.
3. |
The Client and the Lending Agent agree and acknowledge that no advisory fee is payable with respect to management and investment of a Group B Funds Cash Collateral in any joint account, fund or similar vehicle. The Lending Agent has agreed to cap the Cash Management Costs in respect of the investment of Cash Collateral in Money Market Series on an annualized basis at 0.04% of the daily net asset value of Money Market Series. The cap on the Cash Management Costs may be raised or reduced upon mutual agreement between the Lending Agent and the Client. In the event that a Group B Fund directly or indirectly bears any Cash Management Costs, as computed at least monthly by the Lending Agent or its designee, in excess of such cap, then such excess shall, without limitation, be deemed a transaction fee or other operational cost for which the Lending Agent shall be responsible. |
4. |
Notwithstanding any of the foregoing, if the fee calculated pursuant to paragraphs 1, 2 and 3 of this Appendix C would result in an effective fee split for a Group B Fund of less than seventy percent (70%) of the sum of such Group B Funds securities lending income (after deducting the rebate to the Approved Borrowers) and Cash Management Costs for any day (the Group B Funds Effective Fee Split Floor), then the Lending Agents fees for such day shall be reduced to the extent necessary to provide such Group B Fund with the Group B Funds Effective Fee Split Floor. |
App. C-2
Appendix D
Fixed-Income Complex Open-End Funds*
BlackRock Funds VI
BlackRock CoreAlpha Bond Fund
Master Investment Portfolio II
CoreAlpha Bond Master Portfolio
* |
Funds have alternative securities lending agency arrangement. |
App. D-1
Appendix E
Multi-Asset Complex Open-End Funds*
BlackRock ETF Trust**
BlackRock U.S. Equity Factor Rotation ETF
BlackRock FundsSM
iShares Developed Real Estate Index Fund
iShares Edge MSCI Min Vol EAFE Index Fund
iShares Edge MSCI Min Vol USA Index Fund
iShares Edge MSCI Multifactor Intl Index Fund
iShares Edge MSCI Multifactor USA Index Fund
iShares Municipal Bond Index Fund
iShares Russell Mid-Cap Index Fund
iShares Russell Small/Mid-Cap Index Fund
iShares Short-Term TIPS Bond Index Fund
iShares Total U.S. Stock Market Index Fund
BlackRock Funds III
BlackRock Cash Funds: Institutional
BlackRock Cash Funds: Treasury
BlackRock LifePath® Dynamic Retirement Fund
BlackRock LifePath® Dynamic 2025 Fund
BlackRock LifePath® Dynamic 2030 Fund
BlackRock LifePath® Dynamic 2035 Fund
BlackRock LifePath® Dynamic 2040 Fund
BlackRock LifePath® Dynamic 2045 Fund
BlackRock LifePath® Dynamic 2050 Fund
BlackRock LifePath® Dynamic 2055 Fund
BlackRock LifePath® Dynamic 2060 Fund
BlackRock LifePath® Dynamic 2065 Fund
BlackRock LifePath® Index Retirement Fund
BlackRock LifePath® Index 2025 Fund
BlackRock LifePath® Index 2030 Fund
BlackRock LifePath® Index 2035 Fund
BlackRock LifePath® Index 2040 Fund
BlackRock LifePath® Index 2045 Fund
BlackRock LifePath® Index 2050 Fund
BlackRock LifePath® Index 2055 Fund
BlackRock LifePath® Index 2060 Fund
BlackRock LifePath® Index 2065 Fund
iShares MSCI Total International Index Fund
iShares Russell 1000 Large-Cap Index Fund
iShares S&P 500 Index Fund
iShares U.S. Aggregate Bond Index Fund
App. E-1
BlackRock Index Funds, Inc.
iShares MSCI EAFE International Index Fund
iShares Russell 2000 Small-Cap Index Fund
Master Investment Portfolio
Active Stock Master Portfolio
International Tilts Master Portfolio
Large Cap Index Master Portfolio
LifePath® Dynamic Retirement Master Portfolio
LifePath® Dynamic 2025 Master Portfolio
LifePath® Dynamic 2030 Master Portfolio
LifePath® Dynamic 2035 Master Portfolio
LifePath® Dynamic 2040 Master Portfolio
LifePath® Dynamic 2045 Master Portfolio
LifePath® Dynamic 2050 Master Portfolio
LifePath® Dynamic 2055 Master Portfolio
LifePath® Dynamic 2060 Master Portfolio
LifePath® Dynamic 2065 Master Portfolio
LifePath® Index Retirement Master Portfolio
LifePath® Index 2025 Master Portfolio
LifePath® Index 2030 Master Portfolio
LifePath® Index 2035 Master Portfolio
LifePath® Index 2040 Master Portfolio
LifePath® Index 2045 Master Portfolio
LifePath® Index 2050 Master Portfolio
LifePath® Index 2055 Master Portfolio
LifePath® Index 2060 Master Portfolio
LifePath® Index 2065 Master Portfolio
Money Market Master Portfolio
S&P 500 Index Master Portfolio
Total International ex U.S. Index Master Portfolio
Treasury Money Market Master Portfolio
U.S. Total Bond Index Master Portfolio
Quantitative Master Series LLC
Master Small Cap Index Series
* |
Funds have alternative securities lending agency arrangement. |
** |
Fund is an exchange-traded fund |
App. E-2
Exhibit (l)
May 27, 2020
BlackRock MuniAssets Fund, Inc.
100 Bellevue Parkway
Wilmington, Delaware 19809
Ladies and Gentlemen:
We have acted as special Maryland counsel to BlackRock MuniAssets Fund, Inc., a Maryland corporation (the Company), in connection with the registration under the Securities Act of 1933, as amended (the Act), of up to an aggregate of 5,500,000 shares (the Shares) of the Companys common stock, par value $0.10 per share (the Common Stock), on its Registration Statement on Form N-2 filed with the Securities and Exchange Commission on March 4, 2020 (File No. 333-236891) (together with all amendments through the date hereof, the Registration Statement).
We have examined the Registration Statement and such corporate records, certificates, and documents as we deemed necessary for the purpose of this opinion. We have relied as to certain factual matters on information obtained from public officials and officers of the Company. Based on that examination, we advise you that in our opinion the Shares offered by the Company have been duly authorized and, assuming that upon any issuance of Shares the total number of shares of Common Stock issued and outstanding will not exceed the total number of shares of Common Stock that the Company is then authorized to issue under its charter, when issued and delivered under the circumstances contemplated in the Registration Statement, will be legally issued, fully paid, and non-assessable.
In expressing the opinion set forth herein, we have assumed that (i) all documents submitted to us as originals are authentic, (ii) all documents submitted to us as copies conform with the originals of those documents, (iii) all signatures on all documents submitted to us for examination are genuine, (iv) each natural person executing any such document is legally competent to do so, and (v) all public records reviewed by us or on our behalf are accurate and complete. We express no opinion with respect to the laws of, or the effect or applicability of the laws of, any jurisdiction other than, and our opinion expressed herein is limited to, the laws of the State of Maryland. The opinion expressed herein is limited to the matters expressly set forth in this letter and no other opinion should be inferred beyond the matters expressly stated.
We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. In giving our consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
Miles & Stockbridge P.C.
By: |
/s/ Emily Higgs |
|
Principal |
Exhibit (n)
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in this Registration Statement No. 333-236891 on Form N-2 of our report dated June 21, 2019, relating to the financial statements and financial highlights of BlackRock MuniAssets Fund, Inc. (the Fund), appearing in the Annual Report on Form N-CSR of the Fund for the year ended April 30, 2019, and to the references to us under the headings Financial Highlights and Independent Registered Public Accounting Firm in the Preliminary Base Prospectus and Independent Registered Public Accounting Firm and Financial Statements in the Statement of Additional Information, which are part of such Registration Statement.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
May 27, 2020
Exhibit (r)
Code of Ethics for Fund Access Persons |
Effective Date: April 1, 2019 |
Applies to the following types of Funds registered under the 1940 Act: ☒ Open-End Mutual Funds (excluding money market funds) ☒ Money Market Funds ☒ iShares ETFs ☒ Closed-End Funds ☒ Other (BCIC) |
1. Introduction
The purpose of this Code of Ethics (the Code) is to prevent Access Persons (as defined below) of BlackRock open- and closed-end funds and iShares exchange traded funds and BlackRock Capital Investment Corporation (each a Fund and collectively, the Funds) from engaging in any act, practice or course of business prohibited by paragraph (b) of Rule 17j-1 (the Rule) under the Investment Company Act of 1940, as amended (the 1940 Act). This Code is required by paragraph (c) of the Rule. A copy of the Rule is attached to this Code as Appendix A.
Access Persons (as defined below) of the Funds, in conducting their personal securities transactions, owe a fiduciary duty to the Funds. The fundamental standard to be followed in personal securities transactions is that Access Persons may not take inappropriate advantage of their positions. All personal securities transactions by Access Persons must be conducted in such a manner as to avoid any actual or potential conflict of interest between the Access Persons interest and the interests of the Funds, or any abuse of an Access Persons position of trust and responsibility. Potential conflicts arising from personal investment activities could include buying or selling securities based on knowledge of a Funds trading position or plans (sometimes referred to as front-running), and acceptance of personal favors that could influence trading judgments on behalf of the Fund. While this Code is designed to address identified conflicts and potential conflicts, it cannot possibly be written broadly enough to cover all potential situations and, in this regard, Access Persons are expected to adhere not only to the letter, but also the spirit, of the policies contained herein.
2. Confidential Information
In order to understand how this Code applies to particular persons and transactions, familiarity with the key terms and concepts used in this Code is necessary. Those key terms and concepts are:
2.1. Access Person with respect to a Fund means any Advisory Person of the Fund, BlackRock or a Subadviser. Those persons who may be considered Access Persons of the Funds include those listed on attached Appendix B to this Code and will be updated from time to time.
2.2. Advisory Person means: (a) any director or advisory board1 member, officer, general partner or employee of a Fund, BlackRock or a Subadviser or of any company in a control relationship to the Fund, BlackRock or a Subadviser, who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of a Covered Security by the Fund, or whose functions relate to the making of any recommendations with respect to such purchases or sales; and (b) any natural person in a control relationship to the Fund, BlackRock or a Subadviser who obtains information concerning recommendations made to the Fund with regard to the purchase or sale of Covered Securities by the Fund.
1 |
As defined in Section 2(a)(1) of the 1940 Act. |
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2.3. Automatic Investment Plan means a program in which regular periodic purchases (or withdrawals) are made automatically in (or from) investment accounts in accordance with a predetermined schedule and allocation. An Automatic Investment Plan includes a dividend reinvestment plan.
2.4. Beneficial ownership has the meaning set forth in Rule 16a-1(a)(2) under the Securities Exchange Act of 1934, as amended (the Exchange Act), a copy of which is included as Appendix C. The determination of direct or indirect beneficial ownership shall apply to all securities which an Access Person has or acquires.
2.5. BRIL means BlackRock Investments, LLC, each open-end Funds principal underwriter and the principal underwriter of certain closed-end Funds.
2.6. BlackRock means persons controlling, controlled by or under common control with BlackRock, Inc. that act as investment adviser and sub-adviser to the Funds.
2.7. Board means, collectively, the boards of directors or trustees of the Funds.
2.8. PTP means the Personal Trading Policy adopted by BlackRock and BRIL and approved by the Board.
2.9. control has the meaning set forth in Section 2(a)(9) of the 1940 Act.
2.10. Covered Security has the meaning set forth in Section 2(a)(36) of the 1940 Act, except that it shall not include: direct obligations of the U.S. Government; bankers acceptances, bank certificates of deposit, commercial paper, and high-quality short-term debt instruments, including repurchase agreements; and shares issued by registered open-end investment companies. A high-quality short-term debt instrument is one with a maturity at issuance of less than 366 days and that is rated in one of the two highest rating categories by a nationally recognized statistical rating organization.
2.11. Independent Director means a director or trustee of a Fund who is not an interested person of the Fund within the meaning of Section 2(a)(19) of the 1940 Act. All provisions of this Code applicable to Independent Directors will also be applicable to advisory board members.
2.12. Investment Personnel of a Fund, BlackRock or a Subadviser means: (a) any employee of the Fund, BlackRock or a Subadviser (or of any company in a control relationship to the Fund, BlackRock or a Subadviser) who, in connection with his or her regular functions or duties, makes or participates in making recommendations regarding the purchase or sale of securities by the Fund and (b) any natural person who controls the Fund, BlackRock or a Subadviser and who obtains information concerning recommendations made to the Fund regarding the purchase or sale of securities by the Fund.
2.13. IPO means an offering of securities registered under the Securities Act of 1933 (the 1933 Act) the issuer of which, immediately before the registration, was not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act.
2.14. Limited Offering means an offering exempt from registration under the 1933 Act pursuant to Section 4(a)(2) or 4(a)(5) or Rule 504, 505 or 506 under the 1933 Act.
2.15. Purchase or sale of a Covered Security includes, among other things, the writing of an option to purchase or sell a Covered Security.
2.16. Subadviser means any investment adviser to a Fund that does not control, is not controlled by and is not under common control with BlackRock and to whom BlackRock delegates certain investment management responsibilities.
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3. RESTRICTIONS APPLICABLE TO DIRECTORS, OFFICERS AND EMPLOYEES OF BLACKROCK AND BRIL
3.1. All Access Persons of BlackRocks investment advisory companies and BRIL shall be subject to the restrictions, limitations and reporting responsibilities set forth in the PTP, as if fully set forth herein.
3.2. Persons subject to this Section 3 shall not be subject to the restrictions, limitations and reporting responsibilities set forth in Sections 4 and 5 below. In particular, an Access Person of BlackRocks investment advisory companies need not make a separate report under this Code to the extent the information would duplicate information required to be recorded under Rule 204-2(a)(13) under the Investment Advisers Act of 1940, as amended.
3.3. Any Access Person of a Subadviser shall not be subject to this Code, so long as such Access Person is subject to a code of ethics duly adopted by the Subadviser relating to personal securities transactions by such Access Person, provided that such code of ethics complies with the requirements of the Rule and has been approved by the Board.
4. PRE-APPROVAL OF INVESTMENTS IN INITIAL PUBLIC OFFERINGS OR LIMITED OFFERINGS
With respect to purchases of securities (including, but not limited to, any Covered Security) issued in an initial public offering (IPO) or a Limited Offering, all Access Persons of BlackRocks investment advisory companies are subject to the restrictions, limitations and reporting responsibilities set forth in the PTP and in addition, with respect to Limited Offerings, the Global Employee Private Investment Policy.
No Investment Personnel shall purchase any security (including, but not limited to, any Covered Security) issued in an IPO or a Limited Offering unless an officer of a Fund approves the transaction in advance. The Chief Compliance Officer (CCO) of the Funds shall maintain a written record of any decisions to permit these transactions, along with the reasons supporting the decision.
5. REPORTING
5.1. Initial Holdings Reports
No later than ten days after a person becomes an Access Person, he or she must report to the applicable Fund the following information (which information must be current as of a date no more than 45 days prior to the date the person becomes an Access Person):
5.1.1. the title, number of shares and principal amount of each Covered Security in which the Access Person had any direct or indirect beneficial ownership when the person became an Access Person;
5.1.2. the name of any broker, dealer or bank with whom the Access Person maintained an account in which any securities were held for the direct or indirect benefit of the Access Person as of the date the person became an Access Person; and
5.1.3. the date that the report is submitted by the Access Person.
5.2. Quarterly Reporting
5.2.1. Every Access Person shall either report to the applicable Fund the information described in paragraphs 5.2.2 and 5.2.3 below with respect to transactions in any Covered Security in which the Access Person has, or by reason of the transaction acquires, any direct or indirect beneficial ownership or, in the alternative, make the representation in Section 5.2.4 below.
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5.2.2. Every report shall be made not later than 30 days after the end of the calendar quarter in which the transaction to which the report relates was effected and shall contain the following information:
5.2.2.1. the date of the transaction, the title, the interest rate and maturity date (if applicable), the number of units and the principal amount of each Covered Security involved;
5.2.2.2. the nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition);
5.2.2.3. the price at which the transaction was effected;
5.2.2.4. the name of the broker, dealer or bank with or through whom the transaction was effected;
5.2.2.5. the date that the report is submitted by the Access Person; and
5.2.2.6. a description of any factors potentially relevant to an analysis of whether the Access Person may have a conflict of interest with respect to the transaction, including the existence of any substantial economic relationship between the transaction and securities held or to be acquired by a Fund.
5.2.3. With respect to any account established by the Access Person in which any securities were held during the quarter for the direct or indirect benefit of the Access Person, no later than 30 days after the end of a calendar quarter, an Access Person shall provide a report to each Fund containing the following information:
5.2.3.1. the name of the broker, dealer or bank with whom the Access Person established the account;
5.2.3.2. the date the account was established; and
5.2.3.3. the date that the report is submitted by the Access Person.
5.2.4. If no transactions were conducted by an Access Person during a calendar quarter that are subject to the reporting requirements described above, such Access Person shall, not later than 30 days after the end of that calendar quarter, provide a written representation to that effect to the Funds.
5.3. Annual Reporting
5.3.1. Every Access Person shall report to each Fund the information described in Section 5.3.2 below with respect to transactions in any Covered Security in which the Access Person has, or by reason of the transaction acquires, any direct or indirect beneficial ownership in the security.
5.3.2. Annually, an Access Person shall provide a report to each Fund containing the following information (which information must be current as of a date no more than 45 days before the report is submitted):
5.3.2.1. the title, number of shares and principal amount of each Covered Security in which the Access Person had any direct or indirect beneficial ownership;
5.3.2.2. the name of any broker, dealer or bank with whom the Access Person maintains an account in which any securities are held for the direct or indirect benefit of the Access Person; and
5.3.2.3. the date that the report is submitted by the Access Person.
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5.4. Exceptions to Reporting Requirements
5.4.1. An Access Person is not required to make a report otherwise required under Sections 5.1, 5.2 and 5.3 above with respect to any transaction effected for any account over which the Access Person does not have any direct or indirect influence or control; provided, however, that if the Access Person is relying upon the provisions of this Section 5.4.1 to avoid making such a report, the Access Person shall, not later than 30 days after the end of each calendar quarter, identify any such account in writing and certify in writing that he or she had no direct or indirect influence over any such account.
5.4.2. An Access Person is not required to make a report otherwise required under Section 5.2 above with respect to transactions effected pursuant to an Automatic Investment Plan.
5.4.3. An Independent Director of a Fund (which for purposes of this Section shall include an advisory board member) who would be required to make a report pursuant to Sections 5.1, 5.2 and 5.3 above, solely by reason of being a board member of the Fund, is not required to make an initial holdings report under Section 5.1 above and an annual report under Section 5.3 above, and is only required to make a quarterly report under Section 5.2 above, with respect to a transaction in a Covered Security, if the Independent Director knew or, in the ordinary course of fulfilling the Independent Directors official duties as a board member of the Fund, should have known that: (a) the Fund has engaged in a transaction in the same security within the last 15 days of such Independent Directors transaction in such Covered Security or is engaging or going to engage in a transaction in the same security within the next 15 days of such Independent Directors transaction in such Covered Security; or (b) the Fund or BlackRock has within the last 15 days of such Independent Directors transaction in such Covered Security considered a transaction in the same security or is considering a transaction in the same security or within the next 15 days of such Independent Directors transaction in such Covered Security is going to consider a transaction in the same security.
5.5. Annual Certification
5.5.1. All Access Persons are required to certify that they have read and understand this Code and recognize that they are subject to the provisions hereof and will comply with the policy and procedures stated herein. Further, all Access Persons are required to certify annually that they have complied with the requirements of this Code and that they have reported all personal securities transactions required to be disclosed or reported pursuant to the requirements of such policies. A copy of the certification form to be used in complying with this Section 5.5.1 is attached to this Code as Appendix D.
5.5.2. Each Fund, BlackRock and BRIL shall prepare an annual report to the Board to be presented to the Board each year and which shall:
5.5.2.1. summarize existing procedures concerning personal investing, including preclearance policies and the monitoring of personal investment activity after preclearance has been granted, and any changes in the procedures during the past year;
5.5.2.2. describe any issues arising under this Code or procedures since the last report to the Board including, but not limited to, information about any material violations of this Code or procedures and the sanctions imposed during the past year;
5.5.2.3. identify any recommended changes in existing restrictions or procedures based upon experience under this Code, evolving industry practice or developments in applicable laws and regulations;
5.5.2.4. contain such other information, observations and recommendations as deemed relevant by such Fund, BlackRock or BRIL; and
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5.5.2.5. certify that such Fund, BlackRock and BRIL have adopted this Code with procedures reasonably necessary to prevent Access Persons from violating the provisions of Rule 17j-1(b) or this Code.
5.6. Notification of Reporting Obligation and Review of Reports
Each Access Person shall receive a copy of this Code and be notified of his or her reporting obligations.
All reports shall be promptly submitted upon completion to the Funds CCO who shall review such reports.
5.7. Miscellaneous
Any report under this Code may contain a statement that the report shall not be construed as an admission by the person making the report that the person has any direct or indirect beneficial ownership in the securities to which the report relates.
6. RECORDKEEPING REQUIREMENTS
Each Fund shall maintain, at its principal place of business, records in the manner and to the extent set out below, which records shall be available for examination by representatives of the Securities and Exchange Commission (the SEC).
6.1. As long as this Code is in effect, a copy of it (and any version thereof that was in effect within the past five years) shall be preserved in an easily accessible place.
6.2. The following records must be maintained in an easily accessible place for five years after the end of the fiscal year in which the event took place:
6.2.1. a record of any violation of this Code, and of any action taken as a result of the violation;
6.2.2. a record of all persons, currently or within the past five years, who are or were required to make reports under Section 5, or who are or were responsible for reviewing these reports; and
6.2.3. a record of any decision, and the reasons supporting the decision, to approve the acquisition by Investment Personnel of securities under Section 4.
6.3. The following records must be maintained for five years after the end of the fiscal year in which the event took place, the first two years in an easily accessible place:
6.3.1. a copy of each report made by an Access Person pursuant to this Code, including any information required by Section 5.4.1 in lieu of such reports; and
6.3.2. a copy of each annual report submitted by each Fund, BlackRock and BRIL to the Board.
7. CONFIDENTIALITY
No Access Person shall reveal to any other person (except in the normal course of his or her duties on behalf of a Fund) any information regarding securities transactions by a Fund or consideration by a Fund or BlackRock of any such securities transaction.
All information obtained from any Access Person hereunder shall be kept in strict confidence, except that reports of securities transactions hereunder will be made available to the SEC or any other regulatory or self-regulatory organization to the extent required by law or regulation.
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8. SANCTIONS
Upon discovering a violation of this Code, the Board may impose any sanctions it deems appropriate, including a letter of censure, the suspension or termination of any officer or employee of a Fund, or the recommendation to the employer of the violator of the suspension or termination of the employment of the violator.
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Appendix A:
Rule 17j-1 under the 1940 Act
I. DEFINITIONS
For purposes of this section:
1. |
Access Person means: |
A. |
Any Advisory Person of a Fund or of a Funds investment adviser. If an investment advisers primary business is advising Funds or other advisory clients, all of the investment advisers directors, officers, and general partners are presumed to be Access Persons of any Fund advised by the investment adviser. All of a Funds directors, officers, and general partners are presumed to be Access Persons of the Fund. |
(1) |
If an investment adviser is primarily engaged in a business or businesses other than advising Funds or other advisory clients, the term Access Person means any director, officer, general partner or Advisory Person of the investment adviser who, with respect to any Fund, makes any recommendation, participates in the determination of which recommendation will be made, or whose principal function or duties relate to the determination of which recommendation will be made, or who, in connection with his or her duties, obtains any information concerning recommendations on Covered Securities being made by the investment adviser to any Fund. |
(2) |
An investment adviser is primarily engaged in a business or businesses other than advising Funds or other advisory clients if, for each of its most recent three fiscal years or for the period of time since its organization, whichever is less, the investment adviser derived, on an unconsolidated basis, more than 50 percent of its total sales and revenues and more than 50 percent of its income (or loss), before income taxes and extraordinary items, from the other business or businesses. |
B. |
Any director, officer or general partner of a principal underwriter who, in the ordinary course of business, makes, participates in or obtains information regarding, the purchase or sale of Covered Securities by the Fund for which the principal underwriter acts, or whose functions or duties in the ordinary course of business relate to the making of any recommendation to the Fund regarding the purchase or sale of Covered Securities. |
2. |
Advisory Person of a Fund or of a Funds investment adviser means: |
A. |
Any director, officer, general partner or employee of the Fund or investment adviser (or of 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 a Fund, or whose functions relate to the making of any recommendations with respect to such purchases or sales; and |
B. |
Any natural person in a control relationship to the Fund or investment adviser who obtains information concerning recommendations made to the Fund with regard to the purchase or sale of Covered Securities by the Fund. |
3. |
Control has the same meaning as in section 2(a)(9) of the Act. |
4. |
Covered Security means a security as defined in section 2(a)(36) of the Act, except that it does not include: |
A. |
Direct obligations of the Government of the United States; |
B. |
Bankers acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements; and |
C. |
Shares issued by open-end Funds. |
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5. |
Fund means an investment company registered under the Investment Company Act. |
6. |
An Initial Public Offering means an offering of securities registered under the Securities Act of 1933, 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. |
7. |
Investment Personnel of a Fund or of a Funds investment adviser means: |
A. |
Any employee of the Fund or investment adviser (or of any company in a control relationship to the Fund or investment adviser) who, in connection with his or her regular functions or duties, makes or participates in making recommendations regarding the purchase or sale of securities by the Fund. |
B. |
Any natural person who controls the Fund or investment adviser and who obtains information concerning recommendations made to the Fund regarding the purchase or sale of securities by the Fund. |
8. |
A Limited Offering means an offering that is exempt from registration under the Securities Act of 1933 pursuant to section 4(2) or section 4(6) or pursuant to rule 504, rule 505, or rule 506 under the Securities Act of 1933. |
9. |
Purchase or sale of a Covered Security includes, among other things, the writing of an option to purchase or sell a Covered Security. |
10. |
Security Held or to be Acquired by a Fund means: |
A. |
Any Covered Security which, within the most recent 15 days: |
(1) |
Is or has been held by the Fund; or |
(2) |
Is being or has been considered by the Fund or its investment adviser for purchase by the Fund; and |
B. |
Any option to purchase or sell, and any security convertible into or exchangeable for, a Covered Security described in paragraph (1)(10)(A) of this section. |
11. |
Automatic Investment Plan means a program in which regular periodic purchases (or withdrawals) are made automatically in (or from) investment accounts in accordance with a predetermined schedule and allocation. An Automatic Investment Plan includes a dividend reinvestment plan. |
II. UNLAWFUL ACTIONS
It is unlawful for any affiliated person of or principal underwriter for a Fund, or any affiliated person of an investment adviser of or principal underwriter for a Fund, in connection with the purchase or sale, directly or indirectly, by the person of a Security Held or to be Acquired by the Fund:
1. |
To employ any device, scheme or artifice to defraud the Fund; |
2. |
To make any untrue statement of a material fact to the Fund or omit to state a material fact necessary in order to make the statements made to the Fund, in light of the circumstances under which they are made, not misleading; |
3. |
To engage in any act, practice or course of business that operates or would operate as a fraud or deceit on the Fund; or |
4. |
To engage in any manipulative practice with respect to the Fund. |
III. CODE OF ETHICS
1. Adoption and Approval of Code of Ethics.
A. |
Every Fund (other than a money market fund or a Fund that does not invest in Covered Securities) and each investment adviser of and principal underwriter for the Fund, must adopt a written code of ethics containing provisions reasonably necessary to prevent its Access Persons from engaging in any conduct prohibited by paragraph (II) of this section. |
B. |
The board of directors of a Fund, including a majority of directors who are not interested persons, must approve the code of ethics of the Fund, the code of ethics of each investment adviser and principal underwriter of the Fund, and any material changes to these codes. The board must base its approval of a code and any material changes to the code on a determination that the code contains provisions reasonably necessary to prevent Access Persons from engaging in any conduct |
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prohibited by paragraph (II) of this section. Before approving a code of a Fund, investment adviser or principal underwriter or any amendment to the code, the board of directors must receive a certification from the Fund, investment adviser or principal underwriter that it has adopted procedures reasonably necessary to prevent Access Persons from violating the Funds, investment advisers, or principal underwriters code of ethics. The Funds board must approve the code of an investment adviser or principal underwriter before initially retaining the services of the investment adviser or principal underwriter. The Funds board must approve a material change to a code no later than six months after adoption of the material change. |
C. |
If a Fund is a unit investment trust, the Funds principal underwriter or depositor must approve the Funds code of ethics, as required by paragraph (III)(1)(B) of this section. If the Fund has more than one principal underwriter or depositor, the principal underwriters and depositors may designate, in writing, which principal underwriter or depositor must conduct the approval required by paragraph (III)(1)(B) of this section, if they obtain written consent from the designated principal underwriter or depositor. |
2. |
Administration of Code of Ethics. |
A. |
The Fund, investment adviser and principal underwriter must use reasonable diligence and institute procedures reasonably necessary to prevent violations of its code of ethics. |
B. |
No less frequently than annually, every Fund (other than a unit investment trust) and its investment advisers and principal underwriters must furnish to the Funds board of directors, and the board of directors must consider, a written report that: |
(1) |
Describes any issues arising under the code of ethics or procedures since the last report to the board of directors, including, but not limited to, information about material violations of the code or procedures and sanctions imposed in response to the material violations; and |
(2) |
Certifies that the Fund, investment adviser or principal underwriter, as applicable, has adopted procedures reasonably necessary to prevent Access Persons from violating the code. |
3. |
Exception for Principal Underwriters. The requirements of paragraphs (III)(1) and (III)(2) of this section do not apply to any principal underwriter unless: |
A. |
The principal underwriter is an affiliated person of the Fund or of the Funds investment adviser; or |
B. |
An officer, director or general partner of the principal underwriter serves as an officer, director or general partner of the Fund or of the Funds investment adviser. |
IV. REPORTING REQUIREMENTS OF ACCESS PERSONS
1. |
Reports Required. |
Unless excepted by paragraph (IV)(2) of this section, every Access Person of a Fund (other than a money market fund or a Fund that does not invest in Covered Securities) and every Access Person of an investment adviser of or principal underwriter for the Fund, must report to that Fund, investment adviser or principal underwriter:
A. |
Initial Holdings Reports. No later than 10 days after the person becomes an Access Person (which information must be current as of a date no more than 45 days prior to the date the person becomes an Access Person): |
(1) |
The title, number of shares and principal amount of each Covered Security in which the Access Person had any direct or indirect beneficial ownership when the person became an Access Person; |
(2) |
The name of any broker, dealer or bank with whom the Access Person maintained an account in which any securities were held for the direct or indirect benefit of the Access Person as of the date the person became an Access Person; and |
(3) |
The date that the report is submitted by the Access Person. |
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B. |
Quarterly Transaction Reports. |
No later than 30 days after the end of a calendar quarter, the following information:
(1) With respect to any transaction during the quarter in a Covered Security in which the Access Person had any direct or indirect beneficial ownership:
(1) The date of the transaction, the title, the interest rate and maturity date (if applicable), the number of shares and the principal amount of each Covered Security involved;
(2) The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition);
(3) The price of the Covered Security at which the transaction was effected;
(4) The name of the broker, dealer or bank with or through which the transaction was effected; and
(5) The date that the report is submitted by the Access Person.
(2) With respect to any account established by the Access Person in which any securities were held during the quarter for the direct or indirect benefit of the Access Person:
(1) The name of the broker, dealer or bank with whom the Access Person established the account;
(2) The date the account was established; and
(3) The date that the report is submitted by the Access Person.
C. |
Annual Holdings Reports. |
Annually, the following information (which information must be current as of a date no more than 45 days before the report is submitted):
(1) The title, number of shares and principal amount of each Covered Security in which the Access Person had any direct or indirect beneficial ownership;
(2) The name of any broker, dealer or bank with whom the Access Person maintains an account in which any securities are held for the direct or indirect benefit of the Access Person; and
(3) The date that the report is submitted by the Access Person.
2. |
Exceptions from Reporting Requirements. |
A. |
A person need not make a report under paragraph (IV)(1) of this section with respect to transactions effected for, and Covered Securities held in, any account over which the person has no direct or indirect influence or control. |
B. |
A director of a Fund who is not an interested person of the Fund within the meaning of section 2(a)(19) of the Act, and who would be required to make a report solely by reason of being a Fund director, need not make: |
(1) |
An initial holdings report under paragraph (IV)(1)(A) of this section and an annual holdings report under paragraph (IV)(1)(C) of this section; and |
(2) |
A quarterly transaction report under paragraph (IV)(1)(B) of this section, unless the director knew or, in the ordinary course of fulfilling his or her official duties as a Fund director, should have known that during the 15-day period immediately before or after the directors transaction in a Covered Security, the Fund purchased or sold the Covered Security, or the Fund or its investment adviser considered purchasing or selling the Covered Security. |
C. |
An Access Person to a Funds principal underwriter need not make a report to the principal underwriter under paragraph (IV)(1) of this section if: |
(1) |
The principal underwriter is not an affiliated person of the Fund (unless the Fund is a unit investment trust) or any investment adviser of the Fund; and |
(2) |
The principal underwriter has no officer, director or general partner who serves as an officer, director or general partner of the Fund or of any investment adviser of the Fund. |
D. |
An Access Person to an investment adviser need not make a separate report to the investment adviser under paragraph (IV)(1) of this section to the extent the information in the report would duplicate information required to be recorded under § 275.204-2(a)(13) of this chapter. |
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E. |
An Access Person need not make a quarterly transaction report under paragraph (IV)(1)(B) of this section if the report would duplicate information contained in broker trade confirmations or account statements received by the Fund, investment adviser or principal underwriter with respect to the Access Person in the time period required by paragraph (IV)(1)(B), if all of the information required by that paragraph is contained in the broker trade confirmations or account statements, or in the records of the Fund, investment adviser or principal underwriter. |
F. |
An Access Person need not make a quarterly transaction report under paragraph (IV)(1)(B) of this section with respect to transactions effected pursuant to an Automatic Investment Plan. |
3. |
Review of Reports. |
Each Fund, investment adviser and principal underwriter to which reports are required to be made by paragraph (IV)(1) of this section must institute procedures by which appropriate management or compliance personnel review these reports.
4. |
Notification of Reporting Obligation. |
Each Fund, investment adviser and principal underwriter to which reports are required to be made by paragraph (IV)(1) of this section must identify all Access Persons who are required to make these reports and must inform those Access Persons of their reporting obligation.
5. |
Beneficial Ownership. |
For purposes of this section, beneficial ownership is interpreted in the same manner as it would be under Rule 16a-1(a)(2) of this chapter in determining whether a person is the beneficial owner of a security for purposes of section 16 of the Securities Exchange Act of 1934 and the rules and regulations thereunder. Any report required by paragraph (IV) of this section may contain a statement that the report will not be construed as an admission that the person making the report has any direct or indirect beneficial ownership in the Covered Security to which the report relates.
V. PRE-APPROVAL OF INVESTMENTS IN IPOS AND LIMITED OFFERINGS
Investment Personnel of a Fund or its investment adviser must obtain approval from the Fund or the Funds investment adviser before directly or indirectly acquiring beneficial ownership in any securities in an Initial Public Offering or in a Limited Offering.
VI. RECORDKEEPING REQUIREMENTS
1. |
Each Fund, investment adviser and principal underwriter that is required to adopt a code of ethics or to which reports are required to be made by Access Persons must, at its principal place of business, maintain records in the manner and to the extent set out in this paragraph (VI), and must make these records available to the Commission or any representative of the Commission at any time and from time to time for reasonable periodic, special or other examination: |
A. |
A copy of each code of ethics for the organization that is in effect, or at any time within the past five years was in effect, must be maintained in an easily accessible place; |
B. |
A record of any violation of the code of ethics, and of any action taken as a result of the violation, must be maintained in an easily accessible place for at least five years after the end of the fiscal year in which the violation occurs; |
C. |
A copy of each report made by an Access Person as required by this section, including any information provided in lieu of the reports under paragraph (IV)(2)(E) of this section, must be maintained for at least five years after the end of the fiscal year in which the report is made or the information is provided, the first two years in an easily accessible place; |
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D. |
A record of all persons, currently or within the past five years, who are or were required to make reports under paragraph (IV) of this section, or who are or were responsible for reviewing these reports, must be maintained in an easily accessible place; and |
E. |
A copy of each report required by paragraph (III)(2)(B) of this section must be maintained for at least five years after the end of the fiscal year in which it is made, the first two years in an easily accessible place. |
2. |
A Fund or investment adviser must maintain a record of any decision, and the reasons supporting the decision, to approve the acquisition by investment personnel of securities under paragraph (V), for at least five years after the end of the fiscal year in which the approval is granted. |
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Appendix B:
Access Persons
The following are Access Persons for purposes of the foregoing Code of Ethics:
|
Each Director/Trustee of the Funds |
|
Any advisory board member of the Funds |
|
Each Officer of the Funds |
|
The Portfolio Managers of the Funds |
|
All employees of BlackRock, Inc. and its subsidiaries |
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Appendix C:
Rule 16a-1(a)(2) under the Exchange Act
Other than for purposes of determining whether a person is a beneficial owner of more than ten percent of any class of equity securities registered under Section 12 of the Act, the term beneficial owner shall mean any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares a direct or indirect pecuniary interest in the equity securities, subject to the following:
1. |
The term pecuniary interest in any class of equity securities shall mean the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in the subject securities. |
2. |
The term indirect pecuniary interest in any class of equity securities shall include, but not be limited to: |
A. |
Securities held by members of a persons immediate family sharing the same household; provided, however, that the presumption of such beneficial ownership may be rebutted; see also Rule 16a-1(a)(4); |
B. |
A general partners proportionate interest in the portfolio securities held by a general or limited partnership. The general partners proportionate interest, as evidenced by the partnership agreement in effect at the time of the transaction and the partnerships most recent financial statements, shall be the greater of: |
(1) |
The general partners share of the partnerships profits, including profits attributed to any limited partnership interests held by the general partner and any other interests in profits that arise from the purchase and sale of the partnerships portfolio securities; or |
(2) |
The general partners share of the partnership capital account, including the share attributable to any limited partnership interest held by the general partner. |
C. |
A performance-related fee, other than an asset-based fee, received by any broker, dealer, bank, insurance company, investment company, investment adviser, investment manager, trustee or person or entity performing a similar function; provided, however, that no pecuniary interest shall be present where: |
(1) |
The performance-related fee, regardless of when payable, is calculated based upon net capital gains and/or net capital appreciation generated from the portfolio or from the fiduciarys overall performance over a period of one year or more; and |
(2) |
Equity securities of the issuer do not account for more than ten percent of the market value of the portfolio. A right to a nonperformance-related fee alone shall not represent a pecuniary interest in the securities; |
D. |
A persons right to dividends that are separated or separable from the underlying securities. Otherwise, a right to dividends alone shall not represent a pecuniary interest in the securities; |
E. |
A persons interest in securities held by a trust, as specified in Rule 16a-8(b); and |
F. |
A persons right to acquire equity securities through the exercise or conversion of any derivative security, whether or not presently exercisable. |
3. |
A shareholder shall not be deemed to have a pecuniary interest in the portfolio securities held by a corporation or similar entity in which the person owns securities if the shareholder is not a controlling shareholder of the entity and does not have or share investment control over the entitys portfolio. |
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NY 76483717v2 |
Appendix D:
Initial and Annual Certification Form
Code of Ethics for BlackRock Funds and iShares Funds
This is to certify that I have read and understand the Code of Ethics of the Funds and that I recognize that I am subject to the provisions thereof and will comply with the policy and procedures stated therein.
This is to further certify that I have complied with the requirements of such Code of Ethics and that I have reported all personal securities transactions and accounts required to be disclosed or reported pursuant to the requirements of such Code of Ethics.
Please sign your name here: |
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Please print your name here: |
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Please date here: |
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Please sign two copies of this Certification Form, return one copy to Mr. Charles Park, c/o BlackRock, 40 East 52nd Street, New York, NY 10022, and retain the other copy, together with a copy of the Code of Ethics, for your records.
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