UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number ___811-06179 __
Flaherty & Crumrine Preferred and Income Fund Incorporated | ||
(Exact name of registrant as specified in charter) |
301 E. Colorado Boulevard, Suite 800 | ||
Pasadena , CA 91101 | ||
(Address of principal executive offices) (Zip code) |
R. Eric Chadwick | ||
Flaherty & Crumrine Incorporated | ||
301 E. Colorado Boulevard, Suite 800 | ||
Pasadena , CA 91101 | ||
(Name and address of agent for service) |
Registrant’s telephone number, including area code: 626-795-7300
Date of fiscal year end: November 30
Date of reporting period: November 30, 2020
Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.
Item 1. Reports to Stockholders.
(a) | The Report to Shareholders is attached herewith. |
Beginning January 1, 2021, as permitted by regulations adopted by the Securities and Exchange Commission, the Fund intends to no longer mail paper copies of the Fund’s shareholder reports like this one, unless you specifically request paper copies of the reports from the Fund 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.
If you already elected to receive shareholder reports electronically (“edelivery”), you will not be affected by this change and you need not take any action. If you have not already elected edelivery, you may elect to receive shareholder reports and other communications from the Fund electronically at any time by contacting the Fund at the telephone number or mailing address listed on the last page of this report, if you invest directly with the Fund, or by contacting your financial intermediary.
You may elect to receive all future reports in paper free of charge. If you invest through a financial intermediary, you can contact your financial intermediary to request that you continue to receive paper copies of your shareholder reports. That election will apply to all funds held in your account at that financial intermediary. Likewise, your election to receive reports in paper will apply to all funds held with the fund complex if you invest directly with the Fund. If you are a direct shareholder with the Fund, you can call or write to the Fund at the telephone number or address listed on the last page of this report to let the Fund know you wish to continue receiving paper copies of your shareholder reports.
Please see “Where’s my Printed Report? (Electing Delivery Preferences)” in the Discussion Topics section inside this Annual Report for more details on setting your delivery preferences.
www.preferredincome.com
Annual Report
November 30, 2020
Flaherty & Crumrine Preferred and Income Fund
To the Shareholders of Flaherty & Crumrine Preferred and Income Fund (“PFD”):
Fiscal 2020 came to an end on November 30, 2020, closing out quite a year for preferred and income securities. Total return1 on net asset value (“NAV”) was 4.8% for the fourth fiscal quarter2 and 7.6% for the full fiscal year. Total return on market price of Fund shares over the same periods was 16.7% and 23.9%, respectively.
TOTAL RETURN ON NET ASSET VALUE
For Periods Ended November 30, 2020
(Unaudited)
|
|
Actual Returns |
|
Average Annualized Returns |
||||||||||
|
|
Three
|
|
Six
|
|
One Year |
|
Three
|
|
Five Years |
|
Ten Years |
|
Life of
|
Flaherty & Crumrine Preferred and Income Fund |
|
4.8% |
|
14.8% |
|
7.6% |
|
7.2% |
|
8.8% |
|
10.2% |
|
9.8% |
Bloomberg Barclays U.S. Aggregate Index(2) |
|
0.5% |
|
1.8% |
|
7.3% |
|
5.5% |
|
4.3% |
|
3.7% |
|
5.9% |
S&P 500 Index(3) |
|
3.9% |
|
20.0% |
|
17.4% |
|
13.2% |
|
14.0% |
|
14.2% |
|
10.5% |
(1)Since inception on January 31, 1991.
(2)The Bloomberg Barclays U.S. Aggregate Index is an unmanaged index considered representative of the U.S. investment grade, fixed-rate bond market.
(3)The S&P 500 is a capitalization-weighted index of 500 common stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results. In addition, NAV performance will vary from market price performance, and you may have a taxable gain or loss when you sell your shares.
2020 will go down as a year many would like to forget, with uneven economic, social, and personal fortunes and misfortunes experienced by so many. We are all hoping for a swift end to COVID-19 and related suffering. Markets are ending 2020 well out ahead of this healing process, looking forward to effective vaccines and a return to economic health – supported by continued accommodative monetary policy.
Investors won’t soon forget the wild ride that started in March and continued (thankfully, in a positive direction) for the balance of the year. Much of the market’s early selloff was driven by fear and uncertainty, and market technicals (particularly deleveraging) accelerated the decline. There are, however, a few important factors firmly behind the Fund’s performance, the market rebound and a continued rally in preferreds and contingent-capital (“CoCo”) securities. We believe many of those factors will continue into next year.
Credit quality remains a bright spot within most sectors that issue preferreds – most notably financials. Not all issuers are created equal, but in general banks and other financial issuers have been out in front of loan losses related to COVID-19 – adding aggressively to reserves while adjusting operations to continue serving customers and earning a profit. Not all borrowers will be able to meet their loan obligations, but we believe banks have strong balance sheets and will continue to be a source of strength for the broader economy. Loan losses generally have been absorbed within ongoing earnings and do not appear to threaten capital. Energy was a difficult sector for most of the year but rebounded nicely in the fourth fiscal quarter as investors gained confidence in these credits and enjoyed some of the highest yields available in preferreds. Financials and energy were 80.7% and 6.7% of the portfolio, respectively, as of November 30, 2020.
1Following the methodology required by the Securities and Exchange Commission, total return assumes dividend reinvestment.
2September 1, 2020 – November 30, 2020
2
Compared to the start of 2020, interest rates moved materially lower and are forecast to remain near these levels for several years. Declining interest rates had a large impact on most fixed-income securities, including preferreds and CoCos. Interest-rate duration varies among individual preferreds and CoCos, and longer duration securities certainly outperformed shorter duration. However, the real impact of low rates on our market has been on all-in yields and a corresponding compression in spreads. As Treasury rates moved lower, fixed-income yields moved lower as well – and preferreds/CoCos, offering a spread to Treasuries in excess of investment-grade corporate bonds, benefited greatly from this compression. We’ve referred to this before as a global search for yield, and this search accelerated as U.S. interest rates declined materially. (Many global rates were already low, so the U.S. compressed relative to other markets.) With business and consumer spending down as a result of the pandemic, savings are up, and investors have cash that needs to be invested. Yield is difficult to find in a low-rate environment, and preferreds/CoCos continue to offer a yield advantage over many alternatives.
A discussion of lower interest rates and economic recovery isn’t complete without acknowledging the important role of the Federal Reserve. Beginning in March, the Fed quickly resurrected the emergency credit and liquidity facilities it used in the financial crisis of 2008-2009. In addition, it aggressively eased monetary policy through both lower short-term rates and quantitative easing (i.e., securities purchases). This time around, it added direct investments in both investment-grade (IG) and high yield (HY) corporate bonds – with ETFs as a primary investment vehicle. In addition to factors mentioned above, this also led to a “pile-on” trade in these markets as investors followed the Fed’s lead. It is difficult to measure the impact directly, but there’s little question the Fed’s actions were important factors in improving investor confidence.
Taken as a whole, the Fund’s portfolio performed very well this fiscal year – certainly better than anyone imagined back in March/April. We raised cash and reduced portfolio risk proactively during those early weeks but did not reduce leverage balances during the year. The Fund’s ability to redeploy that cash as markets rebounded proved very beneficial. Distributions to shareholders were raised twice during the year, reflecting the benefits of resilient portfolio income and lower leverage costs.
The portfolio remains concentrated in financials, which is consistent with our view of ongoing credit strength there. We continue to value call protection and current income, as they allow better control over reinvestment decisions and more stable distributions to shareholders. Nonetheless, there is a trade-off for the Fund’s strong total return this year. As benchmark interest rates fell and credit spreads narrowed, prices rose but reinvestment yields declined. This is a natural part of fixed-income markets, but it does likely mean a trend toward lower coupons as issuers refinance older, higher-coupon securities when they become callable. Lower reinvestment yields put downward pressure on portfolio income over time, and with short-term rates already near zero, there is not much room for lower leverage cost to offset it.
Economic recovery will be uneven across sectors and regions, as COVID-19 continues to be a new and challenging virus, but we are at least beginning to turn a corner with vaccine production and distribution. We believe most preferred and CoCo issuers entered this latest crisis on solid footing and have taken steps necessary to weather this storm, but much uncertainty remains over the pace and extent of global recovery. In the meantime, we continue to monitor credits and security valuations closely and work to position the Fund’s portfolio to meet its objectives. We continue to see opportunity in the preferred and CoCo markets, especially from the viewpoint of long-term income investors.
Sincerely,
The Flaherty & Crumrine Portfolio Management Team
December 31, 2020
3
DISCUSSION TOPICS
(Unaudited)
The Fund’s Portfolio Results and Components of Total Return on NAV
The table below presents a breakdown of the components that comprise the Fund’s total return on NAV over both the recent six months and the Fund’s fiscal year. These components include: (a) the total return on the Fund’s portfolio of securities; (b) the impact of utilizing leverage to enhance returns to shareholders; and (c) the Fund’s operating expenses. When all of these components are added together, they comprise the total return on NAV.
Components of PFD’s Total Return on NAV
for Periods Ended November 30, 2020
|
|
Six Months1 |
|
One Year |
||
Total Return on Unleveraged Securities Portfolio (including principal change
|
|
10.5 |
% |
|
6.7 |
% |
Impact of Leverage (including leverage expense) |
|
4.9 |
% |
|
2.2 |
% |
Expenses (excluding leverage expense) |
|
(0.6 |
)% |
|
(1.3 |
)% |
1 Actual, not annualizedTotal Return on NAV
|
|
14.8 |
% |
|
7.6 |
% |
For the six months and one year periods ended November 30, 2020, the ICE BofA 8% Constrained Core West Preferred & Jr Subordinated Securities IndexSM (P8JC)1 returned 9.4% and 7.5%, respectively. This index reflects the various segments of the preferred securities market constituting the Fund’s primary focus. Since this index return excludes all expenses and the impact of leverage, it compares most directly to the top line in the Fund’s performance table above (Total Return on Unleveraged Securities Portfolio).
Total Return on Market Price of Fund Shares
While our focus is primarily on managing the Fund’s investment portfolio, a shareholder’s actual return is comprised of the Fund’s monthly dividend payments plus changes in the market price of Fund shares. During the twelve-month period ended November 30, 2020, total return on market price of Fund shares was 23.9%.
Historically, the preferred securities market has experienced price volatility consistent with those of other fixed-income securities. However, since mid-2007 it has become clear that preferred-security valuations can move dramatically when there is volatility in financial markets. This volatility can lead to swings in both the NAV and market price of Fund shares. The chart below contrasts the relative stability of the Fund’s earlier period with the more recent volatility in both its NAV and market price. Many fixed-income asset classes experienced increased volatility over this period.
1The ICE BofA 8% Constrained Core West Preferred & Jr Subordinated Securities Index (P8JC) includes U.S. dollar-denominated investment-grade or below investment-grade, fixed rate, floating rate or fixed-to-floating rate, retail or institutionally structured preferred securities of U.S. and foreign issuers with issuer concentration capped at 8%. All index returns include interest and dividend income, and, unlike the Fund’s returns, are unmanaged and do not reflect any expenses.
4
In a more perfect world, the market price of Fund shares and its NAV, as shown in the above chart, would track more closely. If so, any premium or discount (calculated as the difference between these two inputs and expressed as a percentage) would remain relatively close to zero. However, as can be seen in the chart below, this often has not been the case.
Although divergence between NAV and market price of a closed-end fund is generally driven by supply/demand imbalances affecting its market price, we can only speculate about why the relationship between the Fund’s market price and NAV hasn’t been closer.
5
Based on a closing price of $18.95 on December 31st and assuming its current monthly distribution of $0.086 does not change, the annualized yield on market price of Fund shares is 5.4%. Of course, there can be no guarantee that the Fund’s dividend will not change based on market conditions.
U.S. Economic and Credit Outlook
Like financial markets, the U.S. economy had a rollercoaster year in 2020. The COVID-19 pandemic and public and private responses to it dealt a severe blow to the economy in the first half of 2020. Safer-at-home orders that began in March prompted many businesses to suspend or sharply reduce operations; a recession began that month. Most of those businesses began to reopen in May, prompting a strong, albeit uneven, recovery in the second half of the year. Today, many businesses are coping with renewed restrictions – or simply more cautious consumer behavior – as COVID-19 cases multiplied in the last several months of the year, clouding the near-term economic outlook.
Nonetheless, the economy exited 2020 in a substantially better position than seemed possible last spring. Inflation-adjusted gross domestic product (real GDP) fell 5.0% in the first quarter of 2020 as the pandemic unfolded, plunged 31.4% in Q2 on unprecedented steps to slow its spread, and rebounded 33.4% in Q3 as the economy reopened. Those swings in Q2 and Q3 were by far the largest since quarterly GDP statistics began in 1947. Economists forecast2 4.5% real GDP growth in Q4, which still would leave the economy about 2.3% smaller than its level in 4Q2019. Looking ahead, economists expect 4.0% real growth in 2021, with a sluggish first quarter followed by solid expansion over the remainder of the year as vaccines accelerate progress against COVID-19.
After reaching a 50-year low of 3.5% in late 2019, the unemployment rate surged to a high of 14.7% in April 2020. It ended the year at 6.7%. From a peak level of 152.5 million nonfarm payroll jobs in February 2020, employment fell by 22.2 million jobs in just two months before gradually climbing back to 142.6 million in December, although that means nearly 10 million job losses since the start of the pandemic. Moreover, total payroll jobs are roughly 12 million below where they would have been if job growth continued at its prior rate of about 1.5%. There is still a long way to go before employment fully recovers from the pandemic.
Higher wages offset some of the pain for those who remained employed, and jobless benefits and other transfer payments provided needed support for those who lost jobs. As a result, real disposable personal income rose 3.1% over 12 months ending in November 2020 (latest data available). However, with many activities curtailed, real personal spending fell 2.4% over the same period. Higher income and lower spending pushed the average personal savings rate up to a record 15.7% over 12 months ending in November. Although some individuals are experiencing significant financial hardship, aggregate consumer balance sheets are in very good shape. Consumer spending is likely to remain cautious in Q1, but warmer weather and wider availability of coronavirus vaccines should prompt a rebound in consumer spending over the balance of 2021.
Investment spending was mixed in 2020. Business investment rose strongly in the third quarter (+22.9%), but it remains 4.4% below its 4Q2019 level, mostly due to lower nonresidential construction. Office building occupancy remains low, which drove a 14.8% drop (not annualized) in investment in nonresidential structures since 4Q2019. In contrast, residential investment boomed in 2020. It was up at a 63% pace in Q3 and is 5.7% above its 4Q2019 level. However, because residential investment is only ¼ the size of business investment, overall investment spending remains down a little more than 2% since 4Q2019. Looking ahead, business investment should pick up gradually as excess capacity declines with economic recovery; residential investment – fueled by rising wages, low mortgage interest rates and migration from high-density urban to lower-density environments – should remain strong in 2021, albeit below Q3’s torrid pace.
2Unless noted otherwise, forecasts are from Bloomberg® L.P., U.S. Monthly Economic Survey, December 11, 2020.
6
Government spending performed its usual countercyclical role during a recession. Government consumption rose 1.3% and 2.5% in Q1 and Q2, respectively, as other sectors contracted. Spending slipped 4.8% in Q3 as GDP elsewhere recovered. At the federal level, the entire jump in spending was deficit-financed, pushing the budget deficit for 12 months ended in November 2020 to $3.2 trillion on $6.6 trillion in spending, which was up 47% from the same period a year earlier. A sharp increase in private savings and the Federal Reserve’s balance sheet expansion made that debt easy to finance, although federal government debt-to-GDP rose more than 20 percentage points to end Q3 at almost 109%. This is not a near-term worry, but it has longer-term implications for economic growth and could limit fiscal options over coming years.
Inflation slowed as the economy fell into recession. The personal consumption expenditures deflator excluding food and energy touched a low of 1.2% year-over-year in June and edged up to 1.6% as of November 2020, well below the Fed’s 2% inflation target. Economic recovery should close the gap between current and potential economic growth, pushing inflation upward, although global excess capacity could make this a slow process.
As noted in our opening shareholder letter, monetary policy eased vigorously at the onset of the pandemic and has remained highly accommodative given outlooks for employment and inflation. The Federal Reserve cut the federal funds rate target by 1.5% to nearly zero in 2020; it forecasts no change through 2023. Moreover, the Fed’s balance sheet grew from about $4.2 trillion in February to nearly $7.4 trillion at year-end 2020, leaving markets awash in liquidity. Money supply growth surged, with M1 and M2 up 67% and 25%, respectively, at year-end 2020 compared to a year earlier. While probably not a significant risk for 2021, that could fuel a quicker rise in inflation than the Fed currently expects as the pandemic recedes.
Credit conditions worsened sharply as the economy entered a recession in March, but fiscal and monetary responses along with a flattening of the coronavirus infection curve and strong economic recovery in Q3 led to a rapid improvement from April onwards. Although bankruptcy filings increased notably in 2020, bank loan problems have remained modest. Most U.S. banks roughly doubled loan-loss reserves relative to nonperforming loans in 2020, in expectation of significant credit deterioration. For the most part, that has not materialized. Consumer loan charge-offs and delinquencies were 1.9% and 1.8%, respectively, in Q3 (latest data available), down about 0.4% from 4Q2019. Commercial and industrial loan problems did increase, with Q3 charge-offs and delinquencies at 0.55% and 1.9%, respectively, but that is only about 0.2% higher than in 4Q2019. There is little doubt that some of these borrowers will default in 2021, but so far, most U.S. banks have not experienced a spike in loan defaults.
At the same time, banks reduced payments to shareholders, with steady or lower dividends and little to no share repurchases since the first quarter, all while making respectable profits. As a result, despite significantly increasing loan-loss reserves, banks’ capital ratios improved substantially in 2020. Capital and reserve strength was evident in a second round of stress tests that the Federal Reserve conducted on the nation’s largest banks. From an average starting common equity Tier 1 (“CET1”) ratio of 12.2%, the average ratio fell to 9.6-9.7% under severe economic assumptions used in the tests, a smaller decline than in earlier tests, due to larger loan-loss reserves, and well above the 4.5% minimum set by the Fed. Moreover, no bank in the exercise failed its stress tests. We think these results highlight the major improvement in bank credit quality since the financial crisis, and we remain confident owning their preferred securities.
Although not all sectors look as good as banks, insurance and other financial services, utilities and communications businesses remain broadly healthy. Even energy companies, which seemed at risk as economic activity plummeted in Q2, revived along with a brighter economic outlook over the past quarter.
We see risk from the pandemic receding in 2021, leading to above-trend growth with low but gradually rising inflation: in short, a favorable credit environment. After a sustained rally since the lows in March 2020, credit spreads reflect that optimistic view. That means credit selection will be of paramount importance, and it remains at the heart of the Fund’s investment process. As we said to close our shareholder letter, we continue to see opportunity in the preferred and contingent capital securities markets.
7
Where’s my Printed Report? (Electing Delivery Preferences)
The Securities and Exchange Commission (“SEC”) in recent years made substantial changes to reporting requirements for closed-end investment companies such as the Fund. Among those changes is the option for funds to save on printing and mailing costs by providing electronic access to shareholder reports and notice of their availability. The Fund is no longer required to mail printed shareholder reports unless the shareholder specifically requests a paper copy. Under the new rules, which the Fund adopted with this report, shareholders fall into one of three groups.
1.Shareholders who have requested electronic delivery of the report (“edelivery”), either directly from their financial intermediary (if holding shares in “street name” in a brokerage account) or from the Fund (if holding “registered shares” at BNY Mellon/Computershare, the Fund’s transfer agent). When you sign up for edelivery, you will receive an email notification and a weblink to the shareholder report when it is available. If you already elected edelivery, you will not be affected by the new rule and you need not take any action.
2.Shareholders who have requested a printed shareholder report. Once again, this can be done either directly through your financial intermediary or from the Fund (if holding registered shares). Shareholders requesting a printed report will receive it via postal mail.
3.All other shareholders will receive mailed notice that a report is available, along with a web address where it can be accessed via the internet.
Please note, most shareholders hold shares in street name in their brokerage account (rather than registered shares) and should select their delivery preference with their financial intermediary.
We encourage shareholders to choose edelivery. You will receive reports sooner than via postal mail. It’s better for the environment. And it saves the Fund money; printing and mailing reports is expensive, and shareholders bear those expenses. Nonetheless, if you want a printed report, you may request it at no cost to you.
We would also like to minimize mailed notices. It seems wasteful to mail a piece of paper whose purpose is to direct you to your web browser. If you want to access reports electronically, please sign up for edelivery and skip the extra step – and added cost to your Fund – of mailed notices.
Summarizing how to specify your delivery preferences:
If you hold Fund shares in your brokerage account (most shareholders) and have not already selected your delivery preferences, contact your financial intermediary and request edelivery or printed reports. If you received a mailed notice, specific instructions are printed there.
If you hold shares at the Fund’s transfer agent, BNY Mellon/Computershare, and have not already selected your delivery preferences, contact the transfer agent and request edelivery or printed reports by telephone at 1-866-351-7446 (U.S. toll-free) or +1 (201) 680 6578 (International) or postal mail at BNY Mellon c/o Computershare, P.O. Box 505000, Louisville, KY, 40233-5000, United States.
You may change your delivery preferences at any time. There is no cost to you for either delivery option. In general, elections will apply to all funds held in your account at that financial intermediary. Likewise, your election to receive reports in paper will apply to all funds held with the fund complex if you invest directly with the Fund.
Thank you for taking the time to make your delivery election!
8
Federal Tax Advantages of 2020 Calendar Year Distributions
In calendar year 2020, approximately 83.0% of distributions made by the Fund was eligible for treatment as qualified dividend income, or QDI. Depending on an individual’s level of income, QDI can be taxed at a rate of 0%, 15% or 20%.
For an individual in the 32% marginal tax bracket, this means that the Fund’s total distributions will only be taxed at a blended 17.9% rate versus the 32% rate which would apply to distributions by a fund investing in traditional corporate bonds. This tax advantage means that, all other things being equal, for every $100 distribution that such individual receives from the Fund for the calendar year, the same individual would have had to receive approximately $121 in distributions from a fully-taxable bond fund to net the same after-tax amount as the distributions paid by the Fund.
For detailed information about tax treatment of particular distributions received from the Fund, please see the Form 1099 you receive from either the Fund or your broker.
Corporate shareholders also receive a federal tax benefit from the 37.2% of distributions that were eligible for the inter-corporate dividends received deduction, or DRD.
It is important to remember that composition of the portfolio and income distributions can change from one year to the next, and that the QDI or DRD portions of 2021’s distributions may not be the same (or even similar) to 2020.
9
Flaherty & Crumrine Preferred and Income Fund Incorporated
PORTFOLIO OVERVIEW (Unaudited)
November 30, 2020
Additional portfolio information of interest to shareholders is available on the Fund’s website at http://www.preferredincome.com/
Fund Statistics |
|
|
|
Net Asset Value |
$ |
14.43 |
|
Market Price |
$ |
18.90 |
|
Premium |
|
30.98 |
% |
Yield on Market Price† |
|
5.46 |
% |
Common Stock Shares Outstanding |
|
11,305,381 |
|
†November 2020 dividend of $0.086 per share,
annualized, divided by Market Price.
Security Ratings* |
% of Net Assets†† |
||
A |
|
0.3 |
% |
BBB |
|
49.0 |
% |
BB |
|
33.8 |
% |
Below “BB” |
|
0.8 |
% |
Not Rated** |
|
15.1 |
% |
Portfolio Rating Guidelines |
% of Net Assets†† |
||
Security Rated Below
|
|
30.0 |
% |
Issuer or Senior Debt Rated Below Investment Grade by All**** |
2.9 |
% |
*Ratings are from Moody’s Investors Service, Inc. May not sum to 100% due to rounding.
**“Not Rated” securities are those with no ratings available from Moody’s. Excludes common stock and money market fund investments and net other assets and liabilities of 0.9%.
***Security rating below investment grade by all of Moody’s, S&P Global Ratings, and Fitch Ratings.
****Security rating and issuer’s senior unsecured debt or issuer rating are below investment grade by all of Moody’s, S&P, and Fitch. The Fund’s investment policy currently limits such securities to 15% of Total Assets.
Industry Categories |
% of Net Assets†† |
Top 10 Holdings by Issuer |
% of Net Assets†† |
|||
MetLife Inc |
|
|
4.4 |
% |
Morgan Stanley |
|
|
3.9 |
% |
BNP Paribas |
|
|
3.4 |
% |
Liberty Mutual Group |
|
|
3.3 |
% |
Fifth Third Bancorp |
|
|
3.2 |
% |
|
|
|
|
|
JPMorgan Chase & Co |
|
|
3.1 |
% |
Citigroup Inc |
|
|
3.0 |
% |
Barclays Bank PLC |
|
|
2.5 |
% |
Unum Group |
|
|
2.5 |
% |
|
% of Net Assets*****†† |
||
Holdings Generating Qualified Dividend Income (QDI) for Individuals |
67 |
% |
|
Holdings Generating Income Eligible for the Corporate Dividends Received Deduction (DRD) |
47 |
% |
*****This does not reflect year-end results or actual tax categorization of Fund distributions. These percentages can, and do, change, perhaps significantly, depending on market conditions. Investors should consult their tax advisor regarding their personal situation. See accompanying notes to financial statements for tax characterization of 2020 distributions.
††Net Assets includes assets attributable to the use of leverage.
The accompanying notes are an integral part of the financial statements.
10
Flaherty & Crumrine Preferred and Income Fund Incorporated
PORTFOLIO OF INVESTMENTS
November 30, 2020
Shares/$ Par |
|
|
Value |
|
Preferred Stock & Hybrid Preferred Securities§ — 77.1% |
|
|
||
|
|
Banking — 39.7% |
|
|
25,600 |
|
BancorpSouth Bank, 5.50%, Series A |
$673,664
|
*(1)(2) |
|
|
Bank of America Corporation: |
|
|
23,500 |
|
4.375%, Series NN |
615,935 |
*(2) |
$3,180,000
|
|
5.875% to 03/15/28 then 3ML + 2.931%, Series FF |
3,569,163 |
*(1)(2)(3) |
$400,000
|
|
6.30% to 03/10/26 then 3ML + 4.553%, Series DD |
459,781 |
*(1)(2) |
15,375 |
|
Capital One Financial Corporation, 5.00%, Series I |
398,751 |
*(2) |
|
|
Citigroup, Inc.: |
|
|
$460,000
|
|
5.95% to 05/15/25 then 3ML + 3.905%, Series P |
496,604 |
*(1)(2) |
113,670 |
|
6.875% to 11/15/23 then 3ML + 4.13%, Series K |
3,244,142 |
*(1)(2) |
119,778 |
|
7.125% to 09/30/23 then 3ML + 4.04%, Series J |
3,457,991 |
*(1)(2) |
|
|
Citizens Financial Group, Inc.: |
|
|
34,300 |
|
6.35% to 04/06/24 then 3ML + 3.642%, Series D |
952,682 |
*(1)(2) |
$1,000,000
|
|
6.375% to 04/06/24 then 3ML + 3.157%, Series C |
1,020,735 |
*(1)(2) |
|
|
CoBank ACB: |
|
|
16,300 |
|
6.125%, Series G, 144A**** |
1,687,050 |
*(1)(2) |
10,000 |
|
6.20% to 01/01/25 then 3ML + 3.744%, Series H, 144A**** |
1,083,000 |
*(1)(2) |
10,000 |
|
6.25% to 10/01/22 then 3ML + 4.557%, Series F, 144A**** |
1,055,000 |
*(1)(2) |
$447,000
|
|
6.25% to 10/01/26 then 3ML + 4.66%, Series I, 144A**** |
487,230 |
*(1)(2) |
$850,000
|
|
Comerica, Inc., 5.625% to 10/01/25 then T5Y + 5.291%, Series A |
935,000 |
*(2) |
23,000 |
|
Cullen/Frost Bankers, Inc., 4.45%, Series B |
585,925 |
*(2) |
29,000 |
|
Dime Community Bancshares, Inc., 5.50%, Series A |
722,680 |
*(2) |
|
|
Fifth Third Bancorp: |
|
|
51,230 |
|
6.00%, Series A |
1,395,347 |
*(1)(2) |
222,435 |
|
6.625% to 12/31/23 then 3ML + 3.71%, Series I |
6,426,703 |
*(1)(2) |
14,600 |
|
First Citizens BancShares, Inc., 5.375%, Series A |
382,228 |
*(2) |
|
|
First Horizon Corporation: |
|
|
13,200 |
|
6.50%, Series E |
357,852 |
*(2) |
1 |
|
FT Real Estate Securities Company, 9.50% 03/31/31, 144A**** |
1,302,500 |
|
795 |
|
First Horizon Bank, 3ML + 0.85%, min 3.75%, 3.75%(4), 144A**** |
631,031 |
*(2) |
8,300 |
|
Fulton Financial Corporation, 5.125%, Series A |
220,407 |
*(2) |
|
|
Goldman Sachs Group: |
|
|
$250,000
|
|
4.95% to 02/10/25 then T5Y + 3.224%, Series R |
262,187 |
*(2) |
$600,000
|
|
5.50% to 08/10/24 then T5Y + 3.623%, Series Q |
661,218 |
*(1)(2) |
50,000 |
|
6.375% to 05/10/24 then 3ML + 3.55%, Series K |
1,419,750 |
*(1)(2) |
31,600 |
|
Heartland Financial USA, Inc., 7.00% to 07/15/25 then T5Y + 6.675%, Series E |
893,174 |
*(2) |
|
|
HSBC Holdings PLC: |
|
|
$800,000
|
|
HSBC Capital Funding LP, 10.176% to 06/30/30 then 3ML + 4.98%, 144A**** |
1,374,240 |
(1)(2)(3)(5) |
The accompanying notes are an integral part of the financial statements.
11
Flaherty & Crumrine Preferred and Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (Continued)
November 30, 2020
Shares/$ Par |
|
|
Value |
|
|
|
Huntington Bancshares, Inc.: |
|
|
106,000 |
|
6.25%, Series D |
$2,724,200
|
*(1)(2) |
$300,000
|
|
4.45% to 10/15/27 then T7Y + 4.045%, Series G |
311,280 |
*(2) |
$875,000
|
|
5.625% to 10/15/30 then T10Y + 4.945%, Series F |
1,014,562 |
*(2) |
$1,000,000
|
|
5.70% to 04/15/23 then 3ML + 2.88%, Series E |
997,300 |
*(1)(2) |
|
|
JPMorgan Chase & Company: |
|
|
$1,832,000
|
|
3ML + 3.47%, 3.6844%(4), Series I |
1,827,835 |
*(1)(2)(3) |
$500,000
|
|
5.00% to 08/01/24 then SOFRRATE + 3.38%, Series FF |
525,610 |
*(1)(2) |
$4,715,000
|
|
6.75% to 02/01/24 then 3ML + 3.78%, Series S |
5,267,496 |
*(1)(2)(3) |
86,510 |
|
KeyCorp, 6.125% to 12/15/26 then 3ML + 3.892%, Series E |
2,604,280 |
*(1)(2) |
$2,790,000
|
|
M&T Bank Corporation, 6.45% to 02/15/24 then 3ML + 3.61%, Series E |
3,082,587 |
*(1)(2)(3) |
15,000 |
|
Merchants Bancorp, 6.00% to 10/01/24 then 3ML + 4.569%, Series B |
397,725 |
*(2) |
|
|
Morgan Stanley: |
|
|
$476,000
|
|
5.30% to 03/15/23 then 3ML + 3.16%, Series N |
493,850 |
*(2) |
77,800 |
|
5.85% to 04/15/27 then 3ML + 3.491%, Series K |
2,273,316 |
*(1)(2) |
154,665 |
|
6.875% to 01/15/24 then 3ML + 3.94%, Series F |
4,406,406 |
*(1)(2) |
80,516 |
|
7.125% to 10/15/23 then 3ML + 4.32%, Series E |
2,350,262 |
*(1)(2) |
174,600 |
|
New York Community Bancorp, Inc., 6.375% to 03/17/27 then
|
4,723,803 |
*(1)(2) |
17,600 |
|
People’s United Financial, Inc., 5.625% to 12/15/26 then 3ML + 4.02%, Series A |
492,305 |
*(2) |
203,023 |
|
PNC Financial Services Group, Inc., 6.125% to 05/01/22 then
|
5,372,496 |
*(1)(2) |
|
|
Regions Financial Corporation: |
|
|
117,980 |
|
5.70% to 08/15/29 then 3ML + 3.148%, Series C |
3,352,107 |
*(1)(2) |
$575,000
|
|
5.75% to 09/15/25 then T5Y + 5.43%, Series D |
629,625 |
*(2) |
50,000 |
|
6.375% to 09/15/24 then 3ML + 3.536%, Series B |
1,400,625 |
*(1)(2) |
8,494 |
|
Sterling Bancorp, 6.50%, Series A |
231,432 |
*(2) |
41,500 |
|
Synchrony Financial, 5.625%, Series A |
1,082,112 |
*(1)(2)(3) |
67,827 |
|
Synovus Financial Corporation, 5.875% to 07/01/24 then T5Y + 4.127%, Series E |
1,824,648 |
*(1)(2)(3) |
8,200 |
|
Texas Capital Bancshares Inc., 6.50%, Series A |
211,683 |
*(2) |
15,000 |
|
TriState Capital Holdings, Inc., 6.375% to 07/01/26 then 3ML + 4.088%, Series B |
391,248 |
*(2) |
|
|
Truist Financial Corporation: |
|
|
15,000 |
|
4.75%, Series R |
400,725 |
*(2) |
$875,000
|
|
4.95% to 12/01/25 then T5Y + 4.605%, Series P |
960,313 |
*(2) |
$440,000
|
|
5.10% to 09/01/30 then T10Y + 4.349%, Series Q |
498,212 |
*(2) |
29,400 |
|
Valley National Bancorp, 5.50% to 09/30/22 then 3ML + 3.578%, Series B |
749,847 |
*(1)(2) |
|
|
Wells Fargo & Company: |
|
|
30,000 |
|
4.70%, Series AA |
769,350 |
*(2) |
241 |
|
7.50%, Series L |
339,207 |
*(2) |
59,490 |
|
5.85% to 09/15/23 then 3ML + 3.09%, Series Q |
1,563,028 |
*(1)(2) |
$2,075,000
|
|
5.875% to 06/15/25 then 3ML + 3.99%, Series U |
2,277,292 |
*(1)(2) |
35,900 |
|
6.625% to 03/15/24 then 3ML + 3.69%, Series R |
1,019,740 |
*(1)(2) |
The accompanying notes are an integral part of the financial statements.
12
Flaherty & Crumrine Preferred and Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (Continued)
November 30, 2020
Shares/$ Par |
|
|
Value |
|
36,500 |
|
WesBanco, Inc., 6.75% to 08/15/25 then T5Y + 6.557%, Series A |
$1,006,123
|
*(2) |
35,500 |
|
Wintrust Financial Corporation, 6.875% to 07/15/25 then T5Y + 6.507%, Series E |
989,208 |
*(2) |
$1,225,000
|
|
Zions Bancorporation, 7.20% to 09/15/23 then 3ML + 4.44%, Series J |
1,277,062 |
*(1)(2)(3) |
|
|
|
96,610,870 |
|
|
|
Financial Services — 2.1% |
|
|
$460,000
|
|
AerCap Global Aviation Trust, 6.50% to 06/15/25 then
|
442,750 |
(5) |
$1,380,000
|
|
AerCap Holdings NV, 5.875% to 10/10/24 then T5Y + 4.535%, 10/10/79 |
1,306,646 |
**(1)(3)(5) |
$650,000
|
|
Discover Financial Services, 6.125% to 09/23/25 then T5Y + 5.783%, Series D |
718,250 |
*(2) |
|
|
General Motors Financial Company: |
|
|
$600,000
|
|
5.70% to 09/30/30 then T5Y + 4.997%, Series C |
660,000 |
*(2) |
$453,000
|
|
5.75% to 09/30/27 then 3ML + 3.598%, Series A |
465,457 |
*(2) |
$775,000
|
|
6.50% to 09/30/28 then 3ML + 3.436%, Series B |
828,266 |
*(1)(2) |
5,094 |
|
National Rural Utilities Cooperative Finance Corporation, 5.50% 05/15/64 |
141,519 |
|
21,500 |
|
Stifel Financial Corp., 6.25%, Series B |
586,198 |
*(1)(2) |
|
|
|
5,149,086 |
|
|
|
Insurance — 18.4% |
|
|
10,570 |
|
Allstate Corporation, 5.10%, Series H |
289,248 |
*(1)(2) |
50,000 |
|
American Equity Investment Life Holding Company, 5.95% to 12/01/24 then
|
1,295,750 |
*(1)(2) |
$1,610,000
|
|
American International Group, Inc., 8.175% to 05/15/38 then
|
2,353,422 |
(1)(3) |
|
|
Arch Capital Group, Ltd.: |
|
|
12,000 |
|
5.25%, Series E |
308,100 |
**(2)(5) |
10,500 |
|
5.45%, Series F |
279,877 |
**(2)(5) |
20,500 |
|
Assurant, Inc., 5.25% 01/15/61 |
563,032 |
|
|
|
Athene Holding Ltd.: |
|
|
89,000 |
|
6.35% to 06/30/29 then 3ML + 4.253%, Series A |
2,510,245 |
**(1)(2)(5) |
23,000 |
|
6.375% to 09/30/25 then T5Y + 5.97%, Series C |
634,685 |
**(2)(5) |
$1,423,000
|
|
AXA SA, 6.379% to 12/14/36 then 3ML + 2.256%, 144A**** |
1,990,884 |
**(1)(2)(5) |
19,350 |
|
Axis Capital Holdings Ltd., 5.50%, Series E |
501,262 |
**(1)(2)(5) |
$655,000
|
|
AXIS Specialty Finance LLC, 4.90% to 01/15/30 then T5Y + 3.186%, 01/15/40 |
677,697 |
(1)(5) |
|
|
Chubb Ltd.: |
|
|
$975,000
|
|
Ace Capital Trust II, 9.70% 04/01/30 |
1,479,885 |
(1) |
12,500 |
|
CNO Financial Group, Inc., 5.125% 11/25/60 |
325,813 |
|
139,279 |
|
Delphi Financial Group, 3ML + 3.19%, 3.411%(4), 05/15/37 |
2,785,580 |
(1)(3) |
|
|
Enstar Group Ltd.: |
|
|
45,000 |
|
7.00% to 09/01/28 then 3ML + 4.015%, Series D |
1,262,813 |
**(1)(2)(5) |
$425,000
|
|
Enstar Finance LLC, 5.75% to 09/01/25 then T5Y + 5.468%, 09/01/40 |
442,871 |
(5) |
$125,000
|
|
Equitable Holdings, Inc., 4.95% to 12/15/25 then T5Y + 4.736%, Series B |
131,250 |
*(2) |
$885,000
|
|
Everest Reinsurance Holdings, 3ML + 2.385%, 2.606%(4), 05/15/37 |
802,695 |
(1)(3) |
The accompanying notes are an integral part of the financial statements.
13
Flaherty & Crumrine Preferred and Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (Continued)
November 30, 2020
Shares/$ Par |
|
|
Value |
|
$3,736,000
|
|
Liberty Mutual Group, 7.80% 03/15/37, 144A**** |
$4,787,330
|
(1)(3) |
|
|
MetLife, Inc.: |
|
|
$3,600,000
|
|
9.25% 04/08/38, 144A**** |
5,494,450 |
(1)(3) |
$3,096,000
|
|
10.75% 08/01/39 |
5,311,863 |
(1)(3) |
$715,000
|
|
PartnerRe Finance B LLC, 4.50% to 10/01/30 then T5Y + 3.815%, 10/01/50 |
743,514 |
(5) |
|
|
PartnerRe Ltd.: |
|
|
22,777 |
|
5.875%, Series I |
583,205 |
**(1)(2)(5) |
5,400 |
|
6.50%, Series G |
138,851 |
**(2)(5) |
42,199 |
|
7.25%, Series H |
1,080,717 |
**(1)(2)(5) |
16,100 |
|
RenaissanceRe Holdings Ltd., 5.75%, Series F |
445,548 |
**(2)(5) |
$975,000
|
|
SBL Holdings, Inc., 7.00% to 05/13/25 then T5Y + 5.58%, Series A, 144A**** |
811,687 |
*(1)(2) |
|
|
Unum Group: |
|
|
$5,160,000
|
|
Provident Financing Trust I, 7.405% 03/15/38 |
5,976,001 |
(1)(3) |
25,000 |
|
Voya Financial, Inc., 5.35% to 09/15/29 then T5Y + 3.21%, Series B |
698,312 |
*(2) |
|
|
|
44,706,587 |
|
|
|
Utilities — 7.7% |
|
|
39,775 |
|
Algonquin Power & Utilities Corporation, 6.20% to 07/01/24 then
|
1,106,640 |
(1)(5) |
$670,000
|
|
CenterPoint Energy, Inc., 6.125% to 09/01/23 then 3ML + 3.27%, Series A |
692,190 |
*(1)(2) |
|
|
Commonwealth Edison: |
|
|
$3,127,000
|
|
COMED Financing III, 6.35% 03/15/33 |
3,698,492 |
(1)(3) |
36,043 |
|
Dominion Energy, Inc., 5.25% 07/30/76, Series A |
932,162 |
(1) |
$2,180,000
|
|
Emera, Inc., 6.75% to 06/15/26 then 3ML + 5.44%, 06/15/76, Series 2016A |
2,500,776 |
(1)(5) |
25,000 |
|
Indianapolis Power & Light Company, 5.65% |
2,607,750 |
*(2) |
80,000 |
|
Integrys Energy Group, Inc., 6.00% to 08/01/23 then 3ML + 3.22%, 08/01/73 |
2,167,704 |
(1)(3) |
|
|
NiSource, Inc.: |
|
|
$325,000
|
|
5.65% to 06/15/23 then T5Y + 2.843%, Series A |
333,284 |
*(2) |
30,000 |
|
6.50% to 03/15/24 then T5Y + 3.632%, Series B |
842,175 |
*(1)(2) |
|
|
PECO Energy: |
|
|
$500,000
|
|
PECO Energy Capital Trust III, 7.38% 04/06/28, Series D |
636,448 |
(1)(3) |
$1,020,000
|
|
Sempra Energy, 4.875% to 10/15/25 then T5Y + 4.55%, Series C |
1,081,200 |
*(2) |
|
|
Southern California Edison: |
|
|
132 |
|
SCE Trust II, 5.10%, Series G |
3,260 |
*(2) |
31,230 |
|
SCE Trust V, 5.45% to 03/15/26 then 3ML + 3.79%, Series K |
759,045 |
*(1)(2) |
$445,000
|
|
Southern California Edison Company, 6.25% to 02/01/22 then
|
449,654 |
*(2) |
|
|
Southern Company: |
|
|
11,950 |
|
4.95% 01/30/80, Series 2020A |
327,968 |
|
$675,000
|
|
4.00% to 01/15/26 then T5Y + 3.733%, 01/15/51, Series B |
706,434 |
|
|
|
|
18,845,182 |
|
The accompanying notes are an integral part of the financial statements.
14
Flaherty & Crumrine Preferred and Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (Continued)
November 30, 2020
Shares/$ Par |
|
|
Value |
|
|
|
Energy — 5.8% |
|
|
|
|
DCP Midstream LP: |
|
|
$1,140,000
|
|
7.375% to 12/15/22 then 3ML + 5.148%, Series A |
$839,325
|
(1)(2) |
3,700 |
|
7.875% to 06/15/23 then 3ML + 4.919%, Series B |
78,088 |
(2) |
|
|
Enbridge, Inc.: |
|
|
$292,000
|
|
5.75% to 07/15/30 then T5Y + 5.314%, 07/15/80, Series 2020-A |
318,744 |
(5) |
$1,120,000
|
|
6.00% to 01/15/27 then 3ML + 3.89%, 01/15/77, Series 2016-A |
1,182,809 |
(1)(3)(5) |
|
|
Energy Transfer LP: |
|
|
|
|
Energy Transfer Operating LP: |
|
|
$670,000
|
|
7.125% to 05/15/30 then T5Y + 5.306%, Series G |
636,333 |
(2) |
102,855 |
|
7.375% to 05/15/23 then 3ML + 4.53%, Series C |
2,140,670 |
(1)(2) |
123,400 |
|
7.60% to 05/15/24 then 3ML + 5.161%, Series E |
2,787,297 |
(1)(2)(3) |
1,500 |
|
7.625% to 08/15/23 then 3ML + 4.738%, Series D |
32,557 |
(2) |
$500,000
|
|
Enterprise Products Operating L.P., 5.25% to 08/16/27 then
|
494,073 |
(1) |
$1,590,000
|
|
MPLX LP, 6.875% to 02/15/23 then 3ML + 4.652%, Series B |
1,450,875 |
(1)(2)(3) |
33,700 |
|
NuStar Logistics LP, 3ML + 6.734%, 6.9709%(4), 01/15/43 |
703,720 |
(1) |
|
|
Transcanada Pipelines, Ltd.: |
|
|
$1,700,000
|
|
5.50% to 09/15/29 then 3ML + 4.154%, 09/15/79 |
1,862,826 |
(1)(5) |
$1,400,000
|
|
5.875% to 08/15/26 then 3ML + 4.64%, 08/15/76, Series 2016-A |
1,555,519 |
(1)(3)(5) |
|
|
|
14,082,836 |
|
|
|
Communication — 0.4% |
|
|
$700,000
|
|
Vodafone Group PLC, 7.00% to 04/04/29 then SW5 + 4.873%, 04/04/79 |
861,503 |
(1)(5) |
|
|
|
861,503 |
|
|
|
Real Estate Investment Trust (REIT) — 0.0% |
|
|
3,440 |
|
Annaly Capital Management, Inc., 6.95% to 09/30/22 then 3ML + 4.993%, Series F |
81,924 |
(2) |
|
|
|
81,924 |
|
|
|
Miscellaneous Industries — 3.0% |
|
|
$325,000
|
|
Apollo Management Holdings LP, 4.95% to 12/17/24 then
|
332,175 |
|
|
|
Land O’ Lakes, Inc.: |
|
|
$260,000
|
|
7.25%, Series B, 144A**** |
248,117 |
*(2) |
$3,900,000
|
|
8.00%, Series A, 144A**** |
3,929,250 |
*(1)(2) |
34,700 |
|
Ocean Spray Cranberries, Inc., 6.25%, Series A, 144A**** |
2,784,675 |
*(1)(2) |
|
|
|
7,294,217 |
|
|
|
Total Preferred Stock & Hybrid Preferred Securities
|
187,632,205 |
|
|
|
|
|
|
The accompanying notes are an integral part of the financial statements.
15
Flaherty & Crumrine Preferred and Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (Continued)
November 30, 2020
Shares/$ Par |
|
|
Value |
|
Contingent Capital Securities† — 17.2% |
|
|
||
|
|
Banking — 14.9% |
|
|
|
|
Banco Bilbao Vizcaya Argentaria SA: |
|
|
$2,400,000
|
|
6.125% to 11/16/27 then SW5 + 3.87% |
$2,491,200
|
**(1)(2)(3)(5) |
$800,000
|
|
6.50% to 03/05/25 then T5Y + 5.192%, Series 9 |
847,104 |
**(1)(2)(5) |
$530,000
|
|
Banco Mercantil del Norte SA, 7.625% to 01/06/28 then T10Y + 5.353%, 144A**** |
578,177 |
**(2)(5) |
|
|
Barclays Bank PLC: |
|
|
$730,000
|
|
6.125% to 06/15/26 then T5Y + 5.867% |
786,601 |
**(2)(5) |
$590,000
|
|
7.75% to 09/15/23 then SW5 + 4.842% |
634,489 |
**(1)(2)(5) |
$2,802,000
|
|
7.875% to 03/15/22 then SW5 + 6.772%, 144A**** |
2,955,964 |
**(1)(2)(5) |
$1,600,000
|
|
8.00% to 06/15/24 then T5Y + 5.672% |
1,784,832 |
**(1)(2)(5) |
$500,000
|
|
BBVA Bancomer SA, 5.875% to 09/13/29 then T5Y + 4.308%, 09/13/34, 144A**** |
548,345 |
(1)(5) |
|
|
BNP Paribas: |
|
|
$420,000
|
|
7.00% to 08/16/28 then SW5 + 3.98%, 144A**** |
498,567 |
**(1)(2)(5) |
$5,315,000
|
|
7.375% to 08/19/25 then SW5 + 5.15%, 144A**** |
6,155,806 |
**(1)(2)(5) |
$1,500,000
|
|
7.625% to 03/30/21 then SW5 + 6.314%, 144A**** |
1,527,188 |
**(1)(2)(5) |
$290,000
|
|
Credit Agricole SA, 7.875% to 01/23/24 then SW5 + 4.898%, 144A**** |
329,476 |
**(2)(5) |
|
|
Credit Suisse Group AG: |
|
|
$210,000
|
|
5.10% to 01/24/30 then T5Y + 3.293%, 144A**** |
220,133 |
**(2)(5) |
$1,100,000
|
|
6.375% to 08/21/26 then T5Y + 4.822%, 144A**** |
1,226,043 |
**(1)(2)(5) |
$800,000
|
|
7.25% to 09/12/25 then T5Y + 4.332%, 144A**** |
901,156 |
**(1)(2)(5) |
$800,000
|
|
7.50% to 07/17/23 then SW5 + 4.60%, 144A**** |
872,960 |
**(1)(2)(5) |
|
|
HSBC Holdings PLC: |
|
|
$350,000
|
|
6.00% to 05/22/27 then ISDA5 + 3.746% |
379,855 |
**(2)(5) |
$3,710,000
|
|
6.50% to 03/23/28 then ISDA5 + 3.606% |
4,153,290 |
**(1)(2)(3)(5) |
$200,000
|
|
Lloyds Banking Group PLC, 7.50% to 09/27/25 then SW5 + 4.496% |
226,560 |
**(2)(5) |
$540,000
|
|
Macquarie Bank Ltd., 6.125% to 03/08/27 then SW5 + 3.703%, 144A**** |
570,151 |
**(1)(2)(5) |
|
|
Societe Generale SA: |
|
|
$750,000
|
|
5.375% to 11/18/30 then T5Y + 4.514%, 144A**** |
779,550 |
**(2)(5) |
$400,000
|
|
6.75% to 04/06/28 then SW5 + 3.929%, 144A**** |
444,500 |
**(2)(5) |
$4,000,000
|
|
7.375% to 09/13/21 then SW5 + 6.238%, 144A**** |
4,140,880 |
**(1)(2)(3)(5) |
|
|
Standard Chartered PLC: |
|
|
$1,815,000
|
|
7.50% to 04/02/22 then SW5 + 6.301%, 144A**** |
1,898,499 |
**(1)(2)(3)(5) |
$1,250,000
|
|
7.75% to 04/02/23 then SW5 + 5.723%, 144A**** |
1,361,550 |
**(1)(2)(5) |
|
|
|
36,312,876 |
|
|
|
Financial Services — 0.2% |
|
|
$400,000
|
|
Deutsche Bank AG, 6.00% to 04/30/26 then T5Y + 4.524% |
396,000 |
**(2)(5) |
|
|
|
396,000 |
|
The accompanying notes are an integral part of the financial statements.
16
Flaherty & Crumrine Preferred and Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (Continued)
November 30, 2020
Shares/$ Par |
|
|
Value |
|
|
|
Insurance — 2.1% |
|
|
|
|
QBE Insurance Group Ltd.: |
|
|
$500,000
|
|
5.875% to 05/12/25 then T5Y + 5.513%, 144A**** |
$548,750
|
**(2)(5) |
$4,043,000
|
|
7.50% to 11/24/23 then SW10 + 6.03%, 11/24/43, 144A**** |
4,619,370 |
(1)(3)(5) |
|
|
|
5,168,120 |
|
|
|
Total Contingent Capital Securities
|
41,876,996 |
|
|
|
|
|
|
Corporate Debt Securities§ — 4.8% |
|
|
||
|
|
Banking — 2.0% |
|
|
|
|
First Horizon Corporation: |
|
|
$725,000
|
|
First Horizon Bank, 5.75% 05/01/30, Sub Notes |
846,006 |
|
131,238 |
|
Texas Capital Bancshares Inc., 6.50% 09/21/42, Sub Notes |
3,376,754 |
(1) |
18,000 |
|
Zions Bancorporation, 6.95% to 09/15/23 then 3ML + 3.89%, 09/15/28, Sub Notes |
510,030 |
(1) |
|
|
|
4,732,790 |
|
|
|
Financial Services — 0.0% |
|
|
1,000 |
|
B. Riley Financial, Inc., 7.50% 05/31/27 |
25,075 |
|
|
|
|
25,075 |
|
|
|
Insurance — 1.3% |
|
|
$2,000,000
|
|
Liberty Mutual Insurance, 7.697% 10/15/97, 144A**** |
3,267,679 |
(1)(3) |
|
|
|
3,267,679 |
|
|
|
Energy — 0.9% |
|
|
|
|
Energy Transfer LP: |
|
|
$1,680,000
|
|
Energy Transfer Operating LP, 8.25% 11/15/29 |
2,219,609 |
(1)(3) |
|
|
|
2,219,609 |
|
|
|
Communication — 0.6% |
|
|
|
|
Qwest Corporation: |
|
|
22,170 |
|
6.50% 09/01/56 |
570,988 |
|
28,330 |
|
6.75% 06/15/57 |
758,502 |
(1) |
|
|
|
1,329,490 |
|
|
|
Total Corporate Debt Securities
|
11,574,643 |
|
|
|
|
|
|
Money Market Fund — 0.1% |
|
|
||
|
|
BlackRock Liquidity Funds: |
|
|
334,754 |
|
T-Fund, Institutional Class |
334,754 |
|
|
|
|
|
|
|
|
Total Money Market Fund
|
334,754 |
|
|
|
|
|
|
The accompanying notes are an integral part of the financial statements.
17
Flaherty & Crumrine Preferred and Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (Continued)
November 30, 2020
|
|
|
|
Value |
|
Total Investments (Cost $219,835,049***) |
99.2 |
% |
$ |
241,418,598 |
|
|
|||||
Other Assets and Liabilities, excluding Loan Payable (net) |
0.8 |
% |
|
1,857,549 |
|
|
|||||
Total Managed Assets |
100.0 |
%‡ |
$ |
243,276,147 |
|
|
|||||
Loan Principal Balance |
|
(80,100,000 |
) |
||
|
|||||
Total Net Assets Available To Common Stock |
$ |
163,176,147 |
|
§Date shown is maturity date unless referencing the end of the fixed-rate period of a fixed-to-floating rate security.
*Securities eligible for the Dividends Received Deduction and distributing Qualified Dividend Income (unaudited).
**Securities distributing Qualified Dividend Income only (unaudited).
***Aggregate cost of securities held.
****Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional buyers. At November 30, 2020, these securities amounted to $61,886,113 or 25.4% of total managed assets.
(1)All or a portion of this security is pledged as collateral for the Fund’s loan. The total value of such securities was $198,272,828 at November 30, 2020.
(2)Perpetual security with no stated maturity date.
(3)All or a portion of this security has been rehypothecated. The total value of such securities was $76,651,328 at November 30, 2020.
(4)Represents the rate in effect as of the reporting date.
(5)Foreign Issuer.
†A Contingent Capital Security is a hybrid security with contractual loss-absorption characteristics.
‡The percentage shown for each investment category is the total value of that category as a percentage of total managed assets.
ABBREVIATIONS:
3ML— 3-Month ICE LIBOR USD A/360
ISDA5— 5-year USD ICE Swap Semiannual 30/360
SOFRRATE— Secured Overnight Funding Rate, Federal Reserve Bank of New York
SW5— 5-year USD Swap Semiannual 30/360
SW10— 10-year USD Swap Semiannual 30/360
T5Y— Federal Reserve H.15 5-Yr Constant Maturity Treasury Semiannual yield
T7Y— Federal Reserve H.15 7-Yr Constant Maturity Treasury Semiannual yield
T10Y— Federal Reserve H.15 10-Yr Constant Maturity Treasury Semiannual yield
The accompanying notes are an integral part of the financial statements.
18
Flaherty & Crumrine Preferred and Income Fund Incorporated
STATEMENT OF ASSETS AND LIABILITIES
November 30, 2020
ASSETS: |
|
|
|
|
|
Investments, at value (Cost $219,835,049) |
|
|
|
$241,418,598
|
|
Dividends and interest receivable |
|
|
|
2,184,458 |
|
Prepaid expenses |
|
|
|
41,836 |
|
Total Assets |
|
|
|
243,644,892 |
|
|
|
|
|
|
|
LIABILITIES: |
|
|
|
|
|
Loan Payable |
|
$80,100,000
|
|
|
|
Interest expense payable |
|
63,019 |
|
|
|
Dividends payable to Common Stock Shareholders |
|
79,082 |
|
|
|
Investment advisory fees payable |
|
107,990 |
|
|
|
Administration, Transfer Agent and Custodian fees payable |
|
32,057 |
|
|
|
Professional fees payable |
|
69,750 |
|
|
|
Accrued expenses and other payables |
|
16,847 |
|
|
|
Total Liabilities |
|
|
|
80,468,745 |
|
NET ASSETS AVAILABLE TO COMMON STOCK |
|
|
|
$163,176,147
|
|
|
|
|
|
|
|
NET ASSETS AVAILABLE TO COMMON STOCK consist of: |
|
|
|
|
|
Total distributable earnings |
|
|
|
$5,757,690
|
|
Par value of Common Stock |
|
|
|
113,054 |
|
Paid-in capital in excess of par value of Common Stock |
|
|
|
157,305,403 |
|
Total Net Assets Available to Common Stock |
|
|
|
$163,176,147
|
|
|
|
|
|
|
|
NET ASSET VALUE PER SHARE OF COMMON STOCK: |
|
|
|
|
|
Common Stock (11,305,381 shares outstanding) |
|
|
|
$14.43
|
|
The accompanying notes are an integral part of the financial statements.
19
Flaherty & Crumrine Preferred and Income Fund Incorporated
STATEMENT OF OPERATIONS
For the Year Ended November 30, 2020
†For Federal income tax purposes, a significant portion of this amount may not qualify for the inter-corporate dividends received deduction (“DRD”) or as qualified dividend income (“QDI”) for individuals.
The accompanying notes are an integral part of the financial statements.
20
Flaherty & Crumrine Preferred and Income Fund Incorporated
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK
|
|
Year Ended
|
|
Year Ended
|
|
OPERATIONS: |
|
|
|
|
|
Net investment income |
|
$10,993,661
|
|
$9,643,343
|
|
Net realized gain/(loss) on investments sold during the year |
|
(206,694 |
) |
(3,218,155 |
) |
Change in net unrealized appreciation/(depreciation) of investments |
|
1,353,362 |
|
21,958,396 |
|
Net increase in net assets resulting from operations |
|
12,140,329 |
|
28,383,584 |
|
|
|
|
|
|
|
DISTRIBUTIONS: |
|
|
|
|
|
Dividends paid from distributable earnings to Common Stock
|
|
(10,860,525 |
) |
(10,130,187 |
) |
Total Distributions |
|
(10,860,525 |
) |
(10,130,187 |
) |
|
|
|
|
|
|
FUND SHARE TRANSACTIONS: |
|
|
|
|
|
Increase from shares issued under the Dividend Reinvestment
|
|
898,275 |
|
623,393 |
|
Net increase in net assets available to Common Stock
|
|
898,275 |
|
623,393 |
|
|
|
|
|
|
|
NET INCREASE IN NET ASSETS AVAILABLE TO
|
|
|
|
|
|
$2,178,079
|
|
$18,876,790
|
|||
|
|
|
|
|
|
NET ASSETS AVAILABLE TO COMMON STOCK: |
|
|
|
|
|
Beginning of year |
|
$160,998,068
|
|
$142,121,278
|
|
Net increase in net assets during the year |
|
2,178,079 |
|
18,876,790 |
|
End of year |
|
$163,176,147
|
|
$160,998,068
|
|
(1)May include income earned, but not paid out, in prior fiscal year.
The accompanying notes are an integral part of the financial statements.
21
Flaherty & Crumrine Preferred and Income Fund Incorporated
STATEMENT OF CASH FLOWS
For the Year Ended November 30, 2020
INCREASE/(DECREASE) IN CASH |
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
Net increase in net assets resulting from operations |
|
$12,140,329
|
|
|
|
|
|
ADJUSTMENTS TO RECONCILE NET INCREASE IN NET ASSETS RESULTING
|
|
|
|
Purchase of investment securities |
|
(27,846,235 |
) |
Proceeds from disposition of investment securities |
|
26,490,390 |
|
Net sales of short-term investment securities |
|
160,858 |
|
Cash received from litigation claim |
|
1,084 |
|
Increase in dividends and interest receivable |
|
(20,500 |
) |
Decrease in prepaid expenses |
|
221 |
|
Net amortization/(accretion) of premium/(discount) |
|
296,188 |
|
Decrease in interest expense payable |
|
(111,201 |
) |
Decrease in payables to related parties |
|
(1,521 |
) |
Decrease in accrued expenses and other liabilities |
|
(6,933 |
) |
Change in net unrealized (appreciation)/depreciation of investments |
|
(1,353,362 |
) |
Net realized loss from investments sold |
|
206,694 |
|
Net cash provided by operating activities |
|
9,956,012 |
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
Dividend paid (net of reinvestment of dividends and change in dividends payable)
|
|
(9,956,012 |
) |
Net cash used in financing activities |
|
(9,956,012 |
) |
Net increase/(decrease) in cash |
|
— |
|
|
|
|
|
CASH: |
|
|
|
Beginning of the year |
|
$—
|
|
End of the year |
|
$—
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
Interest paid during the year |
|
$1,336,998
|
|
Reinvestment of dividends |
|
898,275 |
|
Increase of dividends payable to common stock shareholders |
|
6,238 |
|
Flaherty & Crumrine Preferred and Income Fund Incorporated
Financial Highlights
For a Common Stock share outstanding throughout each year
The accompanying notes are an integral part of the financial statements.
22
Contained below is per share operating performance data, total investment returns, ratios to average net assets and other supplemental data. This information has been derived from information provided in the financial statements and market price data for the Fund’s shares.
*Assumes reinvestment of distributions at the price obtained by the Fund’s Dividend Reinvestment and Cash Purchase Plan.
†The net investment income ratios reflect income net of operating expenses, including interest expense.
††Information presented under heading Supplemental Data includes loan principal balance.
(1)See Note 7.
The accompanying notes are an integral part of the financial statements.
23
Flaherty & Crumrine Preferred and Income Fund Incorporated
FINANCIAL HIGHLIGHTS (Continued)
Per Share of Common Stock
|
|
Total Dividends Paid |
|
Net Asset Value |
|
NYSE Closing Price |
|
Dividend Reinvestment Price(1) |
|
December 31, 2019 |
|
$0.0850 |
|
$14.50 |
|
$15.56 |
|
$14.78 |
|
January 31, 2020 |
|
0.0750 |
|
14.84 |
|
15.92 |
|
15.12 |
|
February 28, 2020 |
|
0.0750 |
|
14.26 |
|
14.17 |
|
14.26 |
|
March 31, 2020 |
|
0.0750 |
|
11.28 |
|
12.07 |
|
11.47 |
|
April 30, 2020 |
|
0.0750 |
|
12.68 |
|
14.10 |
|
13.40 |
|
May 29, 2020 |
|
0.0780 |
|
12.98 |
|
15.07 |
|
14.32 |
|
June 30, 2020 |
|
0.0780 |
|
13.00 |
|
14.52 |
|
13.79 |
|
July 31, 2020 |
|
0.0780 |
|
13.65 |
|
15.58 |
|
14.80 |
|
August 31, 2020 |
|
0.0860 |
|
13.99 |
|
16.45 |
|
15.63 |
|
September 30, 2020 |
|
0.0860 |
|
13.71 |
|
16.51 |
|
15.68 |
|
October 30, 2020 |
|
0.0860 |
|
13.75 |
|
17.00 |
|
16.15 |
|
November 30, 2020 |
|
0.0860 |
|
14.43 |
|
18.90 |
|
17.96 |
|
(1)Whenever the net asset value per share of the Fund’s Common Stock is less than or equal to the market price per share on the reinvestment date, new shares issued will be valued at the higher of net asset value or 95% of the then current market price. Otherwise, the reinvestment shares of Common Stock will be purchased in the open market.
Senior Securities
|
|
11/30/2020 |
|
11/30/2019 |
|
11/30/2018 |
|
11/30/2017 |
|
11/30/2016 |
|
Total Debt Outstanding, End of Period (000s)(1) |
|
$80,100
|
|
$80,100
|
|
$80,100
|
|
$80,100
|
|
$77,400
|
|
Asset Coverage per $1,000 of Debt(2) |
|
3,037 |
|
3,010 |
|
2,774 |
|
2,999 |
|
2,893 |
|
(1)See Note 7.
(2)Calculated by subtracting the Fund’s total liabilities (excluding the loan) from the Fund’s total assets and dividing that amount by the loan outstanding in 000’s.
24
1.Organization
Flaherty & Crumrine Preferred and Income Fund Incorporated (the “Fund”), was incorporated as a Maryland corporation on September 28, 1990, and commenced operations on January 31, 1991 as a diversified, closed-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). The Fund’s investment objective is to provide its common shareholders with high current income consistent with the preservation of capital.
2.Significant Accounting Policies
The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The preparation of the financial statements is in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”), including the accounting and reporting principles under ASC 946-10-50-1, and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Portfolio valuation: The net asset value of the Fund’s Common Stock is determined by the Fund’s Administrator (as defined below) no less frequently than on the last business day of each week and month in accordance with the policies and procedures approved by the Board of Directors (the “Board”) of the Fund. It is determined by dividing the value of the Fund’s net assets available to Common Stock by the number of shares of Common Stock outstanding. The value of the Fund’s net assets available to Common Stock is deemed to equal the value of the Fund’s total assets less (i) the Fund’s liabilities and (ii) the aggregate liquidation value of any outstanding preferred stock.
The Fund’s preferred and debt securities are valued on the basis of current market quotations provided by independent pricing services or dealers approved by the Board of the Fund. Each quotation is based on the mean of the bid and asked prices of a security. In determining the value of a particular preferred or debt security, a pricing service or dealer may use information with respect to transactions in such investments, quotations, market transactions in comparable investments, various relationships observed in the market between investments, and/or calculated yield measures based on valuation technology commonly employed in the market for such investments. Common stocks that are traded on stock exchanges are valued at the last sale price or official close price on the exchange, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available mean price. Futures contracts and option contracts on futures contracts are valued on the basis of the settlement price for such contracts on the primary exchange on which they trade. Investments in over-the-counter derivative instruments, such as interest rate swaps and options thereon (“swaptions”), are valued using prices supplied by a pricing service, or if such prices are unavailable, prices provided by a single broker or dealer that is not the counterparty or, if no such prices are available, at a price at which the counterparty to the contract would repurchase the instrument or terminate the contract. Investments for which market quotations are not readily available or for which management determines that the prices are not reflective of current market conditions are valued at fair value as determined in good faith by or under the direction of the Board of the Fund, including reference to valuations of other securities which are comparable in quality, maturity and type.
Investments in money market instruments and all debt and preferred securities which mature in 60 days or less are valued at amortized cost, provided such amount approximates market value. Investments in money market funds are valued at the net asset value of such funds.
Flaherty & Crumrine Preferred and Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (Continued)
25
Fair Value Measurements: The Fund has analyzed all existing investments to determine the significance and character of all inputs to their fair value determination. The levels of fair value inputs used to measure the Fund’s investments are characterized into a fair value hierarchy. Where inputs for an asset or liability fall into more than one level in the fair value hierarchy, the investment is classified in its entirety based on the lowest level input that is significant to that investment’s valuation. The three levels of the fair value hierarchy are described below:
|
• |
Level 1 – |
quoted prices in active markets for identical securities |
|
• |
Level 2 – |
other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.) |
|
• |
Level 3 – |
significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Transfers in and out of levels are recognized at market value at the end of the period.
A summary of the inputs used to value the Fund’s investments as of November 30, 2020 is as follows:
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Preferred Stock & Hybrid Preferred Securities |
|
|
|
|
|
|
|
|
|
Banking |
|
$96,610,870
|
|
$77,145,150
|
|
$19,465,720
|
|
$—
|
|
Financial Services |
|
5,149,086 |
|
2,681,440 |
|
2,467,646 |
|
— |
|
Insurance |
|
44,706,587 |
|
10,917,458 |
|
33,789,129 |
|
— |
|
Utilities |
|
18,845,182 |
|
6,451,074 |
|
12,394,108 |
|
— |
|
Energy |
|
14,082,836 |
|
9,600,784 |
|
4,482,052 |
|
— |
|
Communication |
|
861,503 |
|
861,503 |
|
— |
|
— |
|
Real Estate Investment Trust (REIT) |
|
81,924 |
|
81,924 |
|
— |
|
— |
|
Miscellaneous Industries |
|
7,294,217 |
|
— |
|
7,294,217 |
|
— |
|
Contingent Capital Securities |
|
|
|
|
|
|
|
|
|
Banking |
|
36,312,876 |
|
15,039,445 |
|
21,273,431 |
|
— |
|
Financial Services |
|
396,000 |
|
— |
|
396,000 |
|
— |
|
Insurance |
|
5,168,120 |
|
— |
|
5,168,120 |
|
— |
|
Corporate Debt Securities |
|
|
|
|
|
|
|
|
|
Banking |
|
4,732,790 |
|
3,886,784 |
|
846,006 |
|
— |
|
Financial Services |
|
25,075 |
|
25,075 |
|
— |
|
— |
|
Insurance |
|
3,267,679 |
|
— |
|
3,267,679 |
|
— |
|
Energy |
|
2,219,609 |
|
— |
|
2,219,609 |
|
— |
|
Communication |
|
1,329,490 |
|
1,329,490 |
|
— |
|
— |
|
Money Market Fund |
|
334,754 |
|
334,754 |
|
— |
|
— |
|
Total Investments |
|
$241,418,598
|
|
$128,354,881
|
|
$113,063,717
|
|
$—
|
|
Flaherty & Crumrine Preferred and Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (Continued)
26
During the reporting period, there were no transfers into or out of Level 3.
The fair values of the Fund’s investments are generally based on market information and quotes received from brokers or independent pricing services that are approved by the Board and are unaffiliated with the Adviser (as defined below). To assess the continuing appropriateness of security valuations, management, in consultation with the Adviser, regularly compares current prices to prior prices, prices across comparable securities, actual sale prices for securities in the Fund’s portfolio, and market information obtained by the Adviser as a function of being an active market participant.
Securities with quotes that are based on actual trades or actionable bids and offers with a sufficient level of activity on or near the measurement date are classified as Level 1. Securities that are priced using quotes derived from implied values, indicative bids and offers, or a limited number of actual trades—or the same information for securities that are similar in many respects to those being valued—are classified as Level 2. If market information is not available for securities being valued, or materially-comparable securities, then those securities are classified as Level 3. In considering market information, management evaluates changes in liquidity, willingness of a broker to execute at the quoted price, the depth and consistency of prices from pricing services, and the existence of observable trades in the market.
Securities transactions and investment income: Securities transactions are recorded as of the trade date. Realized gains and losses from securities sold are recorded on the specific identified cost basis. Dividend income is recorded on ex-dividend dates. Interest income is recorded on the accrual basis. The Fund also amortizes premiums and accretes discounts on fixed income securities using the effective yield method.
Federal income taxes: The Fund intends to continue to qualify as a regulated investment company by complying with the requirements under subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), applicable to regulated investment companies and intends to distribute substantially all of its taxable net investment income to its shareholders. Therefore, no federal income tax provision is required.
Management has analyzed the Fund’s tax positions taken on federal income tax returns for all open tax years (November 30, 2020, 2019 and 2018), and has concluded that no provision for federal income tax is required in the Fund’s financial statements. The Fund’s major tax jurisdictions are federal and the State of California. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.
Dividends and distributions to shareholders: The Fund expects to declare dividends on a monthly basis to holders of Common Stock (“Shareholders”). Distributions to Shareholders are recorded on the ex-dividend date. Any net realized short-term capital gains will be distributed to Shareholders at least annually. Any net realized long-term capital gains may be distributed to Shareholders at least annually or may be retained by the Fund as determined by the Fund’s Board. Capital gains retained by the Fund are subject to tax at the capital gains corporate tax rate. Subject to the Fund qualifying as a regulated investment company, any taxes paid by the Fund on such net realized long-term capital gains may be used by the Fund’s Shareholders as a credit against their own tax liabilities. The Fund may pay distributions in excess of the Fund’s net investment company taxable income and this excess would be a tax-free return of capital distributed from the Fund’s assets.
Flaherty & Crumrine Preferred and Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (Continued)
27
Income and capital gain distributions are determined and characterized in accordance with income tax regulations which may differ from U.S. GAAP. These differences are primarily due to (1) differing treatments of income and gains on various investment securities held by the Fund, including timing differences, (2) the attribution of expenses against certain components of taxable investment income, and (3) federal regulations requiring proportionate allocation of income and gains to all classes of shareholders.
Distributions from net realized gains for book purposes may include short-term capital gains, which are included as ordinary income for tax purposes, and may exclude amortization of premium and discount on certain fixed income securities, which are not reflected in ordinary income for tax purposes. The tax character of distributions paid during 2020 and 2019 was as follows:
|
|
Distributions paid in fiscal year 2020 |
|
Distributions paid in fiscal year 2019 |
||||
|
|
Ordinary
|
|
Long-Term
|
|
Ordinary
|
|
Long-Term
|
Common Stock |
|
$10,860,525 |
|
$0 |
|
$10,130,187 |
|
$0 |
As of November 30, 2020, the components of distributable earnings (i.e., ordinary income and capital gain/loss) available to Shareholders, on a tax basis, were as follows:
Capital (Loss)
|
|
Undistributed
|
|
Undistributed
|
|
Net Unrealized
|
$(15,602,954) |
|
$298,086 |
|
$0 |
|
$20,424,435 |
The composition of the Fund’s accumulated realized capital losses is indicated below. These losses may be carried forward and offset against future capital gains.
No Expiration
|
|
No Expiration
|
|
Total |
$1,726,298 |
|
$13,876,656 |
|
$15,602,954 |
Reclassification of accounts: During the year ended November 30, 2020, reclassifications were made in the Fund’s capital accounts to report these balances on a tax basis, excluding temporary differences, as of November 30, 2020. Additional adjustments may be required in subsequent reporting periods. These reclassifications have no impact on the net asset value of the Fund. The calculation of net investment income per share in the financial highlights excludes these adjustments. Below are the reclassifications:
Paid-in
|
|
Total Distributable
|
$(57,008) |
|
$57,008 |
Excise tax: 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 (1) 98% of the sum of its net investment income for that year and 98.2% of its capital gains (both long-term and short-term) for its fiscal year and (2) certain undistributed amounts from previous years. The Fund is subject to a payment of an estimated $12,000 of federal excise taxes attributed to calendar year 2020.
Flaherty & Crumrine Preferred and Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (Continued)
28
3.Investment Advisory Fee, Administration Fee, Transfer Agent Fee, Custodian Fee, Directors’ Fees and Chief Compliance Officer Fee
Flaherty & Crumrine Incorporated (the “Adviser”) serves as the Fund’s investment adviser. The Fund pays the Adviser a monthly fee at an annual rate of 0.625% on the first $100 million of the Fund’s average monthly total managed assets and 0.50% of the Fund’s average monthly total managed assets above $100 million or more.
For purposes of calculating the fees payable to the Adviser, Administrator and Custodian (as defined below), the Fund’s total managed assets means the total assets of the Fund (including any assets attributable to the Fund’s preferred stock that may be outstanding or otherwise attributable to the use of leverage) minus the sum of accrued liabilities (other than debt, if any, representing financial leverage). For purposes of determining total managed assets, the liquidation preference of any outstanding preferred shares issued by the Fund is not treated as a liability.
The Bank of New York Mellon (“BNY Mellon”) serves as the Fund’s administrator (the “Administrator”). As Administrator, BNY Mellon calculates the net asset value of the Fund’s shares of Common Stock and generally assists in all aspects of the Fund’s administration and operation. As compensation for BNY Mellon’s services as Administrator, the Fund pays BNY Mellon a monthly fee at an annual rate of 0.10% of the first $200 million of the Fund’s average weekly total managed assets, 0.04% of the next $300 million of the Fund’s average weekly total managed assets, 0.03% of the next $500 million of the Fund’s average weekly total managed assets and 0.02% of the Fund’s average weekly total managed assets above $1 billion.
BNY Mellon Investment Servicing (US) Inc. (“BNYIS”) (c/o, Computershare) serves as the Fund’s transfer agent, dividend disbursing agent and registrar (the “Transfer Agent”). As compensation for BNYIS’ services as Transfer Agent, the Fund pays BNYIS a monthly fee in the amount of $1,500, plus certain out of pocket expenses.
The Bank of New York Mellon (the “Custodian”) serves as the Fund’s Custodian. As compensation for the Custodian’s services as custodian, the Fund pays the Custodian a monthly fee at the annual rate of 0.01% of the first $200 million of the Fund’s average weekly total managed assets, 0.008% of the next $300 million of the Fund’s average weekly total managed assets, 0.006% of the next $500 million of the Fund’s average weekly total managed assets, and 0.005% of the Fund’s average weekly total managed assets above $1 billion.
The Fund pays each Director, who is not a director, officer or employee of the Adviser, a fee of $9,000 per annum, plus $750 for each in-person meeting of the Board or Audit Committee, $500 for each in-person meeting of the Nominating and Governance Committee attended, and $250 for each telephone meeting attended. The Audit Committee Chair receives an additional annual fee of $3,000. The Fund also reimburses all Directors for travel and out-of-pocket expenses incurred in connection with such meetings.
The Fund pays the Adviser a fee of $35,000 per annum for Chief Compliance Officer services and reimburses out-of-pocket expenses incurred in connection with providing services in this role.
4.Purchases and Sales of Securities
For the year ended November 30, 2020, the cost of purchases and proceeds from sales of securities, excluding short-term investments, aggregated $27,846,235 and $26,490,390, respectively.
At November 30, 2020, the aggregate cost of securities for federal income tax purposes was $220,994,163, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $24,340,433 and the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $3,915,998.
Flaherty & Crumrine Preferred and Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (Continued)
29
5.Common Stock
At November 30, 2020, 240,000,000 shares of $0.01 par value Common Stock were authorized. Common Stock transactions were as follow:
|
|
Year Ended
|
|
Year Ended
|
|
||||
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Shares issued under the Dividend Reinvestment
|
|
61,981 |
|
$898,275
|
|
44,786 |
|
$623,393
|
|
6.Preferred Stock
The Fund’s Articles of Incorporation authorize the issuance of up to 10,000,000 shares of $0.01 par value preferred stock. The Fund does not currently have any issued and outstanding shares of preferred stock.
7.Committed Financing Agreement
The Fund has entered into a committed financing agreement with BNP Paribas Prime Brokerage International, LTD. (“Financing Agreement”) that allows the Fund to borrow on a secured basis, which the Fund uses in the normal course of business as financial leverage. Such leveraging tends to magnify both the risks and opportunities to Shareholders. The Financing Agreement has been amended from time to time to allow for changes in the committed amount. As of November 30, 2020, the committed amount, and amount borrowed, under the Financing Agreement was $80.1 million.
Effective September 1, 2017, the lender charges an annualized rate of one-month LIBOR (reset monthly) plus 0.80% on the drawn (borrowed) balance. The lender’s charges on the undrawn (committed) balance remain unchanged at an annualized rate of 0.65%. For the year ended November 30, 2020, the daily weighted average annualized interest rate on the drawn balance was 1.505% and the average daily loan balance was $80,100,000. LIBOR rates may vary in a manner unrelated to the income received on the Fund’s assets, which could have either a beneficial or detrimental impact on net investment income and gains available to Shareholders.
The Fund is required to meet certain asset coverage requirements under the Financing Agreement and under the 1940 Act. In accordance with the asset coverage requirements, more than 50% of the Fund’s assets are expected to be pledged as collateral assuming the full committed amount is drawn. Securities pledged as collateral are identified in the portfolio of investments. If the Fund fails to meet these requirements, or maintain other financial covenants required under the Financing Agreement, the Fund may be required to repay immediately, in part or in full, the amount borrowed under the Financing Agreement. Additionally, failure to meet the foregoing requirements or covenants could restrict the Fund’s ability to pay dividends to Shareholders and could necessitate sales of portfolio securities at inopportune times. The Financing Agreement has no stated maturity, but may be terminated by either party without cause with 180 days’ advance notice.
Under the terms of the Financing Agreement, the lender has the ability to borrow a portion of the securities pledged as collateral against the loan (“Rehypothecated Securities”), subject to certain limits. In connection with any Rehypothecated Securities, the Fund receives a fee from the lender equal to the greater of (x) 0.05% of the value of the Rehypothecated Securities and (y) 70% of net securities lending income. The Fund may recall any Rehypothecated Security at any time and the lender is required to return the security in a timely fashion. In the event the lender does
Flaherty & Crumrine Preferred and Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (Continued)
30
not return the security, the Fund will have the right to, among other things, apply and set off an amount equal to 100% of the then-current fair market value of such Rehypothecated Securities against any loan amounts owed to the lender under the Financing Agreement. Rehypothecated Securities are marked- to-market daily and adjusted as necessary so the value of all Rehypothecated Securities does not exceed 100% of the loan amount under the Financing Agreement. The Fund will continue to earn and receive all dividends, interest, and other distributions on Rehypothecated Securities. For the fiscal year ended November 30, 2020, Rehypothecated Securities are identified in the Portfolio of Investments, and fees earned from rehypothecation are included in the Statement of Operations. The Fund had Rehypothecated Securities and had rehypothecation income for the fiscal year ended November 30, 2019 in the amount of $15,409.
8.Subsequent Events
Management has evaluated the impact of all subsequent events on the Fund through the date the financial statements were issued, and has determined that there were no subsequent events requiring recognition or disclosure in the financial statements.
31
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Flaherty & Crumrine Preferred and Income Fund Incorporated:
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities of Flaherty & Crumrine Preferred and Income Fund Incorporated (the “Fund”), including the portfolio of investments, as of November 30, 2020, the related statements of operations and cash flows for the year then ended, the statements of changes in net assets available to common stock for each of the years in the two-year period then ended, and the related notes (collectively, the financial statements) and the financial highlights for each of the years in the five-year period then ended. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of the Fund as of November 30, 2020, the results of its operations and its cash flows for the year then ended, the changes in its net assets available to common stock for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and financial highlights. Such procedures also included confirmation of securities owned as of November 30, 2020, by correspondence with the custodian. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial highlights. We believe that our audits provide a reasonable basis for our opinion.
We have served as the auditor of one or more Flaherty & Crumrine Incorporated investment companies since 2001.
Boston, Massachusetts
January 20, 2021
Flaherty & Crumrine Preferred and Income Fund Incorporated
ADDITIONAL INFORMATION (Unaudited)
32
Dividend Reinvestment and Cash Purchase Plan
Under the Fund’s Dividend Reinvestment and Cash Purchase Plan (the “Plan”), a Shareholder whose Common Stock is registered in his or her own name will have all distributions reinvested automatically by BNY Mellon as agent under the Plan, unless the Shareholder elects to receive cash. Registered Shareholders may elect to receive cash by contacting BNY Mellon at the number provided below. If shares are registered in the name of a broker-dealer or other nominee (that is, in “street name”) and the broker or nominee participates in the Plan, distributions may be reinvested by the broker or nominee in additional shares under the Plan, unless the Shareholder elects to receive distributions in cash. Shareholders may elect to receive cash by contacting their broker or nominee. A Shareholder who holds Common Stock registered in the name of a broker or other nominee may not be able to transfer the Common Stock to another broker or nominee and continue to participate in the Plan. Investors who own Common Stock registered in street name should consult their broker or nominee for details regarding reinvestment.
The number of shares of Common Stock distributed to participants in the Plan in lieu of a cash dividend is determined in the following manner. Whenever the market price per share of the Fund’s Common Stock is equal to or exceeds the net asset value per share on the valuation date, participants in the Plan will be issued new shares valued at the higher of net asset value or 95% of the then current market value. Otherwise, BNY Mellon will buy shares of the Fund’s Common Stock in the open market, on the New York Stock Exchange or elsewhere, on or shortly after the payment date of the dividend or distribution and continuing until the ex-dividend date of the Fund’s next distribution to holders of the Common Stock or until it has expended for such purchases all of the cash that would otherwise be payable to the participants. The number of purchased shares that will then be credited to the participants’ accounts will be based on the average per share purchase price of the shares so purchased, including brokerage commissions. If BNY Mellon commences purchases in the open market and the then current market price of the shares (plus any estimated brokerage commissions) subsequently exceeds their net asset value most recently determined before the completion of the purchases, BNY Mellon will attempt to terminate purchases in the open market and cause the Fund to issue the remaining dividend or distribution in shares. In this case, the number of shares received by the participant will be based on the weighted average of prices paid for shares purchased in the open market and the price at which the Fund issues the remaining shares. These remaining shares will be issued by the Fund at the higher of net asset value or 95% of the then current market value.
Plan participants are not subject to any charge for reinvesting dividends or capital gains distributions. Each Plan participant will, however, bear a proportionate share of brokerage commissions incurred with respect to BNY Mellon’s open market purchases in connection with the reinvestment of dividends or capital gains distributions. For the year ended November 30, 2020, there were no brokerage commissions incurred.
The automatic reinvestment of dividends and capital gains distributions will not relieve Plan participants of any income tax that may be payable on the dividends or capital gains distributions. A participant in the Plan will be treated for Federal income tax purposes as having received, on the dividend payment date, a dividend or distribution in an amount equal to the cash that the participant could have received instead of shares.
In addition to acquiring shares of Common Stock through the reinvestment of cash dividends and distributions, a shareholder may invest any further amounts from $100 to $3,000 semi-annually at the then current market price in shares purchased through the Plan. Such semi-annual investments are subject to any brokerage commission charges incurred by BNY Mellon under the Plan.
Flaherty & Crumrine Preferred and Income Fund Incorporated
ADDITIONAL INFORMATION (Unaudited) (Continued)
33
A shareholder whose Common Stock is registered in his or her own name may terminate participation in the Plan at any time by notifying BNY Mellon in writing, by completing the form on the back of the Plan account statement and forwarding it to BNY Mellon, or by calling BNY Mellon, directly. A termination will be effective immediately if notice is received by BNY Mellon not less than 10 days before any dividend or distribution record date. Otherwise, the termination will be effective, and only with respect to any subsequent dividends or distributions, on the first day after the dividend or distribution has been credited to the participant’s account in additional shares of the Fund. Upon termination and according to a participant’s instructions, BNY Mellon will either (a) issue certificates for the whole shares credited to the shareholder’s Plan account and a check representing any fractional shares or (b) sell the shares in the market. Shareholders who hold Common Stock registered in the name of a broker or other nominee should consult their broker or nominee to terminate participation.
The Plan is described in more detail in the Fund’s Plan brochure. Information concerning the Plan may be obtained from BNY Mellon at 1-866-351-7446.
Proxy Voting Policies and Proxy Voting Record on Form N-PX
The Fund files Form N-PX with its complete proxy voting record for the twelve months ended June 30th no later than August 31st of each year. The Fund filed its latest Form N-PX with the Securities and Exchange Commission (“SEC”) on August 14, 2020. This filing, as well as the Fund’s proxy voting policies and procedures, are available (i) without charge, upon request, by calling the Fund’s Transfer Agent at 1-866-351-7446 and (ii) on the SEC’s website at www.sec.gov. In addition, the Fund’s proxy voting policies and procedures are available on the Fund’s website at www.preferredincome.com.
Portfolio Schedule on Form N-PORT
The Fund files a complete schedule of portfolio holdings with the SEC for the first and third fiscal quarters as an exhibit on Form N-PORT, the latest of which was filed for the quarter ended August 31, 2020. The Fund’s Form N-PORT is available on the SEC’s website at www.sec.gov. The Fund’s full portfolio holdings as of its first and third fiscal quarters will be made publicly available 60 days after the end of each quarter on www.sec.gov.
Flaherty & Crumrine Preferred and Income Fund Incorporated
ADDITIONAL INFORMATION (Unaudited) (Continued)
34
Supplementary Tax Information
Distributions to Common Stock Shareholders are characterized as follows for purposes of federal income taxes (as a percentage of total distributions). Individual Shareholders will receive a Form 1099-DIV in 2021 with information about the tax character of distributions they received in calendar year 2020.
|
|
Individual Shareholder |
|
Corporate Shareholder |
||||
|
|
QDI |
|
Ordinary Income |
|
DRD |
|
Ordinary Income |
Fiscal Year 2020 |
|
83.34% |
|
16.66% |
|
37.44% |
|
62.56% |
Calendar Year 2020 |
|
82.98% |
|
17.02% |
|
37.18% |
|
62.82% |
Flaherty & Crumrine Preferred and Income Fund Incorporated
ADDITIONAL INFORMATION (Unaudited) (Continued)
35
Information about Fund Directors and Officers
The business and affairs of the Fund are managed under the direction of the Fund’s Board of Directors. Information pertaining to the Directors and officers of the Fund is set forth below.
*The Fund’s Board of Directors is divided into three classes, each class having a term of three years. Each year the term of office of one class expires and the successor or successors elected to such class serve for a three year term. The three year term for each class expires as follows:
Class I Director – three year term expires at the Fund’s 2023 Annual Meeting of Shareholders; director may continue in office until his successor is duly elected and qualifies.
Class II Director – three year term expires at the Fund’s 2021 Annual Meeting of Shareholders; director may continue in office until her successor is duly elected and qualifies.
Class III Directors – three year term expires at the Fund’s 2022 Annual Meeting of Shareholders; directors may continue in office until their successors are duly elected and qualify.
**Each Director also serves as a Director for Flaherty & Crumrine Preferred and Income Opportunity Fund, Flaherty & Crumrine Preferred and Income Securities Fund, Flaherty & Crumrine Total Return Fund and Flaherty & Crumrine Dynamic Preferred and Income Fund.
†Ms. Hogan served as a Class I Director from 2005 - 2016.
Flaherty & Crumrine Preferred and Income Fund Incorporated
ADDITIONAL INFORMATION (Unaudited) (Continued)
36
*The Fund’s Board of Directors is divided into three classes, each class having a term of three years. Each year the term of office of one class expires and the successor or successors elected to such class serve for a three year term. The three year term for each class expires as follows:
Class I Director – three year term expires at the Fund’s 2023 Annual Meeting of Shareholders; director may continue in office until his successor is duly elected and qualifies.
Class II Director – three year term expires at the Fund’s 2021 Annual Meeting of Shareholders; director may continue in office until her successor is duly elected and qualifies.
Class III Directors – three year term expires at the Fund’s 2022 Annual Meeting of Shareholders; directors may continue in office until their successors are duly elected and qualify.
**Each Director also serves as a Director for Flaherty & Crumrine Preferred and Income Opportunity Fund, Flaherty & Crumrine Preferred and Income Securities Fund, Flaherty & Crumrine Total Return Fund and Flaherty & Crumrine Dynamic Preferred and Income Fund.
(1)“Interested person” of the Fund as defined in the 1940 Act. Mr. Chadwick is considered an “interested person” because of his affiliation with Flaherty & Crumrine Incorporated, which acts as the Fund’s investment adviser.
Flaherty & Crumrine Preferred and Income Fund Incorporated
ADDITIONAL INFORMATION (Unaudited) (Continued)
37
Name, Address,
|
|
Current
|
|
Term of Office
|
|
Principal
|
|
OFFICERS: |
|
|
|
|
|
|
|
|
|||||||
Chad C. Conwell
301 E. Colorado Boulevard
Pasadena, CA 91101 Age: 48 |
|
Chief Compliance Officer, Vice President and Secretary |
|
Since
|
|
Executive Vice President, Chief Compliance Officer and Chief Legal Officer of Flaherty & Crumrine |
|
|
|||||||
Bradford S. Stone 47 Maple Street Suite 403 Summit, NJ 07901 Age: 61 |
|
Chief Financial Officer, Vice President and Treasurer |
|
Since
|
|
Portfolio Manager and Executive Vice President of Flaherty & Crumrine |
|
|
|||||||
Roger Ko
301 E. Colorado Boulevard
Pasadena, CA 91101 Age: 46 |
|
Assistant
|
|
Since
|
|
Trader of Flaherty & Crumrine |
|
|
|||||||
Laurie C. Lodolo
301 E. Colorado Boulevard
Pasadena, CA 91101 Age: 57 |
|
Assistant Compliance Officer, Assistant Treasurer and Assistant Secretary |
|
Since
|
|
Assistant Compliance Officer and Secretary of Flaherty & Crumrine |
|
|
|||||||
Linda M. Puchalski
301 E. Colorado Boulevard
Pasadena, CA 91101 Age: 64 |
|
Assistant
|
|
Since
|
|
Administrator of Flaherty & Crumrine |
|
*Each officer serves until his or her successor is elected and qualifies or until his or her earlier resignation or removal.
Flaherty & Crumrine Preferred and Income Fund Incorporated
INVESTMENT OBJECTIVE, POLICY & RISK (Unaudited)
38
Investment Objective and Policies
The Fund’s investment objective is to provide its common shareholders with high current income consistent with preservation of capital. The Fund’s investment objective may not be changed except through an amendment to the Fund’s Articles of Incorporation. Any such amendment would require the affirmative vote of at least 80% of the votes of the Fund’s Common Shares and preferred stock (“Preferred Shares”) entitled to be cast by shareholders, voting together as a single class, and of at least 80% of the votes of the Fund’s Preferred Shares entitled to be cast by shareholders, voting as a separate class; unless such change in investment objective has been approved by the affirmative vote of 80% of the total number of directors of the Fund, in which case only the affirmative vote of a majority of the Common Shares and Preferred Shares entitled to vote, voting together as a single class, is required to approve such amendment. The Fund’s investment policies may be changed by the Fund’s Board of Directors without shareholder approval. However, the Fund’s 80% investment policy described below may only be changed upon 60 days’ prior written notice to the Fund’s shareholders.
Under normal market conditions, the Fund invests at least 80% of its Managed Assets (defined below) in a portfolio of preferred and other income-producing securities. Preferred and other income-producing securities may include, among other things, traditional preferred stock, trust preferred securities, hybrid securities that have characteristics of both equity and debt securities, contingent capital securities (“CoCos”), subordinated debt and senior debt. “Managed Assets” are the Fund’s net assets, plus the principal amount of loans from financial institutions or debt securities issued by the Fund, the liquidation preference of preferred stock issued by the Fund, if any, and the proceeds of any reverse repurchase agreements entered into by the Fund.
The Fund will invest, under normal market conditions, at least 25% of its total assets in the financials sector, which for this purpose is comprised of the bank, thrifts & mortgage finance, diversified financial services, finance, consumer finance, capital markets, asset management & custody, investment banking & brokerage, insurance, insurance brokerage and real estate investment trust (“REIT”) industries. From time to time, the Fund may have 25% or more of its total assets invested in any one of these industries. For example, the Fund could have more than 25% of its total assets in insurance companies, while at other times it could have that portion invested in banks. At all times, though, the Fund would have at least 25% of its total assets invested in the financials sector. In addition, the Fund also may focus its investments in other sectors or industries, such as (but not limited to) energy, industrials, utilities, communications and pipelines. The Adviser retains broad discretion to allocate the Fund’s investments as it deems appropriate considering current market and credit conditions.
The Fund may invest up to 100% of its total assets in securities of U.S. companies, and may also invest up to 30% of its total assets in U.S. dollar-denominated securities issued by companies organized or having their principal place of business outside the United States.
At the time of purchase, at least 85% of the Fund’s total assets will be either (a) rated investment grade by any one of Moody’s Investors Service, Inc. (“Moody’s”), S&P Global Ratings (“S&P”) or Fitch Ratings (“Fitch”) or (b) issued by companies with issuer or senior unsecured debt ratings that are investment grade by any one of Moody’s, S&P or Fitch. In addition, for purposes of this 85% policy, the Fund may include unrated securities that the Adviser deems to be comparable in quality to rated issues in which the Fund is authorized to invest. Some of the Fund’s total assets may be invested in securities rated (or issued by companies rated) below investment grade at the time of purchase. Securities that are rated below investment grade are commonly referred to as “high yield” or “junk bonds.” Securities of below investment grade quality are regarded as having predominantly speculative characteristics with respect to
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capacity to pay dividends and interest and repayment of principal. Due to the risks involved in investing in securities of below investment grade quality, an investment in the Fund should be considered speculative.
The maturities of securities in which the Fund will invest generally will be longer-term (perpetual, in the case of many preferred securities and CoCos, and ten years or more for other preferred and debt securities); however, as a result of changing market conditions and interest rates, the Fund may also invest in shorter-term securities. The Fund can buy securities of any maturity or duration. Duration is the sensitivity, expressed in years, of the price of a fixed-income security to changes in the general level of interest rates (or yields). Securities with longer durations tend to be more sensitive to interest rate (or yield) changes than securities with shorter durations. For example, a three-year duration means a bond is expected to decrease in value by 3% if interest rates rise by 1% and increase in value by 3% if interest rates fall by 1%.
The portion of the Fund’s Managed Assets not invested in preferred and other income-producing securities may be invested in, among other securities, common stocks, money market instruments, money market mutual funds, asset-backed securities, and securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities (“Government Securities”) and such obligations which are subject to repurchase agreements and commercial paper. Depending on market conditions, these investments may at times have a higher or lower yield than preferred securities and other income-producing securities in which the Fund invests.
Unless designated as a “fundamental policy” and except as described above, the investment limitations and policies of the Fund may be changed by the Board of Directors without shareholder approval.
Primary Investment Strategies and Techniques
Preferred Securities. Preferred securities share many investment characteristics with both bonds and common stock; therefore, the risks and potential rewards of investing in the Fund may at times be similar to the risks of investing in equity-income funds or both equity funds and bond funds. Similar to bonds, preferred securities, which generally pay fixed- or adjustable-rate dividends or interest to investors, have preference over common stock in the payment of dividends or interest and the liquidation of a company’s assets, which means that a company typically must pay dividends or interest on its preferred securities before paying any dividends on its common stock. On the other hand, like common stock, preferred securities are junior to all forms of the company’s debt, including both senior and subordinated debt, and the company can skip or defer dividend or interest payments for extended periods of time without triggering an event of default. Further, different types of preferred securities can be junior or senior to other types of preferred securities in both priority of payment of dividends or interest and/or the liquidation of a company’s assets.
Preferred securities can be structured differently for retail and institutional investors, and the Fund may purchase either structure. The retail segment is typified by $25 par securities that are listed on a stock exchange and which trade and are quoted with accreted dividend or interest income included in the price. The institutional segment is typified by $1,000 par value securities that are not exchange-listed, trade over-the-counter (“OTC”) and are quoted on a “clean” price, i.e., without accrued dividend or interest income included in the price.
While preferred securities can be issued with a final maturity date, others (including most traditional preferred stock) are perpetual in nature. In certain instances, a final maturity date may be extended and/or the final payment of principal may be deferred at the issuer’s option for a specified time without any adverse consequence to the issuer. No redemption can typically take place unless all cumulative payment obligations to preferred security investors have
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been met, although issuers may be able to engage in open-market repurchases without regard to any cumulative dividends or interest payable, and many preferred securities are non-cumulative, whereby the issuer does not have an obligation to make up any arrearages to holders of such securities.
Debt Securities. The Fund may invest in a variety of debt securities, including corporate senior or subordinated debt securities and U.S. government securities. Corporate debt securities are fixed-income securities issued by businesses to finance their operations. The issuer pays the investor a fixed or variable rate of interest and normally must repay the amount borrowed on or before maturity. Notes, bonds, debentures and commercial paper are the most common types of corporate debt securities, with the primary difference being their maturities and secured or unsecured status.
Contingent Capital Securities. Contingent capital securities or “CoCos” have features similar to preferred and other income producing securities but also include “loss absorption” or mandatory conversion provisions that make the securities more like equity. An automatic write-down or conversion event is typically triggered by a reduction in the capital level of the issuer, but may also be triggered by regulatory actions (e.g., a change in capital requirements) or by other factors.
Illiquid Securities. The Fund may invest without limit in instruments that lack a secondary trading market or are otherwise considered illiquid. Generally, illiquid securities are securities that cannot be disposed of within seven days in the ordinary course of business at approximately the value at which the Fund has valued the securities.
Principal Risks of the Fund
The Fund is a diversified, closed-end management investment company designed primarily as a long-term investment and not as a trading vehicle. The Fund is not intended to be a complete investment program and, due to the uncertainty inherent in all investments, there can be no assurance that the Fund will achieve its investment objective. Different risks may be more significant at different times depending on market conditions.
Market Events Risk. The market values of securities or other assets will fluctuate, sometimes sharply and unpredictably, due to changes in general market conditions, overall economic trends or events, governmental actions or intervention, actions taken by the U.S. Federal Reserve or foreign central banks, market disruptions caused by trade disputes or other factors, political developments, investor sentiment, the global and domestic effects of a pandemic, and other factors that may or may not be related to the issuer of the security or other asset. Economies and financial markets throughout the world are increasingly interconnected. Economic, financial or political events, trading and tariff arrangements, public health events, terrorism, natural disasters and other circumstances in one country or region could have profound impacts on global economies or markets. As a result, whether or not the Fund invests in securities of issuers located in or with significant exposure to the countries directly affected, the value and liquidity of the Fund’s investments may be negatively affected.
The rapid and global spread of a highly contagious novel coronavirus respiratory disease, designated COVID-19, has resulted in extreme volatility in the financial markets and severe declines in the market value of many investments; reduced liquidity of many instruments; restrictions on international and, in some cases, local travel; significant disruptions to business operations (including business closures); strained healthcare systems; disruptions to supply chains, consumer demand and employee availability; and widespread uncertainty regarding the duration and long-term effects of this pandemic. Some sectors of the economy and individual issuers have experienced particularly large losses. In addition, the COVID-19 pandemic may result in a sustained domestic or even global economic downturn or recession, domestic and foreign political and social instability, damage to diplomatic and international
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trade relations and increased volatility and/or decreased liquidity in the securities markets. Developing or emerging market countries may be more impacted by the COVID-19 pandemic as they may have less established health care systems and may be less able to control or mitigate the effects of the pandemic. The impact of the COVID-19 pandemic will last for an extended period of time. The ultimate economic fallout from the pandemic, and the long-term impact on economies, markets, industries and individual issuers, are not known. The U.S. government and the Federal Reserve, as well as certain foreign governments and central banks, are taking extraordinary actions to support local and global economies and the financial markets in response to the COVID-19 pandemic, including by pushing interest rates to very low levels. These actions have resulted in significant expansion of public debt, including in the U.S. This and other government intervention into the economy and financial markets to address the COVID-19 pandemic may not work as intended, particularly if the efforts are perceived by investors as being unlikely to achieve the desired results. Government actions to mitigate the economic impact of the pandemic have resulted in a large expansion of government deficits and debt, the long-term consequences of which are not known. The COVID-19 pandemic could adversely affect the value and liquidity of the Fund’s investments, impair the Fund’s ability to satisfy asset-coverage requirements under its Financing Agreement, and negatively impact the Fund’s performance. In addition, the outbreak of COVID-19, and measures taken to mitigate its effects, could result in disruptions to the services provided to the Fund by its service providers.
Preferred, Contingent Capital and Other Subordinated Securities Risk. Preferred, contingent capital and other subordinated securities rank lower than bonds and other debt instruments in a company’s capital structure and therefore are subject to greater credit risk than those debt instruments. Distributions on some types of these securities may also be skipped or deferred by issuers without causing a default. Finally, some of these securities typically have special redemption rights that allow the issuer to redeem the security at par earlier than scheduled. If this occurs, the Fund may be forced to reinvest in lower yielding securities.
Contingent Capital Securities Risk. Contingent capital securities or “CoCos” have features and risks similar to preferred and other income producing securities but also include “loss absorption” or mandatory conversion provisions and restrictions on dividend or interest payments that make the securities more like equity. This is particularly true in the financial sector, the largest preferred issuer segment.
In one version of a CoCo, the security has loss absorption characteristics whereby the liquidation value of the security may be adjusted downward to below the original par value (even to zero) under certain circumstances. This may occur, for instance, in the event that business losses have eroded capital to a substantial extent. The write down of the par value would occur automatically and would not entitle the holders to seek bankruptcy of the company. In addition, an automatic write-down could result in a reduced income rate if the dividend or interest payment is based on the security’s par value. Such securities may, but are not required to, provide for circumstances under which the liquidation value may be adjusted back up to par, such as an improvement in capitalization and/or earnings.
Another version of a CoCo provides for mandatory conversion of the security into common shares of the issuer under certain circumstances. The mandatory conversion might relate, for instance, to maintenance of a capital minimum, whereby falling below the minimum would trigger automatic conversion. Since the common stock of the issuer may not pay a dividend, investors in these instruments could experience a reduced income rate, potentially to zero, and conversion would deepen the subordination of the investor, hence worsening the Fund’s standing in a bankruptcy. In addition, some such instruments also provide for an automatic write-down if the price of the common stock is below the conversion price on the conversion date.
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An automatic write-down or conversion event is typically triggered by a reduction in the capital level of the issuer, but may also be triggered by regulatory actions (e.g., a change in capital requirements) or by other factors. In addition, interest or dividend payments may be reduced or eliminated if certain earnings or capital levels are breached.
Trust Preferred Securities Risk. Some preferred securities are issued by trusts or other special purpose entities established by operating companies and are not a direct obligation of an operating company. In some cases, when investing in hybrid-preferred securities issued by trusts or other special purpose entities, the Fund may not have recourse against the operating company in the event that the trust or other special purpose entity cannot pay the obligation and therefore, the Fund may lose some or all of the value of its investments in the hybrid-preferred security.
Concentration Risk. The Fund invests at least 25% of its total assets in the financials sector. This policy makes the Fund more susceptible to adverse economic or regulatory occurrences affecting the financials sector.
Financials Sector Risk. The financials sector is especially subject to the adverse effects of economic recession, currency exchange rates, government regulation, decreases in the availability of capital, volatile interest rates, portfolio concentrations in geographic markets and in commercial and residential real estate loans, and competition from new entrants in their fields of business.
U.S. and foreign laws and regulations require banks and bank holding companies to maintain minimum levels of capital and liquidity and to establish loan loss reserves. A bank’s failure to maintain specified capital ratios may trigger dividend restrictions, suspensions on payments on subordinated debt, preferred securities and contingent capital securities, and limitations on growth. Bank regulators have broad authority in these instances and can ultimately impose sanctions, such as imposing resolution authority, conservatorship or receivership, on such non-complying banks even when these banks continue to be solvent, thereby possibly resulting in the elimination of stockholders’ equity. Unless a bank holding company has subsidiaries other than banks that generate substantial revenues, the holding company’s cash flow and ability to declare dividends may be impaired severely by restrictions on the ability of its bank subsidiaries to declare dividends or ultimately to redeem its securities (as they mature).
Similarly, U.S. and foreign laws and regulations require insurance companies to maintain minimum levels of capital and liquidity. An insurance company’s failure to maintain these capital ratios may also trigger dividend restrictions, suspensions on payments of subordinated debt, and limitations on growth. Insurance regulators (at the state-level in the United States) have broad authority in these instances and can ultimately impose sanctions, including conservatorship or receivership, on such non-complying insurance companies even when these companies continue to be solvent, thereby possibly resulting in the elimination of shareholders’ equity. In addition, insurance regulators have extensive authority in some categories of insurance of approving premium levels and setting required levels of underwriting.
Companies engaged in stock brokerage, commodity brokerage, investment banking, investment management or related investment advisory services are closely tied economically to the securities and commodities markets and can suffer during a decline in either market. These companies also are subject to the regulatory environment and changes in regulations, pricing pressure, the availability of funds to borrow and interest rates.
Credit Risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments. Credit risk may be heightened for the Fund because the Fund may invest in “high yield” or “high risk” securities; such securities, while generally offering higher yields than investment grade
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securities with similar maturities, involve greater risks, including the possibility of default or bankruptcy, and are regarded as predominantly speculative with respect to the issuer’s capacity to pay dividends and interest and repay principal.
High Yield Securities Risk. Although high yield securities generally pay higher rates of interest than investment grade securities, high yield securities are high-risk investments that may cause income and principal losses for the Fund. High yield securities may be issued by less creditworthy issuers. Issuers of high yield securities may have a larger amount of outstanding debt relative to their assets than issuers of investment grade securities. In the event of an issuer’s bankruptcy, claims of other creditors may have priority over the claims of high yield bond holders, for example, leaving few or no assets available to repay high yield bond holders. Prices of high yield securities are subject to extreme price fluctuations. Adverse changes in an issuer’s industry and general economic conditions may have a greater impact on the prices of high yield securities than on other higher rated fixed-income securities. Issuers of high yield securities may be unable to meet their interest or principal payment obligations because of an economic downturn, specific issuer developments, or the unavailability of additional financing. High yield securities frequently have redemption features that permit an issuer to repurchase the security from the Fund before it matures. If the issuer redeems high yield securities, the Fund may have to invest the proceeds in securities with lower yields and may lose income. High yield securities may be less liquid than higher rated fixed-income securities, even under normal economic conditions. There may be significant differences in the prices quoted for high yield securities by dealers in the market. Because they are less liquid, judgment may play a greater role in valuing certain of the Fund’s securities than is the case with securities trading in a more liquid market. The Fund may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting issuer. The credit rating of a high yield security does not necessarily address its market value risk. Ratings and market value may change from time to time, positively or negatively, to reflect new developments regarding the issuer.
Credit Agency Risk. Credit ratings are determined by credit rating agencies and are the opinions of such entities. A rating assigned by a rating agency is not an absolute standard of credit quality and does not evaluate a security’s market risk or liquidity. Any shortcomings or inefficiencies in credit rating agencies’ processes for determining credit ratings may adversely affect the credit ratings of securities held by the Fund and, as a result, may adversely affect those securities’ perceived or actual credit risk.
Interest Rate and Duration Risk. Interest rate risk is the risk that securities will decline in value because of changes in market interest rates. For fixed rate securities, when market interest rates rise, the market value of such securities generally will fall. Investments in fixed rate securities with long-term maturities may experience significant price declines if long-term interest rates increase. During periods of rising interest rates, the average life of certain types of securities may be extended because of slower than expected redemptions or prepayments. This may lock in a below-market yield, increase the security’s sensitivity to changes in interest rates (“duration”) and further reduce the value of the security. Fixed rate securities with longer durations tend to be more volatile than securities with shorter durations. The duration of a security will be expected to change over time with changes in market factors and time to maturity.
The market value of floating-rate and fixed-to-floating rate securities may fall in a declining interest rate environment and may also fall in a rising interest rate environment if there is a lag between the rise in interest rates and the interest rate reset. A secondary risk associated with declining interest rates is the risk that income earned by the Fund on floating-rate and fixed-to-floating rate securities may decline due to lower coupon payments on floating-rate securities.
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LIBOR Risk. Many financial instruments use or may use a floating rate based on the London Interbank Offered Rate, or “LIBOR,” which is the offered rate for short-term Eurodollar deposits between major international banks. Over the course of the last several years, global regulators have indicated an intent to phase out the use of LIBOR and similar interbank offering rates (IBOR). There remains uncertainty regarding the nature of any replacement rates for LIBOR and the other IBORs as well as around fallback approaches for instruments extending beyond the any phase-out of these reference rates. The lack of consensus around replacement rates and the uncertainty of the phase out of LIBOR and other IBORs may result in increased volatility in securities or other instruments in which the Fund invests as well as loan facilities used by the Fund.
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. The elimination of LIBOR or changes to other reference rates 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, which may adversely affect the Fund’s performance and/or net asset value. Certain proposed replacement rates to LIBOR, such as the Secured Overnight Financing Rate (“SOFR”), are materially different from LIBOR, and changes in the applicable spread for instruments previously linked to LIBOR will need to be made in order for instruments to pay similar rates. Uncertainty and risk also remain regarding the willingness and ability of issuers and lenders to include revised provisions in new and existing contracts or instruments. Consequently, the transition away from LIBOR to other reference rates may lead to reduced income received by the Fund, higher rates required to be paid by the Fund on credit facilities due to increases in spreads, increased volatility and illiquidity in markets that are tied to LIBOR, fluctuations in values of LIBOR-related investments or investments in issuers that utilize LIBOR, increased difficulty in borrowing or refinancing and diminished effectiveness of any hedging strategies, adversely affecting the Fund’s performance. Furthermore, the risks associated with the expected discontinuation of LIBOR and transition may be exacerbated if the work necessary to effect an orderly transition to an alternative reference rate is not completed in a timely manner. Because the usefulness of LIBOR and the other IBORs as benchmarks could deteriorate during the transition period, these effects could begin to be experienced by the end of 2021 and beyond until the anticipated discontinuance date in 2023 for the majority of the LIBOR rates.
Liquidity Risk. The Fund may invest, without limit, in illiquid securities. From time to time, certain securities held by the Fund may have limited marketability and may be difficult to sell at favorable times or prices. It is possible that certain securities held by the Fund will not be able to be sold in sufficient amounts or in a sufficiently timely manner to raise the cash necessary to meet the Fund’s obligations, including potential repayment of leverage borrowings, if any.
Foreign Investment Risk. Because the Fund may invest its assets in foreign instruments, the value of Fund shares can be adversely affected by political and economic developments abroad. Foreign markets may be smaller, less liquid and more volatile than the major markets in the United States, and as a result, Fund share values may be more volatile. Trading in foreign markets typically involves higher expense than trading in the United States. The Fund may have difficulties enforcing its legal or contractual rights in a foreign country.
Reinvestment Risk. Reinvestment risk is the risk that income from the Fund’s portfolio will decline if the Fund invests proceeds from matured, traded or redeemed securities at market interest rates that are below the Fund portfolio’s current earnings rate. For example, during periods of declining interest rates, the issuer of a security may exercise its option to redeem a security, causing the Fund to reinvest the proceeds into lower-yielding securities, which may result in a decline in the Fund’s income and distributions to Common Shareholders.
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Selection Risk. Selection risk is the risk that the securities selected by Fund management will under-perform the markets, the relevant indices or the securities selected by other funds with similar investment objectives and investment strategies.
Management Risk. The Fund is an actively managed portfolio and its success depends upon the investment skills and analytical abilities of the Adviser to develop and effectively implement strategies that achieve the Fund’s investment objective. Decisions made by the Adviser may cause the Fund to incur losses or to miss profit opportunities.
Leverage Risk. Leverage is a speculative technique and there are special risks and costs associated with leveraging. There is no assurance that leveraging strategy will be successful. Leverage involves risks and special considerations for holders of Common Shares, including: the likelihood of greater volatility of net asset value, market price and dividend rate of the Common Shares than a comparable portfolio without leverage; the risk that fluctuations in the interest or dividend rates that the Fund must pay on any leverage will reduce the return on the holders of the Common Shares; the effect of leverage in a declining market, which is likely to cause a greater decline in the net asset value of the Common Shares than if the Fund were not leveraged, which may result in a greater decline in the market price of the Common Shares; when the Fund uses financial leverage, the management fees payable to the Adviser will be higher than if the Fund did not use leverage; and leverage may increase operating costs, which may reduce total return.
Risk of Market Price Discount from Net Asset Value. Shares of closed-end funds frequently trade at a discount from their net asset value. This characteristic is a risk separate and distinct from the risk that net asset value could decrease as a result of investment activities. We cannot predict whether the Common Shares will trade at, above or below net asset value.
Valuation Risk. Unlike publicly traded common stock that trades on national exchanges, there is no central place or exchange for trading some of the preferred and other income securities owned by the Fund. Preferred, contingent capital and debt securities generally trade on an OTC market which may be anywhere in the world where the buyer and seller can settle on a price. Due to the lack of centralized information and trading, the valuation of these securities may carry more risk than that of common stock. Uncertainties in the conditions of the financial market, unreliable reference data, lack of transparency and inconsistency of valuation models and processes may lead to inaccurate asset pricing.
Cybersecurity Risk. Cybersecurity incidents, both intentional and unintentional, may allow an unauthorized party to gain access to Fund assets, Fund or customer data (including private shareholder information), or proprietary information, cause the Fund, the Adviser, and/or their service providers (including, but not limited to, fund accountants, custodians, sub-custodians, transfer agents and financial intermediaries) to suffer data breaches, data corruption or loss of operational functionality or prevent fund investors from purchasing, redeeming or exchanging shares or receiving distributions. The Fund and the Adviser have limited ability to prevent or mitigate cybersecurity incidents affecting third party service providers, and such third-party service providers may have limited indemnification obligations to the Fund or the Adviser. Cybersecurity incidents may result in financial losses to the Fund and its shareholders, and substantial costs may be incurred in order to prevent any future cybersecurity incidents. Issuers of securities in which the Fund invests are also subject to cybersecurity risks, and the value of these securities could decline if the issuers experience cybersecurity incidents.
Given the risks described above, an investment in the Fund’s Common Shares may not be appropriate for all investors. You should carefully consider your ability to assume these risks before making an investment in the Fund.
Directors
R. Eric Chadwick, CFA
Chairman of the Board
Morgan Gust
David Gale
Karen H. Hogan
Investment Adviser
Flaherty & Crumrine Incorporated
e-mail: flaherty@pfdincome.com
Questions concerning your shares of Flaherty & Crumrine Preferred and Income Fund?
•If your shares are held in a Brokerage Account, contact your Broker.
•If you have physical possession of your shares in certificate form, contact the Fund’s Transfer Agent & Shareholder Servicing Agent —
BNY Mellon
c/o Computershare
P.O. Box 505000,
Louisville, KY, 40233-5000,
United States
1-866-351-7446 (U.S. toll-free) or
+1 (201) 680 6578 (International)
Officers
R. Eric Chadwick, CFA
Chief Executive Officer
and President
Chad C. Conwell
Chief Compliance Officer,
Vice President and Secretary
Bradford S. Stone
Chief Financial Officer,
Vice President and Treasurer
Roger W. Ko
Assistant Treasurer
Laurie C. Lodolo
Assistant Compliance Officer,
Assistant Treasurer and
Assistant Secretary
Linda M. Puchalski
Assistant Treasurer
This report is sent to shareholders of Flaherty & Crumrine Preferred and Income Fund Incorporated for their information. It is not a Prospectus, circular or representation intended for use in the purchase or sale of shares of the Fund or of any securities mentioned in this report.
(b) | Not applicable. |
Item 2. Code of Ethics.
(a) | The registrant, as of the end of the period covered by this report, has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party. |
(c) | There have been no amendments, during the period covered by this report, to a provision of the code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party, and that relates to any element of the code of ethics description. |
(d) | The registrant has not granted any waivers, including an implicit waiver, from a provision of the code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party, that relates to one or more of the items set forth in paragraph (b) of this item’s instructions. |
Item 3. Audit Committee Financial Expert.
As of the end of the period covered by the report, the registrant’s board of directors has determined that David Gale, Morgan Gust and Karen H. Hogan are each qualified to serve as an audit committee financial expert serving on its audit committee and that they all are “independent,” as defined by the Securities and Exchange Commission.
Item 4. Principal Accountant Fees and Services.
Audit Fees
(a) | The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the registrant’s annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years are $50,500 for 2020 and $49,500 for 2019. |
Audit-Related Fees
(b) | The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant’s financial statements and are not reported under paragraph (a) of this Item are $0 for 2020 and $0 for 2019. |
Tax Fees
(c) | The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning are $9,465 for 2020 and $9,280 for 2019. Services included the preparation and review of federal and state tax returns, excise tax returns, and tax distribution requirements. |
All Other Fees
(d) | The aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant, other than the services reported in paragraphs (a) through (c) of this Item are $0 for 2020 and $0 for 2019. |
(e)(1) | The Fund’s Audit Committee Charter states that the Audit Committee shall have the duty and power to pre-approve all audit and non-audit services to be provided by the auditors to the Fund, and all non-audit services to be provided by the auditors to the Fund’s investment adviser and any service providers controlling, controlled by or under common control with the Fund’s investment adviser that provide ongoing services to the Fund, if the engagement relates directly to the operations and financial reporting of the Fund. |
(e)(2) | The percentage of services described in each of paragraphs (b) through (d) of this Item that were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X are as follows: |
(b) N/A
(c) 0%
(d) N/A
(f) | The percentage of hours expended on the principal accountant’s engagement to audit the registrant’s financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees was 0. |
(g) | The aggregate non-audit fees billed by the registrant’s accountant for services rendered to the registrant, and rendered to the registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant for each of the last two fiscal years of the registrant was $0 for 2020 and $0 for 2019. |
(h) | Not applicable. |
Item 5. Audit Committee of Listed Registrants.
(a) | The registrant has a separately designated audit committee consisting of all the independent directors of the registrant. The members of the audit committee are: David Gale, Morgan Gust and Karen H. Hogan. |
(b) | Not applicable. |
Item 6. Investments.
(a) | Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the report to shareholders filed under Item 1 of this form. |
(b) | Not applicable. |
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
The Proxy Voting Policies are set forth below.
ADVISER PROXY VOTING POLICIES AND PROCEDURES
Flaherty & Crumrine Incorporated (“FCI”) acts as discretionary investment adviser for various clients, including the following eight pooled investment vehicles (the “Funds”):
As adviser to the “U.S. Funds” | Flaherty & Crumrine Preferred and Income Fund Incorporated |
Flaherty & Crumrine Preferred and Income Opportunity Fund Incorporated | |
Flaherty & Crumrine Preferred and Income Securities Fund Incorporated | |
Flaherty & Crumrine Total Return Fund Incorporated | |
Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated | |
As sub-adviser to the “Canadian Funds” | Flaherty & Crumrine Investment Grade Preferred Income Fund |
As sub-adviser to the “ETF” | Brompton Flaherty & Crumrine Investment Grade Preferred ETF |
As sub-adviser to the “Mutual Fund” | Destra Flaherty & Crumrine Preferred and Income Fund |
FCI’s authority to vote proxies for its clients is established through the delegation of discretionary authority under its investment advisory contracts and the U.S. Funds have adopted these policies and procedures for themselves.
Purpose
These policies and procedures are designed to satisfy FCI’s duties of care and loyalty to its clients with respect to monitoring corporate events and exercising proxy authority in the best interests of such clients.
In connection with this objective, these policies and procedures are designed to deal with potential complexities which may arise in cases where FCI’s interests conflict or appear to conflict with the interests of its clients.
These policies and procedures are also designed to communicate with clients the methods and rationale whereby FCI exercises proxy voting authority.
This document is available to any client or Fund shareholder upon request and FCI will make available to such clients and Fund shareholders the record of FCI’s votes promptly upon request and to the extent required by Federal law and regulations.
Fundamental Standard
FCI will be guided by the principle that, in those cases where it has proxy voting authority, it will vote proxies, and take such other corporate actions, consistent with the interest of its clients in a manner free of conflicts of interest.
General
These policies and procedures apply only where the client has granted discretionary authority with respect to proxy voting. Where FCI does not have authority, it will keep appropriate written records evidencing that such discretionary authority has not been granted.
FCI may choose not to keep written copies of proxy materials that are subject to SEC regulation and maintained in the SEC’s EDGAR database. In other instances, FCI will keep appropriate written records in its files or in reasonably accessible storage.
Similarly, FCI will keep in its files, or reasonably accessible storage, work papers and other materials that were significant to FCI in making a decision how to vote.
For purposes of decision making, FCI will assume that each ballot for which it casts votes is the only security of an issuer held by the client. Thus, when casting votes where FCI may have discretionary authority with regard to several different securities of the same issuer, it may vote securities “in favor” for those securities or classes where FCI has determined the matter in question to be beneficial while, at the same time, voting “against” for those securities or classes where FCI has determined the matter to be adverse. Such cases occasionally arise, for example, in those instances where a vote is required by both common and preferred shareholders, voting as separate classes, for a change in the terms regarding preferred stock issuance.
FCI will reach its voting decisions independently, after appropriate investigation. It does not generally intend to delegate its decision making or to rely on the recommendations of any third party, although it may take such recommendations into consideration. FCI may consult with such other experts, such as CPA’s, investment bankers, attorneys, etc., as it regards necessary to help it reach informed decisions.
FCI may determine not to vote a proxy for a debt or equity security: if (1) the effect on the applicable client’s economic interests or the value of the portfolio holding is insignificant in relation to its portfolio; (2) the cost of voting the proxy outweighs the possible benefit to the applicable client, including without limitation situations where a jurisdiction imposes share blocking restrictions which may affect the ability to effect transactions in the related securities; or (3) FCI otherwise has determined that it is consistent with its fiduciary obligations not to vote the proxy.
Ultimately, all voting decisions are made on a case-by-case basis, taking relevant considerations into account.
Voting of Common Stock Proxies
FCI categorizes matters as either routine or non-routine, which definition may or may not precisely conform to the definitions set forth by securities exchanges or other bodies categorizing such matters. Routine matters would include such things as the voting for directors and the ratification of auditors and most shareholder proposals regarding social, environmental, and corporate responsibility matters. FCI normally will vote in favor of management’s recommendations on these routine matters.
Non-routine matters might include, without limitation, such things as (1) amendments to management incentive plans, (2) the authorization of additional common or preferred stock, (3) initiation or termination of barriers to takeover or acquisition, (4) mergers or acquisitions, (5) changes in the state of incorporation, (6) corporate reorganizations, and (7) “contested” director slates. Non-routine matters will be voted on a case-by-case basis.
Voting of Preferred Stock Proxies and Exercising Consent Rights of Debt Securities
Preferred securities generally have voting rights only in the event that the issuer has not made timely payments of income and principal to shareholders or in the event that a corporation desires to effectuate some change in its articles of incorporation which might modify the rights of preferred stockholders.
Similarly, debt securities typically do not have express voting rights; however, issuers may seek consents to amendments of covenants or rights of the debt holders.
In deciding upon non-routine matters, having to do with the modification of the rights or protections, FCI will attempt, wherever possible, to assess the costs and benefits of such modifications.
In the case of the election of directors when timely payments to preferred shareholders have not been made (“contingent voting”), FCI will cast its votes on a case-by-case basis after investigation of the qualifications and independence of the persons standing for election.
Routine matters regarding preferred stock are the exception, rather than the rule, and typically arise when the preferred and common shareholders vote together as a class on such matters as election of directors. FCI will vote on a case-by-case basis, reflecting the principles set forth elsewhere in this document. However, in those instances (1) where the common shares of an issuer are held by a parent company and (2) where, because of that, the election outcome is not in doubt, FCI does not intend to vote such proxies since the time and costs would outweigh the benefits.
Actual and Apparent Conflicts of Interest
Potential conflicts of interest between FCI and FCI’s clients may arise when FCI’s relationships with an issuer or with a related third party conflict or appear to conflict with the best interests of FCI’s clients.
FCI will indicate in its voting records available to clients whether or not a material conflict exists or appears to exist. In addition, FCI will communicate with the client (which means the independent Directors or Director(s) they may so designate in the case of the U.S. Funds and the investment adviser in the case of the Canadian Funds or the Mutual Fund) in instances when a material conflict of interest may be apparent. FCI must describe the conflict to the client and state FCI’s voting recommendation and the basis therefor. If the client considers there to be a reasonable basis for the proposed vote notwithstanding the conflict or, in the case of the Funds, that the recommendation was not affected by the conflict (without considering the merits of the proposal), FCI will vote in accordance with the recommendation it had made to the client.
In all such instances, FCI will keep reasonable documentation supporting its voting decisions and/or recommendations to clients.
Amendment of the Policies and Procedures
These policies and procedures may be modified at any time by action of the Board of Directors of FCI but will not become effective, in the case of the U.S. Funds, unless they are approved by majority vote of the non-interested directors of the U.S. Funds. Any such modifications will be sent to FCI’s clients by mail and/or other electronic means in a timely manner. These policies and procedures, and any amendments hereto, will be posted on the U.S. Funds’ websites and will be disclosed in reports to shareholders as required by law.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
The following paragraphs provide certain information with respect to the portfolio managers of the Fund and the material conflicts of interest that may arise in connection with their management of the investments of the Fund, on the one hand, and the investments of other client accounts for which they have responsibility, on the other hand. Certain other potential conflicts of interest with respect to personal trading and proxy voting are discussed above under “Item 2 - Codes of Ethics” and “Item 7 - Proxy Voting Policies.”
(a)(1) Portfolio Managers
R. Eric Chadwick and Bradford S. Stone jointly serve as the Portfolio Managers of the Fund. Additional biographical information about the Portfolio Managers is available in the Annual Report included in Response to Item 1 above.
(a)(2) Other Accounts Managed By Portfolio Managers
The tables below illustrate other accounts where each of the above-mentioned two Portfolio Managers has significant day-to-day management responsibilities as of November 30, 2020:
Name of Portfolio Manager or Team Member | Type of Accounts |
Total # of Accounts Managed |
Total Assets (mm) | # of Accounts Managed for which Advisory Fee is Based on Performance | ||||
1. R. Eric Chadwick | Other Registered Investment Companies: | 5 | $2,968 | 0 | ||||
Other Pooled Investment Vehicles: | 2 | $123 | 0 | |||||
Other Accounts: | 12 | $1,244 | 0 | |||||
2. Bradford S. Stone | Other Registered Investment Companies: | 5 | $2,968 | 0 | ||||
Other Pooled Investment Vehicles: | 2 | $123 | 0 | |||||
Other Accounts: | 12 | $1,244 | 0 |
Potential Conflicts of Interest
In addition to the Fund, the Portfolio Managers jointly manage accounts for four other closed-end funds, one mutual fund, two Canadian funds and other institutional clients. As a result, potential conflicts of interest may arise as follows:
● | Allocation of Limited Time and Attention. The Portfolio Managers may devote unequal time and attention to the management of all accounts. As a result, the Portfolio Managers may not be able to formulate as complete a strategy or identify equally attractive investment opportunities for each of those accounts as might be the case if they were to devote substantially more attention to the management of one account. |
● | Allocation of Limited Investment Opportunities. If the Portfolio Managers identify an investment opportunity that may be suitable for multiple accounts, the Fund may not be able to take full advantage of that opportunity because the opportunity may need to be allocated among other accounts. |
● | Pursuit of Differing Strategies. At times, the Portfolio Managers may determine that an investment opportunity may be appropriate for only some accounts or may decide that certain of these accounts should take differing positions (i.e., may buy or sell the particular security at different times or the same time or in differing amounts) with respect to a particular security. In these cases, the Portfolio Manager may place separate transactions for one or more accounts which may affect the market price of the security or the execution of the transaction, or both, to the detriment of one or more other accounts. |
● | Variation in Compensation. A conflict of interest may arise where the financial or other benefits available to the Portfolio Manager differ among accounts. While the Adviser only charges fees based on assets under management and does not receive a performance fee from any of its accounts, and while it strives to maintain uniform fee schedules, it does have different fee schedules based on the differing advisory services required by some accounts. Consequently, though the differences in such fee rates are slight, the Portfolio Managers may be motivated to favor certain accounts over others. In addition, the desire to maintain assets under management or to derive other rewards, financial or otherwise, could influence the Portfolio Managers in affording preferential treatment to those accounts that could most significantly benefit the Adviser. |
The Adviser and the Fund have adopted compliance policies and procedures that are designed to address the various conflicts of interest that may arise for the Adviser and its staff members. However, there is no guarantee that such policies and procedures will be able to detect and prevent every situation in which an actual or potential conflict may arise.
(a)(3) Portfolio Manager Compensation
Compensation is paid solely by the Adviser. Each Portfolio Manager receives the same fixed salary. In addition, each Portfolio Manager receives a bonus based on peer reviews of his performance and the total net investment advisory fees received by Flaherty & Crumrine Incorporated (which are in turn based on the value of its assets under management). The Portfolio Managers do not receive deferred compensation, but participate in a profit-sharing plan available to all employees of the Adviser; amounts are determined as a percentage of the employee’s eligible compensation for a calendar year based on IRS limitations. Each Portfolio Manager is also a shareholder of Flaherty & Crumrine Incorporated and receives quarterly dividends based on his equity interest in the company.
(a)(4) Disclosure of Securities Ownership
The following indicates the dollar range of beneficial ownership of shares by each Portfolio Manager as of November 30, 2020:
Name | Dollar Range of Fund Shares Beneficially Owned* |
R. Eric Chadwick | $50,001-$100,000 |
Bradford S. Stone | $50,001-$100,000 |
*Doesn’t include 7,169 shares held by Flaherty & Crumrine Incorporated of which each portfolio manager is a shareholder.
(b) Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders.
There have been no material changes to the procedures by which the shareholders may recommend nominees to the registrant’s board of directors, where those changes were implemented after the registrant last provided disclosure in response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR 229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)), or this Item.
Item 11. Controls and Procedures.
(a) | The registrant’s principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”) (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)). |
(b) | There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d))) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
Item 12. Disclosure of Securities Lending Activities for Closed-End Management Investment Companies.
Not applicable.
Item 13. Exhibits.
(a)(1) | Code of ethics, or any amendment thereto, that is the subject of disclosure required by Item 2 is attached hereto. |
(a)(2) | Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto. |
(a)(3) | Not applicable. |
(a)(4) | Not applicable. |
(b) | Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) | Flaherty & Crumrine Preferred and Income Fund Incorporated |
By (Signature and Title)* | /s/ R. Eric Chadwick |
R. Eric Chadwick, Chief Executive Officer and President | |
(principal executive officer) |
Date | January 25, 2021 |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By (Signature and Title)* | /s/ R. Eric Chadwick |
R. Eric Chadwick, Chief Executive Officer and President | |
(principal executive officer) |
Date | January 25, 2021 |
By (Signature and Title)* | /s/ Bradford S. Stone |
Bradford S. Stone, Chief Financial Officer, Treasurer and Vice President | |
(principal financial officer) |
Date | January 25, 2021 |
* Print the name and title of each signing officer under his or her signature.
Flaherty & Crumrine Preferred and Income Fund Incorporated N-CSR
Exhibit 99.CODE ETH
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APPENDIX M
CODES OF ETHICS FOR SENIOR FINANCIAL OFFICERS
Flaherty & Crumrine Preferred and Income Fund Incorporated
Flaherty & Crumrine Preferred and Income Opportunity Fund Incorporated
Flaherty & Crumrine Preferred and Income Securities Fund Incorporated
Flaherty & Crumrine Total Return Fund Incorporated
Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated
Introduction
This Code has been written and adopted in conformity with Section 406 of the Sarbanes-Oxley Act of 2002 as implemented by SEC rules and regulations. This Code sets forth principles and establishes rules of conduct for Senior Officers (as defined below) of each of the above-named Funds. This Code supplements other Codes that the Fund or its Investment Adviser has adopted or may adopt in connection with other matters.
General Principles
It is the ethical and legal obligation of the Fund’s Senior Officers to strive to insure the full, fair, timely, and comprehensible financial disclosure to shareholders, regulatory authorities, and the general public. It is also the obligation of the Fund’s Senior Officers to establish and/or maintain adequate internal control safeguards for the purposes of (1) utilizing the Fund’s financial resources in the manner authorized by the Fund’s Board of Directors and permitted by applicable law and (2) laying the foundation for proper financial accounting. It is the obligation of the Fund’s Senior Officers to avoid improper conflicts of interest.
As a guiding principle, a Senior Officer is expected to act in a manner that he would wish another to act towards him if the roles were reversed.
Applicability
For purposes of this Code, a Senior Officer of the Fund means either the Chief Executive Officer or the Chief Financial Officer or such other officer performing the tasks of such officers in an official capacity.
Compliance with Applicable Law and Regulations
A Senior Officer shall maintain working knowledge of and comply with all applicable laws, rules, and regulations of any government, government agency, regulatory organization and licensing agencies governing matters of internal controls and financial statement disclosure.
A Senior Officer will not knowingly participate or assist in any violation of such laws, rules, or regulations.
Financial Disclosure Procedures
The following procedures and rules are to apply in all manners regarding financial disclosure. Financial disclosure includes, without limitation, regular periodic reports to shareholders (e.g., Annual, Semi-Annual, and Quarterly Reports), press releases, reports to regulatory authorities or securities exchanges, reports to taxing authorities, web pages, information released to statistical subscriber services, etc.
A Senior Officer will not knowingly misstate a material fact nor will such Officer fail to state a fact that is material under the circumstances.
A Senior Officer will use his best efforts to seek to assure that financial disclosure is clear and comprehensible.
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In manners regarding financial disclosure, a Senior Officer will avoid selectively disclosing information, except to service providers of the Fund and applicable regulatory authorities that are expected to maintain confidentiality in accordance with ethical business practice.
A Senior Officer will make every reasonable effort to make sure that financial disclosure is made in a timely manner.
A Senior Officer will provide and/or cause to be provided full cooperation with financial auditors and/or other regulatory/criminal investigators.
A Senior Officer will maintain familiarity with such basic principles of GAAP, AICPA standards, FASB pronouncements, etc., as are necessary to carrying out the obligation of fair and full financial accounting disclosure.
Internal Control Procedures
A Senior Officer will maintain working knowledge of the Fund’s foundational governance documents, key contracts, and actions/resolutions of its Board of Directors and Board Committees.
A Senior Officer will make every reasonable effort to insure that the terms of the Fund governance documents, key contracts, and actions of the Board and its Committees are faithfully carried out.
A Senior Officer will make every reasonable effort to insure, including the establishment of procedures as may be necessary, the proper authorization of securities transactions and the compliance with requisite investment guidelines and requirements.
A Senior Officer will make every reasonable effort to insure, including the establishment of procedures as may be necessary, that payments for investments, expenses, shareholder distributions, and other purposes have been properly made. This may include the designation of certain persons as authorized agents.
A Senior Officer will review the operations of the Fund and review the adequacy of internal controls through the mechanism of the Fund’s Disclosure and Financial Reporting Review Committee and such Committee’s Procedures.
Actual and Apparent Conflicts of Interest
A “conflict of interest” occurs when a Senior Officer’s private interest interferes with the interests of, or his service to, the Fund.
Certain conflicts of interest arise out of relationships between Senior Officers and the Fund and already are subject to conflict of interest provisions in the Investment Company Act of 1940 (the “Investment Company Act”) and the Investment Advisers Act of 1940 (the “Investment Advisers Act”). The Fund’s and the investment adviser’s compliance programs and procedures are designed to prevent, identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside the parameter of this Code.
Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between the Fund and the investment adviser of which the Senior Officers are also officers or employees. As a result, this Code recognizes that the Senior Officers will, in the normal course of their duties (whether formally for the Fund or for the adviser, or for both), be involved in establishing policies and implementing decisions that will have different effects on the adviser and the Fund. The participation of the Senior Officers in such activities is inherent in the contractual relationship between the Fund and the adviser and is consistent with the performance by the Senior Officers of their duties as officers of the Fund. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the Fund’s Board of Directors that the Senior Officers may also be officers or employees of one or more other investment companies covered by this or other codes.
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Other conflicts of interest are covered by this Code, even if such conflicts of interest are not subject to the provisions in the Investment Company Act and the Investment Advisers Act. The overarching principle is that the personal interest of a Senior Officer should not be placed improperly before the interest of the Fund.
A Senior Officer must:
(1) | not use his personal influence or personal relationships improperly to influence investment decisions or financial reporting by the Fund whereby the Senior Officer would benefit personally to the detriment of the Fund; |
(2) | not cause the Fund to take action, or to refrain from taking action, for the individual personal benefit of the Senior Officer rather than for the benefit of the Fund; |
(3) | not use material non-public knowledge of portfolio transactions made or contemplated by the Fund to trade personally or cause others to trade personally in contemplation of the market effect of such transactions. |
Supervision
A Senior Officer will exercise appropriate supervision over employees, officers, and other service providers to seek to insure that the foregoing procedures are followed.
Standard of Care
A Senior Officer will exercise reasonable care in the carrying out of all duties under this Code and as an officer of the Fund.
Reporting and Accountability
A Senior Officer must promptly notify the President of the Fund, or a Vice President he may designate, promptly if he knows of any violation of this Code. Failure to do so is itself a violation of this Code.
The President of the Fund, or a Vice President he may designate, is responsible for applying this Code to specific situations in which questions are presented under it and has the authority to interpret this Code in any particular situation.
The Fund will follow these procedures in investigating and enforcing this Code:
(1) | the President, or a Vice President he may designate, will take all appropriate action to investigate any potential violations reported to him; |
(2) | if, after such investigation, the President or Vice President believes that no violation has occurred, no further action is required; |
(3) | any matter that the President or Vice President believes is a violation will be reported to the Audit Committee; |
(4) | if the Audit Committee concurs that a violation has occurred, it will inform the Board, which will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures, notification of appropriate personnel of the investment adviser or its board, or a recommendation to dismiss the Senior Officer. |
The Board will be responsible for granting waivers, as appropriate, such waiver also requiring a majority vote of the independent directors. However, any changes to or waivers of this Code will, to the extent required, be disclosed as provided by rules of the SEC.
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Consequences of Failure to Comply with this Code
In the event that a Senior Officer has not complied with any provision of this Code, the Audit Committee shall refer the matter to the Fund’s Board of Directors. The Board may impose appropriate sanctions including, among other things, censure and suspension or termination of such person’s officership.
Other Policies and Procedures
This Code shall be the sole code of ethics adopted by the Fund for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the Fund, the Fund’s Investment Adviser or other service providers govern or purport to govern the behavior or activities of the Senior Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. The Fund’s and its Investment Adviser’s codes of ethics under Rule 17J-1 under the Investment Company Act and the Investment Adviser’s other compliance and control policies and procedures are separate requirements applying to the Senior Officers and others, and are not part of this Code.
Acknowledgment
Upon the adoption of this Code and annually thereafter and upon the appointment of any individual to a position as a Senior Officer, he or she is required to sign the affirmation set forth on Exhibit A.
Annual Review and Amendments
This Code of Ethics shall be reviewed and approved by the Fund’s Board of Directors no less frequently than annually.
The Directors may at any time make such amendments as they deem necessary or appropriate to effectuate the purposes of this Code. Such amendments require a majority vote of the Board of Directors and a majority vote of the non-interested Directors.
Internal Use
This Code is intended solely for the internal use of the Fund and does not constitute an admission, by or on behalf of the Fund, as to any fact, circumstance, or legal conclusion.
Re-Adopted by the Board of Directors at its Meeting of April 17, 2013
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Exhibit A
Affirmation
I have read this Code of Ethics for Senior Officers. I further confirm that I am a Senior Officer as defined therein and have complied with the requirements of this Code.
Date: |
Name: |
Title: |
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Flaherty & Crumrine Preferred and Income Fund Incorporated N-CSR
Exhibit 99.CERT
Certification Pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act
I, R. Eric Chadwick, certify that:
1. | I have reviewed this report on Form N-CSR of Flaherty & Crumrine Preferred and Income Fund Incorporated; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. | The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: January 25, 2021 | /s/ R. Eric Chadwick |
R. Eric Chadwick, Chief Executive Officer and President | |
(principal executive officer) |
Certification Pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act
I, Bradford S. Stone, certify that:
1. | I have reviewed this report on Form N-CSR of Flaherty & Crumrine Preferred and Income Fund Incorporated; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. | The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: January 25, 2021 | /s/ Bradford S. Stone |
Bradford S. Stone, Chief Financial Officer, Treasurer and Vice President | |
(principal financial officer) |
Flaherty & Crumrine Preferred and Income Fund Incorporated N-CSR
Exhibit 99.906CERT
Certification Pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes-Oxley Act
I, R. Eric Chadwick, Chief Executive Officer and President of Flaherty & Crumrine Preferred and Income Fund Incorporated (the “Registrant”), certify that:
1. | The Form N-CSR of the Registrant (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
Date: January 25, 2021 | /s/ R. Eric Chadwick |
R. Eric Chadwick, Chief Executive Officer and President | |
(principal executive officer) |
I, Bradford S. Stone, Chief Financial Officer, Treasurer and Vice President of Flaherty & Crumrine Preferred and Income Fund Incorporated (the “Registrant”), certify that:
1. | The Form N-CSR of the Registrant (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
Date: January 25, 2021 | /s/ Bradford S. Stone |
Bradford S. Stone, Chief Financial Officer, Treasurer and Vice President | |
(principal financial officer) |