As filed with the Securities and Exchange Commission on March 18, 2022
Securities Act File No. 333-262366
Investment Company Act File No. 811-21349
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
N-2
Registration Statement
under
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the Securities Act of 1933 |
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Pre-Effective Amendment No. 1 |
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Post-Effective Amendment No. |
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and/or
Registration Statement
Under
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the Investment Company Act of 1940 |
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Amendment No. 9 |
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BlackRock Limited Duration Income Trust
(Exact Name of Registrant as Specified In Charter)
100 Bellevue Parkway
Wilmington, Delaware 19809
(Address of Principal Executive Offices)
Registrants Telephone Number, including Area Code: (800) 882-0052
John M. Perlowski, President
BlackRock Limited Duration Income Trust
55 East 52nd Street
New
York, New York 10055
(Name and Address of Agent For Service)
Copies of information to:
Margery K. Neale, Esq.
Elliot J. Gluck, Esq.
Willkie Farr & Gallagher LLP
787 Seventh Avenue
New
York, New York 10019
Approximate Date of Proposed Public Offering: As soon as practicable after the effective date of this Registration
Statement.
If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, check the following
box ☐
If any securities being registered on this Form will be offered on a delayed or continuous basis in reliance on Rule 415 under the
Securities Act of 1933 (Securities Act), other than securities offered in connection with a dividend reinvestment plan, check the following box ☒
If this Form is a registration statement pursuant to General Instruction A.2 or a post-effective amendment
thereto, check the following box ☒
If this Form is a registration statement pursuant to General Instruction B or a post-effective
amendment thereto that will become effective upon filing with the Commission pursuant to Rule 462(e) under the Securities Act, check the following box ☐
If this Form is a post-effective amendment to a registration statement filed pursuant to General Instruction B to register additional securities or additional
classes of securities pursuant to Rule 413(b) under the Securities Act, check the following box ☐
It is proposed that this filing will
become effective (check appropriate box):
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when declared effective pursuant to Section 8(c) of the Securities Act |
If appropriate, check the following box:
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This [post-effective] amendment designates a new effective date for a previously filed [post-effective amendment] [registration statement]. |
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This Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, and the Securities Act registration statement number of the earlier effective registration statement for the same
offering is: . |
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This Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, and the Securities Act registration statement number of the earlier effective registration statement for the same offering is:
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This Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, and the Securities Act registration statement number of the earlier effective registration statement for the same offering is:
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Check each box that appropriately characterizes the Registrant:
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Registered Closed-End Fund (closed-end company that is registered under the Investment Company Act of 1940 (the Investment Company
Act)). |
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Business Development Company (closed-end company that intends or has elected to be regulated as a business development company under the Investment Company Act). |
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Interval Fund (Registered Closed-End Fund or a Business Development Company that makes periodic repurchase offers under Rule 23c-3 under the Investment
Company Act). |
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A.2 Qualified (qualified to register securities pursuant to General Instruction A.2 of this Form). |
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Well-Known Seasoned Issuer (as defined by Rule 405 under the Securities Act). |
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Emerging Growth Company (as defined by Rule 12b-2 under the Securities and Exchange Act of 1934). |
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If an Emerging Growth Company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to
Section 7(a)(2)(B) of the Securities Act. |
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New Registrant (registered or regulated under the Investment Company Act for less than 12 calendar months preceding this filing). |
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO
DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
The information in this Preliminary Prospectus is not complete and may be changed.
BlackRock Limited Duration Income Trust may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Preliminary Prospectus is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED MARCH 18, 2022
PRELIMINARY BASE PROSPECTUS
10,000,000 Shares
BlackRock Limited Duration Income Trust
Common Shares of Beneficial Interest
Rights to Purchase Common Shares of Beneficial Interest
BlackRock Limited Duration Income Trust (the
Trust, we, us or our) is a diversified, closed-end management investment company. The Trusts investment objective is to provide current income and capital
appreciation. The Trusts portfolio normally has an average portfolio duration of less than five years (including the effect of anticipated leverage), although it may be longer from time to time depending on market conditions.
We may offer, from time to time, in one or more offerings, up to 10,000,000 of our common shares of beneficial interest, par value $0.001 per share
(common shares). We may also offer subscription rights to purchase our common shares. Common shares may be offered at prices and on terms to be set forth in one or more supplements to this Prospectus (each, a Prospectus
Supplement). You should read this Prospectus and the applicable Prospectus Supplement carefully before you invest in our common shares.
Our
common shares may be offered directly to one or more purchasers, including existing shareholders in a rights offering, through agents designated from time to time by us, or to or through underwriters or dealers. The Prospectus Supplement relating to
the offering will identify any agents or underwriters involved in the sale of our common shares, and will set forth any applicable purchase price, fee, commission or discount arrangement between us and our agents or underwriters, or among our
underwriters, or the basis upon which such amount may be calculated. The Prospectus Supplement relating to any offering of rights will set forth the number of common shares issuable upon the exercise of each right (or number of rights) and the other
terms of such rights offering. We may not sell any of our common shares through agents, underwriters or dealers without delivery of a Prospectus Supplement describing the method and terms of the particular offering of our common shares.
Our common shares are listed on the New York Stock Exchange (NYSE) under the symbol BLW. The last reported sale price of our common
shares, as reported by the NYSE on March 17, 2022 was $14.18 per common share. The net asset value of our common shares at the close of business on March 17, 2022 was $15.10 per common share. Rights issued by the Trust may also be listed
on a securities exchange.
Investing in the Trusts common shares involves certain risks, including risks of leverage, that are described in the
Risks section beginning on page 51 of this Prospectus and the Leverage section beginning on page 47 of this Prospectus.
Shares of closed-end management investment companies frequently trade at a discount to their net asset value. The
Trusts common shares have traded at a discount to net asset value, including during recent periods. If the Trusts common shares trade at a discount to its net asset value, the risk of loss may increase for purchasers in a public
offering.
Neither the Securities and Exchange Commission (SEC) nor any state securities commission has
approved or disapproved these securities or passed upon the adequacy of this Prospectus. Any representation to the contrary is a criminal offense.
This Prospectus, together with any Prospectus Supplement, sets forth concisely the information about the Trust that a prospective investor should know before
investing. You should read this Prospectus and applicable Prospectus Supplement, which contain important information, before deciding whether to invest in the common shares. You should retain the Prospectus and Prospectus Supplement for future
reference. A Statement of Additional Information (SAI), dated March [●], 2022, containing additional information about the Trust, has been filed with the SEC and, as amended from time to time, is incorporated by reference in its
entirety into this Prospectus. You may call (800) 882-0052, visit the Trusts website (http://www.blackrock.com) or write to the Trust to obtain, free of charge, copies of the SAI and the Trusts
semi-annual and annual reports, as well as to obtain other information about the Trust or to make shareholder inquiries. The SAI, as well as the Trusts semi-annual and annual reports, are also available for free on the SECs website
(http://www.sec.gov). You may also e-mail requests for these documents to publicinfo@sec.gov. Information contained in, or that can be accessed through, the Trusts website is not part of this Prospectus.
You should not construe the contents of this Prospectus as legal, tax or financial advice. You should consult with your own professional advisors as
to the legal, tax, financial or other matters relevant to the suitability of an investment in the Trust.
The Trusts common shares do not
represent a deposit or an obligation of, and are not guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other
government agency.
Prospectus dated March [●], 2022
TABLE OF CONTENTS
You should rely only on the information contained in, or incorporated by reference into, this Prospectus and any related
Prospectus Supplement in making your investment decisions. The Trust has not authorized any person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. The Trust is
not making an offer to sell the common shares in any jurisdiction where the offer or sale is not permitted. You should assume that the information in this Prospectus and any Prospectus Supplement is accurate only as of the dates on their covers. The
Trusts business, financial condition and prospects may have changed since the date of its description in this Prospectus or the date of its description in any Prospectus Supplement.
PROSPECTUS SUMMARY
This is only a summary of certain information relating to BlackRock Limited Duration Income Trust. This summary may not contain all of the information that
you should consider before investing in our common shares. You should consider the more detailed information contained in the Prospectus and in any related Prospectus Supplement and in the Statement of Additional Information (SAI) before
purchasing common shares.
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The Trust |
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BlackRock Limited Duration Income Trust is a diversified, closed-end management investment company. Throughout this Prospectus, we refer to BlackRock Limited Duration Income Trust simply as
the Trust or as we, us or our. See The Trust. |
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The Trusts common shares are listed for trading on the New York Stock Exchange (NYSE) under the symbol BLW. As of February 28, 2022, the net assets of the Trust were $559,855,464,
the total assets of the Trust were $890,027,347 and the Trust had outstanding 35,711,253 common shares. The last reported sale price of the Trusts common shares, as reported by the NYSE on
March 17, 2022 was $14.18 per common share. The net asset value (NAV) of the Trusts common shares at the close of business on March 17, 2022 was $15.10 per common
share. See Description of Shares. Rights issued by the Trust may also be listed on a securities exchange. |
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The Offering |
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We may offer, from time to time, in one or more offerings, up to 10,000,000 of our common shares on terms to be determined at the time of the offering. We may also offer subscription rights to purchase our common shares.
The common shares may be offered at prices and on terms to be set forth in one or more Prospectus Supplements. You should read this Prospectus and the applicable Prospectus Supplement carefully before you invest in our common shares.
Our common shares may be offered directly to one or more purchasers, through agents designated from time to time by us, or to or through underwriters or dealers. The offering price per common share will not be less than the NAV per common
share at the time we make the offering, exclusive of any underwriting commissions or discounts, provided that rights offerings that meet certain conditions may be offered at a price below the then current NAV. See Rights
Offerings. The Prospectus Supplement relating to the offering will identify any agents, underwriters or dealers involved in the sale of our common shares, and will set forth any applicable purchase price, fee, commission or discount
arrangement between us and our agents or underwriters, or among our underwriters, or the basis upon which such amount may be calculated. See Plan of Distribution. The Prospectus Supplement relating to any offering of rights will
set forth the number of common shares issuable upon the exercise of each right (or number of rights) and the other terms of such rights offering. We may not sell any of our common shares through agents, underwriters or dealers without
delivery of a Prospectus Supplement describing the method and terms of the particular offering of our common shares. |
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Use of Proceeds |
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The net proceeds from the issuance of common shares hereunder will be invested in accordance with our investment objective and policies as appropriate investment opportunities are identified, which is expected to be substantially
completed in approximately three months from the date on which the proceeds from an offering are received by the Trust; however, the identification of appropriate investment opportunities pursuant to the Trusts investment style or changes in
market conditions could result in the Trusts |
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anticipated investment period extending to as long as six months. See Use of Proceeds. |
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Investment Objective and Policies |
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Please refer to the section of the Trusts most recent annual report on Form N-CSR entitled Trust
Investment Objectives, Policies and RisksInvestment Objectives and PoliciesBlackRock Limited Duration Income Trust (BLW), which is incorporated by reference herein, for a discussion of the Trusts investment objective and
policies. |
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Leverage |
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The Trust currently utilizes leverage for investment purposes in the form of reverse repurchase agreements. As of February 28, 2022, this leverage represented approximately 37.1% of the Trusts Managed Assets (approximately
58.97% of the Trusts net assets). Managed Assets means the total assets of the Trust (including any assets attributable to money borrowed for investment purposes) minus the sum of the Trusts accrued liabilities (other than
money borrowed for investment purposes). The Trust may borrow from banks and other financial institutions and may also borrow additional funds using such investment techniques as the Advisors (as defined below) may from time to time determine.
Of these investment techniques, the Trust expects primarily to use reverse repurchase agreements and dollar rolls. The Trust has the ability to utilize leverage through borrowings in an amount up to 33 1/3% of the value of its Managed Assets (which
includes the amount obtained from such borrowings). |
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The Trust also has the ability to utilize leverage through the issuance of preferred shares in an amount up to 50% of the value of its Managed Assets (which includes the amount obtained from such issuance). The Trust does not
currently anticipate issuing any preferred shares; thus, the Trust will limit its borrowing to 33 1/3% of the Trusts Managed Assets. If preferred shares are issued, however, the Trusts borrowing limit will be proportionately reduced so
that the Trusts aggregate leverage will not exceed 33 1/3% of the Trusts Managed Assets. See Leverage. |
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The use of leverage is subject to numerous risks. When leverage is employed, the NAV and market price of the common shares and the yield to holders of common shares will be more volatile than if leverage were not used. For example,
a rise in short-term interest rates, which currently are near historically low levels, will cause the Trusts NAV to decline more than if the Trust had not used leverage. A reduction in the Trusts NAV may cause a reduction in the market
price of its common shares. The Trust cannot assure you that the use of leverage will result in a higher yield on the common shares. When the Trust uses leverage, the management fee payable to the Advisor will be higher than if the Trust did not use
leverage because these fees are calculated on the basis of the Trusts Managed Assets, which include the proceeds of leverage. The Trusts leveraging strategy may not be successful. |
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See Leverage. |
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Investment Advisor and Sub-Advisors |
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BlackRock Advisors, LLC (the Advisor) is the Trusts investment adviser. The Advisor receives an annual fee, payable monthly, in an amount equal to 0.55% of the average weekly value of the Trusts Managed
Assets. BlackRock International Limited (BIL) and BlackRock (Singapore) Limited (BSL and together with BIL, the Sub-Advisors and collectively with the Advisor, the
Advisors) serve as the Trusts sub-advisors. The Advisor, and not the Trust, pays an annual sub-advisory fee to the
Sub- |
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Advisors. For that portion of the Trust for which each Sub-Advisor acts as sub-advisor, the Advisor will pay to such
Sub-Advisor, an annual sub-advisory fee equal to a percentage of the management fee received by the Advisor from the Trust with respect to the average daily value of the
Managed Assets of the Trust allocated to such Sub-Advisor. See Management of the TrustInvestment Advisor and Sub-Advisors. |
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Distributions |
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The Trust intends to make regular monthly cash distributions of all or a portion of its net investment income to holders of the Trusts
common shares. The Trust has, pursuant to an SEC exemptive order granted to
certain of BlackRocks closed-end funds, adopted a plan to support a level distribution of income, capital gains and/or return of capital (the Managed Distribution Plan). The Managed
Distribution Plan has been approved by the Board and is consistent with the Trusts investment objectives and policies. Under the Managed Distribution Plan, the Trust will distribute all available investment income, including current gains, to
its shareholders, consistent with its investment objectives and as required by the Internal Revenue Code of 1986, as amended (the Code). If sufficient investment income, including current gains, is not available on a monthly basis, the
Trust will distribute long-term capital gains and/or return of capital to shareholders in order to maintain a level distribution. The Trust may be required to sell portfolio investments in order to make such distributions.
A return of capital distribution may involve a return of the shareholders
original investment. Though not currently taxable, such a distribution may lower a shareholders basis in the Trust, thus potentially subjecting the shareholder to future tax consequences in connection with the sale of Trust shares, even if
sold at a loss to the shareholders original investment. All or a significant portion of the Trusts distributions to shareholders during the Trusts first year of operations may consist of return of capital. Each monthly distribution
to shareholders is expected to be at a fixed amount established by the Board, except for extraordinary distributions and potential distribution rate increases or decreases to enable the Trust to comply with the distribution requirements imposed
by the Code. Shareholders should not draw any conclusions about the Trusts investment performance from the amount of these distributions or from the terms of the Managed Distribution Plan.
Various factors will affect the level of the Trusts income, including the asset
mix and the Trusts use of options and hedging. To permit the Trust to maintain a more stable monthly distribution, the Trust may from time to time distribute less than the entire amount of income earned in a particular period. The
undistributed income would be available to supplement future distributions. As a result, the distributions paid by the Trust for any particular monthly period may be more or less than the amount of income actually earned by the Trust during that
period. Undistributed income will add to the Trusts NAV (and indirectly benefits the Advisor by increasing its fee) and, correspondingly, distributions from undistributed income will reduce the Trusts NAV. The Trust intends to distribute
any long-term capital gains not distributed under the Managed Distribution Plan annually.
Shareholders will automatically have all dividends and distributions reinvested in common shares of the Trust in accordance with the Trusts dividend
reinvestment plan, unless an election is made to receive cash by |
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contacting the Reinvestment Plan Agent (as defined herein), at (800) 699-1236. See
Dividend Reinvestment Plan. Under normal market conditions, the
Advisors seek to manage the Trust in a manner such that the Trusts distributions are reflective of the Trusts current and projected income and gains. The distribution level of the Trust is subject to change based upon a number of
factors, including the current and projected level of the Trusts income and gains, and may fluctuate over time.
The Trust reserves the right to change its distribution policy and the basis for establishing the rate of its monthly distributions at any time and may do so
without prior notice to common shareholders. See Distributions. |
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Listing |
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The Trusts common shares are listed on the NYSE under the symbol BLW. See Description of SharesCommon Shares. |
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Custodian and Transfer Agent |
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State Street Bank and Trust Company serves as the Trusts custodian, and Computershare Trust Company, N.A. serves as the Trusts transfer agent. |
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Administrator |
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State Street Bank and Trust Company serves as the Trusts administrator and fund accountant. |
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Market Price of Shares |
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Common shares of closed-end investment companies frequently trade at prices lower than their NAV. The Trust cannot assure you that its common shares will trade at a price higher than or equal
to NAV. See Use of Proceeds. The Trusts common shares trade in the open market at market prices that are a function of several factors, including dividend levels (which are in turn affected by expenses), NAV, call protection for
portfolio securities, portfolio credit quality, liquidity, dividend stability, relative demand for and supply of the common shares in the market, general market and economic conditions and other factors. See Leverage, Risks,
Description of Shares and Repurchase of Common Shares. The common shares are designed primarily for long-term investors and you should not purchase common shares of the Trust if you intend to sell them shortly after
purchase. |
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Special Risk Considerations |
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An investment in common shares of the Trust involves risk. Please refer to the section of the Trusts most recent annual report on Form
N-CSR entitled Trust Investment Objectives, Policies and RisksRisk Factors, which is incorporated by reference herein, for a discussion of the risks of investing in the Trust. You should
carefully consider those risks, which are described in more detail under Risks beginning on page 52 of this Prospectus, along with additional risks relating to investments in the Trust. |
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SUMMARY OF TRUST EXPENSES
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Shareholder Transaction Expenses |
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Sales load paid by you (as a percentage of offering price)(1) |
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1.00% |
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Offering expenses borne by the Trust (as a percentage of offering price)(1) |
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0.02% |
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Dividend reinvestment plan fees |
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$0.02(2) per share for open-market purchases of
common shares(2) |
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Dividend reinvestment plan sale transaction fee |
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$2.50(2) |
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Estimated Annual Expenses (as a percentage of net assets attributable to common
shares) |
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Management Fees(3)(4) |
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0.82% |
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Other Expenses(5) |
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0.36% |
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Miscellaneous Other Expenses |
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0.10% |
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Interest Expense(6) |
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0.26% |
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Total Annual Trust Operating Expenses |
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1.18% |
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Fee Waivers and/or Expense Reimbursements(4) |
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Total Annual Trust Operating Expenses after Fee Waivers and/or Expense Reimbursements(4) |
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1.18% |
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(1) |
If the common shares are sold to or through underwriters, the Prospectus Supplement will set forth any
applicable sales load and the estimated offering expenses. Trust shareholders will pay all offering expenses involved with an offering. |
(2) |
The Reinvestment Plan Agents (as defined below under Dividend Reinvestment Plan) fees for the
handling of the reinvestment of dividends will be paid by the Trust. However, you will pay a $0.02 per share fee incurred in connection with open-market purchases, which will be deducted from the value of the dividend. You will also be charged a
$2.50 sales fee and pay a $0.15 per share fee if you direct the Reinvestment Plan Agent to sell your common shares held in a dividend reinvestment account. Per share fees include any applicable brokerage commissions the Reinvestment Plan Agent is
required to pay. |
(3) |
The Trust currently pays the Advisor a monthly fee at an annual contractual investment management fee rate of
0.55% of the average weekly value of the Trusts Managed Assets, plus the proceeds of ay debt securities or outstanding borrowings used for leverage. |
(4) |
The Trust and the Advisor have entered into a fee waiver agreement (the Fee Waiver Agreement),
pursuant to which the Advisor has contractually agreed to waive the management fee with respect to any portion of the Trusts assets attributable to investments in any equity and fixed-income mutual funds and exchange-traded funds
(ETFs) managed by the Advisor or its affiliates that have a contractual management fee, through June 30, 2023. In addition, pursuant to the Fee Waiver Agreement, the Advisor has contractually agreed to waive its management fees by
the amount of investment advisory fees the Trust pays to the Advisor indirectly through its investment in money market funds managed by the Advisor or its affiliates, through June 30, 2023. The Fee Waiver Agreement may be terminated at any
time, without the payment of any penalty, only by the Trust (upon the vote of a majority of the Trustees who are not interested persons (as defined in the Investment Company Act of 1940, as amended (the Investment Company
Act), of the Trust (the Independent Trustees)) or a majority of the outstanding voting securities of the Trust), upon 90 days written notice by the Trust to the Advisor. |
(5) |
Actual amount based on fiscal year ended December 31, 2021. |
(6) |
Assumes the use of leverage in the form of reverse repurchase agreements representing 33.3% of Managed Assets at
an annual interest expense to the Trust of 0.51%, which is based on current market conditions. The actual amount of interest expense borne by the Trust will vary over time in accordance with the level of the Trusts use of reverse repurchase
agreements and variations in market interest rates. Interest expense is required to be treated as an expense of the Trust for accounting purposes. |
The following example illustrates the expenses (including the sales load of $10.00 and offering costs of $0.22) that you would pay on a $1,000 investment in
common shares, assuming (i) total net annual expenses of 1.18% of net assets attributable to common shares, and (ii) a 5% annual return:
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One Year |
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Three Years |
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Five Years |
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Ten Years |
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Total expenses incurred |
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22 |
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$ |
47 |
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$ |
74 |
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$ |
152 |
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The example should not be considered a representation of future expenses. The example assumes that the
Other Expenses set forth in the Estimated Annual Expenses table are accurate and that all dividends and distributions are reinvested at NAV. Actual expenses may be greater or less than those assumed. Moreover, the Trusts actual
rate of return may be greater or less than the hypothetical 5% return shown in the example.
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FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Trusts financial performance for the periods presented. Certain information
reflects financial results for a single common share of the Trust. The information for the fiscal year ended December 31, 2021, 2020, the fiscal period from September 1, 2019 to December 31, 2019 and the fiscal years ended
August 31, 2019, 2018 and 2017 has been audited by Deloitte & Touche LLP, independent registered public accounting firm for the Trust. The report of Deloitte & Touche LLP is included in the
Trusts December 31, 2021 annual report, is incorporated by reference into the Prospectus and SAI.
(For a share outstanding throughout each period)
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Year Ended December 31, |
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Period from 09/01/19 to 12/31/19 |
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Year Ended August 31, |
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2021 |
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2020 |
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2019 |
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2018 |
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2017 |
Net asset value, beginning of year |
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16.93 |
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$ |
17.05 |
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$ |
17.03 |
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$ |
16.71 |
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$ |
17.02 |
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$ |
16.84 |
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Net investment income(a) |
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1.00 |
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0.98 |
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0.31 |
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0.94 |
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0.95 |
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1.01 |
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Net realized and unrealized gain (loss) |
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|
(0.31) |
|
|
|
|
0.08 |
|
|
|
|
0.18 |
|
|
|
|
0.33 |
|
|
|
|
(0.31) |
|
|
|
|
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) from investment operations |
|
|
|
0.69 |
|
|
|
|
1.06 |
|
|
|
|
0.49 |
|
|
|
|
1.27 |
|
|
|
|
0.64 |
|
|
|
|
1.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From net investment income |
|
|
|
(1.02) |
|
|
|
|
(1.03) |
|
|
|
|
(0.47) |
|
|
|
|
(0.95) |
|
|
|
|
(0.95) |
|
|
|
|
(1.27) |
|
Return of capital |
|
|
|
(0.16) |
|
|
|
|
(0.15) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Distributions |
|
|
|
(1.18) |
|
|
|
|
(1.18) |
|
|
|
|
(0.47) |
|
|
|
|
(0.95) |
|
|
|
|
(0.95) |
|
|
|
|
(1.27) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of year |
|
|
$ |
16.44 |
|
|
|
$ |
16.93 |
|
|
|
$ |
17.05 |
|
|
|
$ |
17.03 |
|
|
|
$ |
16.71 |
|
|
|
$ |
17.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price, end of year |
|
|
$ |
16.85 |
|
|
|
$ |
15.92 |
|
|
|
$ |
16.39 |
|
|
|
$ |
15.44 |
|
|
|
$ |
15.06 |
|
|
|
$ |
15.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net asset value |
|
|
|
4.18%(d) |
|
|
|
|
7.58% |
|
|
|
|
3.11%(e) |
|
|
|
|
8.77% |
|
|
|
|
4.42% |
|
|
|
|
9.62% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on market price |
|
|
|
13.55% |
|
|
|
|
5.24% |
|
|
|
|
9.32%(e) |
|
|
|
|
9.41% |
|
|
|
|
0.18% |
|
|
|
|
10.18% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net Assets Applicable to Common Shareholders(f) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
|
1.18% |
|
|
|
|
1.39% |
|
|
|
|
1.64%(g)(h) |
|
|
|
|
1.81% |
|
|
|
|
1.73% |
|
|
|
|
1.45% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and/or reimbursed |
|
|
|
1.18% |
|
|
|
|
1.39% |
|
|
|
|
1.64%(g)(h) |
|
|
|
|
1.81% |
|
|
|
|
1.73% |
|
|
|
|
1.45% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and/or reimbursed and excluding interest expense, fees |
|
|
|
0.92% |
|
|
|
|
0.90% |
|
|
|
|
0.89%(g) |
|
|
|
|
0.84% |
|
|
|
|
0.89% |
|
|
|
|
0.89% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income to Common Shareholders |
|
|
|
5.90% |
|
|
|
|
6.07% |
|
|
|
|
5.32%(g) |
|
|
|
|
5.69% |
|
|
|
|
5.60% |
|
|
|
|
6.00% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 7 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Period from 09/01/19 to 12/31/19 |
|
Year Ended August 31, |
|
|
2021 |
|
2020 |
|
2019 |
|
2018 |
|
2017 |
Supplemental Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets applicable to Common Shareholders, end of period (000) |
|
|
$ |
587,146 |
|
|
|
$ |
603,933 |
|
|
|
$ |
611,068 |
|
|
|
$ |
610,251 |
|
|
|
$ |
612,048 |
|
|
|
$ |
629,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings outstanding, end of period (000) |
|
|
$ |
312,356 |
|
|
|
$ |
275,105 |
|
|
|
$ |
213,399 |
|
|
|
$ |
202,539 |
|
|
|
$ |
234,622 |
|
|
|
$ |
252,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate(i) |
|
|
|
66% |
|
|
|
|
65% |
|
|
|
|
14% |
|
|
|
|
50% |
|
|
|
|
50% |
|
|
|
|
55% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Based on average shares outstanding. |
(b) |
Distributions for annual periods determined in accordance with U.S. federal income tax regulations.
|
(c) |
Total returns based on market price, which can be significantly greater or less than the net asset value, may
result in substantially different returns. Where applicable, excludes the effects of any sales charges and assumes the reinvestment of distributions at actual reinvestment prices. |
(d) |
Includes payment from an affiliate, which had no impact on the Trusts total return. |
(e) |
Aggregate total return. |
(f) |
Excludes fees and expenses incurred indirectly as a result of investments in underlying funds.
|
(h) |
Audit costs were not annualized in the calculation of the expense ratios. If these expenses were annualized, the
total expenses and total expenses after fees waived and/or reimbursed would have been 1.66%. |
(i) |
Includes mortgage dollar roll transactions (MDRs). Additional information regarding portfolio
turnover rate is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Period from 09/01/19 to 12/31/19 |
|
Year Ended August 31, |
|
|
2021 |
|
2020 |
|
2019 |
|
2018 |
|
2017 |
|
|
|
|
|
|
|
Portfolio turnover rate (excluding MDRs) |
|
52% |
|
58% |
|
14% |
|
50% |
|
50% |
|
55% |
|
|
|
|
|
|
|
|
|
|
|
|
|
- 8 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31, |
|
|
|
2016 |
|
|
20151 |
|
|
20141 |
|
|
20131 |
|
|
20121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Operating
Performance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of year |
|
$ |
17.04 |
|
|
$ |
18.09 |
|
|
$ |
17.54 |
|
|
$ |
17.38 |
|
|
$ |
16.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income2 |
|
|
1.32 |
|
|
|
1.16 |
|
|
|
1.26 |
|
|
|
1.30 |
|
|
|
1.31 |
|
Net realized and unrealized gain (loss) |
|
|
(0.22) |
|
|
|
(0.92) |
|
|
|
0.51 |
|
|
|
0.25 |
|
|
|
0.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase from investment operations |
|
|
1.10 |
|
|
|
0.24 |
|
|
|
1.77 |
|
|
|
1.55 |
|
|
|
2.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to Common Shareholders from net investment income3 |
|
|
(1.30) |
|
|
|
(1.29) |
|
|
|
(1.22) |
|
|
|
(1.39) |
|
|
|
(1.33) |
|
|
|
|
|
|
|
Net asset value, end of year |
|
$ |
16.84 |
|
|
$ |
17.04 |
4 |
|
$ |
18.09 |
|
|
$ |
17.54 |
|
|
$ |
17.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price, end of year |
|
$ |
15.74 |
|
|
$ |
14.60 |
|
|
$ |
16.81 |
|
|
$ |
16.89 |
|
|
$ |
18.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net asset value |
|
|
7.74% |
|
|
|
2.23% |
4 |
|
|
10.77% |
|
|
|
9.13% |
|
|
|
13.86% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on market price |
|
|
17.59% |
|
|
|
(5.74)% |
|
|
|
6.89% |
|
|
|
1.47% |
|
|
|
21.68% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
1.21% |
|
|
|
1.15% |
|
|
|
1.14% |
|
|
|
1.12% |
|
|
|
1.05% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and paid indirectly |
|
|
1.21% |
|
|
|
1.15% |
|
|
|
1.14% |
|
|
|
1.12% |
|
|
|
1.05% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and paid indirectly and excluding interest expense |
|
|
0.89% |
|
|
|
0.92% |
|
|
|
0.92% |
|
|
|
0.90% |
|
|
|
0.89% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
8.04% |
|
|
|
6.65% |
|
|
|
7.00% |
|
|
|
7.34% |
|
|
|
7.82% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets applicable to Common Shareholders, end of year (000) |
|
$ |
623,219 |
|
|
$ |
630,388 |
|
|
$ |
669,382 |
|
|
$ |
649,120 |
|
|
$ |
642,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings outstanding, end of year (000) |
|
$ |
263,445 |
|
|
$ |
264,036 |
|
|
$ |
293,890 |
|
|
$ |
273,347 |
|
|
$ |
296,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate |
|
|
54% |
|
|
|
47% |
|
|
|
57% |
|
|
|
71% |
|
|
|
54% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
Consolidated Financial Highlights. |
2 |
Based on average shares outstanding. |
3 |
Distributions for annual periods determined in accordance with federal income tax regulations.
|
4 |
For financial reporting purposes, the market value of certain investments were adjusted as of report date.
Accordingly, the net asset value (NAV) per share and total return performance presented herein are different than the information previously published on August 31, 2015. |
- 9 -
5 |
Total returns based on market price, which can be significantly greater or less than the net asset value, may
result in substantially different returns. Where applicable, excludes the effects of any sales charges and assumes the reinvestment of distributions. |
USE OF PROCEEDS
The net proceeds from the issuance of common shares hereunder will be invested in accordance with the Trusts investment objective and policies as stated
below. We currently anticipate that we will be able to invest all of the net proceeds in accordance with our investment objective and policies within approximately three months from the date on which the proceeds from an offering are received by the
Trust. Pending such investment, it is anticipated that the proceeds will be invested in short-term, tax-exempt or taxable investment grade securities or in high quality, short-term money market instruments.
THE TRUST
The Trust is a diversified, closed-end management investment company registered under the Investment Company Act. The
Trust was formed as a Delaware statutory trust on May 16, 2003, pursuant to an Agreement and Declaration of Trust, as subsequently amended and restated, governed by the laws of the State of Delaware and the Certificate of Trust filed with the
Secretary of State of the State of Delaware. The Trusts principal office is located at 100 Bellevue Parkway, Wilmington, Delaware 19809, and its telephone number is (800) 882-0052.
The Trust commenced operations on July 30, 2003, upon the initiation of an initial public offering of 34,300,000 of its common shares. The proceeds of
such offering were approximately $653.758 million after the payment of organizational and offering expenses. The Trusts common shares are traded on the NYSE under the symbol BLW.
DESCRIPTION OF SHARES
Common Shares
The Trust is a statutory trust formed
under the laws of Delaware and governed by an Amended and Restated Agreement and Declaration of Trust dated as of June 10, 2003 (the Agreement and Declaration of Trust). The Trust is authorized to issue an unlimited number of
common shares of beneficial interest, par value $0.001 per share. Each common share has one vote and, when issued and paid for in accordance with the terms of this offering, will be fully paid and, under the Delaware Statutory Trust Act, the
purchasers of the common shares will have no obligation to make further payments for the purchase of the common shares or contributions to the Trust solely by reason of their ownership of the common shares, except that the Trustees shall have the
power to cause shareholders to pay certain expenses of the Trust by setting off charges due from shareholders from declared but unpaid dividends or distributions owed the shareholders and/or by reducing the number of common shares owned by each
respective shareholder. When preferred shares are outstanding, the holders of common shares will not be entitled to receive any distributions from the Trust unless all accrued dividends on preferred shares have been paid, unless asset coverage (as
defined in the Investment Company Act) with respect to preferred shares would be at least 200% after giving effect to the distributions and unless certain other requirements imposed by any rating agencies rating the preferred shares have been met.
See Description of SharesPreferred Shares in the SAI. All common shares are equal as to dividends, assets and voting privileges and have no conversion, preemptive or other subscription rights. The Trust will send annual and
semi-annual reports, including financial statements, to all holders of its shares.
Unlike open-end funds, closed-end funds like the Trust do not continuously offer shares and do not provide daily redemptions. Rather, if a shareholder determines to buy additional common shares or sell shares already held, the shareholder
may do so by trading through a broker on the NYSE or otherwise. Shares of closed-end investment companies frequently trade on an exchange at prices lower than NAV. Shares of
closed-end investment companies like the Trust have during some periods traded at prices higher than NAV and during other periods have traded at prices lower than NAV. Because the market value of the common
shares may be influenced by such factors as
- 10 -
dividend levels (which are in turn affected by expenses), call protection on its portfolio securities, dividend stability, portfolio credit quality, the Trusts NAV, relative demand for and
supply of such shares in the market, general market and economic conditions and other factors beyond the control of the Trust, the Trust cannot assure you that its common shares will trade at a price equal to or higher than NAV in the future. The
common shares are designed primarily for long-term investors and you should not purchase the common shares if you intend to sell them soon after purchase. See Repurchase of Common Shares below and Repurchase of Common Shares
in the SAI.
The Trusts outstanding common shares are, and when issued, the common shares offered by this Prospectus will be, publicly held and
listed and traded on the NYSE under the symbol BLW. The Trust determines its NAV on a daily basis. The following table sets forth, for the quarters indicated, the highest and lowest daily closing prices on the NYSE per common share, and
the NAV per common share and the premium to or discount from NAV, on the date of each of the high and low market prices. The table also sets forth the number of common shares traded on the NYSE during the respective quarters.
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NYSE Market Price Per Common Share |
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NAV per Common Share on Date of Market Price |
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Premium/ (Discount) on Date of Market Price |
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Trading Volume |
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During Quarter Ended |
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High |
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Low |
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High |
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Low |
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High |
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Low |
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December 31, 2021 |
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$17.33 |
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$ |
16.38 |
|
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$ |
16.67 |
|
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$ |
16.41 |
|
|
|
3.96 |
% |
|
|
(0.18 |
)% |
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3,883,694 |
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September 30, 2021 |
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$17.58 |
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$ |
13.09 |
|
|
$ |
16.97 |
|
|
$ |
16.96 |
|
|
|
3.59 |
% |
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(22.83 |
)% |
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4,757,160 |
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June 30, 2021 |
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$17.24 |
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$ |
16.55 |
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$ |
17.10 |
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$ |
17.00 |
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0.82 |
% |
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(2.65 |
)% |
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5,334,238 |
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March 31, 2021 |
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$16.75 |
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$ |
14.83 |
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$ |
17.04 |
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$ |
16.32 |
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(1.70 |
)% |
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(9.13 |
)% |
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6,372,773 |
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December 31, 2020 |
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$15.95 |
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$ |
14.24 |
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$ |
16.91 |
|
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$ |
16.25 |
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|
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(5.68 |
)% |
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(12.37 |
)% |
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6,666,041 |
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September 30, 2020 |
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$15.30 |
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$ |
13.96 |
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$ |
16.33 |
|
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$ |
15.70 |
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|
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(6.31 |
)% |
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(11.08 |
)% |
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7,487,377 |
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June 30, 2020 |
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$14.61 |
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$ |
11.89 |
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$ |
16.14 |
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$ |
13.90 |
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(9.48 |
)% |
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(14.46 |
)% |
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9,864,955 |
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March 31, 2020 |
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$16.67 |
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$ |
9.56 |
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$ |
17.15 |
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$ |
12.19 |
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|
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(2.80 |
)% |
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(21.58 |
)% |
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16,027,710 |
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As of March 17, 2022, the NAV per common share of the Trust was $15.10 and the market price per common share was
$14.18, representing a discount to NAV of 6.09%. Common shares of the Trust have historically traded at both a premium and discount to NAV.
As of
February 28, 2022, the Trust has outstanding 35,711,253 common shares.
Preferred Shares
The Agreement and Declaration of Trust provides that the Board may authorize and issue preferred shares, with rights as determined by the Board, by action of
the Board without the approval of the holders of the common shares. Holders of common shares have no preemptive right to purchase any preferred shares that might be issued. The Trust does not currently intend to issue preferred shares. Under the
Investment Company Act, the Trust is not permitted to issue preferred shares unless immediately after such issuance the value of the Trusts total assets is at least 200% of the liquidation value of the outstanding preferred shares
(i.e., the liquidation value may not exceed 50% of the Trusts total assets). In addition, the Trust is not permitted to declare any cash dividend or other distribution on its common shares unless, at the time of such declaration, the
value of the Trusts total assets is at least 200% of such liquidation value. If the Trust issues preferred shares, it may be subject to restrictions imposed by the guidelines of one or more rating agencies that may issue ratings for preferred
shares issued by the Trust. These guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed on the Trust by the Investment Company Act. It is not anticipated that these covenants or
guidelines would impede the Advisors from managing the Trusts portfolio in accordance with the Trusts investment objective and policies. Please see Description of Shares in the SAI for more information.
- 11 -
Authorized Shares
The following table provides the Trusts authorized shares and common and preferred shares outstanding as of February 28,
2022.
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Title of Class |
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Amount Authorized |
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Amount Held by Trust or for its Account |
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Amount Outstanding Exclusive of Amount held by Trust |
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Common Shares |
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Unlimited |
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0 |
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35,711,253 |
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THE TRUSTS INVESTMENTS
Investment Objective and Policies
Please refer to the section
of the Trusts most recent annual report on Form N-CSR entitled Trust Investment Objectives, Policies and RisksInvestment Objectives and PoliciesBlackRock Limited Duration Income Trust
(BLW), which is incorporated by reference herein, for a discussion of the Trusts investment objective and policies.
Investment Process
In selecting securities for the Trust, the Advisors will seek to identify issuers and industries that the Advisors believe are likely to experience
stable or improving financial conditions. The Advisors analysis will include:
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credit research on the issuers financial strength; |
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assessment of the issuers ability to meet principal and interest payments; |
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general industry trends; |
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the issuers managerial strength; |
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changing financial conditions; |
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borrowing requirements or debt maturity schedules; and |
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the issuers responsiveness to changes in business conditions and interest rates. |
The Advisors will consider relative values among issuers based on anticipated cash flow, interest or dividend coverage, asset coverage and earnings prospects.
Using these tools, the Advisors will seek to add consistent value and control performance volatility consistent with the Trusts investment objective and policies. The Advisors believe this strategy should enhance the Trusts ability to
achieve its investment objective. In managing the assets of the Trust, the Advisors will utilize an active management approach that stresses the flexibility to reallocate investments as appropriate. The Advisors will diversify the Trusts
portfolio of assets in an effort to minimize exposure to individual securities, issuers and industries.
The Advisors analysis continues on an
ongoing basis for any securities in which the Trust has invested. Although the Advisors use due care in making such analysis, there can be no assurance that such analysis will reveal factors that may impair the value of such
securities.
Portfolio Contents and Techniques
The Trust may invest in the following instruments and use the following investment techniques, subject to any limitations set forth herein. There is no
guarantee the Trust will buy all of the types of securities or use all of the investment techniques that are described herein.
Corporate
Bonds. Corporate bonds are debt obligations issued by corporations. Corporate bonds may be either secured or unsecured. Collateral used for secured debt includes real property, machinery, equipment, accounts receivable, stocks, bonds or
notes. If a bond is unsecured, it is known as a debenture. Bondholders, as creditors, have
- 12 -
a prior legal claim over common and preferred stockholders as to both income and assets of the corporation for the principal and interest due them and may have a prior claim over other creditors
if liens or mortgages are involved. Interest on corporate bonds may be fixed or floating, or the bonds may be zero coupons. Interest on corporate bonds is typically paid semi-annually and is fully taxable to the bondholder. Corporate bonds contain
elements of both interest rate risk and credit risk. The market value of a corporate bond generally may be expected to rise and fall inversely with interest rates and may also be affected by the credit rating of the corporation, the
corporations performance and perceptions of the corporation in the marketplace. Corporate bonds usually yield more than government or agency bonds due to the presence of credit risk.
High Yield Securities (Junk Bonds). The Trust may invest in securities rated, at the time of investment, below investment grade quality
such as those rated Ba or below by Moodys Investors Service, Inc. (Moodys) or BB or below by S&P Global Ratings (S&P) , or securities comparably rated by other rating agencies or in
unrated securities determined by the Advisors to be of comparable quality. Such securities, sometimes referred to as high yield or junk bonds, are predominantly speculative with respect to the capacity to pay interest and
repay principal in accordance with the terms of the security and generally involve greater price volatility than securities in higher rating categories. Often the protection of interest and principal payments with respect to such securities may
be very moderate and issuers of such securities face major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments.
Lower grade securities, though high yielding, are characterized by high risk. They may be subject to certain risks with respect to the issuing entity and to
greater market fluctuations than certain lower yielding, higher rated securities. The secondary market for lower grade securities may be less liquid than that of higher rated securities. Adverse conditions could make it difficult at times for the
Trust to sell certain securities or could result in lower prices than those used in calculating the Trusts NAV.
The prices of fixed income
securities generally are inversely related to interest rate changes; however, the price volatility caused by fluctuating interest rates of securities also is inversely related to the coupons of such securities. Accordingly, below investment grade
securities may be relatively less sensitive to interest rate changes than higher quality securities of comparable maturity because of their higher coupon. The investor receives this higher coupon in return for bearing greater credit risk. The higher
credit risk associated with below investment grade securities potentially can have a greater effect on the value of such securities than may be the case with higher quality issues of comparable maturity.
Lower grade securities may be particularly susceptible to economic downturns. It is likely that an economic recession could severely disrupt the market for
such securities and may have an adverse impact on the value of such securities. In addition, it is likely that any such economic downturn could adversely affect the ability of the issuers of such securities to repay principal and pay interest
thereon and increase the incidence of default for such securities.
The ratings of Moodys, S&P and other rating agencies represent their
opinions as to the quality of the obligations which they undertake to rate. Ratings are relative and subjective and, although ratings may be useful in evaluating the safety of interest and principal payments, they do not evaluate the market value
risk of such obligations. Although these ratings may be an initial criterion for selection of portfolio investments, the Advisors also will independently evaluate these securities and the ability of the issuers of such securities to pay interest and
principal. To the extent that the Trust invests in lower grade securities that have not been rated by a rating agency, the Trusts ability to achieve its investment objective will be more dependent on the Advisors credit analysis than
would be the case when the Trust invests in rated securities.
Distressed and Defaulted Securities. The Trust may invest in securities of
financially distressed and bankrupt issuers, including debt obligations that are in covenant or payment default. Such investments generally trade significantly below par and are considered speculative. The repayment of defaulted obligations is
subject to significant uncertainties. Defaulted obligations might be repaid only after lengthy workout or bankruptcy proceedings, during which the issuer might not make any interest or other payments. Typically such workout or bankruptcy proceedings
result in only partial recovery of cash payments or an exchange of the defaulted obligation for other debt or equity securities of the issuer or its affiliates, which may in turn be illiquid or speculative.
- 13 -
Senior Loans. The senior loans in which the Trust invests may consist of direct obligations of a
borrower undertaken to finance the growth of the borrowers business, internally or externally, or to finance a capital restructuring. Senior loans may also include debtor in possession financings pursuant to Chapter 11 of the U.S. Bankruptcy
Code and obligations of a borrower issued in connection with a restructuring pursuant to Chapter 11 of the U.S. Bankruptcy Code. A significant portion of such senior loans are highly leveraged loans such as leveraged
buy-out loans, leveraged recapitalization loans and other types of acquisition loans. Such senior loans may be structured to include both term loans, which are generally fully funded at the time of the
Trusts investment, and revolving credit facilities or delayed draw term loans, which would require the Trust to make additional investments in the senior loans as required under the terms of the credit facility. Such senior loans may also
include receivables purchase facilities, which are similar to revolving credit facilities secured by a borrowers receivables, senior loans designed to provide bridge financing to a borrower pending the sale of identified assets or
the arrangement of longer-term loans or the issuance and sale of debt obligations or senior loans of borrowers that have obtained bridge loans from other parties. Senior loans generally are issued in the form of senior syndicated loans, but the
Trust also may invest from time to time in privately placed notes, credit linked notes, structured notes or other instruments with credit and pricing terms which are, in the opinion of the Advisors, consistent with investments in senior loan
obligations.
The senior loans in which the Trust invests typically have stated maturities ranging from five to nine years, though such stated maturities
could vary from this range and the Trust is not subject to any restrictions with respect to the maturity of senior loans held in its portfolio. As a result, as short-term interest rates increase, interest payable to the Trust from its investments in
senior loans should increase, and as short-term interest rates decrease, interest payable to the Trust from its investments in senior loans should decrease. Because of prepayments, the Advisors expect the average life of the senior loans in which
the Trust invests to be shorter than the stated maturity.
The senior loans in which the Trust invests generally hold a senior position in the capital
structure of the borrower. Such loans may include loans that hold the most senior position, loans that hold an equal ranking with other senior debt, or loans that are, in the judgment of the Advisors, in the category of senior debt. A senior
position in the borrowers capital structure generally gives the holder of the senior loan a claim on some or all of the borrowers assets that is senior to that of subordinated debt, preferred stock and common stock in the event the
borrower defaults or becomes bankrupt. The senior loans in which the Trust invests may be wholly or partially secured by collateral, or may be unsecured. In the event of a default, the ability of an investor to have access to any collateral may be
limited by bankruptcy and other insolvency laws. The value of the collateral also may decline subsequent to the Trusts investment in the senior loan. Under certain circumstances, the collateral may be released with the consent of the Agent
Bank and Co-Lenders (each as defined below), or pursuant to the terms of the underlying credit agreement with the borrower. There is no assurance that the liquidation of the collateral will satisfy the
borrowers obligation in the event of nonpayment of scheduled interest or principal, or that the collateral could be readily liquidated. As a result, the Trust might not receive payments to which it is entitled and thereby may experience a
decline in the value of the investment, and possibly, its NAV.
In the case of highly leveraged senior loans, a borrower is often required to pledge
collateral that may include (i) working capital assets, such as accounts receivable and inventory, (ii) tangible fixed assets, such as real property, buildings and equipment, (iii) intangible assets, such as trademarks, copyrights and
patent rights and/or (iv) security interests in securities of subsidiaries or affiliates. Collateral also may include guarantees or other credit support by subsidiaries or affiliates. In some cases the only collateral for the senior loan is the
stock of the borrower and/or its subsidiaries and affiliates. To the extent a senior loan is secured by stock of the borrower and/or its subsidiaries and affiliates, such stock may lose all of its value in the event of a bankruptcy or insolvency of
the borrower. In the case of senior loans to privately held companies, the companies owners may provide additional credit support in the form of guarantees and/or pledges of other securities that they own.
In the case of project finance loans, the borrower is generally a special purpose entity that pledges undeveloped land and other non-income producing assets as collateral and obtains construction completion guaranties from third parties, such as the project sponsor. Project finance credit facilities typically provide for payment of interest
from escrowed funds during a scheduled construction period, and for the pledge of current and fixed assets after the project is constructed and becomes operational. During the construction period, however, the lenders bear the risk that the project
will not be constructed in a timely manner, or will exhaust project funds prior to completion. In such an event, the lenders may need to take legal action to enforce the completion guaranties, or may need to lend more
- 14 -
money to the project on less favorable financing terms, or may need to liquidate the undeveloped project assets. There can be no assurance in any of such cases that the lenders will recover all
of their invested capital.
The rate of interest payable on senior floating rate loans is established as the sum of a base lending rate plus a specified
margin. These base lending rates generally are the prime rate (Prime Rate) of a designated U.S. bank, London Interbank Offered Rate (LIBOR), the Certificate of Deposit (CD) rate or another base lending rate used
by commercial lenders. The interest rate on Prime Rate-based senior loans floats daily as the Prime Rate changes, while the interest rate on LIBOR-based and CD-based senior loans is reset periodically,
typically every one, two, three or six months. Certain of the senior floating rate loans in which the Trust invests permit the borrower to select an interest rate reset period of up to one year. A portion of the Trusts portfolio may be
invested in senior loans with interest rates that are fixed for the term of the loan. Investment in senior loans with longer interest rate reset periods or fixed interest rates may increase fluctuations in the Trusts NAV, and potentially the
market price of the Trusts common shares, as a result of changes in interest rates.
The Trust may receive and/or pay certain fees in connection
with its lending activities. These fees are in addition to interest payments received and may include facility fees, commitment fees, amendment and waiver fees, commissions and prepayment fees. In certain circumstances, the Trust may receive a
prepayment fee on the prepayment of a senior loan by a borrower. In connection with the acquisition of senior loans or other debt securities, the Trust also may acquire warrants and other debt and equity securities of the borrower or issuer or its
affiliates. The Trust may also acquire other debt and equity securities of the borrower or issuer in connection with an amendment, waiver, conversion or exchange of a senior loan or in connection with a bankruptcy or workout of the borrower or
issuer.
In making an investment in a senior loan, the Advisors will consider factors deemed by it to be appropriate to the analysis of the borrower and
the senior loan. The Advisors perform their own independent credit analysis of the borrower in addition to utilizing information prepared and supplied by the Agent Bank, Co-Lender or Participant (each defined
below) from whom the Trust purchases its interest in a senior loan. Such factors include, but are not limited to, the legal/protective features associated with the securities (such as their position in the borrowers capital structure and any
security through collateral), financial ratios of the borrower such as pre-tax interest coverage, leverage ratios, and the ratios of cash flows to total debts and the ratio of tangible assets to debt. In its
analysis of these factors, the Advisors also will be influenced by the nature of the industry in which the borrower is engaged, the nature of the borrowers assets and the Advisors assessments of the general quality of the borrower. The
Advisors analysis continues on an ongoing basis for any senior loans in which the Trust has invested. Although the Advisors use due care in making such analysis, there can be no assurance that such analysis will disclose factors that may
impair the value of the senior loan.
Senior loans made in connection with highly leveraged transactions are subject to greater credit risks than other
senior loans in which each Trust may invest. These credit risks include a greater possibility of default or bankruptcy of the borrower and the assertion that the pledging of collateral to secure the loan constituted a fraudulent conveyance or
preferential transfer which can be nullified or subordinated to the rights of other creditors of the borrower under applicable law.
Many senior loans in
which the Trust invests may not be rated by a rating agency, are not registered with the SEC, or any state securities commission, and are not listed on any national securities exchange. Borrowers may have outstanding debt obligations that are rated
below investment grade by a rating agency. Many of the senior loans in which the Trust invests will have been assigned below investment grade ratings by independent rating agencies. In the event senior loans are not rated, they are likely to be the
equivalent of below investment grade quality. The Advisors do not view ratings as the determinative factor in its investment decisions and relies more upon its credit analysis abilities than upon ratings.
The Trust has no policy with regard to minimum ratings for senior loans in which it may invest. The Trust may purchase and retain in its portfolio senior
loans where the borrower has experienced, or may be perceived to be likely to experience, credit problems, including involvement in or recent emergence from bankruptcy reorganization proceedings or other forms of debt restructuring. Such investments
may provide opportunities for enhanced income as well as capital appreciation, although they also will be subject to greater risk of loss. At times, in connection with the restructuring of a senior loan either outside of bankruptcy court or in the
context of bankruptcy court
- 15 -
proceedings, the Trust may determine or be required to accept equity securities or junior fixed income securities in exchange for all or a portion of a senior loan.
The secondary market for trading of senior loans continues to develop and mature. One of the effects of a more active and liquid secondary market, however, is
that a senior loan may trade at a premium or discount to the principal amount, or par value, of the loan. There are many factors that influence the market value of a senior loan, including technical factors relating to the operation of the loan
market, supply and demand conditions, market perceptions about the credit quality or financial condition of the borrower or more general concerns about the industry in which the borrower operates. The Trust participates in this secondary market for
senior loans, purchasing and selling loans that may trade at a premium or discount to the par value of the loan. However, no active trading market may exist for some senior loans and some loans may be subject to restrictions on resale. A secondary
market may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods, which may impair the ability to realize full value and thus cause a material decline in the Trusts NAV. In addition, the Trust may
not be able to readily dispose of its senior loans at prices that approximate those at which the Trust could sell such loans if they were more widely-traded and, as a result of such illiquidity, the Trust may have to sell other investments or engage
in borrowing transactions if necessary to raise cash to meet its obligations. During periods of limited supply and liquidity of senior loans, the Trusts yield may be lower.
When interest rates decline, the value of a fund invested in fixed rate obligations can be expected to rise. Conversely, when interest rates rise, the value
of a fund invested in fixed rate obligations can be expected to decline. Although changes in prevailing interest rates can be expected to cause some fluctuations in the value of floating rate senior loans (due to the fact that floating rates on
senior loans only reset periodically), the value of floating rate senior loans is substantially less sensitive to changes in market interest rates than fixed rate instruments. As a result, to the extent the Trust invests in floating rate senior
loans, the Trusts portfolio may be less volatile and less sensitive to changes in market interest rates than if the Trust invested in fixed rate obligations. Similarly, a sudden and significant increase in market interest rates may cause a
decline in the value of these investments and in the Trusts NAV. Other factors (including, but not limited to, rating downgrades, credit deterioration, a large downward movement in stock prices, a disparity in supply and demand of certain
securities or market conditions that reduce liquidity) can reduce the value of senior loans and other debt obligations, impairing the Trusts NAV.
A
borrower must comply with various restrictive covenants contained in any credit agreement between the borrower and the lending syndicate. Such covenants, in addition to requiring the scheduled payment of interest and principal, may include
restrictions on dividend payments and other distributions to stockholders, provisions requiring the borrower to maintain specific financial ratios or relationships, limits on total debt and restrictions on the borrowers ability to pledge its
assets. In addition, the loan agreement may contain a covenant requiring the borrower to prepay the senior loan with any excess cash flow. Excess cash flow generally includes net cash flow after scheduled debt service payments and permitted capital
expenditures, among other things, as well as the proceeds from asset dispositions or sales of securities. A breach of a covenant (after giving effect to any cure period) which is not waived by the Agent Bank and the lending syndicate normally is an
event of default (i.e., the Agent Bank has the right to call the outstanding senior loan).
Senior loans usually require, in addition to scheduled
payments of interest and principal, the prepayment of the senior loan from excess cash flow, as discussed above, and typically permit the borrower to prepay at its election. The degree to which borrowers prepay senior loans, whether as a contractual
requirement or at their election, may be affected by general business conditions, the financial condition of the borrower and competitive conditions among lenders, among other factors. Accordingly, prepayments cannot be predicted with accuracy. Upon
a prepayment, the Trust may receive both a prepayment fee from the prepaying borrower and a facility fee on the purchase of a new senior loan with the proceeds from the prepayment of the former. Such fees may mitigate any adverse impact on the yield
on the Trusts portfolio which may arise as a result of prepayments and the reinvestment of such proceeds in senior loans bearing lower interest rates.
A senior loan in which the Trust may invest typically is originated, negotiated and structured by a syndicate of lenders
(Co-Lenders) consisting of commercial banks, thrift institutions, insurance companies, finance companies, investment banking firms, securities brokerage houses or other financial institutions or
institutional investors, one or more of which administers the loan on behalf of the syndicate (the Agent Bank). Co-Lenders may sell senior loans to third parties (Participants). The
Trust invests in a senior loan either by participating in the primary distribution
- 16 -
as a Co-Lender at the time the loan is originated or by buying an assignment or participation interest in the senior loan in the secondary market from a Co-Lender or a Participant.
The Trust may invest in a senior loan at origination as a
Co-Lender or by acquiring an assignment or participation interest in the secondary market from a Co-Lender or Participant. If the Trust purchases an assignment, the
Trust typically accepts all of the rights of the assigning lender in a senior loan, including the right to receive payments of principal and interest and other amounts directly from the borrower and to enforce its rights as a lender directly against
the borrower and assumes all of the obligations of the assigning lender, including any obligations to make future advances to the borrower. As a result, therefore, the Trust has the status of a Co-Lender. In
some cases, the rights and obligations acquired by a purchaser of an assignment may differ from, and may be more limited than, the rights and obligations of the assigning lender. The Trust also may purchase a participation in a portion of the rights
of a Co-Lender or Participant in a senior loan by means of a participation agreement. A participation is similar to an assignment in that the Co-Lender or Participant
transfers to the Trust all or a portion of an interest in a senior loan. Unlike an assignment, however, a participation does not establish any direct relationship between the Trust and the borrower. In such a case, the Trust is required to rely on
the Co-Lender or Participant that sold the participation not only for the enforcement of the Trusts rights against the borrower but also for the receipt and processing of payments due to the Trust under
the senior loans.
Because it may be necessary to assert through a Co-Lender or Participant such rights as may
exist against the borrower, in the event the borrower fails to pay principal and interest when due, the Trust may be subject to delays, expenses and risks that are greater than those that would be involved if the Trust could enforce its rights
directly against the borrower. Moreover, under the terms of a participation, the Trust may be regarded as a creditor of the Co-Lender or Participant that sold the participation (rather than of the borrower),
so that the Trust may also be subject to the risk that the Co-Lender or Participant may become insolvent. Similar risks may arise with respect to the Agent Bank, as described below. Further, in the event of
the bankruptcy or insolvency of the borrower, the obligation of the borrower to repay the senior loan may be subject to certain defenses that can be asserted by such borrower as a result of improper conduct by the Agent Bank, Co-Lender or Participant.
In a typical senior loan, the Agent Bank administers the terms of the credit agreement and is
responsible for the collection of principal and interest and fee payments from the borrower and the apportionment of these payments to the credit of all lenders which are parties to the credit agreement. The Trust generally relies on the Agent Bank
(or the Co-Lender or Participant that sold the Trust a participation interest) to collect its portion of the payments on the senior loan. Furthermore, the Trust generally relies on the Agent Bank to use
appropriate creditor remedies against the borrower. Typically, under credit agreements, the Agent Bank is given broad discretion in enforcing the credit agreement, and is obligated to use only the same care it would use in the management of its own
property. The borrower compensates the Agent Bank for these services. Such compensation may include special fees paid on structuring and funding the senior loan and other fees paid on a continuing basis.
In the event that an Agent Bank becomes insolvent, or has a receiver, conservator, or similar official appointed for it by the appropriate bank regulatory
authority or becomes a debtor in a bankruptcy proceeding, assets held by the Agent Bank under the credit agreement should remain available to holders of senior loans.
If, however, assets held by the Agent Bank for the benefit of the Trust were determined by an appropriate regulatory authority or court to be subject to the
claims of the Agent Banks general or secured creditors, the Trust might incur certain costs and delays in realizing payment on a senior loan or suffer a loss of principal and/or interest. In situations involving a Co-Lender or Participant that sold the Trust a participation interest, similar risks may arise, as described above.
The
Trust may have certain obligations pursuant to a credit agreement, which may include the obligation to make future advances to the borrower in connection with revolving credit facilities in certain circumstances. These commitments may have the
effect of requiring the Trust to increase its investment in a borrower at a time it might not be desirable to do so (including at a time when the borrowers financial condition makes it unlikely that such amounts will be repaid). The Trust
currently intends to reserve against such contingent obligations by designating sufficient investments in liquid assets on its books and records.
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The Trust may obtain exposure to senior loans through the use of derivative instruments, which have recently
become increasingly available. The Advisors may utilize these instruments and similar instruments that may be available in the future. The Trust may invest in a derivative instrument known as a Select Aggregate Market Index (SAMI), which
provides investors with exposure to a reference basket of senior loans. SAMIs are structured as floating rate instruments. SAMIs consist of a basket of credit default swaps whose underlying reference securities are senior secured loans. While
investing in SAMIs will increase the universe of floating rate fixed income securities to which the Trust is exposed, such investments entail risks that are not typically associated with investments in other floating rate fixed income securities.
The liquidity of the market for SAMIs will be subject to liquidity in the secured loan and credit derivatives markets. Investment in SAMIs involves many of the risks associated with investments in derivative instruments discussed generally herein.
Second Lien Loans. The Trust may invest in second lien or other subordinated or unsecured floating rate and fixed rate loans or
debt. Second lien loans have the same characteristics as senior loans except that such loans are second in lien property rather than first. Second lien loans typically have adjustable floating rate interest payments. Accordingly, the risks
associated with second lien loans are higher than the risk of loans with first priority over the collateral. In the event of default on a second lien loan, the first priority lien holder has first claim to the underlying collateral of the loan. It
is possible that no collateral value would remain for the second priority lien holder, which may result in a loss of investment to the Trust.
Mezzanine Loans. The Trust may invest in mezzanine loans. Structurally, mezzanine loans usually rank subordinate in priority of payment to senior
debt, such as senior bank debt, and are often unsecured. However, mezzanine loans rank senior to common and preferred equity in a borrowers capital structure. Mezzanine debt is often used in leveraged buyout and real estate finance
transactions. Typically, mezzanine loans have elements of both debt and equity instruments, offering the fixed returns in the form of interest payments associated with senior debt, while providing lenders an opportunity to participate in the capital
appreciation of a borrower, if any, through an equity interest. This equity interest typically takes the form of warrants. Due to their higher risk profile and often less restrictive covenants as compared to senior loans, mezzanine loans generally
earn a higher return than senior secured loans. The warrants associated with mezzanine loans are typically detachable, which allows lenders to receive repayment of their principal on an agreed amortization schedule while retaining their equity
interest in the borrower. Mezzanine loans also may include a put feature, which permits the holder to sell its equity interest back to the borrower at a price determined through an agreed-upon formula. Mezzanine investments may be issued
with or without registration rights. Similar to other high yield securities, maturities of mezzanine investments are typically seven to ten years, but the expected average life is significantly shorter at three to five years; however, maturities and
expected average lives could vary from these ranges and the Trust is not subject to any restrictions with respect to the maturities or expected average lives of mezzanine loans held in its portfolio. Mezzanine investments are usually unsecured and
subordinate to other obligations of the issuer.
Debtor-In-Possession
Financings. The Trust may invest in debtor-in-possession or DIP financings newly issued in connection with special situation
restructuring and refinancing transactions. DIP financings are loans to a debtor-in-possession in a proceeding under the U.S. Bankruptcy Code that has been approved by
the bankruptcy court. These financings allow the entity to continue its business operations while reorganizing under Chapter 11 of the U.S. Bankruptcy Code. DIP financings are typically fully secured by a lien on the debtors otherwise
unencumbered assets or secured by a junior lien on the debtors encumbered assets (so long as the loan is fully secured based on the most recent current valuation or appraisal report of the debtor). DIP financings are often required to close
with certainty and in a rapid manner in order to satisfy existing creditors and to enable the issuer to emerge from bankruptcy or to avoid a bankruptcy proceeding.
Mortgage Related Securities. Mortgage-backed securities (MBS) include structured debt obligations collateralized by pools of
commercial (CMBS) or residential (RMBS) mortgages. Pools of mortgage loans and mortgage-backed loans, such as mezzanine loans, are assembled as securities for sale to investors by various governmental, government-related and
private organizations. MBS include complex instruments such as collateralized mortgage obligations (CMOs), stripped MBS, mortgage pass-through securities and interests in Real Estate Mortgage Investment Conduits (REMICs). The
MBS in which the Trust may invest include those with fixed, floating or variable interest rates, those with interest rates that change based on multiples of changes in a specified reference interest rate or index of interest rates and those with
interest rates that change inversely to changes in interest rates, as well as those that do not bear interest. The Trust may invest in RMBS and CMBS issued
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by governmental entities and private issuers, including subordinated MBS and residual interests. The Trust may invest in sub-prime mortgages or MBS that
are backed by sub-prime mortgages.
In general, losses on a mortgaged property securing a mortgage loan included
in a securitization will be borne first by the equity holder of the property, then by a cash reserve fund or letter of credit, if any, then by the holder of a mezzanine loan or B-Note, if any, then by the
first loss subordinated security holder (generally, the B-Piece buyer) and then by the holder of a higher rated security. The Trust may invest in any class of security included in a
securitization. In the event of default and the exhaustion of any equity support, reserve fund, letter of credit, mezzanine loans or B-Notes, and any classes of securities junior to those in which the Trust
invests, the Trust will not be able to recover all of its investment in the MBS it purchases. MBS in which the Trust invests may not contain reserve funds, letters of credit, mezzanine loans and/or junior classes of securities. The prices of lower
credit quality securities are generally less sensitive to interest rate changes than more highly rated investments, but more sensitive to adverse economic downturns or individual issuer developments.
Mortgage Pass-Through Securities. Mortgage pass-through securities differ from other forms of fixed income securities, which
normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Instead, these securities provide a monthly payment which consists of both interest and principal payments. In effect,
these payments are a pass through of the monthly payments made by the individual borrowers on their residential or commercial mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Additional payments are
caused by repayments of principal resulting from the sale of the underlying property, refinancing or foreclosure, net of fees or costs that may be incurred. Some mortgage related securities (such as securities issued by the Government National
Mortgage Association (GNMA)) are described as modified pass-through. These securities entitle the holder to receive all interest and principal payments owed on the mortgage pool, net of certain fees, at the scheduled payment
dates regardless of whether or not the mortgagor actually makes the payment.
RMBS. RMBS are securities the payments on which
depend primarily on the cash flow from residential mortgage loans made to borrowers that are secured, on a first priority basis or second priority basis, subject to permitted liens, easements and other encumbrances, by residential real estate (one- to four-family properties), the proceeds of which are used to purchase real estate and purchase or construct dwellings thereon or to refinance indebtedness previously used for such purposes. Non-agency residential mortgage loans are obligations of the borrowers thereunder only and are not typically insured or guaranteed by any other person or entity. The ability of a borrower to repay a loan secured by
residential property is dependent upon the income or assets of the borrower. A number of factors, including a general economic downturn, acts of God, terrorism, social unrest and civil disturbances, may impair a borrowers ability to repay its
loans.
Agency RMBS. The principal U.S. governmental guarantor of mortgage related securities is GNMA, which is a wholly owned
U.S. government corporation. GNMA is authorized to guarantee, with the full faith and credit of the U.S. government, the timely payment of principal and interest on securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and backed by pools of mortgages insured by the Federal Housing Administration (the FHA) or guaranteed by the Department of Veterans Affairs (the VA). MBS issued by
GNMA include GNMA Mortgage Pass-Through Certificates (also known as Ginnie Maes) which are guaranteed as to the timely payment of principal and interest by GNMA and such guarantees are backed by the full faith and credit of the United
States. GNMA certificates also are supported by the authority of GNMA to borrow funds from the U.S. Treasury to make payments under its guarantee.
Government-related guarantors (i.e., not backed by the full faith and credit of the U.S. government) include the Federal National Mortgage
Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). FNMA is a government-sponsored corporation the common stock of which is owned entirely by private stockholders. FNMA purchases conventional (i.e., not
insured or guaranteed by any government agency) residential mortgages from a list of approved seller/servicers which include state and federally chartered savings and loan associations, mutual savings banks, commercial banks and credit unions and
mortgage bankers. Pass-through securities issued by FNMA (also known as Fannie Maes) are guaranteed as to timely payment of principal and interest by FNMA, but are not backed by the full faith and credit of the U.S.
government. FHLMC was created by Congress in 1970 for the purpose of increasing the availability of mortgage credit for residential housing. It is a government-sponsored corporation that issues FHLMC Guaranteed Mortgage Pass-Through
Certificates (also
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known as Freddie Macs or PCs), which are pass-through securities, each representing an undivided interest in a pool of residential mortgages. FHLMC guarantees the timely
payment of interest and ultimate collection of principal, but PCs are not backed by the full faith and credit of the U.S. government.
In
2008, the Federal Housing Finance Agency (FHFA) placed FNMA and FHLMC into conservatorship. FNMA and FHLMC are continuing to operate as going concerns while in conservatorship and each remains liable for all of its obligations, including
its guaranty obligations, associated with its MBS.
As the conservator, FHFA succeeded to all rights, titles, powers and privileges of
FNMA and FHLMC and of any stockholder, officer or director of FNMA and FHLMC with respect to FNMA and FHLMC and the assets of FNMA and FHLMC. In connection with the conservatorship, the U.S. Treasury entered into a Senior Preferred Stock Purchase
Agreement with each of FNMA and FHLMC pursuant to which the U.S. Treasury would purchase up to an aggregate of $100 billion of each of FNMA and FHLMC to maintain a positive net worth in each enterprise. This agreement contains various covenants
that severely limit each enterprises operations. In exchange for entering into these agreements, the U.S. Treasury received $1 billion of each enterprises senior preferred stock and warrants to purchase 79.9% of each
enterprises common stock. In February 2009, the U.S. Treasury doubled the size of its commitment to each enterprise under the Senior Preferred Stock Program to $200 billion. The U.S. Treasurys obligations under the Senior Preferred
Stock Program are for an indefinite period of time for a maximum amount of $200 billion per enterprise. In December 2009, the U.S. Treasury announced further amendments to the Senior Preferred Stock Purchase Agreements which included additional
financial support to certain governmentally supported entities, including the Federal Home Loan Banks (FHLBs), FNMA and FHLMC. It is difficult, if not impossible, to predict the future political, regulatory or economic changes that could
impact FNMA, FHLMC and the FHLBs, and the values of their related securities or obligations. There is no assurance that the obligations of such entities will be satisfied in full, or that such obligations will not decrease in value or default.
Under the Federal Housing Finance Regulatory Reform Act of 2008 (the Reform Act), which was included as part of the Housing and
Economic Recovery Act of 2008, FHFA, as conservator or receiver, has the power to repudiate any contract entered into by FNMA or FHLMC prior to FHFAs appointment as conservator or receiver, as applicable, if FHFA determines, in its sole
discretion, that performance of the contract is burdensome and that repudiation of the contract promotes the orderly administration of FNMAs or FHLMCs affairs. The Reform Act requires FHFA to exercise its right to repudiate any contract
within a reasonable period of time after its appointment as conservator or receiver. FHFA, in its capacity as conservator, has indicated that it has no intention to repudiate the guaranty obligations of FNMA or FHLMC because FHFA views repudiation
as incompatible with the goals of the conservatorship. However, in the event that FHFA, as conservator or if it is later appointed as receiver for FNMA or FHLMC, were to repudiate any such guaranty obligation, the conservatorship or receivership
estate, as applicable, would be liable for actual direct compensatory damages in accordance with the provisions of the Reform Act. Any such liability could be satisfied only to the extent of FNMAs or FHLMCs assets available therefor. In
the event of repudiation, the payments of interest to holders of FNMA or FHLMC MBS would be reduced if payments on the mortgage loans represented in the mortgage loan groups related to such MBS are not made by the borrowers or advanced by the
servicer. Any actual direct compensatory damages for repudiating these guaranty obligations may not be sufficient to offset any shortfalls experienced by such MBS holders. Further, in its capacity as conservator or receiver, FHFA has the right to
transfer or sell any asset or liability of FNMA or FHLMC without any approval, assignment or consent. Although FHFA has stated that it has no present intention to do so, if FHFA, as conservator or receiver, were to transfer any such guaranty
obligation to another party, holders of FNMA or FHLMC MBS would have to rely on that party for satisfaction of the guaranty obligation and would be exposed to the credit risk of that party. In addition, certain rights provided to holders of MBS
issued by FNMA and FHLMC under the operative documents related to such securities may not be enforced against FHFA, or enforcement of such rights may be delayed, during the conservatorship or any future receivership. The operative documents for FNMA
and FHLMC MBS may provide (or with respect to securities issued prior to the date of the appointment of the conservator may have provided) that upon the occurrence of an event of default on the part of FNMA or FHLMC, in its capacity as guarantor,
which includes the appointment of a conservator or receiver, holders of such MBS have the right to replace FNMA or FHLMC as trustee if the requisite percentage of MBS holders consent. The Reform Act prevents MBS holders from enforcing such rights if
the event of default arises solely because a conservator or receiver has been appointed.
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Non-Agency
RMBS. Non-agency RMBS are issued by commercial banks, savings and loan institutions, mortgage bankers, private mortgage insurance companies and other
non-governmental issuers. Timely payment of principal and interest on RMBS backed by pools created by non-governmental issuers often is supported partially by various
forms of insurance or guarantees, including individual loan, title, pool and hazard insurance. The insurance and guarantees are issued by government entities, private insurers and the mortgage poolers. There can be no assurance that the private
insurers or mortgage poolers can meet their obligations under the policies, so that if the issuers default on their obligations, the holders of the security could sustain a loss. No insurance or guarantee covers the Trust or the price of the
Trusts shares. RMBS issued by non-governmental issuers generally offer a higher rate of interest than government agency and government-related securities because there are no direct or indirect
government guarantees of payment.
CMBS. CMBS generally are multi-class debt or pass-through certificates secured or backed by
mortgage loans on commercial properties. CMBS generally are structured to provide protection to the senior class investors against potential losses on the underlying mortgage loans. This protection generally is provided by having the holders of
subordinated classes of securities (Subordinated CMBS) take the first loss if there are defaults on the underlying commercial mortgage loans. Other protection, which may benefit all of the classes or particular classes, may include
issuer guarantees, reserve funds, additional Subordinated CMBS, cross-collateralization and over-collateralization.
The Trust may invest
in Subordinated CMBS, which are subordinated in some manner as to the payment of principal and/or interest to the holders of more senior CMBS arising out of the same pool of mortgages and which are often referred to as
B-Pieces. The holders of Subordinated CMBS typically are compensated with a higher stated yield than are the holders of more senior CMBS. On the other hand, Subordinated CMBS typically subject the
holder to greater risk than senior CMBS and tend to be rated in a lower rating category (frequently a substantially lower rating category) than the senior CMBS issued in respect of the same mortgage pool. Subordinated CMBS generally are likely to be
more sensitive to changes in prepayment and interest rates and the market for such securities may be less liquid than is the case for traditional income securities and senior CMBS.
CMOs. A CMO is a multi-class bond backed by a pool of mortgage pass-through certificates or mortgage loans. CMOs may be collateralized
by (i) GNMA, FNMA or FHLMC pass-through certificates, (ii) unsecuritized mortgage loans insured by the FHA or guaranteed by the VA, (iii) unsecuritized conventional mortgages, (iv) other MBS or (v) any combination thereof.
Each class of a CMO, often referred to as a tranche, is issued at a specific coupon rate and has a stated maturity or final distribution date. Principal prepayments on collateral underlying a CMO may cause it to be retired substantially
earlier than its stated maturity or final distribution date. The principal and interest on the underlying mortgages may be allocated among the several classes of a series of a CMO in many ways. One or more tranches of a CMO may have coupon rates
which reset periodically at a specified increment over an index, such as LIBOR (or sometimes more than one index). These floating rate CMOs typically are issued with lifetime caps on the coupon rate thereon. CMO residuals represent the interest in
any excess cash flow remaining after making the payments of interest and principal on the tranches issued by the CMO and the payment of administrative expenses and management fees.
The Trust may invest in inverse floating rate CMOs. Inverse floating rate CMOs constitute a tranche of a CMO with a coupon rate that moves in
the reverse direction relative to an applicable index such as LIBOR. Accordingly, the coupon rate thereon will increase as interest rates decrease. Inverse floating rate CMOs are typically more volatile than fixed or floating rate tranches of CMOs.
Many inverse floating rate CMOs have coupons that move inversely to a multiple of an index. The effect of the coupon varying inversely to a multiple of an applicable index creates a leverage factor. Inverse floating rate debt instruments
(inverse floaters) based on multiples of a stated index are designed to be highly sensitive to changes in interest rates and can subject the holders thereof to extreme reductions of yield and loss of principal. The market for inverse
floating rate CMOs with highly leveraged characteristics at times may be very thin. The Trusts ability to dispose of its positions in such securities will depend on the degree of liquidity in the markets for such securities. It is impossible
to predict the amount of trading interest that may exist in such securities, and therefore the future degree of liquidity.
Stripped
MBS. Stripped MBS are created by segregating the cash flows from underlying mortgage loans or mortgage securities to create two or more new securities, each receiving a specified percentage of the underlying securitys principal or interest
payments. Mortgage securities may be partially stripped so that each investor class
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receives some interest and some principal. When securities are completely stripped, however, all of the interest is distributed to holders of one type of security, known as an interest-only
security (or IO), and all of the principal is distributed to holders of another type of security, known as a principal-only security (or PO). Strips can be created in a pass-through structure or as tranches of a CMO. The
yields to maturity on IOs and POs are very sensitive to the rate of principal payments (including prepayments) on the related underlying mortgage assets. If the underlying mortgage assets experience greater than anticipated prepayments of principal,
the Trust may not fully recoup its initial investment in IOs. Conversely, if the underlying mortgage assets experience less than anticipated prepayments of principal, the yield on POs could be materially and adversely affected.
Adjustable Rate Mortgage Securities. Adjustable rate mortgages (ARMs) have interest rates that reset at periodic
intervals. Acquiring ARMs permits the Trust to participate in increases in prevailing current interest rates through periodic adjustments in the coupons of mortgages underlying the pool on which ARMs are based. Such ARMs generally have higher
current yield and lower price fluctuations than is the case with more traditional fixed income securities of comparable rating and maturity. In addition, when prepayments of principal are made on the underlying mortgages during periods of rising
interest rates, the Trust may potentially reinvest the proceeds of such prepayments at rates higher than those at which they were previously invested. Mortgages underlying most ARMs, however, have limits on the allowable annual or lifetime increases
that can be made in the interest rate that the mortgagor pays. Therefore, if current interest rates rise above such limits over the period of the limitation, the Trust, when holding an ARM, does not benefit from further increases in interest rates.
Moreover, when interest rates are in excess of the coupon rates (i.e., the rates being paid by mortgagors) of the mortgages, ARMs behave more like fixed income securities and less like adjustable-rate securities and are subject to the risks
associated with fixed income securities. In addition, during periods of rising interest rates, increases in the coupon rate of ARMs generally lag current market interest rates slightly, thereby creating the potential for capital depreciation on such
securities.
Sub-Prime Mortgages. Sub-prime
mortgages are mortgages rated below A by S&P or Moodys. Historically, sub-prime mortgage loans have been made to borrowers with blemished (or
non-existent) credit records, and the borrower is charged a higher interest rate to compensate for the greater risk of delinquency and the higher costs of loan servicing and collection. Sub-prime mortgages are subject to both state and federal anti-predatory lending statutes that carry potential liability to secondary market purchasers such as the Trust.
Sub-prime mortgages have certain characteristics and associated risks similar to below investment grade securities, including a higher degree of credit risk, and certain characteristics and associated risks
similar to MBS, including prepayment risk.
Mortgage Related ABS. Asset-backed securities (ABS) are bonds backed by
pools of loans or other receivables. ABS are created from many types of assets, including in some cases mortgage related asset classes, such as home equity loan ABS. Home equity loan ABS are subject to many of the same risks as RMBS, including
interest rate risk and prepayment risk.
Mortgage REITs. A real estate investment trust (REIT) is a corporation, or
a business trust that would otherwise be taxed as a corporation, that meets the definitional requirements applicable to REITs under the Code. The Code permits a qualifying REIT to deduct
dividends paid, thereby generally eliminating corporate level U.S. federal income tax and effectively making the REIT a pass-through vehicle for U.S. federal income tax purposes. To meet the definitional requirements of the Code, a REIT must, among
other things, invest substantially all of its assets in interests in real estate (including mortgages and other REITs) or cash and government securities, derive most of its income from rents from real property or interest on loans secured by
mortgages on real property, and distribute to shareholders annually substantially all of its otherwise taxable income. Mortgage REITs invest mostly in mortgages on real estate, which may secure construction, development or long-term loans, and the
main source of their income is mortgage interest payments. The value of securities issued by REITs is affected by tax and regulatory requirements and by perceptions of management skill. They also are subject to heavy cash flow dependency and
the possibility of failing to qualify for REIT status under the Code or to maintain exemption from the 1940 Act.
Mortgage Related
Derivative Instruments. The Trust may invest in MBS credit default swaps. MBS credit default swaps include swaps the reference obligation for which is an MBS or related index, such as the CMBX Index (a tradeable index referencing a
basket of CMBS), the TRX Index (a tradeable index referencing total return swaps based on CMBS) or the ABX Index (a tradeable index referencing a basket of sub-prime MBS). The Trust may engage in other
derivative transactions related to MBS, including purchasing and selling exchange-listed and
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over-the-counter put and call options, futures and forwards on mortgages and MBS. The Trust may invest in
newly developed mortgage related derivatives that may hereafter become available.
Net Interest Margin (NIM) Securities. The
Trust may invest in net interest margin (NIM) securities. These securities are derivative interest-only mortgage securities structured off home equity loan transactions. NIM securities receive any excess interest computed
after paying coupon costs, servicing costs and fees and any credit losses associated with the underlying pool of home equity loans. Like traditional stripped MBS, the yield to maturity on a NIM security is sensitive not only to changes in prevailing
interest rates but also to the rate of principal payments (including prepayments) on the underlying home equity loans. NIM securities are highly sensitive to credit losses on the underlying collateral and the timing in which those losses are taken.
Tiered Index Bonds. Tiered index bonds are relatively new forms of mortgage-related securities. The interest rate on a tiered
index bond is tied to a specified index or market rate. So long as this index or market rate is below a predetermined strike rate, the interest rate on the tiered index bond remains fixed. If, however, the specified index or market rate
rises above the strike rate, the interest rate of the tiered index bond will decrease. Thus, under these circumstances, the interest rate on a tiered index bond, like an inverse floater, will move in the opposite direction of prevailing
interest rates, with the result that the price of the tiered index bond may be considerably more volatile than that of a fixed-rate bond.
TBA Commitments. The Trust may enter into to be announced or TBA commitments. TBA commitments are forward
agreements for the purchase or sale of securities, including MBS, for a fixed price, with payment and delivery on an agreed upon future settlement date. The specific securities to be delivered are not identified at the trade date. However, delivered
securities must meet specified terms, including issuer, rate and mortgage terms.
Other Mortgage Related Securities. Other mortgage
related securities include securities other than those described above that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans on real property. Other mortgage related securities may be equity or
debt securities issued by agencies or instrumentalities of the U.S. government or by private originators of, or investors in, mortgage loans, including savings and loan associations, homebuilders, mortgage banks, commercial banks, investment banks,
partnerships, trusts and special purpose entities of the foregoing.
Asset-Backed Securities. ABS are a form of structured debt obligation. The
securitization techniques used for ABS are similar to those used for MBS. ABS are bonds backed by pools of loans or other receivables. The collateral for these securities may include home equity loans, automobile and credit card receivables, boat
loans, computer leases, airplane leases, mobile home loans, recreational vehicle loans and hospital account receivables. The Trust may invest in these and other types of ABS that may be developed in the future. ABS present certain risks that are not
presented by mortgage related securities. Primarily, these securities may provide the Trust with a less effective security interest in the related collateral than do mortgage related securities. Therefore, there is the possibility that recoveries on
the underlying collateral may not, in some cases, be available to support payments on these securities.
REITs. REITs are subject to certain
risks which differ from an investment in common stocks. REITs are financial vehicles that pool investors capital to purchase or finance real estate. REITs may concentrate their investments in specific geographic areas or in specific property
types (e.g., hotels, shopping malls, residential complexes and office buildings). The market value of REIT shares and the ability of REITs to distribute income may be adversely affected by several factors, including rising interest rates, changes in
the national, state and local economic climate and real estate conditions, perceptions of prospective tenants of the safety, convenience and attractiveness of the properties, the ability of the owners to provide adequate management, maintenance and
insurance, the cost of complying with the Americans with Disabilities Act, increased competition from new properties, the impact of present or future environmental legislation and compliance with environmental laws, changes in real estate taxes and
other operating expenses, adverse changes in governmental rules and fiscal policies, adverse changes in zoning laws and other factors beyond the control of the REIT issuers. In addition, distributions received by the Trust from REITs may consist of
dividends, capital gains and/or return of capital. As REITs generally pay a higher rate of dividends (on a pre-tax basis) than operating companies, to the extent application of the Trusts investment
strategy results in the Trust investing in REIT shares, the percentage of the Trusts dividend income received from REIT shares will likely exceed the percentage of the Trusts portfolio which is comprised of REIT shares. There are three
general categories
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of REITs: equity REITs, mortgage REITs and hybrid REITs. Equity REITs invest primarily in direct fee ownership or leasehold ownership of real property; they derive most of their income from
rents. Mortgage REITs invest mostly in mortgages on real estate, which may secure construction, development or long-term loans, and the main source of their income is mortgage interest payments. Hybrid REITs hold both ownership and mortgage
interests in real estate.
Collateralized Debt Obligations. The Trust may invest in collateralized debt obligations (CDOs), which
include collateralized bond obligations (CBOs), collateralized loan obligations (CLOs) and other similarly structured securities. CDOs are types of asset-backed securities. A CBO is ordinarily issued by a fund or other
special purpose entity (SPE) and is typically backed by a diversified pool of fixed income securities (which may include high risk, below investment grade securities) held by such issuer. A CLO is ordinarily issued by a trust or other
SPE and is typically collateralized by a pool of loans, which may include, among others, domestic and non-U.S. senior secured loans, senior unsecured loans, and subordinate corporate loans, including loans
that may be rated below investment grade or equivalent unrated loans, held by such issuer. Although certain CDOs may benefit from credit enhancement in the form of a senior-subordinate structure, over-collateralization or bond insurance, such
enhancement may not always be present, and may fail to protect the Trust against the risk of loss on default of the collateral. Certain CDO issuers may use derivatives contracts to create synthetic exposure to assets rather than holding
such assets directly, which entails the risks of derivative instruments described elsewhere in this Prospectus. CDOs may charge management fees and administrative expenses, which are in addition to those of the Trust.
For both CBOs and CLOs, the cash flows from the SPE are split into two or more portions, called tranches, varying in risk and yield. The riskiest portion is
the equity tranche, which bears the first loss from defaults from the bonds or loans in the SPE and serves to protect the other, more senior tranches from default (though such protection is not complete). Since it is partially protected
from defaults, a senior tranche from a CBO or CLO typically has higher ratings and lower yields than its underlying securities, and may be rated investment grade. Despite the protection from the equity tranche, CBO or CLO tranches can experience
substantial losses due to actual defaults, downgrades of the underlying collateral by rating agencies, forced liquidation of the collateral pool due to a failure of coverage tests, increased sensitivity to defaults due to collateral default and
disappearance of protecting tranches, market anticipation of defaults as well as investor aversion to CBO or CLO securities as a class. Interest on certain tranches of a CDO may be paid in kind or deferred and capitalized (paid in the form of
obligations of the same type rather than cash), which involves continued exposure to default risk with respect to such payments.
Delayed Funding Loans
and Revolving Credit Facilities. The Trust may enter into, or acquire participations in, delayed funding loans and revolving credit facilities, in which a bank or other lender agrees to make loans up to a maximum amount upon demand by the
borrower during a specified term. These commitments may have the effect of requiring the Trust to increase its investment in a company at a time when it might not be desirable to do so (including at a time when the companys financial condition
makes it unlikely that such amounts will be repaid). Delayed funding loans and revolving credit facilities are subject to credit, interest rate and liquidity risk and the risks of being a lender.
Zero-Coupon Bonds, Step-Ups and
Pay-In-Kind Securities. Zero-coupon bonds pay interest only at maturity rather than at intervals during the life of the security. Like
zero-coupon bonds, step up bonds pay no interest initially but eventually begin to pay a coupon rate prior to maturity, which rate may increase at stated intervals during the life of the security. Pay-in-kind securities (PIKs) are debt obligations that pay interest in the form of other debt obligations, instead of in cash. Each of these
instruments is normally issued and traded at a deep discount from face value. Zero-coupon bonds, step-ups and PIKs allow an issuer to avoid or delay the need to generate cash to meet current interest payments
and, as a result, may involve greater credit risk than bonds that pay interest currently or in cash. The Trust would be required to distribute the income on these instruments as it accrues, even though the Trust will not receive the income on a
current basis or in cash. Thus, the Trust may have to sell other investments, including when it may not be advisable to do so, to make income distributions to its shareholders.
Premium Securities. The Trust may invest in income securities bearing coupon rates higher than prevailing market rates. Such premium
securities are typically purchased at prices greater than the principal amounts payable on maturity. The Trust will not amortize the premium paid for such securities in calculating its net investment income. As a result, in such cases the purchase
of such securities provides the Trust a higher level of investment income distributable to shareholders on a current basis than if the Trust purchased securities bearing current market rates of interest. Although such securities bear coupon rates
higher than prevailing market rates, because they are purchased
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at a price in excess of par value, the yield earned by the Trust on such investments may not exceed prevailing market yields. If an issuer were to redeem securities held by the Trust during a
time of declining interest rates, the Trust may not be able to reinvest the proceeds in securities providing the same investment return as the securities redeemed. If securities purchased by the Trust at a premium are called or sold prior to
maturity, the Trust will recognize a capital loss to the extent the call or sale price is less than the purchase price. Additionally, the Trust will recognize a capital loss if it holds such securities to maturity.
U.S. Government Debt Securities. The Trust may invest in debt securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, including U.S. Treasury obligations, which differ in their interest rates, maturities and times of issuance. Such obligations include U.S. Treasury bills (maturity of one year or less), U.S. Treasury notes (maturity of one to
ten years) and U.S. Treasury bonds (generally maturities of greater than ten years), including the principal components or the interest components issued by the U.S. government under the separate trading of registered interest and principal
securities program (i.e., STRIPS), all of which are backed by the full faith and credit of the United States.
Municipal Securities.
Set forth below is a detailed description of the municipal securities in which the Trust invests. Information with respect to ratings assigned to tax-exempt obligations that the Trust may
purchase is set forth in Appendix ARatings of Investments in the SAI. Obligations are included within the term municipal securities if the interest paid thereon is excluded from gross income for federal income tax purposes in
the opinion of bond counsel to the issuer.
Municipal securities include debt obligations issued to obtain funds for various public purposes, including
the construction of a wide range of public facilities, refunding of outstanding obligations and obtaining funds for general operating expenses and loans to other public institutions and facilities. In addition, certain types of PABs are issued by or
on behalf of public authorities to finance various privately owned or operated facilities, including among other things, airports, public ports, mass commuting facilities, multi-family housing projects, as well as facilities for water supply, gas,
electricity, sewage or solid waste disposal and other specialized facilities. Other types of PABs, the proceeds of which are used for the construction, equipment or improvement of privately operated industrial or commercial facilities, may
constitute municipal securities. The interest on municipal securities may bear a fixed rate or be payable at a variable or floating rate. The two principal classifications of municipal securities are general obligation bonds and
revenue bonds, which latter category includes PABs and, for bonds issued on or before August 15, 1986, industrial development bonds. Municipal securities typically are issued to finance public projects, such as roads or public
buildings, to pay general operating expenses or to refinance outstanding debt. Municipal securities may also be issued for private activities, such as housing, medical and educational facility construction, or for privately owned industrial
development and pollution control projects. General obligation bonds are backed by the full faith and credit, or taxing authority, of the issuer and may be repaid from any revenue source. Revenue bonds may be repaid only from the revenues of a
specific facility or source. Municipal securities may be issued on a long-term basis to provide permanent financing. The repayment of such debt may be secured generally by a pledge of the full faith and credit taxing power of the issuer, a limited
or special tax, or any other revenue source, including project revenues, which may include tolls, fees and other user charges, lease payments and mortgage payments. Municipal securities may also be issued to finance projects on a short-term interim
basis, anticipating repayment with the proceeds of the later issuance of long-term debt.
The municipal securities in which the Trust invests pay interest
or income that, in the opinion of bond counsel to the issuer, is exempt from regular Federal income tax. The Advisors do not conduct its own analysis of the tax status of the interest paid by municipal securities held by the Trust, but will rely on
the opinion of counsel to the issuer of each such instrument. The Trust may also invest in municipal securities issued by United States Territories (such as Puerto Rico or Guam) that are exempt from regular Federal income tax. In addition to the
types of municipal securities described in this Prospectus, the Trust may invest in other securities that pay interest or income that is, or make other distributions that are, exempt from regular Federal income tax and/or state and local personal
taxes, regardless of the technical structure of the issuer of the instrument. The Trust treats all of such tax-exempt securities as municipal securities.
The yields on municipal securities are dependent on a variety of factors, including prevailing interest rates and the condition of the general money market
and the municipal security market, the size of a particular offering, the
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maturity of the obligation and the rating of the issue. The market value of municipal securities will vary with changes in interest rate levels and as a result of changing evaluations of the
ability of bond issuers to meet interest and principal payments.
The Trust has not established any limit on the percentage of its portfolio that may be
invested in PABs. The Trust may not be a suitable investment for investors who are already subject to the federal alternative minimum tax or who would become subject to the federal alternative minimum tax as a result of an investment in the
Trusts common shares.
General Obligation Bonds. General obligation bonds are typically secured by the issuers pledge
of its faith, credit and taxing power for the repayment of principal and the payment of interest. The taxing power of any governmental entity may be limited, however, by provisions of its state constitution or laws, and an entitys
creditworthiness will depend on many factors, including potential erosion of its tax base due to population declines, natural disasters, declines in the states industrial base or inability to attract new industries, economic limits on the
ability to tax without eroding the tax base, state legislative proposals or voter initiatives to limit ad valorem real property taxes and the extent to which the entity relies on federal or state aid, access to capital markets or other factors
beyond the states or entitys control. Accordingly, the capacity of the issuer of a general obligation bond as to the timely payment of interest and the repayment of principal when due is affected by the issuers maintenance of its
tax base.
Revenue Bonds. Revenue or special obligation bonds are typically payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds of a special excise tax or other specific revenue sources such as payments from the user of the facility being financed. Accordingly, the timely payment of interest and
the repayment of principal in accordance with the terms of the revenue or special obligation bond is a function of the economic viability of such facility or such revenue source. Revenue bonds issued by state or local agencies to finance the
development of low-income, multi-family housing involve special risks in addition to those associated with municipal securities generally, including that the underlying properties may not generate
sufficient income to pay expenses and interest costs. Such bonds are generally non-recourse against the property owner, may be junior to the rights of others with an interest in the properties, may
pay interest that changes based in part on the financial performance of the property, may be prepayable without penalty and may be used to finance the construction of housing developments which, until completed and rented, do not generate income to
pay interest. Increases in interest rates payable on senior obligations may make it more difficult for issuers to meet payment obligations on subordinated bonds.
Municipal Notes. Municipal notes are shorter term municipal debt obligations. They may provide interim financing in anticipation of tax
collection, bond sales or revenue receipts. If there is a shortfall in the anticipated proceeds, repayment on the note may be delayed or the note may not be fully repaid, and the Trust may lose money.
Municipal Commercial Paper. Municipal commercial paper is generally unsecured and issued to meet short-term financing needs. The lack
of security presents some risk of loss to the Trust since, in the event of an issuers bankruptcy, unsecured creditors are repaid only after the secured creditors out of the assets, if any, that remain.
PABs. The Trust may purchase municipal securities classified as PABs. Interest received on certain PABs is treated as an item of
tax preference for purposes of the federal alternative minimum tax and may impact the overall tax liability of certain investors in the Trust. PABs, formerly referred to as industrial development bonds, are issued by, or on behalf of,
states, municipalities or public authorities to obtain funds to provide privately operated housing facilities, airport, mass transit or port facilities, sewage disposal, solid waste disposal or hazardous waste treatment or disposal facilities and
certain local facilities for water supply, gas or electricity. Other types of PABs, the proceeds of which are used for the construction, equipment, repair or improvement of privately operated industrial or commercial facilities, may constitute
municipal securities, although the federal tax laws may place substantial limitations on the size of such issues. Such bonds are secured primarily by revenues derived from loan repayments or lease payments due from the entity which may or may not be
guaranteed by a parent company or otherwise secured. PABs generally are not secured by a pledge of the taxing power of the issuer of such bonds. Therefore, an investor should be aware that repayment of such bonds generally depends on the revenues of
a private entity and be aware of the risks that such an investment may entail. The continued ability of an entity to generate
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sufficient revenues for the payment of principal and interest on such bonds will be affected by many factors including the size of the entity, capital structure, demand for its products or
services, competition, general economic conditions, government regulation and the entitys dependence on revenues for the operation of the particular facility being financed.
Moral Obligation Bonds. Municipal securities may also include moral obligation bonds, which are normally issued by special
purpose public authorities. If an issuer of moral obligation bonds is unable to meet its obligations, the repayment of such bonds becomes a moral commitment but not a legal obligation of the state or municipality in question.
Municipal Lease Obligations. Also included within the general category of municipal securities are certificates of participation
(COPs) issued by government authorities or entities to finance the acquisition or construction of equipment, land and/or facilities. COPs represent participations in a lease, an installment purchase contract or a conditional sales
contract (hereinafter collectively called lease obligations) relating to such equipment, land or facilities. Municipal leases, like other municipal debt obligations, are subject to the risk of
non-payment. Although lease obligations do not constitute general obligations of the issuer for which the issuers unlimited taxing power is pledged, a lease obligation is frequently backed by the
issuers covenant to budget for, appropriate and make the payments due under the lease obligation. However, certain lease obligations contain non-appropriation clauses which provide that the
issuer has no obligation to make lease or installment purchase payments in future years unless money is appropriated for such purpose on a yearly basis. Although non-appropriation lease obligations
are secured by the leased property, disposition of the property in the event of foreclosure might prove difficult and the value of the property may be insufficient to issue lease obligations. Certain investments in lease obligations may be illiquid.
The ability of issuers of municipal leases to make timely lease payments may be adversely impacted in general economic downturns and as
relative governmental cost burdens are allocated and reallocated among federal, state and local governmental units. Such non-payment would result in a reduction of income to the Trust, and could result in a
reduction in the value of the municipal lease experiencing non-payment and a potential decrease in the NAV of the Trust. Issuers of municipal lease obligations might seek protection under the bankruptcy laws.
In the event of bankruptcy of such an issuer, the Trust could experience delays and limitations with respect to the collection of principal and interest on such municipal leases and the Trust may not, in all circumstances, be able to collect all
principal and interest to which it is entitled. To enforce its rights in the event of a default in lease payments, the Trust might take possession of and manage the assets securing the issuers obligations on such securities, which may increase
the Trusts operating expenses and adversely affect the NAV of the Trust. When the lease contains a non-appropriation clause, however, the failure to pay would not be a default and the Trust would not
have the right to take possession of the assets. Any income derived from the Trusts ownership or operation of such assets may not be tax-exempt or may fail to generate qualifying income for purposes of
the income tests applicable to regulated investment companies. In addition, the Trusts intention to qualify as a regulated investment company under the Code may limit the extent to which the Trust may exercise its rights by taking possession
of such assets, because as a regulated investment company the Trust is subject to certain limitations on its investments and on the nature of its income.
Zero-Coupon Bonds. Municipal securities may include zero-coupon bonds. Zero-coupon bonds are
securities that are sold at a discount to par value and do not pay interest during the life of the security. The discount approximates the total amount of interest the security will accrue and compound over the period until maturity at a rate of
interest reflecting the market rate of the security at the time of issuance. Upon maturity, the holder of a zero-coupon bond is entitled to receive the par value of the security.
While interest payments are not made on such securities, holders of such securities are deemed to have received income (phantom
income) annually, notwithstanding that cash may not be received currently. The effect of owning instruments that do not make current interest payments is that a fixed yield is earned not only on the original investment but also, in effect, on
all discount accretion during the life of the obligations. This implicit reinvestment of earnings at a fixed rate eliminates the risk of being unable to invest distributions at a rate as high as the implicit yield on the zero-coupon bond, but at the same time eliminates the holders ability to reinvest at higher rates in the future. For this reason, some of these securities may be subject to substantially greater price
fluctuations during periods of changing market interest rates than are comparable securities that pay interest currently. Longer
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term zero-coupon bonds are more exposed to interest rate risk than shorter term zero-coupon bonds. These
investments benefit the issuer by mitigating its need for cash to meet debt service, but also require a higher rate of return to attract investors who are willing to defer receipt of cash.
The Trust accrues income with respect to these securities for U.S. federal income tax and accounting purposes prior to the receipt of cash
payments. Zero-coupon bonds may be subject to greater fluctuation in value and less liquidity in the event of adverse market conditions than comparably rated securities that pay cash interest at regular intervals.
Further, to maintain its qualification for pass-through treatment under the federal tax laws, the Trust is required to distribute income to
its shareholders and, consequently, may have to dispose of other, more liquid portfolio securities under disadvantageous circumstances or may have to leverage itself by borrowing in order to generate the cash to satisfy these distributions. The
required distributions may result in an increase in the Trusts exposure to zero-coupon bonds.
In addition to the above-described risks, there are certain other risks related to investing in
zero-coupon bonds. During a period of severe market conditions, the market for such securities may become even less liquid. In addition, as these securities do not pay cash interest, the Trusts
investment exposure to these securities and their risks, including credit risk, will increase during the time these securities are held in the Trusts portfolio.
Pre-Refunded Municipal Securities. The principal of, and interest on, pre-refunded municipal securities are no longer paid from the original revenue source for the securities. Instead, the source of such payments is typically an escrow fund consisting of U.S. Government securities.
The assets in the escrow fund are derived from the proceeds of refunding bonds issued by the same issuer as the pre-refunded municipal securities. Issuers of municipal securities use this advance refunding
technique to obtain more favorable terms with respect to securities that are not yet subject to call or redemption by the issuer. For example, advance refunding enables an issuer to refinance debt at lower market interest rates, restructure debt to
improve cash flow or eliminate restrictive covenants in the indenture or other governing instrument for the pre-refunded municipal securities.
However, except for a change in the revenue source from which principal and interest payments are made, the
pre-refunded municipal securities remain outstanding on their original terms until they mature or are redeemed by the issuer.
Special Taxing Districts. Special taxing districts are organized to plan and finance infrastructure developments to induce residential,
commercial and industrial growth and redevelopment. The bond financing methods such as tax increment finance, tax assessment, special services district and Mello-Roos bonds (a type of municipal security established by the Mello-Roos Community
Facilities Act of 1982), are generally payable solely from taxes or other revenues attributable to the specific projects financed by the bonds without recourse to the credit or taxing power of related or overlapping municipalities. They often are
exposed to real estate development-related risks and can have more taxpayer concentration risk than general tax-supported bonds, such as general obligation bonds. Further, the fees, special taxes, or tax
allocations and other revenues that are established to secure such financings are generally limited as to the rate or amount that may be levied or assessed and are not subject to increase pursuant to rate covenants or municipal or corporate
guarantees. The bonds could default if development failed to progress as anticipated or if larger taxpayers failed to pay the assessments, fees and taxes as provided in the financing plans of the districts.
Indexed and Inverse Floating Rate Securities. The Trust may invest in municipal securities (and
Non-Municipal Tax-Exempt Securities) that yield a return based on a particular index of value or interest rates. For example, the Trust may invest in municipal
securities that pay interest based on an index of municipal security interest rates. The principal amount payable upon maturity of certain municipal securities also may be based on the value of the index. To the extent the Trust invests in these
types of municipal securities, the Trusts return on such municipal securities will be subject to risk with respect to the value of the particular index. Interest and principal payable on the municipal securities may also be based on relative
changes among particular indices. Also, the Trust may invest in so-called inverse floating rate bonds or residual interest bonds on which the interest rates vary inversely with a
short-term floating rate (which may be reset periodically by a Dutch auction, a remarketing agent, or by reference to a short-term tax-exempt interest rate index). The Trust may purchase synthetically created
inverse
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floating rate bonds evidenced by custodial or trust receipts. Generally, income on inverse floating rate bonds will decrease when short-term interest rates increase, and will increase when
short-term interest rates decrease. Such securities have the effect of providing a degree of investment leverage, since they may increase or decrease in value in response to changes, as an illustration, in market interest rates at a rate which is a
multiple (typically two) of the rate at which fixed rate long-term tax-exempt securities increase or decrease in response to such changes. As a result, the market values of such securities will generally be
more volatile than the market values of fixed rate tax-exempt securities. To seek to limit the volatility of these securities, the Trust may purchase inverse floating rate bonds with shorter-term maturities or
limitations on the extent to which the interest rate may vary. Certain investments in such obligations may be illiquid.
When-Issued
Securities, Delayed Delivery Securities and Forward Commitments. The Trust may purchase or sell securities that it is entitled to receive on a when-issued basis. The Trust may also purchase or sell securities on a delayed delivery basis. The
Trust may also purchase or sell securities through a forward commitment. These transactions involve the purchase or sale of securities by the Trust at an established price with payment and delivery taking place in the future. The purchase will be
recorded on the date the Trust enters into the commitment and the value of the securities will thereafter be reflected in the Trusts NAV. The Trust has not established any limit on the percentage of its assets that may be committed in
connection with these transactions. At the time the Trust enters into a transaction on a when-issued basis, it will segregate or designate on its books and records cash or liquid assets with a value not less than the value of the when-issued
securities.
There can be no assurance that a security purchased on a when-issued basis will be issued or that a security purchased or
sold through a forward commitment will be delivered. A default by a counterparty may result in the Trust missing the opportunity of obtaining a price considered to be advantageous. The value of securities in these transactions on the delivery date
may be more or less than the Trusts purchase price. The Trust may bear the risk of a decline in the value of the security in these transactions and may not benefit from an appreciation in the value of the security during the commitment period.
If deemed advisable as a matter of investment strategy, the Trust may dispose of or renegotiate a commitment after it has been entered
into, and may sell securities it has committed to purchase before those securities are delivered to the Trust on the settlement date. In these cases the Trust may realize a taxable capital gain or loss.
When the Trust engages in when-issued, delayed delivery or forward commitment transactions, it relies on the other party to consummate the
trade. Failure of such party to do so may result in the Trusts incurring a loss or missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a commitment to purchase securities, and any subsequent fluctuations in their market value, is
taken into account when determining the market value of the Trust starting on the day the Trust agrees to purchase the securities. The Trust does not earn interest on the securities it has committed to purchase until they are paid for and delivered
on the settlement date.
Yields. Yields on municipal securities are dependent on a variety of factors, including the general
condition of the money market and of the municipal security market, the size of a particular offering, the financial condition of the issuer, the maturity of the obligation and the rating of the issue. The ability of the Trust to achieve its
investment objective is also dependent on the continuing ability of the issuers of the securities in which the Trust invests to meet their obligations for the payment of interest and principal when due. There are variations in the risks involved in
holding municipal securities, both within a particular classification and between classifications, depending on numerous factors. Furthermore, the rights of owners of municipal securities and the obligations of the issuer of such municipal
securities may be subject to applicable bankruptcy, insolvency and similar laws and court decisions affecting the rights of creditors generally and to general equitable principles, which may limit the enforcement of certain remedies.
Preferred Securities. The Trust may invest in preferred securities. There are two basic types of preferred securities. The first type, sometimes
referred to as traditional preferred securities, consists of preferred stock issued by an entity taxable as a corporation. The second type, sometimes referred to as trust preferred securities, are usually issued by a
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trust or limited partnership and represent preferred interests in deeply subordinated debt instruments issued by the corporation for whose benefit the trust or partnership was established.
Traditional Preferred Securities. Traditional preferred securities generally pay fixed or adjustable rate dividends to investors
and generally have a preference over common stock in the payment of dividends and the liquidation of a companys assets. This means that a company must pay dividends on preferred stock before paying any dividends on its common
stock. In order to be payable, distributions on such preferred securities must be declared by the issuers board of directors. Income payments on typical preferred securities currently outstanding are cumulative, causing dividends and
distributions to accumulate even if not declared by the board of directors or otherwise made payable. In such a case all accumulated dividends must be paid before any dividend on the common stock can be paid. However, some traditional preferred
stocks are non-cumulative, in which case dividends do not accumulate and need not ever be paid. A portion of the portfolio may include investments in non-cumulative
preferred securities, whereby the issuer does not have an obligation to make up any arrearages to its shareholders. Should an issuer of a non-cumulative preferred stock held by the Trust determine not to pay
dividends on such stock, the amount of dividends the Trust pays may be adversely affected. There is no assurance that dividends or distributions on the preferred securities in which the Trust invests will be declared or otherwise made payable.
Preferred stockholders usually have no right to vote for corporate directors or on other matters. Shares of preferred stock have a liquidation value that
generally equals the original purchase price at the date of issuance. The market value of preferred securities may be affected by favorable and unfavorable changes impacting companies in the utilities and financial services sectors, which are
prominent issuers of preferred securities, and by actual and anticipated changes in tax laws, such as changes in corporate income tax rates or the Dividends Received Deduction. Because the claim on an issuers earnings represented
by preferred securities may become onerous when interest rates fall below the rate payable on such securities, the issuer may redeem the securities. Thus, in declining interest rate environments in particular, the Trusts holdings, if any, of
higher rate-paying fixed rate preferred securities may be reduced and the Trust may be unable to acquire securities of comparable credit quality paying comparable rates with the redemption proceeds.
Trust Preferred Securities. Trust preferred securities are typically issued by corporations, generally in the form
of interest-bearing notes with preferred security characteristics, or by an affiliated business trust of a corporation, generally in the form of beneficial interests in subordinated debentures or similarly structured securities. The trust preferred
securities market consists of both fixed and adjustable coupon rate securities that are either perpetual in nature or have stated maturity dates.
Trust preferred securities are typically junior and fully subordinated liabilities of an issuer or the beneficiary of a guarantee that is junior and fully
subordinated to the other liabilities of the guarantor. In addition, trust preferred securities typically permit an issuer to defer the payment of income for eighteen months or more without triggering an event of default. Generally, the deferral
period is five years or more. Because of their subordinated position in the capital structure of an issuer, the ability to defer payments for extended periods of time without default consequences to the issuer, and certain other features (such as
restrictions on common dividend payments by the issuer or ultimate guarantor when full cumulative payments on the trust preferred securities have not been made), these trust preferred securities are often treated as close substitutes for traditional
preferred securities, both by issuers and investors. Trust preferred securities have many of the key characteristics of equity due to their subordinated position in an issuers capital structure and because their quality and value are heavily
dependent on the profitability of the issuer rather than on any legal claims to specific assets or cash flows.
Convertible Securities. A
convertible security is a bond, debenture, note, preferred stock or other security that may be converted into or exchanged for a prescribed amount of common stock or other equity security of the same or a different issuer within a particular period
of time at a specified price or formula. A convertible security entitles the holder to receive interest paid or accrued on debt or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted or exchanged.
Before conversion, convertible securities have characteristics similar to nonconvertible income securities in that they ordinarily provide a stable stream of income with generally higher yields than those of common stocks of the same or similar
issuers, but lower yields than comparable nonconvertible securities. The value of a convertible security is influenced by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline.
The credit standing of the issuer and other factors also may have an effect on the convertible securitys investment value. Convertible
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securities rank senior to common stock in a corporations capital structure but are usually subordinated to comparable nonconvertible securities. Convertible securities may be subject to
redemption at the option of the issuer at a price established in the convertible securitys governing instrument.
A synthetic or
manufactured convertible security may be created by the Trust or by a third party by combining separate securities that possess the two principal characteristics of a traditional convertible security: an income producing component and a
convertible component. The income-producing component is achieved by investing in non-convertible, income-producing securities such as bonds, preferred stocks and money market instruments. The convertible
component is achieved by investing in securities or instruments such as warrants or options to buy common stock at a certain exercise price, or options on a stock index. Unlike a traditional convertible security, which is a single security having a
single market value, a synthetic convertible comprises two or more separate securities, each with its own market value. Because the market value of a synthetic convertible security is the sum of the values of its income-producing
component and its convertible component, the value of a synthetic convertible security may respond differently to market fluctuations than a traditional convertible security. The Trust also may purchase synthetic convertible securities created by
other parties, including convertible structured notes. Convertible structured notes are income-producing debentures linked to equity. Convertible structured notes have the attributes of a convertible security; however, the issuer of the convertible
note (typically an investment bank), rather than the issuer of the underlying common stock into which the note is convertible, assumes credit risk associated with the underlying investment and the Trust in turn assumes credit risk associated with
the issuer of the convertible note.
Contingent Convertible Securities. One type of convertible security in which the Trust may invest is
contingent convertible securities, sometimes referred to as CoCos. CoCos are a form of hybrid debt security issued by banking institutions that are intended to either automatically convert into equity or have their principal written down
upon the occurrence of certain trigger events, which may include a decline in the issuers capital below a specified threshold level, increase in the issuers risk weighted assets, the share price of the issuer falling to a
particular level for a certain period of time and certain regulatory events. CoCos unique equity conversion or principal write-down features are tailored to the issuing banking institution and its regulatory requirements. CoCos are a newer
form of instrument and the regulatory environment for these instruments continues to evolve.
Restricted and Illiquid Securities. The
Trust may invest in restricted, illiquid or less liquid securities or securities in which no secondary trading market is readily available or which are otherwise illiquid, including private placement securities.
The liquidity of a security relates to the ability to dispose easily of the security and the price to be obtained upon disposition of the security, which may
be less than would be obtained for a comparable more liquid security. Illiquid securities are securities which cannot be sold within seven days in the ordinary course of business at approximately the value used by the Trust in
determining its NAV. Illiquid securities may trade at a discount from comparable, more liquid investments. Investment of the Trusts assets in illiquid securities may restrict the ability of the Trust to dispose of its investments in a
timely fashion and for a fair price as well as its ability to take advantage of market opportunities. The risks associated with illiquidity will be particularly acute where the Trusts operations require cash, such as when the Trust pays
dividends, and could result in the Trust borrowing to meet short-term cash requirements or incurring capital losses on the sale of illiquid investments.
Restricted securities are securities that are not registered under the Securities Act. Restricted securities may be sold in private placement
transactions between issuers and their purchasers and may be neither listed on an exchange nor traded in other established markets. In many cases, privately placed securities may not be freely transferable under the laws of the applicable
jurisdiction or due to contractual restrictions on resale. As a result of the absence of a public trading market, privately placed securities may be less liquid and more difficult to value than publicly traded securities. To the extent that
privately placed securities may be resold in privately negotiated transactions, the prices realized from the sales, due to restrictions on resale, could be less than those originally paid by the Trust or less than their fair market value. In
addition, issuers whose securities are not publicly traded may not be subject to the disclosure and other investor protection requirements that may be applicable if their securities were publicly traded. If any privately placed securities held by
the Trust are required to be registered under the securities laws of one or more jurisdictions before being resold, the Trust may be required to bear the expenses of registration. Certain of the Trusts investments in private placements may
consist of direct investments and may include investments in smaller, less seasoned issuers, which may involve greater risks. These issuers may have limited product lines, markets or financial resources, or they may be dependent on a limited
management group. In making investments in such securities, the Trust may obtain access to material nonpublic information, which may restrict the Trusts ability to conduct portfolio transactions in such securities.
Some of these securities are new and complex, and trade only among institutions; the markets for these securities are still developing, and may not function
as efficiently as established markets. Also, because there may not be an established market price for these securities, the Trust may have to estimate their value, which means that their valuation (and thus the valuation of the Trust) may have a
subjective element.
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Transactions in restricted or illiquid securities may entail registration expense and other transaction costs
that are higher than those for transactions in unrestricted or liquid securities eligible for trading on national securities exchanges or in the over-the-counter
markets. Where registration is required for restricted or illiquid securities a considerable time period may elapse between the time the Trust decides to sell the security and the time it is actually permitted to sell the security under an effective
registration statement. If during such period, adverse market conditions were to develop, the Trust may obtain less favorable pricing terms then when it decided to sell the security.
Non-U.S. Securities. The Trust may invest in securities of non-U.S.
issuers (Non-U.S. Securities). Subject to the Trusts investment policies, these securities may be U.S. dollar-denominated or non-U.S.
dollar-denominated. Some Non-U.S. Securities may be less liquid and more volatile than securities of comparable U.S. issuers. Similarly, there is less volume and liquidity in most foreign securities
markets than in the United States and, at times, greater price volatility than in the United States. Because evidence of ownership of such securities usually is held outside the United States, the Trust will be subject to additional risks if it
invests in Non-U.S. Securities, which include adverse political and economic developments, seizure or nationalization of foreign deposits and adoption of governmental restrictions which might adversely affect
or restrict the payment of principal and interest on the foreign securities to investors located outside the country of the issuer, whether from currency blockage or otherwise. Non-U.S. Securities may trade on
days when the common shares are not priced or traded.
Emerging Markets Investments. The Trust may invest in securities of issuers located in
emerging market countries, including securities denominated in currencies of emerging market countries. Emerging market countries generally include every nation in the world except the United States, Canada, Japan, Australia, New Zealand and
most countries located in Western Europe. These issuers may be subject to risks that do not apply to issuers in larger, more developed countries. These risks are more pronounced to the extent the Trust invests significantly in one country. Less
information about non-U.S. issuers or markets may be available due to less rigorous disclosure and accounting standards or regulatory practices. Many non-U.S. markets
are smaller, less liquid and more volatile than U.S. markets. In a changing market, the Advisors may not be able to sell the Trusts portfolio securities in amounts and at prices it considers reasonable. The U.S. dollar may appreciate against non-U.S. currencies or an emerging market government may impose restrictions on currency conversion or trading. The economies of non-U.S. countries may grow at a slower rate
than expected or may experience a downturn or recession. Economic, political and social developments may adversely affect non-U.S. securities markets.
Equity Securities. The Trust may invest in equity securities, including common stocks and warrants. Common stock represents an equity ownership
interest in a company. The Trust may hold or have exposure to common stocks of issuers of any size, including small and medium capitalization stocks. Warrants are privileges issued by corporations enabling the owners to subscribe to and purchase a
specified number of shares of the corporation at a specified price during a specified period of time. Warrants normally have a short life span to expiration. The purchase of warrants involves the risk that the Trust could lose the purchase value of
a right or warrant if the right to subscribe to additional shares is not exercised prior to the warrants expiration. Also, the purchase of warrants involves the risk that the effective price paid for the warrant added to the subscription price
of the related security may exceed the value of the subscribed securitys market price such as when there is no movement in the level of the underlying security. Buying a warrant does not make the Trust a shareholder of the underlying stock.
Sovereign Governmental and Supranational Debt. The Trust may invest in all types of debt securities of governmental issuers in all countries,
including emerging market countries. These sovereign debt securities may include without limitation: debt securities issued or guaranteed by governments, governmental agencies or instrumentalities and political subdivisions; debt securities issued
by government owned, controlled or sponsored entities; interests in entities organized and operated for the purpose of restructuring the investment characteristics of instruments issued by any of the above issuers; Brady Bonds, which are debt
securities issued under the framework of the Brady Plan as a means for debtor nations to restructure their outstanding external indebtedness; participations in loans between governments and financial institutions; or debt securities issued by
supranational entities such as the World Bank. A supranational entity is a bank, commission or company established or financially supported by the national governments of one or more countries to promote reconstruction or development. Sovereign
government and supranational debt involve all the risks described herein regarding foreign and emerging markets investments as well as the risk of debt moratorium, repudiation or renegotiation.
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Brady Bonds are debt securities, generally denominated in U.S. dollars, issued under the framework of the Brady
Plan as a means for debtor nations to restructure their outstanding external indebtedness. In restructuring its external debt under the Brady Plan framework, a debtor nation negotiates with its existing bank lenders as well as multilateral
institutions such as the World Bank and the International Monetary Fund (the IMF). The Brady Plan framework, as it has developed, contemplates the exchange of external commercial bank debt for newly issued bonds known as Brady
Bonds. Brady Bonds may also be issued in respect of new money being advanced by existing lenders in connection with the debt restructuring. The World Bank and/or the IMF support the restructuring by providing funds pursuant to loan agreements
or other arrangements which enable the debtor nation to collateralize the new Brady Bonds or to repurchase outstanding bank debt at a discount. Under these arrangements with the World Bank and/or the IMF, debtor nations have been required to agree
to the implementation of certain domestic monetary and fiscal reforms. Such reforms have included the liberalization of trade and foreign investment, the privatization of state-owned enterprises and the setting of targets for public spending and
borrowing. These policies and programs seek to promote the debtor countrys economic growth and development. Investors should also recognize that the Brady Plan only sets forth general guiding principles for economic reform and debt reduction,
emphasizing that solutions must be negotiated on a case-by-case basis between debtor nations and their creditors.
Brady Bonds involve various risk factors described elsewhere associated with investing in foreign securities, including the history of defaults with respect
to commercial bank loans by public and private entities of countries issuing Brady Bonds. In light of the residual risk of Brady Bonds and, among other factors, the history of defaults, investments in Brady Bonds are considered speculative. There
can be no assurance that Brady Bonds in which the Trust may invest will not be subject to restructuring arrangements or to requests for new credit, which may cause the Trust to suffer a loss of interest or principal on any of its holdings.
Inflation-Indexed Bonds. Inflation-indexed bonds (other than municipal inflation-indexed bonds and certain corporate inflation-indexed bonds) are
fixed income securities the principal value of which is periodically adjusted according to the rate of inflation. If the index measuring inflation falls, the principal value of inflation-indexed bonds (other than municipal inflation-indexed bonds
and certain corporate inflation-indexed bonds) will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of the original bond principal
upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds (TIPs). For bonds that do not provide a similar guarantee, the adjusted principal value of the bond repaid at maturity may be
less than the original principal. With regard to municipal inflation-indexed bonds and certain corporate inflation-indexed bonds, the inflation adjustment is typically reflected in the semi-annual coupon payment. As a result, the principal value of
municipal inflation-indexed bonds and such corporate inflation-indexed bonds does not adjust according to the rate of inflation.
Variable and Floating
Rate Instruments. Variable and floating rate securities provide for a periodic adjustment in the interest rate paid on the obligations. The terms of such obligations provide that interest rates are adjusted periodically based upon an interest
rate adjustment index as provided in the respective obligations. The adjustment intervals may be regular, and range from daily up to annually, or may be event-based, such as based on a change in the prime rate.
The interest rate on a floating rate security is a variable rate which is tied to another interest rate, such as a money-market index or Treasury bill
rate. The interest rate on a floating rate security resets periodically, typically every six months. Because of the interest rate reset feature, floating rate securities provide the Trust with a certain degree of protection
against rises in interest rates, although the Trust will participate in any declines in interest rates as well.
Inverse Floating Rate Securities.
An inverse floater is a type of debt instrument that bears a floating or variable interest rate that moves in the opposite direction to interest rates generally or the interest rate on another security or index. Changes in interest rates generally,
or the interest rate of the other security or index, inversely affect the interest rate paid on the inverse floater, with the result that the inverse floaters price will be considerably more volatile than that of a fixed rate bond. The Trust
may invest in inverse floaters, which brokers typically create by depositing an income-producing instrument, including a mortgage related security, in a trust. The trust in turn issues a variable rate security and inverse floaters. The interest rate
for the variable rate security is typically determined by an index or an auction process, while the inverse floater holder receives the balance of the income from the underlying income-producing instrument less an auction fee. The market prices of
inverse floaters may be highly
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sensitive to changes in interest rates and prepayment rates on the underlying securities, and may decrease significantly when interest rates increase or prepayment rates change. In a transaction
in which the Trust purchases an inverse floater from a trust, and the underlying security was held by the Trust prior to being deposited into the trust, the Trust typically treats the transaction as a secured borrowing for financial reporting
purposes. As a result, for financial reporting purposes, the Trust will generally incur a non-cash interest expense with respect to interest paid by the trust on the variable rate securities and will recognize
additional interest income in an amount directly corresponding to the non-cash interest expense. Therefore, the Trusts NAV per common share and performance are not affected by the non-cash interest expense. This accounting treatment does not apply to inverse floaters acquired by the Trust when the Trust did not previously own the underlying bond.
Strategic Transactions and Other Management Techniques. The Trust may engage in various strategic transactions for hedging and risk management purposes
or to enhance total return (Strategic Transactions). Strategic Transactions involve the use of derivative instruments. Such instruments may include, but are not limited to, financial futures contracts, swap contracts (including, but not
limited to, credit default swaps), options on financial futures, options on swap contracts and other derivative instruments. If the Trust engages in Strategic Transactions for hedging and risk management purposes, it primarily intends to use
strategies that include swaps (including interest rate swaps), financial futures contracts, options on financial futures or options based either on an index of long-term securities or on taxable debt securities whose prices, in the opinion of the
Advisors, correlate with the prices of the Trusts investments. If the Trust engages in Strategic Transactions to enhance total return, it primarily intends to use the same strategies as discussed above for hedging and risk management purposes
and, in addition, to engage in credit derivative transactions, including credit default swaps. There is no assurance that these derivative strategies will be available at any time or that the Advisors will determine to use them for hedging or risk
management purposes or to enhance total return or, if used, that the strategies will be successful.
There is no particular strategy that requires use of
one technique rather than another as the decision to use any particular strategy or instrument is a function of market conditions and the composition of the portfolio. The ability of the Trust to use Strategic Transactions successfully will depend
on the Advisors ability to predict pertinent market movements as well as sufficient correlation among the instruments, which cannot be assured. Strategic Transactions subject the Trust to the risk that, if the Advisors incorrectly forecasts
market values, interest rates or other applicable factors, the Trusts performance could suffer. Certain of these Strategic Transactions, such as investments in inverse floating rate securities and credit default swaps, may provide investment
leverage to the Trusts portfolio. The Trust is not required to use derivatives or other portfolio strategies to seek to hedge its portfolio and may choose not to do so.
The use of Strategic Transactions may result in losses greater than if they had not been used, may require the Trust to sell or purchase portfolio securities
at inopportune times or for prices other than current market values, may limit the amount of appreciation the Trust can realize on an investment or may cause the Trust to hold a security that it might otherwise sell. Furthermore, the Trust may only
engage in Strategic Transactions from time to time and may not necessarily be engaging in hedging activities when movements in interest rates occur.
Inasmuch as any obligations of the Trust that arise from the use of Strategic Transactions will be covered by segregated or earmarked liquid assets or
offsetting transactions, the Trust and the Advisors believe such obligations do not constitute senior securities and, accordingly, will not treat such transactions as being subject to its borrowing restrictions. Additionally, segregated or earmarked
liquid assets, amounts paid by the Trust as premiums and cash or other assets held in margin accounts with respect to Strategic Transactions are not otherwise available to the Trust for investment purposes. The SAI contains further information about
the characteristics, risks and possible benefits of Strategic Transactions and the Trusts other policies and limitations (which are not fundamental policies) relating to Strategic Transactions. Certain provisions of the Code may restrict or
affect the ability of the Trust to engage in Strategic Transactions. In addition, the use of certain Strategic Transactions may give rise to taxable income and have certain other consequences.
Swaps. The Trust may enter into swap agreements, including interest rate and index swap agreements. Swap agreements are two party contracts entered
into primarily by institutional investors for periods ranging from a few weeks to more than one year. In a standard swap transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on
particular predetermined investments or instruments. The gross returns to be exchanged or swapped between the parties are calculated with respect to a notional amount, i.e.,
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the dollar amount invested at a particular interest rate, in a particular foreign currency, or in a basket of securities representing a particular index. The notional
amount of the swap agreement is only a fictive basis on which to calculate the obligations that the parties to a swap agreement have agreed to exchange. The Trusts obligations (or rights) under a swap agreement will generally be equal
only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the net amount). The Trusts obligations under a swap agreement will be accrued
daily (offset against any amounts owing to the Trust) and the Trust will segregate with a custodian or earmark on its books and records an amount of cash or liquid assets having an aggregate NAV at all times at least equal to any accrued
but unpaid net amounts owed to a swap counterparty.
Whether the Trusts use of swap agreements will be successful in furthering its investment
objective will depend on the Advisors ability to correctly predict whether certain types of investments are likely to produce greater returns than other investments. Moreover, the Trust bears the risk of loss of the amount expected to be
received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. Swap agreements also bear the risk that the Trust will not be able to meet its payment obligations to the counterparty. As noted, however,
the Trust will deposit in a segregated account, or earmark on its books and records, liquid assets permitted to be so segregated or earmarked by the SEC in an amount equal to or greater than the market value of the Trusts liabilities under the
swap agreement or the amount it would cost the Trust initially to make an equivalent direct investment plus or minus any amount the Trust is obligated to pay or is to receive under the swap agreement. Restrictions imposed by the tax rules applicable
to regulated investment companies may limit the Trusts ability to use swap agreements. It is possible that developments in the swap market, including government regulation, could adversely affect the Trusts ability to terminate existing
swap agreements or to realize amounts to be received under such agreements.
Swaptions. A swaption is a contract that gives a counterparty the
right (but not the obligation) to enter into a new swap agreement or to shorten, extend, cancel or otherwise modify an existing swap agreement, at some designated future time on specified terms. The Trust may write (sell) and purchase put and call
swaptions. Depending on the terms of the particular option agreement, the Trust may incur a greater degree of risk when it writes a swaption than it would incur when it purchases a swaption with the same terms. When the Trust purchases a swaption,
it risks losing only the amount of the premium it has paid should it decide to let the option expire unexercised. However, when the Trust writes a swaption, upon exercise of the option the Trust will become obligated according to the terms of the
underlying agreement, and the Trust could be exposed to losses in excess of the amount of premium it received from the purchaser of the swaption.
Credit Default Swaps. The Trust may enter into credit default swap agreements. The credit default swap agreement may have as reference obligations
one or more securities that are not currently held by the Trust. The protection buyer in a credit default contract may be obligated to pay the protection seller an upfront or a periodic stream of payments over the term of the
contract, provided that no credit event on the reference obligation occurs. If a credit event occurs, the seller generally must pay the buyer the par value (full notional amount) of the swap in exchange for an equal face amount of
deliverable obligations of the reference entity described in the swap, or if the swap is cash settled the seller may be required to deliver the related net cash amount (the difference between the market value of the reference obligation and its par
value). The Trust may be either the buyer or seller in the transaction. If the Trust is a buyer and no credit event occurs, the Trust will generally receive no payments from its counterparty under the swap if the swap is held through its termination
date. However, if a credit event occurs, the buyer generally may elect to receive the full notional amount of the swap in exchange for an equal face amount of deliverable obligations of the reference entity, the value of which may have significantly
decreased. As a seller, the Trust generally receives an upfront payment or a fixed rate of income throughout the term of the swap, which typically is between six months and three years, provided that there is no credit event. If a credit event
occurs, generally the seller must pay the buyer the full notional amount of the swap in exchange for an equal face amount of deliverable obligations of the reference entity, the value of which may have significantly decreased. As the seller, the
Trust would effectively add leverage to its portfolio because, in addition to its Managed Assets, the Trust would be subject to investment exposure on the notional amount of the swap in excess of any premium and margin required to establish and
maintain the position.
Credit default swap agreements involve greater risks than if the Trust had taken a position in the reference obligation directly
(either by purchasing or selling) since, in addition to general market risks, credit default swaps are subject to
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illiquidity risk, counterparty risk and credit risks. A buyer generally will also lose its upfront payment or any periodic payments it makes to the seller counterparty and receive no payments
from its counterparty should no credit event occur and the swap is held to its termination date. If a credit event were to occur, the value of any deliverable obligation received by the seller, coupled with the upfront or periodic payments
previously received, may be less than the full notional amount it pays to the buyer, resulting in a loss of value to the seller. A seller of a credit default swap or similar instrument is exposed to many of the same risks of leverage since, if a
credit event occurs, the seller generally will be required to pay the buyer the full notional amount of the contract net of any amounts owed by the buyer related to its delivery of deliverable obligations. The Trusts obligations under a credit
default swap agreement will be accrued daily (offset against any amounts owed to the Trust). The Trust will at all times segregate or designate on its books and records in connection with each such transaction liquid assets or cash with a value at
least equal to the Trusts exposure (any accrued but unpaid net amounts owed by the Trust to any counterparty) on a marked-to-market basis (as required by
the clearing organization with respect to cleared swaps or as calculated pursuant to requirements of the SEC). If the Trust is a seller of protection in a credit default swap transaction, it will designate on its books and records in connection with
such transaction liquid assets or cash with a value at least equal to the full notional amount of the contract. Such designation will ensure that the Trust has assets available to satisfy its obligations with respect to the transaction and will
avoid any potential leveraging of the Trusts portfolio. Such designation will not limit the Trusts exposure to loss.
In addition, the credit
derivatives market is subject to a changing regulatory environment. It is possible that regulatory or other developments in the credit derivatives market could adversely affect the Trusts ability to successfully use credit derivatives.
Total Return Swaps. Total return swap agreements are contracts in which one party agrees to make periodic payments to another party based on the
change in market value of the assets underlying the contract, which may include a specified security, basket of securities or securities indices during the specified period, in return for periodic payments based on a fixed or variable interest rate
or the total return from other underlying assets. Total return swap agreements may be used to obtain exposure to a security or market without owning or taking physical custody of such security or investing directly in such market. Total return swap
agreements may effectively add leverage to the Trusts portfolio because, in addition to its Managed Assets, the Trust would be subject to investment exposure on the notional amount of the swap in excess of any premium and margin required to
establish and maintain the position.
Total return swap agreements are subject to market risk as well as the risk that a counterparty will default on its
payment obligations to the Trust thereunder. Swap agreements also bear the risk that the Trust will not be able to meet its obligation to the counterparty. Generally, the Trust will enter into total return swaps on a net basis (i.e., the two payment
streams are netted against one another with the Trust receiving or paying, as the case may be, only the net amount of the two payments). The net amount of the excess, if any, of the Trusts obligations over its entitlements with respect to each
total return swap will be accrued on a daily basis, and an amount of liquid assets having an aggregate NAV at least equal to the accrued excess will be segregated by the Trust or earmarked on its books and records. If the total return swap
transaction is entered into on other than a net basis, the full amount of the Trusts obligations will be accrued on a daily basis, and the full amount of the Trusts obligations will be segregated or earmarked by the Trust in an amount
equal to or greater than the market value of the liabilities under the total return swap agreement or the amount it would have cost the Trust initially to make an equivalent direct investment, plus or minus any amount the Trust is obligated to pay
or is to receive under the total return swap agreement.
Interest Rate Transactions. The Trust may enter into interest rate swaps and purchase
or sell interest rate caps and floors primarily to preserve a return or spread on a particular investment or portion of its portfolio as a duration management technique or to protect against any increase in the price of securities the Trust
anticipates purchasing at a later date. The Trust intends to use these transactions for duration and risk management purposes and not as a speculative investment. The Trust will not sell interest rate caps or floors that it does not own. Interest
rate swaps involve the exchange by the Trust with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. The
purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate cap. The
purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a
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predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate floor.
The Trust may enter into interest rate swaps, caps and floors on either an asset-based or liability-based basis, depending on whether it is offsetting
volatility with respect to its assets or liabilities, and will usually enter into interest rate swaps on a net basis, i.e., the two payment streams are netted out, with the Trust receiving or paying, as the case may be, only the net amount of the
two payments on the payment dates. In as much as these Strategic Transactions are entered into for good faith risk management purposes, the Advisors and the Trust believe such obligations do not constitute senior securities and, accordingly, will
not treat them as being subject to its borrowing restrictions. The Trust will accrue the net amount of the excess, if any, of the Trusts obligations over its entitlements with respect to each interest rate swap on a daily basis and will
designate on its books and records with a custodian an amount of cash or liquid high grade securities having an aggregate net asset value at all times at least equal to the accrued excess. The Trust will not enter into any interest rate swap, cap or
floor transaction unless the unsecured senior debt or the claims-paying ability of the other party thereto is rated in the highest rating category of at least one nationally recognized statistical rating organization at the time of entering into
such transaction. If there is a default by the other party to such a transaction, the Trust will have contractual remedies pursuant to the agreements related to the transaction. The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. Caps and floors are more recent innovations for which standardized documentation has not yet been developed and,
accordingly, they are less liquid than swaps.
Foreign Currency Transactions. The Trusts common shares are priced in U.S. dollars and the
distributions paid by the Trust to common shareholders are paid in U.S. dollars. However, a portion of the Trusts assets may be denominated in non-U.S. currencies and the income received by the
Trust from such securities will be paid in non-U.S. currencies. The Trust also may invest in or gain exposure to non-U.S. currencies for investment
or hedging purposes. The Trusts investments in securities that trade in, or receive revenues in, non-U.S. currencies will be subject to currency risk, which is the risk that fluctuations in the
exchange rates between the U.S. dollar and foreign currencies may negatively affect an investment. The Trust may (but is not required to) hedge some or all of its exposure to non-U.S. currencies
through the use of derivative strategies, including forward foreign currency exchange contracts, foreign currency futures contracts and options on foreign currencies and foreign currency futures. Suitable hedging transactions may not be available in
all circumstances and there can be no assurance that the Trust will engage in such transactions at any given time or from time to time when they would be beneficial. Although the Trust has the flexibility to engage in such transactions, the Advisors
may determine not to do so or to do so only in unusual circumstances or market conditions. These transactions may not be successful and may eliminate any chance for the Trust to benefit from favorable fluctuations in relevant foreign currencies. The
Trust may also use derivatives contracts for purposes of increasing exposure to a foreign currency or to shift exposure to foreign currency fluctuations from one currency to another.
Foreign Exchange Transactions. The Trust may engage in spot and forward foreign exchange transactions and currency swaps, purchase
and sell options on currencies and purchase and sell currency futures and related options thereon (collectively, Currency Instruments). Such transactions could be effected with respect to hedges on foreign dollar denominated securities
owned by the Trust, sold by the Trust but not yet delivered, or committed or anticipated to be purchased by the Trust. As an illustration, the Trust may use such techniques to hedge the stated value in U.S. dollars of an investment in a yen-denominated security. In such circumstances, for example, the Trust may purchase a foreign currency put option enabling it to sell a specified amount of yen for dollars at a specified price by a
future date. To the extent the hedge is successful, a loss in the value of the yen relative to the dollar will tend to be offset by an increase in the value of the put option. To offset, in whole or in part, the cost of acquiring such a put option,
the Trust may also sell a call option which, if exercised, requires it to sell a specified amount of yen for dollars at a specified price by a future date (a technique called a straddle). By selling such a call option in this
illustration, the Trust gives up the opportunity to profit without limit from increases in the relative value of the yen to the dollar. Straddles of the type that may be used by the Trust are considered to constitute hedging
transactions. The Trust may not attempt to hedge any or all of its foreign portfolio positions.
Forward Foreign Currency
Contracts. The Trust may enter into forward currency contracts to purchase or sell foreign currencies for a fixed amount of U.S. dollars or another foreign currency. A forward currency contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of
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days (term) from the date of the forward currency contract agreed upon by the parties, at a price set at the time the forward currency contract is entered into. Forward currency contracts are
traded directly between currency traders (usually large commercial banks) and their customers. The Trust may purchase a forward currency contract to lock in the U.S. dollar price of a security denominated in a foreign currency that the Trust intends
to acquire. The Trust may sell a forward currency contract to lock in the U.S. dollar equivalent of the proceeds from the anticipated sale of a security or a dividend or interest payment denominated in a foreign currency. The Trust may also use
forward currency contracts to shift the Trusts exposure to foreign currency exchange rate changes from one currency to another. For example, if the Trust owns securities denominated in a foreign currency and the Advisors believe that currency
will decline relative to another currency, the Trust might enter into a forward currency contract to sell the appropriate amount of the first foreign currency with payment to be made in the second currency. The Trust may also purchase forward
currency contracts to enhance income when the Advisors anticipate that the foreign currency will appreciate in value but securities denominated in that currency do not present attractive investment opportunities. The Trust may also use forward
currency contracts to hedge against a decline in the value of existing investments denominated in a foreign currency. Such a hedge would tend to offset both positive and negative currency fluctuations, but would not offset changes in security values
caused by other factors. The Trust could also hedge the position by entering into a forward currency contract to sell another currency expected to perform similarly to the currency in which the Trusts existing investments are denominated. This
type of transaction could offer advantages in terms of cost, yield or efficiency, but may not hedge currency exposure as effectively as a simple forward currency transaction to sell U.S. dollars. This type of transaction may result in losses if the
currency used to hedge does not perform similarly to the currency in which the hedged securities are denominated. The Trust may also use forward currency contracts in one currency or a basket of currencies to attempt to hedge against fluctuations in
the value of securities denominated in a different currency if the Advisors anticipate that there will be a correlation between the two currencies.
The
cost to the Trust of engaging in forward currency contracts varies with factors such as the currency involved, the length of the contract period and the market conditions then prevailing. Because forward currency contracts are usually entered into
on a principal basis, no fees or commissions are usually involved. When the Trust enters into a forward currency contract, it relies on the counterparty to make or take delivery of the underlying currency at the maturity of the contract. Failure by
the counterparty to do so would result in the loss of some or all of any expected benefit of the transaction. Secondary markets generally do not exist for forward currency contracts, with the result that closing transactions generally can be made
for forward currency contracts only by negotiating directly with the counterparty. Thus, there can be no assurance that the Trust will in fact be able to close out a forward currency contract at a favorable price prior to maturity. In addition, in
the event of insolvency of the counterparty, the Trust might be unable to close out a forward currency contract. In either event, the Trust would continue to be subject to market risk with respect to the position, and would continue to be required
to maintain a position in securities denominated in the foreign currency or to maintain cash or liquid assets in a segregated account or earmark such cash or liquid assets on its books and records. The precise matching of forward currency contract
amounts and the value of the securities involved generally will not be possible because the value of such securities, measured in the foreign currency, will change after the forward currency contract has been established. Thus, the Trust might need
to purchase or sell foreign currencies in the spot (cash) market to the extent such foreign currencies are not covered by forward currency contracts. The projection of short-term currency market movements is extremely difficult and the successful
execution of a short-term hedging strategy is highly uncertain.
Put and Call Options on Securities and Indices. The Trust may purchase and sell
put and call options on securities and indices. A put option gives the purchaser of the option the right to sell and the writer the obligation to buy the underlying security at the exercise price during the option period. The Trust may also purchase
and sell options on bond indices (index options). Index options are similar to options on securities except that, rather than taking or making delivery of securities underlying the option at a specified price upon exercise, an index
option gives the holder the right to receive cash upon exercise of the option if the level of the bond index upon which the option is based is greater, in the case of a call, or less, in the case of a put, than the exercise price of the option. The
purchase of a put option on a debt security could protect the Trusts holdings in a security or a number of securities against a substantial decline in the market value. A call option gives the purchaser of the option the right to buy and the
seller the obligation to sell the underlying security or index at the exercise price during the option period or for a specified period prior to a fixed date. The purchase of a call option on a security could protect the Trust against an increase in
the price of a security that it intended to purchase in the future.
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Writing Covered Call Options. The Trust is authorized to write (i.e., sell) covered call options with
respect to municipal securities it owns, thereby giving the holder of the option the right to buy the underlying security covered by the option from the Trust at the stated exercise price until the option expires. The Trust writes only covered call
options, which means that so long as the Trust is obligated as the writer of a call option, it will own the underlying securities subject to the option.
The Trust receives a premium from writing a call option, which increases the Trusts return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, the Trust limits its opportunity to profit from an increase in the market value of the underlying security above the exercise price of the option for as long as the Trusts obligation
as a writer continues. Covered call options serve as a partial hedge against a decline in the price of the underlying security. The Trust may engage in closing transactions in order to terminate outstanding options that it has written.
Financial Futures Transactions and Options. The Trust is authorized to purchase and sell certain exchange traded financial futures contracts
(financial futures contracts) in order to hedge its investments against declines in value, and to hedge against increases in the cost of securities it intends to purchase or to seek to enhance the Trusts return. However, any
transactions involving financial futures or options (including puts and calls associated therewith) will be in accordance with the Trusts investment policies and limitations. A financial futures contract obligates the seller of a contract to
deliver and the purchaser of a contract to take delivery of the type of financial instrument covered by the contract, or in the case of index-based futures contracts to make and accept a cash settlement, at a specific future time for a specified
price. To hedge its portfolio, the Trust may take an investment position in a futures contract which will move in the opposite direction from the portfolio position being hedged. A sale of financial futures contracts may provide a hedge against a
decline in the value of portfolio securities because such depreciation may be offset, in whole or in part, by an increase in the value of the position in the financial futures contracts. A purchase of financial futures contracts may provide a hedge
against an increase in the cost of securities intended to be purchased because such appreciation may be offset, in whole or in part, by an increase in the value of the position in the futures contracts.
Distributions, if any, of net long-term capital gains from certain transactions in futures or options are taxable at long-term capital gains rates for U.S.
federal income tax purposes.
Futures Contracts. A futures contract is an agreement between two parties to buy and sell a security or, in the case
of an index-based futures contract, to make and accept a cash settlement for a set price on a future date. A majority of transactions in futures contracts, however, do not result in the actual delivery of the underlying instrument or cash
settlement, but are settled through liquidation, i.e., by entering into an offsetting transaction. Futures contracts have been designed by boards of trade which have been designated contracts markets by the Commodity Futures Trading
Commission (the CFTC).
The purchase or sale of a futures contract differs from the purchase or sale of a security in that no price or premium
is paid or received. Instead, an amount of cash or securities acceptable to the broker and the relevant contract market, which varies, but is generally about 5% of the contract amount, must be deposited with the broker. This amount is known as
initial margin and represents a good faith deposit assuring the performance of both the purchaser and seller under the futures contract. Subsequent payments to and from the broker, called variation margin, are
required to be made on a daily basis as the price of the futures contract fluctuates making the long and short positions in the futures contract more or less valuable, a process known as marking to the market. At any time prior to the
settlement date of the futures contract, the position may be closed out by taking an opposite position that will operate to terminate the position in the futures contract. A final determination of variation margin is then made, additional cash is
required to be paid to or released by the broker and the purchaser realizes a loss or gain. In addition, a nominal commission is paid on each completed sale transaction.
The Trust may also purchase and sell financial futures contracts on U.S. Government securities as a hedge against adverse changes in interest rates as
described below. With respect to U.S. Government securities, currently there are financial futures contracts based on long-term U.S. Treasury bonds, U.S. Treasury notes, Government National Mortgage Association Certificates and three-month U.S.
Treasury bills. The Trust may purchase and write call and put options on futures contracts on U.S. Government securities and purchase and sell municipal security index futures contracts in connection with its hedging strategies.
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The Trust also may engage in other futures contracts transactions such as futures contracts on other municipal
bond indices that may become available if the Advisors should determine that there is normally a sufficient correlation between the prices of such futures contracts and the municipal securities in which the Trust invests to make such hedging
appropriate.
Futures Strategies. The Trust may sell a financial futures contract (i.e., assume a short position) in anticipation of a decline in
the value of its investments resulting from an increase in interest rates or otherwise. The risk of decline could be reduced without employing futures as a hedge by selling investments and either reinvesting the proceeds in securities with shorter
maturities or by holding assets in cash. This strategy, however, entails increased transaction costs in the form of dealer spreads and typically would reduce the average yield of the Trusts portfolio securities as a result of the shortening of
maturities. The sale of futures contracts provides an alternative means of hedging against declines in the value of its investments. As such values decline, the value of the Trusts positions in the futures contracts will tend to increase, thus
offsetting all or a portion of the depreciation in the market value of the Trusts investments that are being hedged. While the Trust will incur commission expenses in selling and closing out futures positions, commissions on futures
transactions are typically lower than transaction costs incurred in the purchase and sale of the Trusts investments being hedged. In addition, the ability of the Trust to trade in the standardized contracts available in the futures markets may
offer a more effective defensive position than a program to reduce the average maturity of the portfolio securities due to the unique and varied credit and technical characteristics of the instruments available to the Trust. Employing futures as a
hedge also may permit the Trust to assume a defensive posture without reducing the yield on its investments beyond any amounts required to engage in futures trading.
When the Trust intends to purchase a security, the Trust may purchase futures contracts as a hedge against any increase in the cost of such security resulting
from a decrease in interest rates or otherwise, that may occur before such purchase can be effected. Subject to the degree of correlation between such securities and the futures contracts, subsequent increases in the cost of such securities should
be reflected in the value of the futures held by the Trust. As such purchases are made, an equivalent amount of futures contracts will be closed out. Due to changing market conditions and interest rate forecasts, however, a futures position may be
terminated without a corresponding purchase of portfolio securities.
Call Options on Futures Contracts. The Trust may also purchase and sell
exchange traded call and put options on financial futures contracts. The purchase of a call option on a futures contract is analogous to the purchase of a call option on an individual security. Depending on the pricing of the option compared to
either the futures contract upon which it is based or the price of the underlying securities, it may or may not be less risky than ownership of the futures contract or underlying securities. Like the purchase of a futures contract, the Trust may
purchase a call option on a futures contract to hedge against a market advance when the Trust is not fully invested.
The writing of a call option on a
futures contract constitutes a partial hedge against declining prices of the securities which are deliverable upon exercise of the futures contract. If the futures price at expiration is below the exercise price, the Trust will retain the full
amount of the option premium, which provides a partial hedge against any decline that may have occurred in the Trusts portfolio holdings.
Put
Options on Futures Contracts. The purchase of a put option on a futures contract is analogous to the purchase of a protective put option on portfolio securities. The Trust may purchase a put option on a futures contract to hedge the Trusts
portfolio against the risk of rising interest rates.
The writing of a put option on a futures contract constitutes a partial hedge against increasing
prices of the securities which are deliverable upon exercise of the futures contract. If the futures price at expiration is higher than the exercise price, the Trust will retain the full amount of the option premium, which provides a partial hedge
against any increase in the price of securities which the Trust intends to purchase.
The writer of an option on a futures contract is required to deposit
initial and variation margin pursuant to requirements similar to those applicable to futures contracts. Premiums received from the writing of an option will be included in initial margin. The writing of an option on a futures contract involves risks
similar to those relating to futures contracts.
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The CFTC subjects advisers to registered investment companies to regulation by the CFTC if a fund that is advised
by the investment adviser either (i) invests, directly or indirectly, more than a prescribed level of its liquidation value in CFTC-regulated futures, options and swaps (CFTC Derivatives), or (ii) markets itself as providing
investment exposure to such instruments. To the extent the Trust uses CFTC Derivatives, it intends to do so below such prescribed levels and will not market itself as a commodity pool or a vehicle for trading such instruments.
Accordingly, the Advisor has claimed an exclusion from the definition of the term commodity pool operator under the Commodity Exchange Act (CEA) pursuant to Rule 4.5 under the CEA. The Advisor is not, therefore, subject to
registration or regulation as a commodity pool operator under the CEA in respect of the Trust.
Additional Information About
Options. The Trusts ability to close out its position as a purchaser or seller of an exchange-listed put or call option is dependent upon the existence of a liquid secondary market on option exchanges. Among the possible reasons for
the absence of a liquid secondary market on an exchange are: (i) insufficient trading interest in certain options; (ii) restrictions on transactions imposed by an exchange; (iii) trading halts, suspensions or other restrictions
imposed with respect to particular classes or series of options or underlying securities; (iv) interruption of the normal operations on an exchange; (v) inadequacy of the facilities of an exchange or the Office of the Comptroller of the
Currency (the OCC) to handle current trading volume; or (vi) a decision by one or more exchanges to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that
exchange (or in that class or series of options) would cease to exist, although outstanding options on that exchange that had been listed by the OCC as a result of trades on that exchange would generally continue to be exercisable in accordance with
their terms. Over-the-counter (OTC) options are purchased from or sold to dealers, financial institutions or other counterparties which have entered into
direct agreements with the Trust. With OTC options, such variables as expiration date, exercise price and premium will be agreed upon between the Trust and the counterparty, without the intermediation of a third party such as the OCC. If the
counterparty fails to make or take delivery of the securities underlying an option it has written, or otherwise settle the transaction in accordance with the terms of that option as written, the Trust would lose the premium paid for the option as
well as any anticipated benefit of the transaction. OTC options and assets used to cover OTC options written by the Trust are considered by the staff of the SEC to be illiquid. The illiquidity of such options or assets may prevent a successful sale
of such options or assets, result in a delay of sale, or reduce the amount of proceeds that might otherwise be realized.
The Trust may engage in options
and futures transactions on exchanges and options in the over-the-counter markets. The Trust will only enter into OTC options with counterparties the Advisors believe to
be creditworthy at the time they enter into such transactions.
The hours of trading for options on debt securities may not conform to the hours during
which the underlying securities are traded. To the extent that the option markets close before the markets for the underlying securities, significant price and rate movements can take place in the underlying markets that cannot be reflected in the
option markets.
Structured Instruments. The Trust may invest in structured instruments. While structured instruments may offer the potential for a
favorable rate of return from time to time, they also entail certain risks. Structured instruments may be less liquid than other securities and the price of structured instruments may be more volatile. In some cases, depending on the terms of the
embedded index, a structured instrument may provide that the principal and/or interest payments may be adjusted below zero. Structured instruments also may involve significant credit risk and risk of default by the counterparty. Structured
instruments may also be illiquid. Like other sophisticated strategies, the Trusts use of structured instruments may not work as intended.
Structured Notes. The Trust may invest in structured notes and other related instruments, which are privately
negotiated debt obligations in which the principal and/or interest is determined by reference to the performance of a benchmark asset, market or interest rate (an embedded index), such as selected securities, an index of securities or
specified interest rates, or the differential performance of two assets or markets. Structured instruments may be issued by corporations, including banks, as well as by governmental agencies. Structured instruments frequently are assembled in the
form of medium-term notes, but a variety of forms are available and may be used in particular circumstances. The terms of such structured instruments normally provide that their principal and/or interest payments are to be adjusted upwards or
downwards (but ordinarily not below zero) to reflect changes in the embedded index while the structured instruments are outstanding. As a result, the interest
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and/or principal payments that may be made on a structured product may vary widely, depending on a variety of factors, including the volatility of the embedded index and the effect of changes in
the embedded index on principal and/or interest payments. The rate of return on structured notes may be determined by applying a multiplier to the performance or differential performance of the referenced index(es) or other asset(s). Application of
a multiplier involves leverage that will serve to magnify the potential for gain and the risk of loss.
Event-Linked
Securities. The Trust may obtain event-linked exposure by investing in event-linked bonds or event-linked swaps or by implementing event-linked strategies. Event-linked exposure results in gains or losses
that typically are contingent upon, or formulaically related to, defined trigger events. Examples of trigger events include hurricanes, earthquakes, weather-related phenomena or statistics relating to such events. Some event-linked bonds are
commonly referred to as catastrophe bonds. If a trigger event occurs, the Trust may lose a portion of or its entire principal invested in the bond or the entire notional amount of a swap. Event-linked exposure often provides for an
extension of maturity to process and audit loss claims when a trigger event has, or possibly has, occurred. An extension of maturity may increase volatility. Event-linked exposure may also expose the Trust to certain other risks including credit
risk, counterparty risk, adverse regulatory or jurisdictional interpretations and adverse tax consequences. Event-linked exposures may also be subject to liquidity risk.
Equity-Linked Notes. Equity-linked notes are hybrid securities with characteristics of both fixed income and equity securities. An
equity-linked note is a debt instrument, usually a bond, that pays interest based upon the performance of an underlying equity, which can be a single stock, basket of stocks or an equity index. Instead of paying a predetermined coupon, equity-linked
notes link the interest payment to the performance of a particular equity market index or basket of stocks or commodities. The interest payment is typically based on the percentage increase in an index from a predetermined level, but alternatively
may be based on a decrease in the index. The interest payment may in some cases be leveraged so that, in percentage terms, it exceeds the relative performance of the market. Equity-linked notes generally are subject to the risks associated with the
securities of equity issuers, default risk and counterparty risk.
Credit Linked Notes. A credit-linked note (CLN) is a
derivative instrument. It is a synthetic obligation between two or more parties where the payment of principal and/or interest is based on the performance of some obligation (a reference obligation). In addition to the credit risk of the reference
obligations and interest rate risk, the buyer/seller of the CLN is subject to counterparty risk.
Hybrid Instruments. A hybrid instrument is a
type of potentially high-risk derivative that combines a traditional bond, stock or commodity with an option or forward contract. Generally, the principal amount, amount payable upon maturity or redemption, or interest rate of a hybrid is tied
(positively or negatively) to the price of some commodity, currency or securities index or another interest rate or some other economic factor (each a benchmark). The interest rate or (unlike most fixed income securities) the principal
amount payable at maturity of a hybrid security may be increased or decreased, depending on changes in the value of the benchmark. An example of a hybrid could be a bond issued by an oil company that pays a small base level of interest with
additional interest that accrues in correlation to the extent to which oil prices exceed a certain predetermined level. Such a hybrid instrument would be a combination of a bond and a call option on oil. Hybrids can be used as an efficient means of
pursuing a variety of investment goals, including currency hedging, duration management and increased total return. Hybrids may not bear interest or pay dividends. The value of a hybrid or its interest rate may be a multiple of a benchmark and, as a
result, may be leveraged and move (up or down) more steeply and rapidly than the benchmark. These benchmarks may be sensitive to economic and political events, such as commodity shortages and currency devaluations, which cannot be readily foreseen
by the purchaser of a hybrid. Under certain conditions, the redemption value of a hybrid could be zero. Thus, an investment in a hybrid may entail significant market risks that are not associated with a similar investment in a traditional, U.S.
dollar-denominated bond that has a fixed principal amount and pays a fixed rate or floating rate of interest. The purchase of hybrids also exposes the Trust to the credit risk of the issuer of the hybrids. These risks may cause significant
fluctuations in the NAV of the Trusts common shares if the Trust invests in hybrid instruments.
Other Investment Companies. The Trust may
invest in securities of other investment companies (including exchange-traded funds (ETFs) and business development companies (BDCs), subject to applicable regulatory limits. As a shareholder in an investment company,
the Trust will bear its ratable share of that investment companys expenses and will remain subject to payment of the Trusts advisory and other fees and expenses with
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respect to assets so invested. Holders of common shares will therefore be subject to duplicative expenses to the extent the Trust invests in other investment companies. The Advisors will take
expenses into account when evaluating the investment merits of an investment in an investment company relative to available equity and/or fixed income securities investments. In addition, the securities of other investment companies may be leveraged
and will therefore be subject to the same leverage risks to which the Trust may be subject to the extent it employs a leverage strategy. The NAV and market value of securities of leveraged shares will be more volatile and the yield to shareholders
will tend to fluctuate more than the yield generated by unleveraged shares. Investment companies may have investment policies that differ from those of the Trust. In addition, to the extent the Trust invests in other investment companies, the Trust
will be dependent upon the investment and research abilities of persons other than the Advisors.
The Trust may invest in ETFs, which are investment
companies that typically aim to track or replicate a desired index, such as a sector, market or global segment. ETFs are typically passively managed and their shares are traded on a national exchange or The NASDAQ Stock Market, Inc. ETFs do not sell
individual shares directly to investors and only issue their shares in large blocks known as creation units. The investor purchasing a creation unit may sell the individual shares on a secondary market. Therefore, the liquidity of ETFs
depends on the adequacy of the secondary market. There can be no assurance that an ETFs investment objective will be achieved, as ETFs based on an index may not replicate and maintain exactly the composition and relative weightings of
securities in the index. ETFs are subject to the risks of investing in the underlying securities. The Trust, as a holder of the securities of the ETF, will bear its pro rata portion of the ETFs expenses, including advisory fees. These expenses
are in addition to the direct expenses of the Trusts own operations.
Repurchase Agreements and Purchase and Sale Contracts. The Trust may
invest in repurchase agreements. A repurchase agreement is a contractual agreement whereby the seller of securities agrees to repurchase the same security at a specified price on a future date agreed upon by the parties. The agreed upon repurchase
price determines the yield during the Trusts holding period. Repurchase agreements are considered to be loans collateralized by the underlying security that is the subject of the repurchase contract. Income generated from transactions in
repurchase agreements will be taxable. The risk to the Trust is limited to the ability of the issuer to pay the agreed upon repurchase price on the delivery date; however, although the value of the underlying collateral at the time the transaction
is entered into always equals or exceeds the agreed upon repurchase price, if the value of the collateral declines there is a risk of loss of both principal and interest. In the event of default, the collateral may be sold but the Trust might incur
a loss if the value of the collateral declines, and might incur disposition costs or experience delays in connection with liquidating the collateral. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security,
realization upon the collateral by the Trust may be delayed or limited. The Advisors will monitor the value of the collateral at the time the transaction is entered into and at all times subsequent during the term of the repurchase agreement in an
effort to determine that such value always equals or exceeds the agreed upon repurchase price. In the event the value of the collateral declines below the repurchase price, the Advisors will demand additional collateral from the issuer to increase
the value of the collateral to at least that of the repurchase price, including interest.
A purchase and sale contract is similar to a repurchase
agreement, but differs from a repurchase agreement in that the contract arrangements stipulate that the securities are owned by the Trust. In the event of a default under such a repurchase agreement or a purchase and sale contract, instead of the
contractual fixed rate of return, the rate of return to the Trust shall be dependent upon intervening fluctuations of the market value of such security and the accrued interest on the security. In such event, the Trust would have rights against the
seller for breach of contract with respect to any losses arising from market fluctuations following the failure of the seller to perform.
Short
Sales. The Trust may make short sales of securities. A short sale is a transaction in which the Trust sells a security it does not own in anticipation that the market price of that security will decline. The Trust may make short sales to hedge
positions, for duration and risk management, in order to maintain portfolio flexibility or, to the extent applicable, to enhance income or gain. When the Trust makes a short sale, it must borrow the security sold short and deliver it to the
broker-dealer through which it made the short sale as collateral for its obligation to deliver the security upon conclusion of the sale. The Trust may have to pay a fee to borrow particular securities and is often obligated to pay over to the
securities lender any income, distributions or dividends received on such borrowed securities until it returns the security to the securities lender. The Trusts obligation to replace the borrowed security will be secured by collateral
deposited with the securities lender, usually cash, U.S. government securities or other
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liquid assets. The Trust will also be required to segregate or earmark similar collateral with its custodian to the extent, if any, necessary so that the aggregate collateral value is at all
times at least equal to the current market value of the security sold short. Depending on arrangements made with the securities lender regarding payment over of any income, distributions or dividends received by the Trust on such security, the Trust
may not receive any payments (including interest) on its collateral deposited with such securities lender. If the price of the security sold short increases between the time of the short sale and the time the Trust replaces the borrowed security,
the Trust will incur a loss; conversely, if the price declines, the Trust will realize a gain. Any gain will be decreased, and any loss increased, by the transaction costs described above. Although the Trusts gain is limited to the price at
which it sold the security short, its potential loss is theoretically unlimited. The Trust may also make short sales against the box. Short sales, even if covered, may represent a form of economic leverage and will create risks. In this
type of short sale, at the time of the sale, the Trust owns or has the immediate and unconditional right to acquire at no additional cost the identical security.
Bank Obligations. Bank obligations may include certificates of deposit, bankers acceptances and fixed time deposits. Certificates of deposit
are negotiable certificates issued against funds deposited in a commercial bank for a definite period of time and earning a specified return. Bankers acceptances are negotiable drafts or bills of exchange, normally drawn by an importer or
exporter to pay for specific merchandise, which are accepted by a bank, meaning, in effect, that the bank unconditionally agrees to pay the face value of the instrument on maturity. Fixed time deposits are bank obligations payable at a
stated maturity date and bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand by the investor, but may be subject to early withdrawal penalties, which vary depending upon market conditions and the remaining maturity of
the obligation. There are no contractual restrictions on the right to transfer a beneficial interest in a fixed time deposit to a third party, although there is no market for such deposits.
Obligations of foreign banks involve somewhat different investment risks than those affecting obligations of U.S. banks, including the possibilities that
their liquidity could be impaired because of future political and economic developments, that their obligations may be less marketable than comparable obligations of U.S. banks, that a foreign jurisdiction might impose withholding taxes on interest
income payable on those obligations, that foreign deposits may be seized or nationalized, that foreign governmental restrictions such as exchange controls may be adopted which might adversely affect the payment of principal and interest on those
obligations and that the selection of those obligations may be more difficult because there may be less publicly available information concerning foreign banks or the accounting, auditing and financial reporting standards, practices and requirements
applicable to foreign banks may differ from those applicable to U.S. banks. Foreign banks are not generally subject to examination by any U.S. government agency or instrumentality.
Participation Notes. The Trust may buy participation notes from a bank or broker-dealer (issuer) that entitle the Trust to a return
measured by the change in value of an identified underlying security or basket of securities (collectively, the underlying security). Participation notes are typically used when a direct investment in the underlying security is
restricted due to country-specific regulations.
The Trust is subject to counterparty risk associated with each issuer. Investment in a participation note
is not the same as investment in the constituent shares of the company. A participation note represents only an obligation of the issuer to provide the Trust the economic performance equivalent to holding shares of an underlying security. A
participation note does not provide any beneficial or equitable entitlement or interest in the relevant underlying security. In other words, shares of the underlying security are not in any way owned by the Trust. However each participation note
synthetically replicates the economic benefit of holding shares in the underlying security. Because a participation note is an obligation of the issuer, rather than a direct investment in shares of the underlying security, the Trust may suffer
losses potentially equal to the full value of the participation note if the issuer fails to perform its obligations.
The counterparty may, but is not
required to, purchase the shares of the underlying security to hedge its obligation. The Trust may, but is not required to, purchase credit protection against the default of the issuer. When the participation note expires or the Trust exercises the
participation note and closes its position, the Trust receives a payment that is based upon the then-current value of the underlying security converted into U.S. dollars (less transaction costs). The price, performance and liquidity of the
participation note are all linked directly to the
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underlying security. The Trusts ability to redeem or exercise a participation note generally is dependent on the liquidity in the local trading market for the security underlying the
participation note.
When-Issued, Delayed Delivery and Forward Commitment Securities. The Trust may purchase securities on a
when-issued basis and may purchase or sell securities on a forward commitment basis (including on a TBA (to be announced) basis) or on a delayed delivery basis. When such transactions are negotiated,
the price, which is generally expressed in yield terms, is fixed at the time the commitment is made, but delivery and payment for the securities take place at a later date. When-issued securities and forward commitments may be sold prior to the
settlement date. If the Trust disposes of the right to acquire a when-issued security prior to its acquisition or disposes of its right to deliver or receive against a forward commitment, it might incur a gain or loss. At the time the Trust enters
into a transaction on a when-issued or forward commitment basis, it will designate on its books and records cash or liquid assets with a value not less than the value of the when-issued or forward commitment securities. The value of these assets
will be monitored daily to ensure that their marked to market value will at all times equal or exceed the corresponding obligations of the Trust. Pursuant to recommendations of the Treasury Market Practices Group, which is sponsored by the Federal
Reserve Board of New York, the Trust or its counterparty generally is required to post collateral when entering into certain forward-settling transactions, including without limitation TBA transactions.
There is always a risk that the securities may not be delivered and that the Trust may incur a loss. Settlements in the ordinary course are not treated by the
Trust as when-issued or forward commitment transactions and accordingly are not subject to the foregoing restrictions.
Standby Commitment
Agreements. The Trust from time to time may enter into standby commitment agreements. Such agreements commit the Trust, for a stated period of time, to purchase a stated amount of a fixed income security that may be issued and sold to the Trust
at the option of the issuer. The price and coupon of the security is fixed at the time of the commitment. At the time of entering into the agreement the Trust may be paid a commitment fee, regardless of whether or not the security ultimately is
issued. The Trust will enter into such agreements only for the purpose of investing in the security underlying the commitment at a yield and price which is considered advantageous to the Trust. The Trust at all times will designate on its books and
records cash or other liquid assets with a value equal to the purchase price of the securities underlying the commitment.
There can be no assurance that
the securities subject to a standby commitment will be issued and the value of the security, if issued, on the delivery date may be more or less than its purchase price. Since the issuance of the security underlying the commitment is at the option
of the issuer, the Trust may bear the risk of decline in the value of such security and may not benefit from an appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and the related commitment fee will be recorded on the date on which the security
reasonably can be expected to be issued and the value of the security thereafter will be reflected in the calculation of the Trusts NAV. The cost basis of the security will be adjusted by the amount of the commitment fee. In the event the
security is not issued, the commitment fee will be recorded as income on the expiration date of the standby commitment.
Temporary Defensive
Positions. During temporary defensive periods, if the Advisors determine that market conditions warrant, and also during the period in which the net proceeds of this offering of common shares (or preferred shares, should the Trust determine
to issue preferred shares in the future) are being invested, the Trust may invest any percentage of its assets without limitation in cash, cash equivalents, money market securities, such as U.S. Treasury and agency obligations, other U.S. government
securities, short-term debt obligations of corporate issuers, certificates of deposit, bankers acceptances, commercial paper (short-term, unsecured, negotiable promissory notes of a domestic or foreign issuer), repurchase agreements, obligations of
supranational organizations, bank obligations, including U.S. subsidiaries and branches of foreign banks, or other high quality fixed income securities. Temporary defensive positions may affect the Trusts ability to achieve its investment
objective. Generally, such obligations will mature within one year from the date of settlement, but may mature within two years from the date of settlement.
Short-Term Debt Securities. Short-term debt securities are defined to include, without limitation:
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U.S. government securities, including bills, notes and bonds differing as to maturity and rates of interest that
are either issued or guaranteed by the U.S. Treasury or by U.S. government agencies or instrumentalities. U.S. government securities include securities issued by (a) the FHA, Farmers Home Administration, Export-Import Bank of the United States,
Small Business Administration and GNMA, whose securities are supported by the full faith and credit of the United States; (b) the FHLBs, Federal Intermediate Credit Banks, and Tennessee Valley Authority, whose securities are supported by the
right of the agency to borrow from the U.S. Treasury; (c) FNMA, whose securities are supported by the discretionary authority of the U.S. government to purchase certain obligations of the agency or instrumentality; and (d) the Student Loan
Marketing Association, whose securities are supported only by its credit. While the U.S. government provides financial support to such U.S. government-sponsored agencies or instrumentalities, no assurance can be given that it always will do so since
it is not so obligated by law. The U.S. government, its agencies and instrumentalities do not guarantee the market value of their securities. Consequently, the value of such securities may fluctuate. |
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Certificates of deposit issued against funds deposited in a bank or a savings and loan association. Such
certificates are for a definite period of time, earn a specified rate of return, and are normally negotiable. The issuer of a certificate of deposit agrees to pay the amount deposited plus interest to the bearer of the certificate on the date
specified thereon. Certificates of deposit purchased by the Trust may not be fully insured by the Federal Deposit Insurance Corporation. |
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Repurchase agreements, which involve purchases of debt securities. |
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Commercial paper, which consists of short-term unsecured promissory notes, including variable rate master demand
notes issued by corporations to finance their current operations. Master demand notes are direct lending arrangements between the Trust and a corporation. There is no secondary market for such notes. However, they are redeemable by the Trust at any
time. The Advisors will consider the financial condition of the corporation (e.g., earning power, cash flow and other liquidity ratios) and will continuously monitor the corporations ability to meet all of its financial obligations, because
the Trusts liquidity might be impaired if the corporation were unable to pay principal and interest on demand. |
New
Products. The financial markets continue to evolve and financial products continue to be developed. The Trust reserves the right to invest in new financial products as they are developed or become more widely accepted. As with any new
financial product, these products will entail risks, including risks to which the Trust currently is not subject.
Securities Lending. The
Trust may lend portfolio securities to certain borrowers determined to be creditworthy by the Advisors, including to borrowers affiliated with the Advisors. The borrowers provide collateral that is maintained in an amount at least equal to the
current market value of the securities loaned. No securities loan will be made on behalf of the Trust if, as a result, the aggregate value of all securities loans of the Trust exceeds one-third of the value of
the Trusts total assets (including the value of the collateral received). The Trust may terminate a loan at any time and obtain the return of the securities loaned. The Trust receives the value of any interest or cash or non-cash distributions paid on the loaned securities.
With respect to loans that are collateralized by cash, the
borrower may be entitled to receive a fee based on the amount of cash collateral. The Trust is compensated by the difference between the amount earned on the reinvestment of cash collateral and the fee paid to the borrower. In the case of collateral
other than cash, the Trust is compensated by a fee paid by the borrower equal to a percentage of the market value of the loaned securities. Any cash collateral received by the Trust for such loans, and uninvested cash, may be invested, among other
things, in a private investment company managed by an affiliate of the Advisors or in registered money market funds advised by the Advisors or their affiliates; such investments are subject to investment risk.
The Trust conducts its securities lending pursuant to an exemptive order from the SEC permitting it to lend portfolio securities to borrowers affiliated with
the Trust and to retain an affiliate of the Trust as lending agent. To the extent that the Trust engages in securities lending, BlackRock Investment Management, LLC (BIM), an affiliate of the Advisors, acts as securities lending agent
for the Trust, subject to the overall supervision of the Advisors. BIM
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administers the lending program in accordance with guidelines approved by the Board. Pursuant to the current securities lending agreement, BIM may lend securities only when the difference between
the borrower rebate rate and the risk free rate exceeds a certain level.
To the extent that the Trust engages in securities lending, the Trust retains a
portion of securities lending income and remits a remaining portion to BIM as compensation for its services as securities lending agent. Securities lending income is equal to the total of income earned from the reinvestment of cash collateral (and
excludes collateral investment expenses as defined below), and any fees or other payments to and from borrowers of securities. As securities lending agent, BIM bears all operational costs directly related to securities lending. The Trust is
responsible for expenses in connection with the investment of cash collateral received for securities on loan in a private investment company managed by an affiliate of the Advisors (the collateral investment expenses); however, BIM has
agreed to cap the collateral investment expenses the Trust bears to an annual rate of 0.04% of the daily net assets of such private investment company. In addition, in accordance with the exemptive order, the investment adviser to the private
investment company will not charge any advisory fees with respect to shares purchased by the Trust. Such shares also will not be subject to a sales load, redemption fee, distribution fee or service fee.
Pursuant to the current securities lending agreement, the Trust retains 82% of securities lending income (which excludes collateral investment expenses).
In addition, commencing the business day following the date that the aggregate securities lending income earned across the BlackRock Fixed-Income Complex (as
defined in the SAI) in a calendar year exceeds the breakpoint dollar threshold applicable in the given year, the Trust, pursuant to the current securities lending agreement, will receive for the remainder of that calendar year securities lending
income in an amount equal to 85% of securities.
Other Investment Policies
Project Loans. The Trust may invest in project loans, which are fixed income securities of issuers whose revenues are primarily derived from mortgage
loans to multi-family, nursing home and other real estate development projects.
Guaranteed Investment Contracts. The Trust may make investments in
guaranteed investment contracts issued by highly rated U.S. insurance companies. Under these contracts, the Trust makes cash contributions to a deposit fund of the insurance companys general account. The insurance company then credits to the
Trust, on a monthly basis, interest which is based on an index, but is guaranteed not to be less than a certain minimum rate.
Rights
Offerings. The Trust may participate in rights offerings. Subscription rights normally have a short life span to expiration. The purchase of rights involves the risk that the Trust could lose the purchase value of a right if the right to
subscribe to additional shares is not exercised prior to the rights expiration. Also, the purchase of rights involves the risk that the effective price paid for the right added to the subscription price of the related security may exceed the
value of the subscribed securitys market price such as when there is no movement in the level of the underlying security.
LEVERAGE
The Trust currently utilizes leverage for investment purposes in the form of reverse repurchase agreements. As of February 28, 2022
this leverage represented approximately 37.1% of the Trusts Managed Assets (approximately 58.97% of the Trusts net assets). The Trust may borrow from banks and other financial institutions and may also borrow additional funds using
such investment techniques as the Advisors may from time to time determine. Of these investment techniques, the Trust expects primarily to use reverse repurchase agreements and dollar rolls. The Trust has the ability to utilize leverage through
borrowings in an amount up to 33 1/3% of the value of its Managed Assets (which includes the amount obtained from such borrowings).
The use of
leverage, including investments in reverse repurchase agreements, can create risks. When leverage is employed, the NAV and market price of the common shares and the yield to holders of common shares will be more volatile than if leverage were not
used. Changes in the value of the Trusts portfolio, including securities bought with the proceeds of leverage, will be borne entirely by the holders of common shares. If there is a net decrease or
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increase in the value of the Trusts investment portfolio, leverage will decrease or increase, as the case may be, the NAV per common share to a greater extent than if the Trust did not
utilize leverage. A reduction in the Trusts NAV may cause a reduction in the market price of its shares. During periods in which the Trust is using leverage, the fee paid to the Advisors for advisory services will be higher than if the Trust
did not use leverage, because the fees paid will be calculated on the basis of the Trusts Managed Assets, which includes the proceeds from leverage. The Trusts leveraging strategy may not be successful.
Certain types of leverage the Trust may use may result in the Trust being subject to covenants relating to asset coverage and portfolio composition
requirements. The Trust may be subject to certain restrictions on investments imposed by one or more lenders or by guidelines of one or more rating agencies, which may issue ratings for any short-term debt securities or preferred shares issued by
the Trust. The terms of any borrowings or rating agency guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed by the Investment Company Act. The Advisors do not believe that these
covenants or guidelines will impede it from managing the Trusts portfolio in accordance with its investment objective and policies if the Trust were to utilize leverage.
Under the Investment Company Act, the Trust is not permitted to issue senior securities if, immediately after the issuance of such senior securities, the
Trust would have an asset coverage ratio (as defined in the Investment Company Act) of less than 300% with respect to senior securities representing indebtedness (i.e., for every dollar of indebtedness outstanding, the Trust is required to
have at least three dollars of assets) or less than 200% with respect to senior securities representing preferred shares (i.e., for every dollar of preferred shares outstanding, the Trust is required to have at least two dollars of assets).
The Investment Company Act also provides that the Trust may not declare distributions, or purchase its stock (including through tender offers) if, immediately after doing so, it will have an asset coverage ratio of less than 300% or 200%, as
applicable. Under the Investment Company Act, certain short-term borrowings (such as for cash management purposes) are not subject to these limitations if (i) repaid within 60 days, (ii) not extended or renewed, and (iii) not in
excess of 5% of the total assets of the Trust.
Effects of Leverage
Assuming that leverage will represent approximately 36.8% of the Trusts Managed Assets and that the Trust will bear expenses relating to that leverage at
an average annual rate of 0.51%, the income generated by the Trusts portfolio (net of estimated expenses) must exceed 0.19% in order to cover the expenses specifically related to the Trusts use of leverage. Of course, these numbers are
merely estimates used for illustration. Actual leverage expenses will vary frequently and may be significantly higher or lower than the rate estimated above.
The following table is furnished in response to requirements of the SEC. It is designed to illustrate the effect of leverage on common share total return,
assuming investment portfolio total returns (comprised of income and changes in the value of investments held in the Trusts portfolio) of (10)%, (5)%, 0%, 5% and 10%. These assumed investment portfolio returns are hypothetical figures and are
not necessarily indicative of the investment portfolio returns experienced or expected to be experienced by the Trust. The table further reflects the use of leverage representing 37.3% of the Trusts Managed Assets and an assumed annual cost of
leverage of 0.51%.
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Assumed Portfolio Total Return (Net of
Expenses) |
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(10.00 |
)% |
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(5.00 |
)% |
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0 |
% |
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5.00 |
% |
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10.00 |
% |
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Common Share Total Return |
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(16.3 |
)% |
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(8.3 |
)% |
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(0.3 |
)% |
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7.7 |
% |
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15.6 |
% |
Common share total return is composed of two elements: the common share dividends paid by the Trust (the amount of which
is largely determined by the net investment income of the Trust after paying for any leverage used by the Trust) and gains or losses on the value of the securities the Trust owns. As required by SEC rules, the table assumes that the Trust is more
likely to suffer capital losses than to enjoy capital appreciation. For example, to assume a total return of 0% the Trust must assume that the interest it receives on its investments is entirely offset by losses in the value of those securities.
Reverse Repurchase Agreements
The Trust may enter
into reverse repurchase agreements with respect to its portfolio investments subject to the investment restrictions set forth herein. Reverse repurchase agreements involve the sale of securities held by the
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Trust with an agreement by the Trust to repurchase the securities at an agreed upon price, date and interest payment. At the time the Trust enters into a reverse repurchase agreement, it may
establish and maintain a segregated account with the custodian containing, or designate on its books and records, cash and/or liquid assets having a value not less than the repurchase price (including accrued interest). If the Trust establishes and
maintains such a segregated account, or earmarks such assets as described, a reverse repurchase agreement will not be considered a senior security under the Investment Company Act but will constitute leverage; however, under certain circumstances in
which the Trust does not establish and maintain such a segregated account, or earmark such assets on its books and records, such reverse repurchase agreement will be considered a senior security for the purpose of the limitation under the Investment
Company Act on issuing senior securities discussed above. Reverse repurchase agreements involve the risk that the market value of the securities acquired in connection with the reverse repurchase agreement may decline below the price of the
securities the Trust has sold but is obligated to repurchase. Also, reverse repurchase agreements involve the risk that the market value of the securities retained in lieu of sale by the Trust in connection with the reverse repurchase agreement may
decline in price. Effective August 19, 2022, certain asset segregation requirements will be replaced by the requirements under the newly adopted Rule 18f-4 as described in this prospectus. See
Additional Risk Factors Risk Factors in Strategic Transactions and Derivatives in the SAI.
If the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce the Trusts obligation to repurchase the securities and the Trusts use
of the proceeds of the reverse repurchase agreement may effectively be restricted pending such decision. Also, the Trust would bear the risk of loss to the extent that the proceeds of the reverse repurchase agreement are less than the value of the
securities subject to such agreement.
The Trust also may effect simultaneous purchase and sale transactions that are known as sale-buybacks.
A sale-buyback is similar to a reverse repurchase agreement, except that in a sale-buyback, the counterparty that purchases the security is entitled to receive any principal or interest payments made on the underlying security pending settlement of
the Trusts repurchase of the underlying security.
Dollar Roll Transactions
The Trust may enter into dollar roll transactions. In a dollar roll transaction, the Trust sells a mortgage related security or other
security to a dealer and simultaneously agrees to repurchase a similar security (but not the same security) in the future at a pre-determined price. A dollar roll transaction can be viewed, like a reverse
repurchase agreement, as a collateralized borrowing in which the Trust pledges a mortgage related security to a dealer to obtain cash. However, unlike reverse repurchase agreements, the dealer with which the Trust enters into a dollar roll
transaction is not obligated to return the same securities as those originally sold by the Trust, but rather only securities which are substantially identical, which generally means that the securities repurchased will bear the same
interest rate and a similar maturity as those sold, but pools of mortgages collateralizing those securities may have different prepayment histories than those sold.
During the period between the sale and repurchase, the Trust will not be entitled to receive interest and principal payments of the securities sold. Proceeds
of the sale will be invested in additional instruments for the Trust and the income from these investments will generate income for the Trust. If such income does not exceed the income, capital appreciation and gain that would have been realized on
the securities sold as part of the dollar roll, the use of this technique will diminish the investment performance of the Trust compared with what the performance would have been without the use of dollar rolls.
At the time the Trust enters into a dollar roll transaction, it may establish and maintain a segregated account with the custodian containing, or designate on
its books and records, cash and/or liquid assets having a value not less than the repurchase price (including accrued interest). If the Trust establishes and maintains such a segregated account, or earmarks such assets as described, a dollar
roll transaction will not be considered a senior security under the 1940 Act and therefore will not be considered a borrowing by the Trust.
Dollar roll
transactions involve the risk that the market value of the securities the Trust is required to purchase may decline below the agreed upon repurchase price of those securities. The Trusts right to purchase or repurchase securities may be
restricted. Successful use of mortgage dollar rolls may depend upon the investment managers
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ability to correctly predict interest rates and prepayments. There is no assurance that dollar rolls can be successfully employed.
Credit Facility
The Trust is permitted to leverage its
portfolio by entering into one or more credit facilities. If the Trust enters into a credit facility, the Trust may be required to prepay outstanding amounts or incur a penalty rate of interest upon the occurrence of certain events of default. The
Trust would also likely have to indemnify the lenders under the credit facility against liabilities they may incur in connection therewith. In addition, the Trust expects that any credit facility would contain covenants that, among other things,
likely would limit the Trusts ability to pay distributions in certain circumstances, incur additional debt, change certain of its investment policies and engage in certain transactions, including mergers and consolidations, and require asset
coverage ratios in addition to those required by the Investment Company Act. The Trust may be required to pledge its assets and to maintain a portion of its assets in cash or high-grade securities as a reserve against interest or principal payments
and expenses. The Trust expects that any credit facility would have customary covenant, negative covenant and default provisions. There can be no assurance that the Trust will enter into an agreement for a credit facility or one on terms and
conditions representative of the foregoing, or that additional material terms will not apply. In addition, if entered into, a credit facility may in the future be replaced or refinanced by one or more credit facilities having substantially different
terms or by the issuance of preferred shares.
Preferred Shares
The Trust also has the ability to utilize leverage through the issuance of preferred shares in an amount up to 50% of the value of its Managed Assets (which
includes the amount obtained from such issuance). The Trust does not currently anticipate issuing any preferred shares; thus, the Trust will limit its borrowing to 33 1/3% of the Trusts Managed Assets. If preferred shares are issued,
however, the Trusts borrowing limit will be proportionately reduced so that the Trusts aggregate leverage will not exceed 33 1/3% of the Trusts Managed Assets.
Derivatives
The Trust may enter into derivative
transactions that have economic leverage embedded in them. Derivative transactions that the Trust may enter into and the risks associated with them are described elsewhere in this Prospectus and are also referred to as Strategic
Transactions. The Trust cannot assure you that investments in derivative transactions that have economic leverage embedded in them will result in a higher return on its common shares.
To the extent the terms of such transactions obligate the Trust to make payments, the Trust may earmark or segregate cash or liquid assets in an amount at
least equal to the current value of the amount then payable by the Trust under the terms of such transactions or otherwise cover such transactions in accordance with applicable interpretations of the staff of the SEC. If the current value of the
amount then payable by the Trust under the terms of such transactions is represented by the notional amounts of such investments, the Trust would segregate or earmark cash or liquid assets having a market value at least equal to such notional
amounts, and if the current value of the amount then payable by the Trust under the terms of such transactions is represented by the market value of the Trusts current obligations, the Trust would segregate or earmark cash or liquid assets
having a market value at least equal to such current obligations. To the extent the terms of such transactions obligate the Trust to deliver particular securities to extinguish the Trusts obligations under such transactions the Trust may
cover its obligations under such transactions by either (i) owning the securities or collateral underlying such transactions or (ii) having an absolute and immediate right to acquire such securities or collateral without
additional cash consideration (or, if additional cash consideration is required, having earmarked or segregated an appropriate amount of cash or liquid assets). Such earmarking, segregation or cover is intended to provide the Trust with available
assets to satisfy its obligations under such transactions. As a result of such earmarking, segregation or cover, the Trusts obligations under such transactions will not be considered senior securities representing indebtedness for purposes of
the Investment Company Act, or considered borrowings subject to the Trusts limitations on borrowings discussed above, but may create leverage for the Trust. To the extent that the Trusts obligations under such transactions are not so
earmarked, segregated or covered, such obligations may be considered
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senior securities representing indebtedness under the Investment Company Act and therefore subject to the 300% asset coverage requirement.
These earmarking, segregation or cover requirements can result in the Trust maintaining securities positions it would otherwise liquidate, segregating or
earmarking assets at a time when it might be disadvantageous to do so or otherwise restrict portfolio management.
On October 28, 2020, the SEC
adopted new regulations governing the use of derivatives by registered investment companies (Rule 18f-4). The Trust will be required to implement and comply with Rule
18f-4 by August 19, 2022. Once implemented, Rule 18f-4 will impose limits on the amount of derivatives a fund can enter into, eliminate the asset segregation
framework currently used by funds to comply with Section 18 of the Investment Company Act, treat derivatives as senior securities and require funds whose use of derivatives is more than a limited specified exposure amount to establish and
maintain a comprehensive derivatives risk management program and appoint a derivatives risk manager.
Temporary Borrowings
The Trust may also borrow money as a temporary measure for extraordinary or emergency purposes, including the payment of dividends and the settlement of
securities transactions which otherwise might require untimely dispositions of Trust securities.
RISKS
The NAV and market price of, and dividends paid on, the common shares will fluctuate with and be affected by, among other things, the risks of
investing in the Trust.
General Risks
Please refer
to the section of the Trusts most recent annual report on Form N-CSR entitled Trust Investment Objectives,
Policies and RisksRisk Factors, which is incorporated by reference herein, for a discussion of the general risks of investing in the Trust.
Other Risks
Second Lien Loans Risk
Second lien loans generally are subject to similar risks as those associated with investments in senior loans. Because second lien loans are subordinated or
unsecured and thus lower in priority of payment to senior loans, they are subject to the additional risk that the cash flow of the borrower and property securing the loan or debt, if any, may be insufficient to meet scheduled payments after giving
effect to the senior secured obligations of the borrower. This risk is generally higher for subordinated unsecured loans or debt, which are not backed by a security interest in any specific collateral. Second lien loans generally have greater price
volatility and may be less liquid than senior loans.
There is also a possibility that originators will not be able to sell participations in second lien
loans, which would create greater credit risk exposure for the holders of such loans. Second lien loans share the same risks as other below investment grade securities.
Mezzanine Securities Risk
Mezzanine securities
generally are rated below investment grade and frequently are unrated and present many of the same risks as senior loans, second lien loans and non-investment grade bonds. However, unlike senior loans and
second lien loans, mezzanine securities are not a senior or secondary secured obligation of the related borrower. They typically are the most subordinated debt obligation in an issuers capital structure. Mezzanine securities also may often be
unsecured. Mezzanine securities therefore are subject to the additional risk that the cash flow of the related borrower and the property securing the loan may be insufficient to repay the scheduled obligation after
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giving effect to any senior obligations of the related borrower. Mezzanine securities will be subject to certain additional risks to the extent that such loans may not be protected by financial
covenants or limitations upon additional indebtedness. Investment in mezzanine securities is a highly specialized investment practice that depends more heavily on independent credit analysis than investments in other types of debt obligations.
Bank Loans Risk
The market for bank loans may not be
highly liquid and the Trust may have difficulty selling them. These investments are subject to both interest rate risk and credit risk. These investments expose the Trust to the credit risk of both the financial institution and the underlying
borrower.
Corporate Bonds Risk
The market value of
a corporate bond generally may be expected to rise and fall inversely with interest rates. The market value of intermediate and longer-term corporate bonds is generally more sensitive to changes in interest rates than is the market value of
shorter-term corporate bonds. The market value of a corporate bond also may be affected by factors directly related to the issuer, such as investors perceptions of the creditworthiness of the issuer, the issuers financial performance,
perceptions of the issuer in the market place, performance of management of the issuer, the issuers capital structure and use of financial leverage and demand for the issuers goods and services. Certain risks associated with investments
in corporate bonds are described elsewhere in this Prospectus in further detail. There is a risk that the issuers of corporate bonds may not be able to meet their obligations on interest or principal payments at the time called for by an instrument.
Corporate bonds of below investment grade quality are often high risk and have speculative characteristics and may be particularly susceptible to adverse issuer-specific developments.
Distressed Securities Risk
Distressed securities are
speculative and involve substantial risks in addition to the risks of investing in junk bonds. The Trust will generally not receive interest payments on the distressed securities and may incur costs to protect its investment. In addition, distressed
securities involve the substantial risk that principal will not be repaid. These securities may present a substantial risk of default or may be in default at the time of investment. The Trust may incur additional expenses to the extent it is
required to seek recovery upon a default in the payment of principal of or interest on its portfolio holdings. In any reorganization or liquidation proceeding relating to a portfolio company, the Trust may lose its entire investment or may be
required to accept cash or securities with a value less than its original investment. Distressed securities and any securities received in an exchange for such securities may be subject to restrictions on resale.
Yield and Ratings Risk
The yields on certain debt
obligations are dependent on a variety of factors, including general market conditions, conditions in the particular market for the obligation, the financial condition of the issuer, the size of the offering, the maturity of the obligation and the
ratings of the issue. The ratings of Moodys and S&P, which are described in Appendix A, represent their respective opinions as to the quality of the obligations they undertake to rate. Ratings, however, are general and are not absolute
standards of quality. Consequently, obligations with the same rating, maturity and interest rate may have different market prices. Subsequent to its purchase by the Trust, a rated security may cease to be rated. The Advisors will consider such an
event in determining whether the Trust should continue to hold the security.
Unrated Securities Risk
Because the Trust may purchase securities that are not rated by any rating organization, the Advisors may, after assessing their credit quality, internally
assign ratings to certain of those securities in categories similar to those of rating organizations. Some unrated securities may not have an active trading market or may be difficult to value, which means the Trust might have difficulty
selling them promptly at an acceptable price. To the extent that the
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Trust invests in unrated securities, the Trusts ability to achieve its investment objective will be more dependent on the Advisors credit analysis than would be the case when the
Trust invests in rated securities.
Debtor-in-Possession (DIP)
Financing Risk
The Trusts participation in DIP financings is subject to risks. DIP financings are arranged when an entity seeks the protections
of the bankruptcy court under Chapter 11 of the U.S. Bankruptcy Code and must be approved by the bankruptcy court. These financings allow the entity to continue its business operations while reorganizing under Chapter 11. DIP financings are
typically fully secured by a lien on the debtors otherwise unencumbered assets or secured by a junior lien on the debtors encumbered assets (so long as the loan is fully secured based on the most recent current valuation or appraisal
report of the debtor). DIP financings are often required to close with certainty and in a rapid manner in order to satisfy existing creditors and to enable the issuer to emerge from bankruptcy or to avoid a bankruptcy proceeding. There is a risk
that the borrower will not emerge from Chapter 11 bankruptcy proceedings and be forced to liquidate its assets under Chapter 7 of the U.S. Bankruptcy Code. In the event of liquidation, the Trusts only recourse will be against the property
securing the DIP financing.
Mortgage Related Securities Risks
Investing in MBS entails various risks. MBS represent an interest in a pool of mortgages. The risks associated with MBS include: credit risk associated with
the performance of the underlying mortgage properties and of the borrowers owning these properties; risks associated with their structure and execution (including the collateral, the process by which principal and interest payments are allocated and
distributed to investors and how credit losses affect issuing vehicles and the return to investors in such MBS); whether the collateral represents a fixed set of specific assets or accounts, whether the underlying collateral assets are revolving or closed-end, under what terms (including maturity of the MBS) any remaining balance in the accounts may revert to the issuing entity and the extent to which the entity that is the actual source of the
collateral assets is obligated to provide support to the issuing vehicle or to the investors in such MBS; risks associated with the servicer of the underlying mortgages; adverse changes in economic conditions and circumstances, which are more likely
to have an adverse impact on MBS secured by loans on certain types of commercial properties than on those secured by loans on residential properties; prepayment risk, which can lead to significant fluctuations in the value of the MBS; loss of all or
part of the premium, if any, paid; and decline in the market value of the security, whether resulting from changes in interest rates, prepayments on the underlying mortgage collateral or perceptions of the credit risk associated with the underlying
mortgage collateral. In addition, the Trusts level of investment in MBS of a particular type or in MBS issued or guaranteed by affiliated obligors, serviced by the same servicer or backed by underlying collateral located in a specific
geographic region, may subject the Trust to additional risk. To the extent the Trust invests in junior tranches of MBS, it will be subject to additional risks, such as the risk that the proceeds that would otherwise be distributed to the Trust will
be used to pay down more senior tranches.
When market interest rates decline, more mortgages are refinanced and the securities are paid off earlier than
expected. Prepayments may also occur on a scheduled basis or due to foreclosure. During such periods, the reinvestment of prepayment proceeds by the Trust will generally be at lower rates than the rates that were carried by the obligations that have
been prepaid. When market interest rates increase, the market values of MBS decline. At the same time, however, mortgage refinancings and prepayments slow, lengthening the effective maturities of these securities. As a result, the negative effect of
the rate increase on the market value of MBS is usually more pronounced than it is for other types of fixed-income securities. Moreover, the relationship between borrower prepayments and changes in interest rates may mean some high-yielding mortgage
related and other asset-backed securities have less potential for increases in value if market interest rates were to fall than conventional bonds with comparable maturities.
In general, losses on a mortgaged property securing a mortgage loan included in a securitization will be borne first by the equity holder of the property,
then by a cash reserve fund or letter of credit, if any, then by the holder of a mezzanine loan or B-Note, if any, then by the first loss subordinated security holder (generally, the B-Piece buyer) and then by the holder of a higher rated security. The Trust could invest in any class of security included in a securitization. In the event of default and the exhaustion of
any equity support, reserve fund, letter of credit, mezzanine loans or B-Notes, and any classes of securities junior to those in which the Trust invests, the Trust will not be able to recover all of
its investment in the MBS it purchases. MBS in which the Trust invests may not
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contain reserve funds, letters of credit, mezzanine loans and/or junior classes of securities. The prices of lower credit quality securities are generally less sensitive to interest rate changes
than more highly rated investments, but more sensitive to adverse economic downturns or individual issuer developments.
MBS generally are classified as
either RMBS or CMBS, each of which are subject to certain specific risks as further described below.
RMBS Risks. RMBS are securities the
payments on which depend primarily on the cash flow from residential mortgage loans made to borrowers that are secured by residential real estate. Non-agency residential mortgage loans are
obligations of the borrowers thereunder only and are not typically insured or guaranteed by any other person or entity. The ability of a borrower to repay a loan secured by residential property is dependent upon the income or assets of the borrower.
A number of factors, including a general economic downturn, acts of God, terrorism, social unrest and civil disturbances, may impair a borrowers ability to repay its loans.
Agency RMBS Risks. MBS issued by FNMA or FHLMC are guaranteed as to timely payment of principal and interest by FNMA or FHLMC, but are not
backed by the full faith and credit of the U.S. Government. In 2008, the FHFA placed FNMA and FHLMC into conservatorship. FNMA and FHLMC are continuing to operate as going concerns while in conservatorship and each remains liable for all of its
obligations, including its guaranty obligations, associated with its MBS. As the conservator, FHFA succeeded to all rights, titles, powers and privileges of FNMA and FHLMC and of any stockholder, officer or director of FNMA and FHLMC with respect to
FNMA and FHLMC and the assets of FNMA and FHLMC. In connection with the conservatorship, the U.S. Treasury entered into an agreement with each of FNMA and FHLMC that contains various covenants that severely limit each enterprises operations.
There is no assurance that the obligations of such entities will be satisfied in full, or that such obligations will not decrease in value or default.
Under the Reform Act, FHFA, as conservator or receiver, has the power to repudiate any contract entered into by FNMA or FHLMC prior to FHFAs appointment
as conservator or receiver, as applicable, if FHFA determines, in its sole discretion, that performance of the contract is burdensome and that repudiation of the contract promotes the orderly administration of FNMAs or FHLMCs affairs. In
the event that FHFA, as conservator of, or if it is later appointed as receiver for, FNMA or FHLMC, were to repudiate any such guaranty obligation, the conservatorship or receivership estate, as applicable, would be liable for actual direct
compensatory damages in accordance with the provisions of the Reform Act. Any such liability could be satisfied only to the extent of FNMAs or FHLMCs assets available therefor. In the event of repudiation, the payments of interest to
holders of FNMA or FHLMC MBS would be reduced if payments on the mortgage loans represented in the mortgage loan groups related to such MBS are not made by the borrowers or advanced by the servicer. Any actual direct compensatory damages for
repudiating these guaranty obligations may not be sufficient to offset any shortfalls experienced by such MBS holders. Further, in its capacity as conservator or receiver, FHFA has the right to transfer or sell any asset or liability of FNMA or
FHLMC without any approval, assignment or consent. If FHFA, as conservator or receiver, were to transfer any such guaranty obligation to another party, holders of FNMA or FHLMC MBS would have to rely on that party for satisfaction of the guaranty
obligation and would be exposed to the credit risk of that party. In addition, certain rights provided to holders of MBS issued by FNMA and FHLMC under the operative documents related to such securities may not be enforced against FHFA, or
enforcement of such rights may be delayed, during the conservatorship or any future receivership. The operative documents for FNMA and FHLMC MBS may provide (or with respect to securities issued prior to the date of the appointment of the
conservator may have provided) that upon the occurrence of an event of default on the part of FNMA or FHLMC, in its capacity as guarantor, which includes the appointment of a conservator or receiver, holders of such MBS have the right to replace
FNMA or FHLMC as trustee if the requisite percentage of MBS holders consent. The Reform Act prevents MBS holders from enforcing such rights if the event of default arises solely because a conservator or receiver has been appointed.
RMBS Legal Risks. Legal risks associated with RMBS can arise as a result of the procedures followed in connection with the origination of the
mortgage loans or the servicing thereof, which may be subject to various federal and state laws (including, without limitation, predatory lending laws), public policies and principles of equity that regulate interest rates and other charges, require
certain disclosures, require licensing of originators, prohibit discriminatory lending practices, regulate the use of consumer credit information and debt collection practices and may limit the servicers ability to collect all or part of the
principal of or interest on a residential mortgage loan, entitle the borrower to a refund of amounts previously paid by it or subject the servicer to damages and sanctions.
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Specifically, provisions of federal predatory lending laws, such as the federal Truth-in-Lending Act (as
supplemented by the Home Ownership and Equity Protection Act of 1994) and Regulation Z, and various recently enacted state predatory lending laws provide that a purchaser or assignee of specified types of residential mortgage loans (including an
issuer of RMBS) may be held liable for violations by the originator of such mortgage loans. Under such assignee liability provisions, a borrower is generally given the right to assert against a purchaser of its mortgage loan any affirmative claims
and defenses to payment that such borrower could assert against the originator of the loan or, where applicable, the home improvement contractor that arranged the loan. Liability under such assignee liability provisions could, therefore, result in a
disruption of cash flows allocated to the holders of RMBS where either the issuer of such RMBS is liable for damages or is unable to enforce payment by the borrower.
In most but not all cases, the amount recoverable against a purchaser or assignee under such assignee liability provisions is limited to amounts previously
paid and still owed by the borrower. Moreover, sellers of residential mortgage loans to an issuer of RMBS typically represent that the loans have been originated in accordance with all applicable laws and in the event such representation is
breached, the seller typically must repurchase the offending loan. Notwithstanding these protections, an issuer of RMBS may be exposed to an unquantifiable amount of potential assignee liability because, first, the amount of potential assignee
liability under certain predatory lending laws is unclear and has yet to be litigated, and, second, in the event a predatory lending law does not prohibit class action lawsuits, it is possible that an issuer of RMBS could be liable for damages for
more than the original principal amount of the offending loans held by it. In such circumstances the issuer of RMBS may be forced to seek contribution from other parties, who may no longer exist or have adequate funds available to fund such
contribution.
In addition, structural and legal risks of RMBS include the possibility that, in a bankruptcy or similar proceeding involving the
originator or the servicer (often the same entity or affiliates), the assets of the issuer could be treated as never having been truly sold by the originator to the issuer and could be substantively consolidated with those of the originator, or the
transfer of such assets to the issuer could be voided as a fraudulent transfer. Challenges based on such doctrines could result also in cash flow delays and losses on the related issue of RMBS.
Non-Agency RMBS
Risks. Non-agency RMBS are securities issued by non-governmental issuers. Non-agency RMBS
have no direct or indirect government guarantees of payment and are subject to various risks as described herein.
Borrower Credit Risk.
Credit-related risk on RMBS arises from losses due to delinquencies and defaults by the borrowers in payments on the underlying mortgage loans and breaches by originators and servicers of their obligations under the underlying documentation pursuant
to which the RMBS are issued. Non-agency residential mortgage loans are obligations of the borrowers thereunder only and are not typically insured or guaranteed by any other person or entity. The
rate of delinquencies and defaults on residential mortgage loans and the aggregate amount of the resulting losses will be affected by a number of factors, including general economic conditions, particularly those in the area where the related
mortgaged property is located, the level of the borrowers equity in the mortgaged property and the individual financial circumstances of the borrower. If a residential mortgage loan is in default, foreclosure on the related residential
property may be a lengthy and difficult process involving significant legal and other expenses. The net proceeds obtained by the holder on a residential mortgage loan following the foreclosure on the related property may be less than the total
amount that remains due on the loan. The prospect of incurring a loss upon the foreclosure of the related property may lead the holder of the residential mortgage loan to restructure the residential mortgage loan or otherwise delay the foreclosure
process.
Mortgage Loan Market Risk. In the recent past, the residential mortgage market in the United States experienced difficulties that
adversely affected the performance and market value of certain mortgages and mortgage related securities. Delinquencies and losses on residential mortgage loans (especially sub-prime and second lien
mortgage loans) generally increased during this period and declines in or flattening of housing values in many housing markets were generally viewed as exacerbating such delinquencies and losses. Borrowers with ARMs are more sensitive to changes in
interest rates, which affect their monthly mortgage payments, and may be unable to secure replacement mortgages at comparably low interest rates.
At any
one time, a portfolio of RMBS may be backed by residential mortgage loans that are highly concentrated in only a few states or regions. As a result, the performance of such residential mortgage loans may be more susceptible to a downturn in the
economy, including in particular industries that are highly represented in such states
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or regions, natural calamities and other adverse conditions affecting such areas. The economic downturn experienced in the recent past at the national level, and the more serious economic
downturn experienced in the recent past in certain geographic areas of the United States, including in particular areas of the United States where rates of delinquencies and defaults on residential mortgage loans were particularly high, is generally
viewed as having contributed to the higher rates of delinquencies and defaults on the residential mortgage loans underlying RMBS during this period. There also can be no assurance that areas of the United States that mostly avoided higher rates of
delinquencies and defaults on residential mortgage loans during this period would continue to do so if an economic downturn were to reoccur at the national level.
Another factor that may contribute to, and may in the future result in, higher delinquency and default rates is the increase in monthly payments on
ARMs. Any increase in prevailing market interest rates, which are currently at historical lows, may result in increased payments for borrowers who have ARMs. Moreover, with respect to hybrid mortgage loans (which are mortgage loans
combining fixed and adjustable rate features) after their initial fixed rate period or other adjustable-rate mortgage loans, interest-only products or products having a lower rate, and with respect to mortgage loans with a negative amortization
feature which reach their negative amortization cap, borrowers may experience a substantial increase in their monthly payment even without an increase in prevailing market interest rates. Increases in payments for borrowers may result in increased
rates of delinquencies and defaults on residential mortgage loans underlying the non-agency RMBS.
As a
result of rising concerns about increases in delinquencies and defaults on residential mortgage loans (particularly on sub-prime and adjustable-rate mortgage loans) and as a result of increasing
concerns about the financial strength of originators and servicers and their ability to perform their obligations with respect to non-agency RMBS, there may be an adverse change in the market
sentiments of investors about the market values and volatility and the degree of risk of non-agency RMBS generally. Some or all of the underlying residential mortgage loans in an issue of non-agency RMBS may have balloon payments due on their respective maturity dates. Balloon residential mortgage loans involve a greater risk to a lender than fully amortizing loans, because the ability
of a borrower to pay such amount will normally depend on its ability to obtain refinancing of the related mortgage loan or sell the related mortgaged property at a price sufficient to permit the borrower to make the balloon payment, which will
depend on a number of factors prevailing at the time such refinancing or sale is required, including, without limitation, the strength of the local or national residential real estate markets, interest rates and general economic conditions and the
financial condition of the borrower. If borrowers are unable to make such balloon payments, the related issue of non-agency RMBS may experience losses.
The Trust may acquire RMBS backed by collateral pools of mortgage loans that have been originated using underwriting standards that are less restrictive than
those used in underwriting prime mortgage loans and Alt-A mortgage loans. These lower standards include mortgage loans made to borrowers having imperfect or impaired credit
histories, mortgage loans where the amount of the loan at origination is 80% or more of the value of the mortgage property, mortgage loans made to borrowers with low credit scores, mortgage loans made to borrowers who have other debt that represents
a large portion of their income and mortgage loans made to borrowers whose income is not required to be disclosed or verified and are commonly referred to as sub-prime mortgage loans. Sub-prime mortgage loans have in recent periods experienced increased rates of delinquency, foreclosure, bankruptcy and loss, and they are likely to continue to experience delinquency, foreclosure,
bankruptcy and loss rates that are higher, and that may be substantially higher, than those experienced by mortgage loans underwritten in a more traditional manner. Certain categories of RMBS, such as option ARM RMBS
and sub-prime RMBS, have been referred to by the financial media as toxic assets.
Although
the United States economy has been slowly improving in recent years, the impact of the coronavirus pandemic on the United States has caused the economy to deteriorate again and led to a high incidence of missed mortgage payments, which could result
in the incidence of mortgage foreclosures, especially sub-prime mortgages, beginning to increase again, which could adversely affect the value of any RMBS owned by the Trust.
CMBS Risks. CMBS are, generally, securities backed by obligations (including certificates of participation in
obligations) that are principally secured by mortgages on real property or interests therein having a multifamily or commercial use, such as regional malls, other retail space, office buildings, industrial or warehouse properties, hotels, nursing
homes and senior living centers. The market for CMBS developed more recently and, in terms of total outstanding principal amount of issues, is relatively small compared to the market for single-family RMBS.
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CMBS are subject to particular risks, including lack of standardized terms, shorter maturities than residential
mortgage loans and payment of all or substantially all of the principal only at maturity rather than regular amortization of principal. Additional risks may be presented by the type and use of a particular commercial property. Special risks are
presented by hospitals, nursing homes, hospitality properties and certain other property types. Commercial property values and net operating income are subject to volatility, which may result in net operating income becoming insufficient to cover
debt service on the related mortgage loan. The repayment of loans secured by income-producing properties is typically dependent upon the successful operation of the related real estate project rather than upon the liquidation value of the underlying
real estate. Furthermore, the net operating income from and value of any commercial property is subject to various risks, including changes in general or local economic conditions and/or specific industry segments; the solvency of the related
tenants; declines in real estate values; declines in rental or occupancy rates; increases in interest rates, real estate tax rates and other operating expenses; changes in governmental rules, regulations and fiscal policies; acts of God; new and
ongoing epidemics and pandemics of infectious diseases and other global health events; natural/environmental disasters; terrorist threats and attacks and social unrest and civil disturbances. Consequently, adverse changes in economic conditions and
circumstances are more likely to have an adverse impact on MBS secured by loans on commercial properties than on those secured by loans on residential properties. In addition, commercial lending generally is viewed as exposing the lender to a
greater risk of loss than one- to four- family residential lending. Commercial lending, for example, typically involves larger loans to single borrowers or groups of related borrowers than residential one- to four- family mortgage loans. In addition, the repayment of loans secured by income producing properties typically is dependent upon the successful operation of the related real estate
project and the cash flow generated therefrom. The coronavirus pandemic in the United States has had a severe adverse effect on many commercial businesses, resulting in them not paying rent, which in turn will likely result in the owners of the
underlying properties being impaired in their ability to make mortgage payments.
The exercise of remedies and successful realization of liquidation
proceeds relating to CMBS is also highly dependent on the performance of the servicer or special servicer. In many cases, overall control over the special servicing of related underlying mortgage loans will be held by a directing
certificateholder or a controlling class representative, which is appointed by the holders of the most subordinate class of CMBS in such series.
The Trust may not have the right to appoint the directing certificateholder. In connection with the servicing of the specially serviced mortgage loans, the
related special servicer may, at the direction of the directing certificateholder, take actions with respect to the specially serviced mortgage loans that could adversely affect the Trusts interests. There may be a limited number of special
servicers available, particularly those that do not have conflicts of interest.
The Trust may invest in Subordinated CMBS issued or sponsored by
commercial banks, savings and loan institutions, mortgage bankers, private mortgage insurance companies and other non-governmental issuers. Subordinated CMBS have no governmental guarantee and are
subordinated in some manner as to the payment of principal and/or interest to the holders of more senior CMBS arising out of the same pool of mortgages.
Subordinated CMBS are often referred to
as B-Pieces. The holders of Subordinated CMBS typically are compensated with a higher stated yield than are the holders of more senior CMBS. On the
other hand, Subordinated CMBS typically subject the holder to greater risk than senior CMBS and tend to be rated in a lower rating category (frequently a substantially lower rating category) than the senior CMBS issued in respect of the same
mortgage pool. Subordinated CMBS generally are likely to be more sensitive to changes in prepayment and interest rates and the market for such securities may be less liquid than is the case for traditional income securities and senior CMBS.
Stripped MBS Risk. Stripped MBS may be subject to additional risks. One type of stripped MBS pays to one class all of the interest from the
mortgage assets (the IO class), while the other class will receive all of the principal (the PO class). The yield to maturity on an IO class is extremely sensitive to the rate of principal payments (including prepayments) on
the underlying mortgage assets and a rapid rate of principal payments may have a material adverse effect on the Trusts yield to maturity from these securities. If the assets underlying the IO class experience greater than anticipated
prepayments of principal, the Trust may fail to recoup fully, or at all, its initial investment in these securities. Conversely, PO class securities tend to decline in value if prepayments are slower than anticipated.
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CMO Risk. There are certain risks associated specifically with CMOs. CMOs are debt obligations
collateralized by mortgage loans or mortgage pass-through securities. The average life of a CMO is determined using mathematical models that incorporate prepayment assumptions and other factors that involve estimates of future economic and market
conditions. Actual future results may vary from these estimates, particularly during periods of extreme market volatility. Further, under certain market conditions, such as those that occurred during the recent downturn in the mortgage markets, the
weighted average life of certain CMOs may not accurately reflect the price volatility of such securities. For example, in periods of supply and demand imbalances in the market for such securities and/or in periods of sharp interest rate movements,
the prices of CMOs may fluctuate to a greater extent than would be expected from interest rate movements alone. CMOs issued by private entities are not obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities and
are not guaranteed by any government agency, although the securities underlying a CMO may be subject to a guarantee. Therefore, if the collateral securing the CMO, as well as any third party credit support or guarantees, is insufficient to make
payments when due, the holder could sustain a loss.
Inverse floating rate CMOs are typically more volatile than fixed or floating rate tranches of CMOs.
Many inverse floating rate CMOs have coupons that move inversely to a multiple of an index. The effect of the coupon varying inversely to a multiple of an applicable index creates a leverage factor. Inverse floaters based on multiples of a stated
index are designed to be highly sensitive to changes in interest rates and can subject the holders thereof to extreme reductions of yield and loss of principal. The market for inverse floating rate CMOs with highly leveraged characteristics at times
may be very thin. The Trusts ability to dispose of its positions in such securities will depend on the degree of liquidity in the markets for such securities. It is impossible to predict the amount of trading interest that may exist in such
securities, and therefore the future degree of liquidity.
The Trust may also invest in REMICs, which are CMOs that qualify for special tax treatment
under the Code and invest in certain mortgages principally secured by interests in real property and other permitted investments.
Credit Risk
Associated With Originators and Servicers of Mortgage Loans. A number of originators and servicers of residential and commercial mortgage loans, including some of the largest originators and servicers in the residential and commercial
mortgage loan market, have experienced serious financial difficulties, including some that are now or were subject to federal insolvency proceedings. These difficulties have resulted from many factors, including increased competition among
originators for borrowers, decreased originations by such originators of mortgage loans and increased delinquencies and defaults on such mortgage loans, as well as from increases in claims for repurchases of mortgage loans previously sold by them
under agreements that require repurchase in the event of breaches of representations regarding loan quality and characteristics. Such difficulties may affect the performance of MBS backed by mortgage loans. Furthermore, the inability of the
originator to repurchase such mortgage loans in the event of loan representation breaches or the servicer to repurchase such mortgage loans upon a breach of its servicing obligations also may affect the performance of related MBS. Delinquencies and
losses on, and, in some cases, claims for repurchase by the originator of, mortgage loans originated by some mortgage lenders have recently increased as a result of inadequate underwriting procedures and policies, including inadequate due diligence,
failure to comply with predatory and other lending laws and, particularly in the case of any no documentation or limited documentation mortgage loans that may
support non-agency RMBS, inadequate verification of income and employment history. Delinquencies and losses on, and claims for repurchase of, mortgage loans originated by some mortgage lenders have
also resulted from fraudulent activities of borrowers, lenders, appraisers, and other residential mortgage industry participants such as mortgage brokers, including misstatements of income and employment history, identity theft and overstatements of
the appraised value of mortgaged properties. Many of these originators and servicers are very highly leveraged. These difficulties may also increase the chances that these entities may default on their warehousing or other credit lines or become
insolvent or bankrupt and thereby increase the likelihood that repurchase obligations will not be fulfilled and the potential for loss to holders of non-agency MBS and subordinated security holders.
The servicers of non-agency MBS are often the same entities as, or affiliates of, the originators of
these mortgage loans. Accordingly, the financial risks relating to originators of MBS described immediately above also may affect the servicing of MBS. In the case of such servicers, and other servicers, financial difficulties may have a negative
effect on the ability of servicers to pursue collection on mortgage loans that are experiencing increased delinquencies and defaults and to maximize recoveries on sale of underlying properties following foreclosure. In
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recent years, a number of lenders specializing in residential mortgages have sought bankruptcy protection, shut down or been refused further financings from their lenders.
MBS typically provide that the servicer is required to make advances in respect of delinquent mortgage loans. However, servicers experiencing financial
difficulties may not be able to perform these obligations or obligations that they may have to other parties of transactions involving these securities. Like originators, these entities are typically very highly leveraged. Such difficulties may
cause servicers to default under their financing arrangements. In certain cases, such entities may be forced to seek bankruptcy protection. Due to the application of the provisions of bankruptcy law, servicers who have sought bankruptcy protection
may not be required to advance such amounts. Even if a servicer were able to advance amounts in respect of delinquent mortgage loans, its obligation to make such advances may be limited to the extent that it does not expect to recover such advances
due to the deteriorating credit of the delinquent mortgage loans or declining value of the related mortgaged properties. Moreover, servicers may overadvance against a particular mortgage loan or charge too many costs of resolution or foreclosure of
a mortgage loan to a securitization, which could increase the potential losses to holders of MBS. In such transactions, a servicers obligation to make such advances may also be limited to the amount of its servicing fee. In addition, if an
issue of MBS provides for interest on advances made by the servicer, in the event that foreclosure proceeds or payments by borrowers are not sufficient to cover such interest, such interest will be paid to the servicer from available collections or
other mortgage income, thereby reducing distributions made on the MBS and, in the case of senior-subordinated MBS described below, first from distributions that would otherwise be made on the most subordinated MBS of such issue. Any such financial
difficulties may increase the possibility of a servicer termination and the need for a transfer of servicing and any such liabilities or inability to assess such liabilities may increase the difficulties and costs in affecting such transfer and the
potential loss, through the allocation of such increased cost of such transfer, to subordinated security holders.
There can be no assurance that
originators and servicers of mortgage loans will not continue to experience serious financial difficulties or experience such difficulties in the future, including becoming subject to bankruptcy or insolvency proceedings, or that underwriting
procedures and policies and protections against fraud will be sufficient in the future to prevent such financial difficulties or significant levels of default or delinquency on mortgage loans. Because the recent financial difficulties experienced by
such originators and servicers is unprecedented and unpredictable, the past performance of the residential and commercial mortgage loans originated and serviced by them (and the corresponding performance of the related MBS) is not a reliable
indicator of the future performance of such residential mortgage loans (or the related MBS).
In some cases, servicers of MBS have been the subject of
legal proceedings involving the origination and/or servicing practices of such servicers. Large groups of private litigants and states attorneys general have brought such proceedings. Because of the large volume of mortgage loans originated
and serviced by such servicers, such litigation can cause heightened financial strain on servicers. In other cases, origination and servicing practices may cause or contribute to such strain, because of representation and warranty repurchase
liability arising in MBS and mortgage loan sale transactions. Any such financial strain could cause servicers to service below required standards, causing delinquencies and losses in any related MBS transaction to rise, and in extreme cases could
cause the servicer to seek the protection of any applicable bankruptcy or insolvency law. In any such proceeding, it is unclear whether the fees that the servicer charges in such transactions would be sufficient to permit that servicer or a
successor servicer to service the mortgage loans in such transaction adequately. If such fees had to be increased, it is likely that the most subordinated security holders in such transactions would be effectively required to pay such increased
fees. Finally, these entities may be the subject of future laws designed to protect consumers from defaulting on their mortgage loans. Such laws may have an adverse effect on the cash flows paid under such MBS.
Additional Risks of Mortgage Related Securities. Additional risks associated with investments in MBS include:
Interest Rate Risk. In addition to the interest rate risks described above, certain MBS may be subject to additional risks as the rate of
interest payable on certain MBS may be set or effectively capped at the weighted average net coupon of the underlying mortgage loans themselves, often referred to as an available funds cap. As a result of this cap, the return to the
holder of such MBS is dependent on the relative timing and rate of delinquencies and prepayments of mortgage loans bearing a higher rate of interest. In general, early prepayments will have a greater negative impact on the yield to the holder of
such MBS.
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Structural Risk. Because MBS generally are ownership or participation interests in pools of
mortgage loans secured by a pool of properties underlying the mortgage loan pool, the MBS are entitled to payments provided for in the underlying agreement only when and if funds are generated by the underlying mortgage loan pool. This likelihood of
the return of interest and principal may be assessed as a credit matter. However, the holders of MBS do not have the legal status of secured creditors, and cannot accelerate a claim for payment on their securities, or force a sale of the mortgage
loan pool in the event that insufficient funds exist to pay such amounts on any date designated for such payment. The holders of MBS do not typically have any right to remove a servicer solely as a result of a failure of the mortgage pool to perform
as expected.
Subordination Risk. MBS may be subordinated to one or more other senior classes of securities of the same series for purposes
of, among other things, offsetting losses and other shortfalls with respect to the related underlying mortgage loans. For example, in the case of certain MBS, no distributions of principal will generally be made with respect to any class until the
aggregate principal balances of the corresponding senior classes of securities have been reduced to zero. As a result, MBS may be more sensitive to risk of loss, writedowns, the non-fulfillment of
repurchase obligations, overadvancing on a pool of loans and the costs of transferring servicing than senior classes of securities.
Prepayment,
Extension and Redemption Risks. MBS may reflect an interest in monthly payments made by the borrowers who receive the underlying mortgage loans. Although the underlying mortgage loans are for specified periods of time, such as 20 or 30
years, the borrowers can, and historically have paid them off sooner. When a prepayment happens, a portion of the MBS which represents an interest in the underlying mortgage loan will be prepaid. A borrower is more likely to prepay a mortgage which
bears a relatively high rate of interest. This means that in times of declining interest rates, a portion of the Trusts higher yielding securities are likely to be redeemed and the Trust will probably be unable to replace them with securities
having as great a yield. In addition to reductions in the level of market interest rates and the prepayment provisions of the mortgage loans, repayments on the residential mortgage loans underlying an issue of RMBS may also be affected by a variety
of economic, geographic and other factors, including the size difference between the interest rates on the underlying residential mortgage loans (giving consideration to the cost of refinancing) and prevailing mortgage rates and the availability of
refinancing. Prepayments can result in lower yields to shareholders. The increased likelihood of prepayment when interest rates decline also limits market price appreciation of MBS. This is known as prepayment risk.
Except in the case of certain types of RMBS, the mortgage loans underlying RMBS generally do not contain prepayment penalties and a reduction in market
interest rates will increase the likelihood of prepayments on the related RMBS. In the case of certain home equity loan securities and certain types of RMBS, even though the underlying mortgage loans often contain prepayment premiums, such
prepayment premiums may not be sufficient to discourage borrowers from prepaying their mortgage loans in the event of a reduction in market interest rates, resulting in a reduction in the yield to maturity for holders of the related RMBS. RMBS
typically contain provisions that require repurchase of mortgage loans by the originator or other seller in the event of a breach of a representation or warranty regarding loan quality and characteristics of such loan. Any repurchase of a mortgage
loan as a result of a breach has the same effect on the yield received on the related issue of RMBS as a prepayment of such mortgage loan. Any increase in breaches of representations and the consequent repurchases of mortgage loans that result from
inadequate underwriting procedures and policies and protections against fraud will have the same effect on the yield on the related RMBS as an increase in prepayment rates.
Risk of prepayment may be reduced for commercial real estate property loans containing significant prepayment penalties or prohibitions on principal payments
for a period of time following origination.
MBS also are subject to extension risk. Extension risk is the possibility that rising interest rates may
cause prepayments to occur at a slower than expected rate. This particular risk may effectively change a security which was considered short or intermediate term into a long-term security. The values of long-term securities generally fluctuate more
widely in response to changes in interest rates than short or intermediate-term securities.
In addition, MBS may be subject to redemption at the option
of the issuer. If a MBS held by the Trust is called for redemption, the Trust will be required to permit the issuer to redeem or pay-off the security, which could have an adverse effect
on the Trusts ability to achieve its investment objective.
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Spread Widening Risk. The prices of MBS may decline substantially, for reasons that may not be
attributable to any of the other risks described in the prospectus. In particular, purchasing assets at what may appear to be undervalued levels is no guarantee that these assets will not be trading at even more undervalued
levels at a time of valuation or at the time of sale. It may not be possible to predict, or to protect against, such spread widening risk.
Illiquidity Risk. The liquidity of MBS varies by type of security; at certain times the Trust may encounter difficulty in disposing of such
investments. Because MBS have the potential to be less liquid than other securities, the Trust may be more susceptible to illiquidity risk than funds that invest in other securities. In the past, in stressed markets, certain types of MBS suffered
periods of illiquidity when disfavored by the market. Due to increased instability in the credit markets, the market for some MBS has experienced reduced liquidity and greater volatility with respect to the value of such securities, making it more
difficult to value such securities.
Asset-Backed Securities Risks
ABS involve certain risks in addition to those presented by MBS. There is the possibility that recoveries on the underlying collateral may not, in some cases,
be available to support payments on these securities. Relative to MBS, ABS may provide the Trust with a less effective security interest in the underlying collateral and are more dependent on the borrowers ability to pay. If many borrowers on
the underlying loans default, losses could exceed the credit enhancement level and result in losses to investors in an ABS transaction. Finally, ABS have structure risk due to a unique characteristic known as early amortization, or early payout,
risk. Built into the structure of most ABS are triggers for early payout, designed to protect investors from losses. These triggers are unique to each transaction and can include a significant rise in defaults on the underlying loans, a sharp drop
in the credit enhancement level or the bankruptcy of the originator. Once early amortization begins, all incoming loan payments (after expenses are paid) are used to pay investors as quickly as possible based upon a predetermined priority of
payment. As a result, proceeds that would otherwise be distributed to holders of a junior tranche may be diverted to pay down more senior tranches.
The
collateral underlying ABS may constitute assets related to a wide range of industries and sectors, such as credit card and automobile receivables. Credit card receivables are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. Most issuers of automobile receivables permit the servicers to retain
possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related automobile receivables. In
addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have an effective security interest in all of the
obligations backing such receivables. If the economy of the United States deteriorates, defaults on securities backed by credit card, automobile and other receivables may increase, which may adversely affect the value of any ABS owned by Trust.
There is the possibility that recoveries on the underlying collateral may not, in some cases, be available to support payments on these securities. In the past, certain automobile manufacturers have been granted access to emergency loans from the
U.S. Government and have experienced bankruptcy. These events may adversely affect the value of securities backed by receivables from the sale or lease of automobiles
Some ABS, particularly home equity loan transactions, are subject to interest rate risk and prepayment risk. A change in interest rates can affect the pace of
payments on the underlying loans, which in turn, affects total return on the securities.
Zero Coupon Securities Risk
While interest payments are not made on such securities, holders of such securities are deemed to have received income (phantom income) annually,
notwithstanding that cash may not be received currently. The effect of owning instruments that do not make current interest payments is that a fixed yield is earned not only on the original investment but also, in effect, on all discount accretion
during the life of the obligations. This implicit reinvestment of earnings at a fixed rate eliminates the risk of being unable to invest distributions at a rate as high as the implicit yield on the zero coupon bond, but at the same time eliminates
the holders ability to reinvest at higher rates in the
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future. For this reason, some of these securities may be subject to substantially greater price fluctuations during periods of changing market interest rates than are comparable securities that
pay interest currently. Longer term zero coupon bonds are more exposed to interest rate risk than shorter term zero coupon bonds. These investments benefit the issuer by mitigating its need for cash to meet debt service, but also require a higher
rate of return to attract investors who are willing to defer receipt of cash. Because zero-coupon bonds allow an issuer to defer the need to generate cash to meet current interest payments, these investments may involve greater credit risk than
bonds that pay interest currently or in cash. In addition, zero coupon bonds may be difficult to value accurately because their continuing accruals require continuing judgments about the collectability of the deferred payments and the value of any
associated collateral.
Pay-in-Kind Bonds Risk
Similar to zero coupon obligations, pay-in-kind bonds also carry additional
risk as holders of these types of securities realize no cash until the cash payment date unless a portion of such securities is sold and, if the issuer defaults, the Trust may obtain no return at all on its investment. The market price of pay-in-kind bonds is affected by interest rate changes to a greater extent, and therefore tends to be more volatile, than that of securities which pay interest in cash.
Because pay-in-kind bonds allow an issuer to defer the need to generate cash to meet current interest payments, these investments may involve greater credit risk than bonds that pay interest currently or in cash. In addition, pay-in-kind bonds may
be difficult to value accurately because their continuing accruals require continuing judgments about the collectability of the deferred payments and the value of any associated collateral. Additionally, interest on pay-in-kind bonds has the effect
of generating investment income, and the deferral of interest on pay-in-kind bonds increases the loan-to-value ratio at a compounding rate. Current federal tax law requires the holder of certain pay-in-kind bonds to accrue income with respect to these securities prior to the receipt of cash payments. To maintain its qualification as a regulated investment company and avoid liability for U.S. federal
income and excise taxes, the Trust may be required to distribute income accrued with respect to these securities and may have to dispose of portfolio securities under disadvantageous circumstances in order to generate cash to satisfy these
distribution requirements.
Insolvency of Issuers of Indebtedness Risk
Various laws enacted for the protection of creditors may apply to indebtedness in which the Trust invests. The information in this and the following
paragraph is applicable with respect to U.S. issuers subject to U.S. federal bankruptcy law. Insolvency considerations may differ with respect to other issuers. If, in a lawsuit brought by an unpaid creditor or representative of creditors
of an issuer of indebtedness, a court were to find that the issuer did not receive fair consideration or reasonably equivalent value for incurring the indebtedness and that, after giving effect to such indebtedness, the issuer (i) was
insolvent, (ii) was engaged in a business for which the remaining assets of such issuer constituted unreasonably small capital or (iii) intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they
mature, such court could determine to invalidate, in whole or in part, such indebtedness as a fraudulent conveyance, to subordinate such indebtedness to existing or future creditors of such issuer, or to recover amounts previously paid by such
issuer in satisfaction of such indebtedness. The measure of insolvency for purposes of the foregoing will vary. Generally, an issuer would be considered insolvent at a particular time if the sum of its debts was then greater than all of its
property at a fair valuation, or if the present fair saleable value of its assets was then less than the amount that would be required to pay its probable liabilities on its existing debts as they became absolute and matured. There can be no
assurance as to what standard a court would apply in order to determine whether the issuer was insolvent after giving effect to the incurrence of the indebtedness in which the Trust invested or that, regardless of the method of
valuation, a court would not determine that the issuer was insolvent upon giving effect to such incurrence. In addition, in the event of the insolvency of an issuer of indebtedness in which the Trust invests, payments made on such
indebtedness could be subject to avoidance as a preference if made within a certain period of time (which may be as long as one year) before insolvency.
The Trust does not anticipate that it will engage in conduct that would form the basis for a successful cause of action based upon fraudulent conveyance,
preference or subordination. There can be no assurance, however, as to whether any lending institution or other party from which the Trust may acquire such indebtedness engaged in any such conduct (or any other conduct that would subject such
indebtedness and the Trust to insolvency laws) and, if it did, as to whether such creditor claims could be asserted in a U.S. court (or in the courts of any other country) against the Trust.
Indebtedness consisting of obligations of non-U.S. issuers may be subject to various laws enacted in the countries of
their issuance for the protection of creditors. These insolvency considerations will differ depending on the country in which each issuer is located or domiciled and may differ depending on whether the issuer is a
non-sovereign or a sovereign entity.
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Warrants Risk
If the price of the underlying stock does not rise above the exercise price before the warrant expires, the warrant generally expires without any value and
the Trust will lose any amount it paid for the warrant. Thus, investments in warrants may involve substantially more risk than investments in common stock. Warrants may trade in the same markets as their underlying stock; however, the price of the
warrant does not necessarily move with the price of the underlying stock.
Rights Risk
The failure to exercise subscription rights to purchase common stock would result in the dilution of the Trusts interest in the issuing company. The
market for such rights is not well developed, and, accordingly, the Trust may not always realize full value on the sale of rights.
Convertible
Securities Risk
The market value of a convertible security performs like that of a regular debt security; that is, if market interest rates rise, the
value of a convertible security usually falls. In addition, convertible securities are subject to the risk that the issuer will not be able to pay interest or dividends when due, and their market value may change based on changes in the
issuers credit rating or the markets perception of the issuers creditworthiness. Since it derives a portion of its value from the common stock into which it may be converted, a convertible security is also subject to the same types
of market and issuer risks that apply to the underlying common stock.
Contingent Convertible Securities Risk
CoCos are subject to additional risk factors in addition to those related to convertible securities. CoCos are a newer form of instrument and the regulatory
environment for these instruments continues to evolve. Because the market for such securities is evolving, it is uncertain how the larger market for CoCos would react to a trigger event, coupon cancellation, write-down of par value or coupon
suspension (as described below) applicable to a single issuer. Following conversion of a CoCo, because the common stock of the issuer may not pay a dividend, investors in such securities could experience reduced yields or no yields at all.
There are special risks associated with investing in CoCos, including:
Loss Absorption Risk. CoCos have fully discretionary coupons. This means coupons can potentially be cancelled at the banking institutions
discretion or at the request of the relevant regulatory authority in order to help the bank absorb losses. The liquidation value of a CoCo may be adjusted downward to below the original par value or written off entirely under certain circumstances.
The write-down of the securitys par value may occur automatically and would not entitle holders to institute bankruptcy proceedings against the issuer. In addition, an automatic write-down could result in a reduced income rate if the dividend
or interest payment associated with the security is based on the securitys par value. Coupon payments may also be subject to approval by the issuers regulator and may be suspended in the event there are insufficient distributable
reserves. Due to uncertainty surrounding coupon payments, CoCos may be volatile and their price may decline rapidly in the event that coupon payments are suspended.
Subordinated Instruments. CoCos will, in the majority of circumstances, be issued in the form of subordinated debt instruments in order to
provide the appropriate regulatory capital treatment prior to a conversion. Accordingly, in the event of liquidation, dissolution or winding-up of an issuer prior to a conversion having occurred, the rights and claims of the
holders of the CoCos, such as the Trust, against the issuer in respect of or arising under the terms of the CoCos shall generally rank junior to the claims of all holders of unsubordinated obligations of the issuer. In addition, if the CoCos are
converted into the issuers underlying equity securities following a conversion event (i.e., a trigger), each holder will be subordinated due to their conversion from being the holder of a debt instrument to being the holder of
an equity instrument. Such conversion may be automatic.
Unpredictable Market Value Fluctuate. The value of CoCos is unpredictable and
will be influenced by many factors including, without limitation: (i) the creditworthiness of the issuer and/or fluctuations in such issuers applicable capital ratios; (ii) supply and demand for the CoCos; (iii) general market
conditions and available liquidity; and (iv) economic, financial and political events that affect the issuer, its particular market or the financial markets in general.
Municipal Securities Risk
Municipal securities risks
include the ability of the issuer to repay the obligation, the relative lack of information about certain issuers of municipal securities, and the possibility of future legislative changes which could affect the market for and value of municipal
securities. These risks include:
General Obligation Bonds Risks. The full faith, credit and taxing power of the municipality that issues a
general obligation bond secures payment of interest and repayment of principal. Timely payments depend on the issuers credit quality, ability to raise tax revenues and ability to maintain an adequate tax base.
Revenue Bonds Risks. Revenue bonds issued by state or local agencies to finance the development of
low-income, multi-family housing involve special risks in addition to those associated with municipal bonds generally, including that the underlying properties may not generate sufficient income to pay
expenses and interest costs. Payments of interest and principal on revenue bonds are made only from the revenues generated by a particular facility, class of facilities or the proceeds of a special tax or other revenue source. These payments depend
on the money earned by the particular facility or class of facilities, or the amount of revenues derived from another source. Such bonds are generally nonrecourse against the property owner, may be junior to the rights of others with an interest in
the properties, may pay interest that changes based in part on the financial performance of the property, may be prepayable without penalty and may be used to finance the construction of housing developments which, until completed and rented, do not
generate income to pay interest. Increases in interest rates payable on senior obligations may make it more difficult for issuers to meet payment obligations on subordinated bonds.
Private Activity Bonds Risks. Municipalities and other public authorities issue private activity bonds to finance development of industrial
facilities for use by a private enterprise. The private enterprise pays the principal and interest on the bond, and the issuer does not pledge its full faith, credit and taxing power for repayment. If the private enterprise defaults on its payments,
the Trust may not receive any income or get its money back from the investment. These bonds may subject certain investors in the Trust to the federal alternative minimum tax.
Moral Obligation Bonds Risks. Moral obligation bonds are generally issued by special purpose public authorities of a state or municipality. If
the issuer is unable to meet its obligations, repayment of these bonds becomes a moral commitment, but not a legal obligation, of the state or municipality.
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Municipal Notes Risks. Municipal notes are shorter term municipal debt obligations. They may
provide interim financing in anticipation of, and are secured by, tax collection, bond sales or revenue receipts. If there is a shortfall in the anticipated proceeds, the notes may not be fully repaid and the Trust may lose money.
Municipal Lease Obligations Risks. In a municipal lease obligation, the issuer agrees to make payments when due on the lease obligation. The
issuer will generally appropriate municipal funds for that purpose, but is not obligated to do so. Although the issuer does not pledge its unlimited taxing power for payment of the lease obligation, the lease obligation is secured by the leased
property. However, if the issuer does not fulfill its payment obligation it may be difficult to sell the property and the proceeds of a sale may not cover the Trusts loss.
Municipal leases and certificates of participation involve special risks not normally associated with general obligations or revenue bonds. Leases and
installment purchase or conditional sale contracts (which normally provide for title to the leased asset to pass eventually to the governmental issuer) have evolved as a means for governmental issuers to acquire property and equipment without
meeting the constitutional and statutory requirements for the issuance of debt. The debt issuance limitations are deemed to be inapplicable because of the inclusion in many leases or contracts of nonappropriation clauses that relieve the
governmental issuer of any obligation to make future payments under the lease or contract unless money is appropriated for such purpose by the appropriate legislative body on a yearly or other periodic basis. In addition, such leases or contracts
may be subject to the temporary abatement of payments in the event that the governmental issuer is prevented from maintaining occupancy of the lease premises or utilizing the leased equipment. Although the obligations may be secured by the leased
equipment or facilities, the disposition of the property in the event of nonappropriation or foreclosure might prove difficult, time consuming and costly, and may result in a delay in recovering or the failure to fully recover ownership of the
assets.
Certificates of participation, which represent interests in unmanaged pools of municipal leases or installment contracts, involve the same risks
as the underlying municipal leases. In addition, the Trust may be dependent upon the municipal authority issuing the certificate of participation to exercise remedies with respect to the underlying securities.
Certificates of participation also entail a risk of default or bankruptcy, both of the issuer of the municipal lease and also the municipal agency issuing the
certificate of participation.
Liquidity of Investments. Certain municipal bonds in which the Trust invests may lack an established secondary
trading market or are otherwise considered illiquid. Liquidity of a security relates to the ability to easily dispose of the security and the price to be obtained and does not generally relate to the credit risk or likelihood of receipt of cash at
maturity. Illiquid securities may trade at a discount from comparable, more liquid investments.
The financial markets in general, and certain segments of
the municipal securities markets in particular, have in recent years experienced periods of extreme secondary market supply and demand imbalance, resulting in a loss of liquidity during which market prices were suddenly and substantially below
traditional measures of intrinsic value. During such periods some securities could be sold only at arbitrary prices and with substantial losses. Periods of such market dislocation may occur again at any time.
Because the Trust does not expect that it will invest more 50% of its assets in tax-exempt municipal securities, the
Trust will not be eligible to pass tax-exempt interest through to its shareholders in the form of exempt-interest dividends. The amount of tax-exempt
interest earned by the Trust will, however, generally increase the Trusts earnings and profits for U.S. federal income tax purposes. Accordingly, distributions of the Trust attributable to
tax-exempt interest will generally be taxable to shareholders as ordinary dividend income that is not eligible for the preferential tax rates applicable to qualified dividend income, even though
the tax-exempt income, if earned directly by the shareholder, would not have been subject to U.S. federal income tax.
Municipal Securities Market Risk
Economic exposure to
the municipal securities market involves certain risks. The municipal market is one in which dealer firms make markets in bonds on a principal basis using their proprietary capital, and during the financial crisis
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of 2007-2009 these firms capital was severely constrained. As a result, some firms were unwilling to commit their capital to purchase and to serve as a dealer for municipal securities.
Certain municipal securities may not be registered with the SEC or any state securities commission and will not be listed on any national securities exchange. The amount of public information available about the municipal securities to which the
Trust is economically exposed is generally less than that for corporate equities or bonds, and the investment performance of the Trust may therefore be more dependent on the analytical abilities of the Advisors than would be a fund investing solely
in stocks or taxable bonds. The secondary market for municipal securities, particularly the below investment grade securities to which the Trust may be economically exposed, also tends to be less well-developed or liquid than many other securities
markets, which may adversely affect the Trusts ability to sell such securities at attractive prices or at prices approximating those at which the Trust currently values them.
In addition, many state and municipal governments that issue securities are under significant economic and financial stress and may not be able to satisfy
their obligations. This stress may be significantly exacerbated by the coronavirus pandemic. The ability of municipal issuers to make timely payments of interest and principal may be diminished during general economic downturns and as governmental
cost burdens are reallocated among federal, state and local governments. The taxing power of any governmental entity may be limited by provisions of state constitutions or laws and an entitys credit will depend on many factors, including the
entitys tax base, the extent to which the entity relies on federal or state aid, and other factors which are beyond the entitys control. In addition, laws enacted in the future by Congress or state legislatures or referenda could extend
the time for payment of principal and/or interest, or impose other constraints on enforcement of such obligations or on the ability of municipalities to levy taxes. Issuers of municipal securities might seek protection under the bankruptcy laws. In
the event of bankruptcy of such an issuer, holders of municipal securities could experience delays in collecting principal and interest and such holders may not, in all circumstances, be able to collect all principal and interest to which they are
entitled. To enforce its rights in the event of a default in the payment of interest or repayment of principal, or both, the Trust may take possession of and manage the assets securing the issuers obligations on such securities, which may
increase the Trusts operating expenses. Any income derived from the Trusts ownership or operation of such assets may not be tax-exempt or may fail to generate qualifying income
for purposes of the income tests applicable to RICs.
Taxable Municipal Securities Risk. Build America Bonds involve similar risks as municipal
bonds, including credit and market risk. In particular, should a Build America Bonds issuer fail to continue to meet the applicable requirements imposed on the bonds as provided by the ARRA , it is possible that such issuer may not
receive federal cash subsidy payments, impairing the issuers ability to make scheduled interest payments. The Build America Bond program expired on December 31, 2010 and no further issuance is permitted unless Congress renews the program.
As a result, the number of available Build America Bonds is limited, which may negatively affect the value of the Build America Bonds. In addition, there can be no assurance that Build America Bonds will be actively traded. It is difficult to
predict the extent to which a market for such bonds will continue, meaning that Build America Bonds may experience greater illiquidity than other municipal obligations. The Build America Bonds outstanding as of December 31, 2010 will continue
to be eligible for the federal interest rate subsidy, which continues for the life of the Build America Bonds; however, no bonds issued following expiration of the Build America Bond program will be eligible for the U.S. federal tax subsidy.
General Risk Factors in Hedging Foreign Currency
Hedging transactions involving Currency Instruments involve substantial risks, including correlation risk. While the Trusts use of Currency Instruments
to effect hedging strategies is intended to reduce the volatility of the NAV of the Trusts common shares, the NAV of the Trusts common shares will fluctuate. Moreover, although Currency Instruments may be used with the intention of
hedging against adverse currency movements, transactions in Currency Instruments involve the risk that anticipated currency movements will not be accurately predicted and that the Trusts hedging strategies will be ineffective. To the extent
that the Trust hedges against anticipated currency movements that do not occur, the Trust may realize losses and decrease its total return as the result of its hedging transactions. Furthermore, the Trust will only engage in hedging activities from
time to time and may not be engaging in hedging activities when movements in currency exchange rates occur.
It may not be possible for the Trust to hedge
against currency exchange rate movements, even if correctly anticipated, in the event that (i) the currency exchange rate movement is so generally anticipated that the Trust is not
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able to enter into a hedging transaction at an effective price, or (ii) the currency exchange rate movement relates to a market with respect to which Currency Instruments are not available
and it is not possible to engage in effective foreign currency hedging. The cost to the Trust of engaging in foreign currency transactions varies with such factors as the currencies involved, the length of the contract period and the market
conditions then prevailing. Since transactions in foreign currency exchange usually are conducted on a principal basis, no fees or commissions are involved.
Foreign Currency Forwards Risk
Forward foreign currency
exchange contracts do not eliminate fluctuations in the value of Non-U.S. Securities (as defined in the prospectus) but rather allow the Trust to establish a fixed rate of exchange for a future point
in time. This strategy can have the effect of reducing returns and minimizing opportunities for gain.
In connection with its trading in forward foreign
currency contracts, the Trust will contract with a foreign or domestic bank, or foreign or domestic securities dealer, to make or take future delivery of a specified amount of a particular currency. There are no limitations on daily price moves in
such forward contracts, and banks and dealers are not required to continue to make markets in such contracts. There have been periods during which certain banks or dealers have refused to quote prices for such forward contracts or have quoted prices
with an unusually wide spread between the price at which the bank or dealer is prepared to buy and that at which it is prepared to sell. Governmental imposition of credit controls might limit any such forward contract trading. With respect to its
trading of forward contracts, if any, the Trust will be subject to the risk of bank or dealer failure and the inability of, or refusal by, a bank or dealer to perform with respect to such contracts. Any such default would deprive the Trust of any
profit potential or force the Trust to cover its commitments for resale, if any, at the then market price and could result in a loss to the Trust.
The
Trust may also engage in proxy hedging transactions to reduce the effect of currency fluctuations on the value of existing or anticipated holdings of portfolio securities. Proxy hedging is often used when the currency to which the Trust is exposed
is difficult to hedge or to hedge against the dollar. Proxy hedging entails entering into a forward contract to sell a currency whose changes in value are generally considered to be linked to a currency or currencies in which some or all of the
Trusts securities are, or are expected to be, denominated, and to buy U.S. dollars. Proxy hedging involves some of the same risks and considerations as other transactions with similar instruments. Currency transactions can result in losses to
the Trust if the currency being hedged fluctuates in value to a degree or in a direction that is not anticipated. In addition, there is the risk that the perceived linkage between various currencies may not be present or may not be present during
the particular time that the Trust is engaging in proxy hedging. The Trust may also cross-hedge currencies by entering into forward contracts to sell one or more currencies that are expected to decline in value relative to other currencies to which
the Trust has or in which the Trust expects to have portfolio exposure. For example, the Trust may hold both Canadian government bonds and Japanese government bonds, and the Advisors may believe that Canadian dollars will deteriorate against
Japanese yen. The Trust would sell Canadian dollars to reduce its exposure to that currency and buy Japanese yen. This strategy would be a hedge against a decline in the value of Canadian dollars, although it would expose the Trust to declines in
the value of the Japanese yen relative to the U.S. dollar.
Some of the forward non-U.S. currency
contracts entered into by the Trust may be classified as non-deliverable forwards (NDFs). NDFs are cash-settled, short-term forward contracts that may be thinly traded or are denominated in non-convertible foreign currency, where the profit or loss at the time at the settlement date is calculated by taking the difference between the agreed upon exchange rate and the spot rate at the time
of settlement, for an agreed upon notional amount of funds. All NDFs have a fixing date and a settlement date. The fixing date is the date at which the difference between the prevailing market exchange rate and the agreed upon exchange rate is
calculated. The settlement date is the date by which the payment of the difference is due to the party receiving payment. NDFs are commonly quoted for time periods of one month up to two years, and are normally quoted and settled in U.S. dollars.
They are often used to gain exposure to and/or hedge exposure to foreign currencies that are not internationally traded.
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Currency Futures Risk
The Trust may also seek to hedge against the decline in the value of a currency or to enhance returns through use of currency futures or options thereon.
Currency futures are similar to forward foreign exchange transactions except that futures are standardized, exchange-traded contracts while forward foreign exchange transactions are traded in the OTC market. Currency futures involve substantial
currency risk, and also involve leverage risk.
Currency Options Risk
The Trust may also seek to hedge against the decline in the value of a currency or to enhance returns through the use of currency options. Currency options
are similar to options on securities. For example, in consideration for an option premium the writer of a currency option is obligated to sell (in the case of a call option) or purchase (in the case of a put option) a specified amount of a specified
currency on or before the expiration date for a specified amount of another currency. The Trust may engage in transactions in options on currencies either on exchanges or OTC markets. Currency options involve substantial currency risk, and may also
involve credit, leverage or illiquidity risk.
Currency Swaps Risk
The Trust may enter into currency swaps. Currency swaps involve the exchange of the rights of the Trust and another party to make or receive payments in
specified currencies. The Trust may also hedge portfolio positions through currency swaps, which are transactions in which one currency is simultaneously bought for a second currency on a spot basis and sold for the second currency on a forward
basis. Currency swaps usually involve the delivery of the entire principal value of one designated currency in exchange for the other designated currency. Because currency swaps usually involve the delivery of the entire principal value of one
designated currency in exchange for the other designated currency, the entire principal value of a currency swap is subject to the risk that the other party to the swap will default on its contractual delivery obligations.
Over-The-Counter Trading Risk
The derivative instruments that may be purchased or sold by the Trust may include instruments not traded on an exchange. The risk of nonperformance by the
counterparty to an instrument may be greater than, and the ease with which the Trust can dispose of or enter into closing transactions with respect to an instrument may be less than, the risk associated with an exchange traded or cleared OTC
instrument. In addition, significant disparities may exist between bid and asked prices for derivative instruments that are not traded on an exchange. The absence of liquidity may make it difficult or impossible for the Trust
to sell such instruments promptly at an acceptable price. Derivative instruments not traded on exchanges also are not subject to the same type of government regulation as exchange traded or cleared OTC instruments, and many of the protections
afforded to participants in a regulated environment may not be available in connection with the transactions. Because derivatives traded in OTC markets generally are not guaranteed by an exchange or clearing corporation and generally do not require
payment of margin, to the extent that the Trust has unrealized gains in such instruments or has deposited collateral with its counterparties the Trust is at risk that its counterparties will become bankrupt or otherwise fail to honor its
obligations.
Event Risk
Event risk is the risk
that corporate issuers may undergo restructurings, such as mergers, leveraged buyouts, takeovers, or similar events financed by increased debt. As a result of the added debt, the credit quality and market value of a companys bonds and/or other
debt securities may decline significantly.
Indexed and Inverse Securities Risk
The Trust may invest in securities the potential return of which is based on the change in a specified interest rate or equity index (an indexed
security). For example, the Trust may invest in a security that pays a variable amount of interest or principal based on the current level of the French or Korean stock markets. The Trust may also invest in
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securities whose return is inversely related to changes in an interest rate or index (inverse securities). In general, the return on inverse securities will decrease when the
underlying index or interest rate goes up and increase when that index or interest rate goes down.
Inverse Floater and Related Securities Risk
Investments in inverse floaters, residual interest tender option bonds and similar instruments expose the Trust to the same risks as investments in
fixed income securities and derivatives, as well as other risks, including those associated with leverage and increased volatility. An investment in these securities typically will involve greater risk than an investment in a fixed rate security.
Distributions on inverse floaters, residual interest tender option bonds and similar instruments will typically bear an inverse relationship to short term interest rates and typically will be reduced or, potentially, eliminated as interest rates
rise. Inverse floaters, residual interest tender option bonds and similar instruments will underperform the market for fixed rate securities in a rising interest rate environment. Inverse floaters may be considered to be leveraged to the extent that
their interest rates vary by a magnitude that exceeds the magnitude of the change in a reference rate of interest (typically a short term interest rate). The leverage inherent in inverse floaters is associated with greater volatility in their market
values. Investments in inverse floaters, residual interest tender option bonds and similar instruments that have fixed income securities underlying them will expose the Trust to the risks associated with those fixed income securities and the values
of those investments may be especially sensitive to changes in prepayment rates on the underlying fixed income securities.
Inflation-Indexed Bonds
Risk
The Trust may invest in inflation-indexed bonds, which are fixed-income securities or other instruments whose principal value is periodically
adjusted according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that accrues inflation into the principal value of the bond. Most other issuers pay out the Consumer Price Index
(CPI) accruals as part of a semi-annual coupon.
Inflation-indexed securities issued by the U.S. Treasury have maturities of five, ten or
thirty years, although it is possible that securities with other maturities will be issued in the future. The U.S. Treasury securities pay interest on a semi-annual basis, equal to a fixed percentage of the inflation-adjusted principal amount. For
example, if the Trust purchased an inflation-indexed bond with a par value of $1,000 and a 3% real rate of return coupon (payable 1.5% semi-annually), and inflation over the first six months was 1%,
the mid-year par value of the bond would be $1,010 and the first semi-annual interest payment would be $15.15 ($1,010 times 1.5%). If inflation during the second half of the year resulted in the
whole years inflation equaling 3%, the end-of-year par value of the bond would be $1,030 and the second semi-annual interest payment would be $15.45
($1,030 times 1.5%).
If the periodic adjustment rate measuring inflation falls, the principal value of inflation-indexed bonds will be adjusted downward,
and, consequently, the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S.
Treasury inflation-indexed bonds, even during a period of deflation. However, the current market value of the bonds is not guaranteed, and will fluctuate. The Trust may also invest in other inflation related bonds which may or may not provide a
similar guarantee. If a guarantee of principal is not provided, the adjusted principal value of the bond repaid at maturity may be less than the original principal. In addition, if the Trust purchases inflation-indexed bonds offered by foreign
issuers, the rate of inflation measured by the foreign inflation index may not be correlated to the rate of inflation in the United States.
The value of
inflation-indexed bonds is expected to change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates and the rate of inflation. Therefore, if inflation were to rise at
a faster rate than nominal interest rates, real interest rates might decline, leading to an increase in value of inflation-indexed bonds. In contrast, if nominal interest rates increased at a faster rate than inflation, real interest rates might
rise, leading to a decrease in value of inflation-indexed bonds. There can be no assurance, however, that the value of inflation-indexed bonds will be directly correlated to changes in interest rates.
While these securities are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If
interest rates rise due to reasons other than inflation (for example, due to
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changes in currency exchange rates), investors in these securities may not be protected to the extent that the increase is not reflected in the bonds inflation measure.
In general, the measure used to determine the periodic adjustment of U.S. inflation-indexed bonds is the Consumer Price Index for Urban Consumers (CPI-U), which is calculated monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in the cost of
living, made up of components such as housing, food, transportation and energy. Inflation-indexed bonds issued by a foreign government are generally adjusted to reflect a comparable inflation index, calculated by that government. There can be no
assurance that the CPI-U or any foreign inflation index will accurately measure the real rate of inflation in the prices of goods and services. Moreover, there can be no assurance that the rate of
inflation in a foreign country will be correlated to the rate of inflation in the United States.
Any increase in the principal amount of an
inflation-indexed bond will be considered taxable ordinary income, even though investors do not receive their principal until maturity.
Structured
Investments Risk
The Trust may invest in structured products, including structured notes, ELNs and other types of structured products. Holders of
structured products bear the risks of the underlying investments, index or reference obligation and are subject to counterparty risk.
The Trust may have
the right to receive payments only from the structured product and generally does not have direct rights against the issuer or the entity that sold the assets to be securitized. While certain structured products enable the investor to acquire
interests in a pool of securities without the brokerage and other expenses associated with directly holding the same securities, investors in structured products generally pay their share of the structured products administrative and other
expenses.
Although it is difficult to predict whether the prices of indices and securities underlying structured products will rise or fall, these prices
(and, therefore, the prices of structured products) will be influenced by the same types of political and economic events that affect issuers of securities and capital markets generally. If the issuer of a structured product uses shorter term
financing to purchase longer term securities, the issuer may be forced to sell its securities at below market prices if it experiences difficulty in obtaining such financing, which may adversely affect the value of the structured products owned by
the Trust.
Structured Notes Risk. Investments in structured notes involve risks, including credit risk and market risk.
Where the Trusts investments in structured notes are based upon the movement of one or more factors, including currency exchange rates, interest rates, referenced bonds and stock indices, depending on the factor used and the use of multipliers
or deflators, changes in interest rates and movement of the factor may cause significant price fluctuations. Additionally, changes in the reference instrument or security may cause the interest rate on the structured note to be reduced to zero and
any further changes in the reference instrument may then reduce the principal amount payable on maturity. Structured notes may be less liquid than other types of securities and more volatile than the reference instrument or security underlying the
note.
Event-Linked Securities Risk. Event-linked securities are a form of derivative issued by insurance companies and
insurance-related special purpose vehicles that apply securitization techniques to catastrophic property and casualty damages. Unlike other insurable low-severity, high-probability events, the insurance risk
of which can be diversified by writing large numbers of similar policies, the holders of a typical event-linked securities are exposed to the risks from high-severity, low-probability events such as that posed
by major earthquakes or hurricanes. If a catastrophe occurs that triggers the event-linked security, investors in such security may lose some or all of the capital invested. In the case of an event, the funds are paid to the bond
sponsoran insurer, reinsurer or corporationto cover losses. In return, the bond sponsors pay interest to investors for this catastrophe protection. Event-linked securities can be structured to
pay-off on three types of variablesinsurance-industry catastrophe loss indices, insured-specific catastrophe losses and parametric indices based on the physical characteristics of catastrophic events.
Such variables are difficult to predict or model, and the risk and potential return profiles of event-linked securities may be difficult to assess. Catastrophe-related event-linked securities have been in use since the 1990s, and the securitization
and risk-transfer aspects of such event-linked securities are beginning to be
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employed in other insurance and risk-related areas. No active trading market may exist for certain event-linked securities, which may impair the ability of the Trust to realize full value in the
event of the need to liquidate such assets.
Equity-Linked Notes Risk. ELNs are hybrid securities with characteristics of
both fixed-income and equity securities. An ELN is a debt instrument, usually a bond, that pays interest based upon the performance of an underlying equity, which can be a single stock, basket of stocks or an equity index. The interest payment on an
ELN may in some cases be leveraged so that, in percentage terms, it exceeds the relative performance of the market. ELNs generally are subject to the risks associated with the securities of equity issuers, default risk and counterparty risk.
Credit-Linked Notes Risk. A credit-linked note is a derivative instrument. It is a synthetic obligation between two or more
parties where the payment of principal and/or interest is based on the performance of some obligation (a reference obligation). In addition to the credit risk of the reference obligations and interest rate risk, the buyer/seller of the credit-linked
note is subject to counterparty risk.
Repurchase Agreements and Purchase and Sale Contracts Risk
Subject to its investment objective and policies, the Trust may enter into repurchase agreements. Repurchase agreements typically involve the acquisition by
the Trust of fixed-income securities from a selling financial institution such as a bank, savings and loan association or broker-dealer. The agreement provides that the Trust will sell the securities back to the institution at a fixed time in the
future. The Trust does not bear the risk of a decline in the value of the underlying security unless the seller defaults under its repurchase obligation. In the event of the bankruptcy or other default of a seller of a repurchase agreement, the
Trust could experience both delays in liquidating the underlying securities and losses, including possible decline in the value of the underlying security during the period in which the Trust seeks to enforce its rights thereto; possible lack of
access to income on the underlying security during this period; and expenses of enforcing its rights. While repurchase agreements involve certain risks not associated with direct investments in fixed-income securities, the Trust follows procedures
approved by the Board that are designed to minimize such risks. In addition, the value of the collateral underlying the repurchase agreement will be at least equal to the repurchase price, including any accrued interest earned on the repurchase
agreement. In the event of a default or bankruptcy by a selling financial institution, the Trust generally will seek to liquidate such collateral. However, the exercise of the Trusts right to liquidate such collateral could involve certain
costs or delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, the Trust could suffer a loss.
When-Issued and Delayed Delivery Securities and Forward Commitments Risk
When-issued and delayed delivery securities and forward commitments involve the risk that the security the Trust buys will lose value prior to its delivery.
There also is the risk that the security will not be issued or that the other party to the transaction will not meet its obligation. If this occurs, the Trust may lose both the investment opportunity for the assets it set aside to pay for the
security and any gain in the securitys price.
Securities Lending Risk
The Trust may lend securities to financial institutions. Securities lending involves exposure to certain risks, including operational risk (i.e., the risk of
losses resulting from problems in the settlement and accounting process), gap risk (i.e., the risk of a mismatch between the return on cash collateral reinvestments and the fees the Trust has agreed to pay a borrower), and credit, legal,
counterparty and market risk. If a securities lending counterparty were to default, the Trust would be subject to the risk of a possible delay in receiving collateral or in recovering the loaned securities, or to a possible loss of rights in the
collateral. In the event a borrower does not return the Trusts securities as agreed, the Trust may experience losses if the proceeds received from liquidating the collateral do not at least equal the value of the loaned security at the time
the collateral is liquidated, plus the transaction costs incurred in purchasing replacement securities. This event could trigger adverse tax consequences for the Trust. The Trust could lose money if its short-term investment of the collateral
declines in value over the period of the loan. Substitute payments for dividends received by the Trust for securities loaned out by the Trust will generally not be considered qualified dividend income. The securities lending agent will take the tax
effects on shareholders of this
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difference into account in connection with the Trusts securities lending program. Substitute payments received on tax-exempt securities
loaned out will generally not be tax-exempt income.
Short Sales Risk
Short-selling involves selling securities which may or may not be owned and borrowing the same securities for delivery to the purchaser, with an obligation to
replace the borrowed securities at a later date. If the price of the security sold short increases between the time of the short sale and the time the Trust replaces the borrowed security, the Trust will incur a loss; conversely, if the price
declines, the Trust will realize a capital gain. Any gain will be decreased, and any loss will be increased, by the transaction costs incurred by the Trust, including the costs associated with providing collateral to the broker-dealer (usually cash
and liquid securities) and the maintenance of collateral with its custodian. Although the Trusts gain is limited to the price at which it sold the security short, its potential loss is theoretically unlimited.
Short-selling necessarily involves certain additional risks. However, if the short seller does not own the securities sold short (an uncovered short sale),
the borrowed securities must be replaced by securities purchased at market prices in order to close out the short position, and any appreciation in the price of the borrowed securities would result in a loss. Uncovered short sales expose the Trust
to the risk of uncapped losses until a position can be closed out due to the lack of an upper limit on the price to which a security may rise. Purchasing securities to close out the short position can itself cause the price of the securities to rise
further, thereby exacerbating the loss. There is the risk that the securities borrowed by the Trust in connection with a short-sale must be returned to the securities lender on short notice. If a request for return of borrowed securities occurs at a
time when other short-sellers of the security are receiving similar requests, a short squeeze can occur, and the Trust may be compelled to replace borrowed securities previously sold short with purchases on the open market at the most
disadvantageous time, possibly at prices significantly in excess of the proceeds received at the time the securities were originally sold short.
Inflation Risk
Inflation risk is the risk that the
value of assets or income from investment will be worth less in the future, as inflation decreases the value of money. As inflation increases, the real value of the common shares and distributions on those shares can decline. In addition, during any
periods of rising inflation, interest rates on any borrowings by the Trust would likely increase, which would tend to further reduce returns to the holders of common shares.
Deflation Risk
Deflation risk is the risk that prices
throughout the economy decline over time, which may have an adverse effect on the market valuation of companies, their assets and their revenues. In addition, deflation may have an adverse effect on the creditworthiness of issuers and may make
issuer default more likely, which may result in a decline in the value of the Trusts portfolio.
EMU and Redenomination Risk
As the European debt crisis progressed the possibility of one or more Eurozone countries exiting the European Monetary Union (EMU), or even the
collapse of the Euro as a common currency, arose, creating significant volatility at times in currency and financial markets generally. The effects of the collapse of the Euro, or of the exit of one or more countries from the EMU, on the U.S. and
global economy and securities markets are impossible to predict and any such events could have a significant adverse impact on the value and risk profile of the Trusts portfolio. Any partial or complete dissolution of the EMU could have
significant adverse effects on currency and financial markets, and on the values of the Trusts portfolio investments. If one or more EMU countries were to stop using the Euro as its primary currency, the Trusts investments in such
countries may be redenominated into a different or newly adopted currency. As a result, the value of those investments could decline significantly and unpredictably. In addition, securities or other investments that are redenominated may be subject
to foreign currency risk, liquidity risk and valuation risk to a greater extent than similar investments currently denominated in Euros. To the extent a currency used for redenomination purposes is not specified in respect of certain EMU-related investments, or should the Euro cease to be used entirely, the currency in which such investments are denominated
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may be unclear, making such investments particularly difficult to value or dispose of. The Trust may incur additional expenses to the extent it is required to seek judicial or other clarification
of the denomination or value of such securities.
Allocation Risk
The Trusts ability to achieve its investment objective depends upon the Advisors skill in determining the Trusts strategic asset class
allocation and in selecting the best mix of investments. There is a risk that the Advisors evaluations and assumptions regarding asset classes or investments may be incorrect in view of actual market conditions.
The Trusts allocation of its investments across various segments of the securities markets and various countries, regions, asset classes and sectors may
vary significantly over time based on the Advisors analysis and judgment. As a result, the particular risks most relevant to an investment in the Trust, as well as the overall risk profile of the Trusts portfolio, may vary over
time. The Advisors employs an active approach to the Trusts investment allocations, but there is no guarantee that the Advisors allocation strategy will produce the desired results. The percentage of the Trusts total assets
allocated to any category of investment may at any given time be significantly less than the maximum percentage permitted pursuant to the Trusts investment policies. It is possible that the Trust will focus on an investment that performs
poorly or underperforms other investments under various market conditions. The flexibility of the Trusts investment policies and the discretion granted to the Advisors to invest the Trusts assets across various segments, classes and
geographic regions of the securities markets and in securities with various characteristics means that the Trusts ability to achieve its investment objective may be more dependent on the success of its investment advisers than other investment
companies.
Risk Associated with Recent Market Events
In response to the financial crisis and recent market events , the United States and other governments and the Federal Reserve and certain foreign
central banks have taken steps to support financial markets. Policy and legislative changes by the U.S. government and the Federal Reserve to assist in the ongoing support of financial markets, both domestically and in other countries, are changing
many aspects of financial regulation. The impact of these changes on the markets, and the practical implications for market participants, may not be fully known for some time. In some countries where economic conditions are recovering, such
countries are nevertheless perceived as still fragile. Withdrawal of government support, failure of efforts in response to the crisis, or investor perception that such efforts are not succeeding, could adversely impact the value and liquidity of
certain investments. The severity or duration of adverse economic conditions may also be affected by policy changes made by governments or quasi-governmental organizations, including changes in tax laws and the imposition of trade barriers. The
impact of new financial regulation legislation on the markets and the practical implications for market participants may not be fully known for some time. Changes to the Federal Reserve policy, including with respect to certain interest rates, may
affect the value, volatility and liquidity of dividend and interest paying securities. Regulatory changes are causing some financial services companies to exit long-standing lines of business, resulting in dislocations for other market participants.
In addition, the current contentious domestic political environment, as well as political and diplomatic events in the United States and abroad, such as
presidential elections in the United States or the U.S. governments inability at times to agree on a long-term budget and deficit reduction plan, has in the past resulted, and may in the future result, in adverse consequences (including a
government shutdown) to the U.S. regulatory landscape, the general market environment and/or investment sentiment, which could negatively impact the Trusts investments and operations. Such adverse consequences may affect investor and/or
consumer confidence and may adversely impact financial markets and the broader economy, potentially to a significant degree. In recent years, some countries, including the United States, have adopted and/or are considering the adoption of more
protectionist trade policies and/or a move away from tight financial industry regulations, including but not limited to, direct capital infusions into companies, new monetary programs and dramatically lower interest rates, that were previously
adopted in response to serious economic disruptions. The exact shape of these policies is still being considered, but the equity and debt markets may react strongly to expectations of change, which could increase volatility, especially if the
markets expectations are not borne out and an unexpected or sudden reversal of these policies, could increase volatility in securities markets, which could adversely affect the Trusts investments or prevent the Trust from executing on
advantageous
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investment opportunities in a timely manner. A rise in protectionist trade policies, and the possibility of changes to some international trade agreements, could affect the economies of many
nations in ways that cannot necessarily be foreseen at the present time. In addition, geopolitical and other risks, including environmental and public health, may add to instability in world economies and markets generally. Economies and financial
markets throughout the world are becoming increasingly interconnected. As a result, whether or not the Trust invests in securities of issuers located in or with significant exposure to countries experiencing economic, political and/or financial
difficulties, the value and liquidity of the Trusts investments may be negatively affected by such events.
An outbreak of respiratory disease
caused by a novel coronavirus was first detected in China in December 2019 and developed into a global pandemic. This pandemic has resulted in closing borders, enhanced health screenings, healthcare service preparation and delivery, quarantines,
cancellations, disruptions to supply chains and customer activity, as well as general concern and uncertainty. Disruptions in markets can adversely impact the Trust and its investments. Further, certain local markets have been or may be subject to
closures, and there can be no certainty regarding whether trading will continue in any local markets in which the Trust may invest, when any resumption of trading will occur or, once such markets resume trading, whether they will face further
closures. Any suspension of trading in markets in which the Trust invests will have an impact on the Trust and its investments and will impact the Trusts ability to purchase or sell securities in such market. The impact of this pandemic has
adversely affected the economies of many nations and the entire global economy and may impact individual issuers and capital markets in ways that cannot be foreseen. Public health crises caused by the pandemic may exacerbate other preexisting
political, social and economic risks in certain countries or globally. Other infectious illness outbreaks that may arise in the future could have similar or other unforeseen effects. The duration of this pandemic or others and their effects cannot
be determined with certainty.
LIBOR Risk
The Trust
may be exposed to financial instruments that are tied to LIBOR to determine payment obligations, financing terms, hedging strategies or investment value. The Trusts investments may pay interest at floating rates based on LIBOR or may be
subject to interest caps or floors based on LIBOR. The Trust may also obtain financing at floating rates based on LIBOR. Derivative instruments utilized by the Trust may also reference LIBOR.
The United Kingdoms Financial Conduct Authority announced a phase out of LIBOR such that after June 30, 2023, the overnight, 1-month, 3-month, 6-month and 12-month U.S. dollar LIBOR settings will cease to be published or
will no longer be representative. All other LIBOR settings and certain other interbank offered rates, such as the Euro Overnight Index Average (EONIA), ceased to be published or representative after December 31, 2021. The Trust may
have investments linked to other interbank offered rates that may also cease to be published in the future. Various financial industry groups have been planning for the transition away from LIBOR, but there remain challenges to converting certain
securities and transactions to a new reference rate (e.g., the Secured Overnight Financing Rate (SOFR), which is intended to replace the U.S. dollar LIBOR).
Neither the effect of the LIBOR transition process nor its ultimate success can yet be known. The transition process might lead to increased volatility and
illiquidity in markets for, and reduce the effectiveness of new hedges placed against, instruments whose terms currently include LIBOR. While some existing LIBOR-based instruments may contemplate a scenario where LIBOR is no longer available by
providing for an alternative rate-setting methodology, there may be significant uncertainty regarding the effectiveness of any such alternative methodologies to replicate LIBOR. Not all existing LIBOR-based instruments may have alternative
rate-setting provisions and there remains uncertainty regarding the willingness and ability of issuers to add alternative rate-setting provisions in certain existing instruments. Global regulators have advised market participants to cease entering
into new contracts using LIBOR as a reference rate, and it is possible that investments in LIBOR-based instruments could invite regulatory scrutiny. In addition, a liquid market for newly issued instruments that use a reference rate other than LIBOR
still may be developing. There may also be challenges for the Trust to enter into hedging transactions against such newly issued instruments until a market for such hedging transactions develops. All of the aforementioned may adversely affect the
Trusts performance or NAV.
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Market Disruption and Geopolitical Risk
The occurrence of events similar to those in recent years, such as the aftermath of the war in Iraq, instability in Afghanistan, Pakistan, Egypt, Libya,
Syria, Russia, Ukraine and the Middle East, new and ongoing epidemics and pandemics of infectious diseases and other global health events, natural/environmental disasters, terrorist attacks in the United States and around the world, social and
political discord, debt crises (such as the Greek crisis), sovereign debt downgrades, increasingly strained relations between the United States and a number of foreign countries, including traditional allies, such as certain European countries, and
historical adversaries, such as North Korea, Iran, China and Russia, and the international community generally, new and continued political unrest in various countries, such as Venezuela and Spain, the exit or potential exit of one or more countries
from the EU or the EMU, continued changes in the balance of political power among and within the branches of the U.S. government, among others, may result in market volatility, may have long term effects on the U.S. and worldwide financial
markets, and may cause further economic uncertainties in the United States and worldwide.
Russia launched a large-scale invasion of Ukraine on
February 24, 2022. The extent and duration of the military action, resulting sanctions and resulting future market disruptions, including declines in its stock markets and the value of the ruble against the U.S. dollar, in the region are
impossible to predict, but could be significant. Any such disruptions caused by Russian military action or other actions (including cyberattacks and espionage) or resulting actual and threatened responses to such activity, including purchasing and
financing restrictions, boycotts or changes in consumer or purchaser preferences, sanctions, tariffs or cyberattacks on the Russian government, Russian companies or Russian individuals, including politicians, could have a severe adverse effect on
Russia and the European region, including significant negative impacts on the Russian economy, the European economy and the markets for certain securities and commodities, such as oil and natural gas, and may likely have collateral impacts on such
sectors globally as well as other sectors. How long such military action and related events will last cannot be predicted.
China and the United
States have each recently imposed tariffs on the other countrys products. These actions may trigger a significant reduction in international trade, the oversupply of certain manufactured goods, substantial price reductions of goods and
possible failure of individual companies and/or large segments of Chinas export industry, which could have a negative impact on the Trusts performance. U.S. companies that source material and goods from China and those that make
large amounts of sales in China would be particularly vulnerable to an escalation of trade tensions. Uncertainty regarding the outcome of the trade tensions and the potential for a trade war could cause the U.S. dollar to decline against safe
haven currencies, such as the Japanese yen and the euro. Events such as these and their consequences are difficult to predict and it is unclear whether further tariffs may be imposed or other escalating actions may be taken in the future.
On January 31, 2020, the United Kingdom (UK) officially withdrew from the EU (commonly known as Brexit). The UK and EU reached a
preliminary trade agreement, which became effective on January 1, 2021, regarding the terms of their future trading relationship relating principally to the trading of goods; however, negotiations are ongoing for matters not covered by the
agreement, such as the trade of financial services. Due to uncertainty of the current political environment, it is not possible to foresee the form or nature of the future trading relationship between the UK and the EU. The longer term economic,
legal, political and social framework to be put in place between the UK and the EU remains unclear and the ongoing political and economic uncertainty and periods of exacerbated volatility in both the UK and in wider European markets may continue for
some time. In particular, Brexit may lead to a call for similar referendums in other European jurisdictions which may cause increased economic volatility in the European and global markets and may destabilize some or all of the other EU member
countries. This uncertainty may have an adverse effect on the economy generally and on the ability of the Trust and its investments to execute their respective strategies, to receive attractive returns and/or to exit certain investments at an
advantageous time or price. In particular, currency volatility may mean that the returns of the Trust and its investments are adversely affected by market movements and may make it more difficult, or more expensive, if the Trust elects to execute
currency hedges. Potential decline in the value of the British Pound and/or the Euro against other currencies, along with the potential downgrading of the UKs sovereign credit rating, may also have an impact on the performance of portfolio
companies or investments located in the UK or Europe. In light of the above, no definitive assessment can currently be made regarding the impact that Brexit will have on the Trust, its investments or its organization more generally.
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Cybersecurity incidents affecting particular companies or industries may adversely affect the economies of
particular countries, regions or parts of the world in which the Trust invests.
The occurrence of any of these above events could have a significant
adverse impact on the value and risk profile of the Trusts portfolio. The Trust does not know how long the securities markets may be affected by similar events and cannot predict the effects of similar events in the future on the
U.S. economy and securities markets. There can be no assurance that similar events and other market disruptions will not have other material and adverse implications.
Regulation and Government Intervention Risk
In recent
years, the U.S. Government and the Federal Reserve, as well as foreign governments throughout the world, have taken unprecedented actions designed to support certain financial institutions and segments of the financial markets that experienced
extreme volatility, such as implementing stimulus packages, providing liquidity in fixed income, commercial paper and other markets, providing tax breaks, direct capital infusions into companies and dramatically lowering interest rates, among other
actions. Such actions may have unintended and adverse consequences, such as causing or contributing to an increased risk of inflation and an unexpected or sudden reversal of these policies, or the ineffectiveness of such policies, may increase
volatility in securities markets or prevent the Trust from executing on advantageous investment opportunities in a timely manner and negatively impact the Trusts investments. The reduction or withdrawal of Federal Reserve or other U.S. or non-U.S. governmental support could negatively affect financial markets generally and reduce the value and liquidity of certain securities. Additionally, with the cessation of certain other market support
activities, such as those mentioned above, the Trust may face a heightened level of interest rate risk as a result of a rise or increased volatility in interest rates.
Federal, state, and other governments, their regulatory agencies or self-regulatory organizations may take actions that affect the regulation of the issuers
in which the Trust invests in ways that are unforeseeable. Legislation or regulation may also change the way in which the Trust is regulated. Such legislation or regulation could limit or preclude the Trusts ability to achieve its investment
objective.
In the aftermath of the global financial crisis, there appears to be a renewed popular, political and judicial focus on finance related
consumer protection. Financial institution practices are also subject to greater scrutiny and criticism generally. In the case of transactions between financial institutions and the general public, there may be a greater tendency toward strict
interpretation of terms and legal rights in favor of the consuming public, particularly where there is a real or perceived disparity in risk allocation and/or where consumers are perceived as not having had an opportunity to exercise informed
consent to the transaction. In the event of conflicting interests between retail investors holding common shares of a closed-end investment company such as the Trust and a large financial institution, a court
may similarly seek to strictly interpret terms and legal rights in favor of retail investors.
The Trust may be affected by governmental action in ways
that are not foreseeable, and there is a possibility that such actions could have a significant adverse effect on the Trust and its ability to achieve its investment objective.
Investment Company Act Regulations
The Trust is a
registered closed-end management investment company and as such is subject to regulations under the Investment Company Act. Generally speaking, any contract or provision thereof that is made, or where
performance involves a violation of the Investment Company Act or any rule or regulation thereunder is unenforceable by either party unless a court finds otherwise.
Regulation as a Commodity Pool
The CFTC
subjects advisers to registered investment companies to regulation by the CFTC if a fund that is advised by the investment adviser either (i) invests, directly or indirectly, more than a prescribed level of its liquidation value in
CFTC-regulated futures, options and swaps (CFTC Derivatives), or (ii) markets itself as providing investment exposure to such instruments. To the extent the Trust uses CFTC Derivatives, it intends to do so below such prescribed
levels and will not market itself as a commodity pool or a vehicle for trading such instruments. Accordingly, the Advisor has claimed an exclusion from the definition of the term commodity pool operator under
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the CEA pursuant to Rule 4.5 under the CEA. The Advisor is not, therefore, subject to registration or regulation as a commodity pool operator under the CEA in respect of the Trust.
Failures of Futures Commission Merchants and Clearing Organizations Risk
The Trust is required to deposit funds to margin open positions in cleared derivative instruments (both futures and swaps) with a clearing broker
registered as a futures commission merchant (FCM). The CEA requires an FCM to segregate all funds received from customers with respect to any orders for the purchase or sale of U.S. domestic futures contracts and cleared
swaps from the FCMs proprietary assets. Similarly, the CEA requires each FCM to hold in a separate secure account all funds received from customers with respect to any orders for the purchase or sale of foreign futures contracts and
segregate any such funds from the funds received with respect to domestic futures contracts. However, all funds and other property received by an FCM from its customers are held by an FCM on a commingled basis in an omnibus account and amounts in
excess of assets posted to the clearing organization may be invested by an FCM in certain instruments permitted under the applicable regulation. There is a risk that assets deposited by the Trust with any FCM as margin for futures contracts or
commodity options may, in certain circumstances, be used to satisfy losses of other clients of the Trusts FCM. In addition, the assets of the Trust posted as margin against both swaps and futures contracts may not be fully protected in the
event of the FCMs bankruptcy.
Legal, Tax and Regulatory Risks
Legal, tax and regulatory changes could occur that may have material adverse effects on the Trust. For example, the regulatory and tax environment for
derivative instruments in which the Trust may participate is evolving, and such changes in the regulation or taxation of derivative instruments may have material adverse effects on the value of derivative instruments held by the Trust and the
ability of the Trust to pursue its investment strategies.
To qualify for the favorable U.S. federal income tax treatment generally accorded to RICs, the
Trust must, among other things, derive in each taxable year at least 90% of its gross income from certain prescribed sources and distribute for each taxable year at least 90% of its investment company taxable income (generally, ordinary
income plus the excess, if any, of net short-term capital gain over net long-term capital loss). If for any taxable year the Trust does not qualify as a RIC, all of its taxable income for that year (including its net capital gain) would be subject
to tax at regular corporate rates without any deduction for distributions to shareholders, and such distributions would be taxable as ordinary dividends to the extent of the Trusts current and accumulated earnings and profits.
The Biden presidential administration has called for significant changes to U.S. fiscal, tax, trade, healthcare, immigration, foreign, and government
regulatory policy. In this regard, there is significant uncertainty with respect to legislation, regulation and government policy at the federal level, as well as the state and local levels. Recent events have created a climate of heightened
uncertainty and introduced new and difficult-to-quantify macroeconomic and political risks with potentially far-reaching
implications. There has been a corresponding meaningful increase in the uncertainty surrounding interest rates, inflation, foreign exchange rates, trade volumes and fiscal and monetary policy. To the extent the U.S. Congress or the current
presidential administration implements changes to U.S. policy, those changes may impact, among other things, the U.S. and global economy, international trade and relations, unemployment, immigration, corporate taxes, healthcare, the U.S. regulatory
environment, inflation and other areas. Although the Trust cannot predict the impact, if any, of these changes to the Trusts business, they could adversely affect the Trusts business, financial condition, operating results and cash
flows. Until the Trust knows what policy changes are made and how those changes impact the Trusts business and
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the business of the Trusts competitors over the long term, the Trust will not know if, overall, the Trust will benefit from them or be negatively affected by them.
The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the Internal Revenue
Service and the U.S. Treasury Department. Revisions in U.S. federal tax laws and interpretations of these laws could adversely affect the tax consequences of your investment.
Potential Conflicts of Interest of the Advisors and Others
The investment activities of BlackRock, Inc. (BlackRock), the ultimate parent company of the Advisors, and its affiliates (including BlackRock and
its subsidiaries (collectively, the Affiliates), and their respective directors, officers or employees, in the management of, or their interest in, their own accounts and other accounts they manage, may present conflicts of interest that
could disadvantage the Trust and its shareholders. BlackRock and its Affiliates provide investment management services to other funds and discretionary managed accounts that may follow investment programs similar to that of the Trust. Subject to the
requirements of the Investment Company Act, BlackRock and its Affiliates intend to engage in such activities and may receive compensation from third parties for their services. Neither BlackRock nor any Affiliate is under any obligation to share any
investment opportunity, idea or strategy with the Trust. As a result, an Affiliate may compete with the Trust for appropriate investment opportunities. The results of the Trusts investment activities, therefore, may differ from those of an
Affiliate and of other accounts managed by BlackRock or an Affiliate, and it is possible that the Trust could sustain losses during periods in which one or more Affiliates and other accounts achieve profits on their trading for proprietary or other
accounts. BlackRock has adopted policies and procedures designed to address potential conflicts of interest. For additional information about potential conflicts of interest and the way in which BlackRock addresses such
conflicts, please see Conflicts of Interest and Management of the TrustPortfolio ManagementPotential Material Conflicts of Interest in the SAI.
Defensive Investing Risk
For defensive purposes, the
Trust may allocate assets into cash or short-term fixed-income securities without limitation. In doing so, the Trust may succeed in avoiding losses but may otherwise fail to achieve its investment objective. Further, the value of short-term
fixed-income securities may be affected by changing interest rates and by changes in credit ratings of the investments. If the Trust holds cash uninvested it will be subject to the credit risk of the depository institution holding the cash.
Decision-Making Authority Risk
Investors have no
authority to make decisions or to exercise business discretion on behalf of the Trust, except as set forth in the Trusts governing documents. The authority for all such decisions is generally delegated to the Board, which in turn, has
delegated the day-to-day management of the Trusts investment activities to the Advisors, subject to oversight by the Board.
Management Risk
The Trust is subject to management risk
because it is an actively managed investment portfolio. The Advisors and the individual portfolio managers will apply investment techniques and risk analyses in making investment decisions for the Trust, but there can be no guarantee that these will
produce the desired results. The Trust may be subject to a relatively high level of management risk because the Trust may invest in derivative instruments, which may be highly specialized instruments that require investment techniques and risk
analyses different from those associated with equities and bonds.
Valuation Risk
The Trust is subject to valuation risk, which is the risk that one or more of the securities in which the Trust invests are valued at prices that the Trust is
unable to obtain upon sale due to factors such as incomplete data, market instability or human error. The Advisors may use an independent pricing service or prices provided by dealers to
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value securities at their market value. Because the secondary markets for certain investments may be limited, such investments may be difficult to value. See Net Asset Value. When
market quotations are not available, the Advisors may price such investments pursuant to a number of methodologies, such as computer-based analytical modeling or individual security evaluations. These methodologies generate approximations of market
values, and there may be significant professional disagreement about the best methodology for a particular type of financial instrument or different methodologies that might be used under different circumstances. In the absence of an actual market
transaction, reliance on such methodologies is essential, but may introduce significant variances in the ultimate valuation of the Trusts investments. Technological issues and/or errors by pricing services or other third-party service
providers may also impact the Trusts ability to value it investments and the calculation of the Trusts NAV.
When market quotations are not
readily available or are deemed to be inaccurate or unreliable, the Trust values its investments at fair value as determined in good faith pursuant to policies and procedures approved by the Board. Fair value is defined as the amount for which
assets could be sold in an orderly disposition over a reasonable period of time, taking into account the nature of the asset. Fair value pricing may require determinations that are inherently subjective and inexact about the value of a security or
other asset. As a result, there can be no assurance that fair value priced assets will not result in future adjustments to the prices of securities or other assets, or that fair value pricing will reflect a price that the Trust is able to obtain
upon sale, and it is possible that the fair value determined for a security or other asset will be materially different from quoted or published prices, from the prices used by others for the same security or other asset and/or from the value that
actually could be or is realized upon the sale of that security or other asset. For example, the Trusts NAV could be adversely affected if the Trusts determinations regarding the fair value of the Trusts investments were materially
higher than the values that the Trust ultimately realizes upon the disposal of such investments. Where market quotations are not readily available, valuation may require more research than for more liquid investments. In addition, elements of
judgment may play a greater role in valuation in such cases than for investments with a more active secondary market because there is less reliable objective data available.
Because of overall size, duration and maturities of positions held by the Trust, the value at which its investments can be liquidated may differ, sometimes
significantly, from the interim valuations obtained by the Trust. In addition, the timing of liquidations may also affect the values obtained on liquidation. Securities held by the Trust may routinely trade with
bid-offer spreads that may be significant. There can be no guarantee that the Trusts investments could ultimately be realized at the Trusts valuation of such investments. In addition, the
Trusts compliance with the asset diversification tests applicable to regulated investment companies depends on the fair market values of the Trusts assets, and, accordingly, a challenge to the valuations ascribed by the Trust could
affect its ability to comply with those tests or require it to pay penalty taxes in order to cure a violation thereof.
The Trusts NAV per share is
a critical component in several operational matters including computation of advisory and services fees and determination of the price at which a tender offer will be made. Consequently, variance in the valuation of the Trusts investments will
impact, positively or negatively, the fees and expenses shareholders will pay.
Reliance on the Advisors Risk
The Trust is dependent upon services and resources provided by the Advisors, and therefore the Advisors parent, BlackRock. The Advisors are not required
to devote their full time to the business of the Trust and there is no guarantee or requirement that any investment professional or other employee of the Advisors will allocate a substantial portion of his or her time to the Trust. The
loss of one or more individuals involved with the Advisors could have a material adverse effect on the performance or the continued operation of the Trust. For additional information on the Advisors and BlackRock, see Management of the
TrustInvestment Advisor and Sub-Advisors.
Reliance on Service Providers Risk
The Trust must rely upon the performance of service providers to perform certain functions, which may include functions that are integral to the Trusts
operations and financial performance. Failure by any service provider to carry out its obligations to the Trust in accordance with the terms of its appointment, to exercise due care and skill or
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to perform its obligations to the Trust at all as a result of insolvency, bankruptcy or other causes could have a material adverse effect on the Trusts performance and returns to
shareholders. The termination of the Trusts relationship with any service provider, or any delay in appointing a replacement for such service provider, could materially disrupt the business of the Trust and could have a material adverse
effect on the Trusts performance and returns to shareholders.
Information Technology Systems Risk
The Trust is dependent on the Advisors for certain management services as well as back-office functions. The Advisors depend on information technology
systems in order to assess investment opportunities, strategies and markets and to monitor and control risks for the Trust. It is possible that a failure of some kind which causes disruptions to these information technology systems could
materially limit the Advisors ability to adequately assess and adjust investments, formulate strategies and provide adequate risk control. Any such information technology-related difficulty could harm the performance of the
Trust. Further, failure of the back-office functions of the Advisors to process trades in a timely fashion could prejudice the investment performance of the Trust.
Cyber Security Risk
With the increased use of
technologies such as the Internet to conduct business, the Trust is susceptible to operational, information security and related risks. In general, cyber incidents can result from deliberate attacks or unintentional events. Cyber-attacks include,
but are not limited to, gaining unauthorized access to digital systems (e.g., through hacking or malicious software coding) for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational
disruption. Cyber-attacks may also be carried out in a manner that does not require gaining unauthorized access, such as causing denial-of-service attacks on websites
(i.e., efforts to make network services unavailable to intended users). Cyber security failures by or breaches of the Advisors and other service providers (including, but not limited to, fund accountants, custodians, transfer agents and
administrators), and the issuers of securities in which the Trust invests, have the ability to cause disruptions and impact business operations, potentially resulting in financial losses, interference with the Trusts ability to calculate its
NAV, impediments to trading, the inability of shareholders to transact business, violations of applicable privacy and other laws, regulatory fines, penalties, reputational damage, reimbursement or other compensation costs, or additional compliance
costs. In addition, substantial costs may be incurred in order to prevent any cyber incidents in the future. While the Trust has established business continuity plans in the event of, and risk management systems to prevent, such cyber-attacks, there
are inherent limitations in such plans and systems including the possibility that certain risks have not been identified. Furthermore, the Trust cannot control the cyber security plans and systems put in place by service providers to the Trust and
issuers in which the Trust invests. As a result, the Trust or its shareholders could be negatively impacted.
Misconduct of Employees and of Service
Providers Risk
Misconduct or misrepresentations by employees of the Advisors or the Trusts service providers could cause significant losses to
the Trust. Employee misconduct may include binding the Trust to transactions that exceed authorized limits or present unacceptable risks and unauthorized trading activities, concealing unsuccessful trading activities (which, in any case, may
result in unknown and unmanaged risks or losses) or making misrepresentations regarding any of the foregoing. Losses could also result from actions by the Trusts service providers, including, without limitation, failing to recognize
trades and misappropriating assets. In addition, employees and service providers may improperly use or disclose confidential information, which could result in litigation or serious financial harm, including limiting the Trusts business
prospects or future marketing activities. Despite the Advisors due diligence efforts, misconduct and intentional misrepresentations may be undetected or not fully comprehended, thereby potentially undermining the Advisors due
diligence efforts. As a result, no assurances can be given that the due diligence performed by the Advisors will identify or prevent any such misconduct.
Special Risks for Holders of Rights
There is a risk
that performance of the Trust may result in the common shares purchasable upon exercise of the rights being less attractive to investors at the conclusion of the subscription period. This may reduce or eliminate the value of the rights. Investors
who receive rights may find that there is no market to sell rights they do not wish to
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exercise. If investors exercise only a portion of the rights, common shares may trade at less favorable prices than larger offerings for similar securities.
Portfolio Turnover Risk
The Trusts annual
portfolio turnover rate may vary greatly from year to year, as well as within a given year. Portfolio turnover rate is not considered a limiting factor in the execution of investment decisions for the Trust. A higher portfolio turnover rate results
in correspondingly greater brokerage commissions and other transactional expenses that are borne by the Trust. High portfolio turnover may result in an increased realization of net short-term capital gains by the Trust which, when distributed to
common shareholders, will be taxable as ordinary income. Additionally, in a declining market, portfolio turnover may create realized capital losses.
Anti-Takeover Provisions Risk
The Trusts
Agreement and Declaration of Trust and Bylaws include provisions that could limit the ability of other entities or persons to acquire control of the Trust or convert the Trust to open-end status or to change
the composition of the Board. Such provisions could limit the ability of shareholders to sell their shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control of the Trust. See Certain
Provisions in the Agreement and Declaration of Trust and Bylaws.
HOW THE TRUST MANAGES RISK
Investment Limitations
The Trust has adopted certain
investment limitations designed to limit investment risk. Some of these limitations are fundamental and thus may not be changed without the approval of the holders of a majority of the outstanding common shares. See Investment Objective and
PoliciesInvestment Restrictions in the SAI.
The restrictions and other limitations set forth throughout this Prospectus and in the SAI apply
only at the time of purchase of securities and will not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of the acquisition of securities.
Management of Investment Portfolio and Capital Structure to Limit Leverage Risk
The Trust may take certain actions if short-term interest rates increase or market conditions otherwise change (or the Trust anticipates such an increase or
change) and any leverage the Trust may have outstanding begins (or is expected) to adversely affect common shareholders. In order to attempt to offset such a negative impact of any outstanding leverage on common shareholders, the Trust may shorten
the average maturity of its investment portfolio (by investing in short-term securities) or may reduce any indebtedness that it may have incurred. The success of any such attempt to limit leverage risk depends on the Advisors ability to
accurately predict interest rate or other market changes. Because of the difficulty of making such predictions, the Trust may never attempt to manage its capital structure in the manner described in this paragraph.
If market conditions suggest that employing additional leverage would be beneficial, the Trust may enter into one or more credit facilities, sell additional
preferred shares or engage in additional leverage transactions, subject to the restrictions of the Investment Company Act.
Strategic Transactions
The Trust may use certain Strategic Transactions designed to limit the risk of price fluctuations of securities and to preserve capital. These
Strategic Transactions include using swaps, financial futures contracts, options on financial futures or options based on either an index of long-term securities, or on securities whose prices, in the opinion of the Advisors, correlate with the
prices of the Trusts investments. There can be no assurance that Strategic Transactions will be used or used effectively to limit risk, and Strategic Transactions may be subject to their own risks.
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MANAGEMENT OF THE TRUST
Trustees and Officers
The Board is responsible for the
overall management of the Trust, including supervision of the duties performed by the Advisors. There are eleven Trustees. A majority of the Trustees are Independent Trustees of the Trust. The name and business address of the Trustees and officers
of the Trust and their principal occupations and other affiliations during the past five years are set forth under Management of the Trust in the SAI.
Investment Advisor and Sub-Advisors
The Advisor is responsible for the management of the Trusts portfolio and provides the necessary personnel, facilities, equipment and certain other
services necessary to the operation of the Trust. BlackRock International Limited and BlackRock (Singapore) Limited serve as the Trusts sub-advisors and perform certain of the day-to-day investment management of the Trust. The Advisor, located at 100 Bellevue Parkway, Wilmington, Delaware 19809, BlackRock International Limited, located at Exchange
Place One, 1 Semple Street, Edinburgh, EH3 8BL, United Kingdom, and BlackRock (Singapore) Limited, located at 20 Anson Road #18-01, 079912 Singapore, are wholly-owned subsidiaries of BlackRock.
BlackRock is one of the worlds largest publicly-traded investment management firms. As of December 31, 2021, BlackRocks assets under
management were approximately $10.010 trillion. BlackRock has over 30 years of experience managing closed-end products and, as of December 31, 2021, advised a registered
closed-end family of 54 active exchange-traded funds with approximately $61.9 billion in managed assets.
BlackRock is independent in ownership and governance, with no single majority shareholder and a majority of independent directors.
Investment Philosophy
BlackRocks investment
decision-making process for the municipal security sector is subject to the same discipline, oversight and investment philosophy that the firm applies to other sectors of the fixed-income market.
BlackRock uses a relative value strategy that evaluates the trade-off between risk and return to seek to achieve the
Trusts investment objective. This strategy is combined with disciplined risk control techniques and applied in sector, sub-sector and individual security selection decisions. BlackRocks extensive
personnel and technology resources are the key drivers of the investment philosophy.
Portfolio Managers
The members of the portfolio management team who are primarily responsible for the
day-to-day management of the Trusts portfolio are as follows:
James E. Keenan, CFA, Managing Director of BlackRock, is Chief Investment Officer and Global Co-Head of Credit within BlackRock Alternative Investors
(BAI). He leads the strategy for Global Fundamental Credit and is responsible for providing oversight of the investment process and performance, the partnerships with BlackRocks distribution channels, and the teams infrastructure as well
as determining the strategic direction and growth initiatives of the platform. Mr. Keenan oversees Leveraged Finance, Hedge Funds, and Private Credit businesses including opportunistic, middle market and specialty finance.
Mr. Keenan serves on BlackRocks Global Operating Committee, BlackRock Alternative Investors Executive Committee, GFI Executive Committee, PEP and ASG
Investment Committees and the Infrastructure Debt Management Committee. He is also the Chairman of the Board of the BlackRock Capital Investment Corporation.
Over the last 13 years, Mr. Keenan was the portfolio manager across a variety of strategies including HY, Opportunistic and distressed portfolios and long
short hedge funds. He has been responsible for building the Global fundamental credit business since 2006.
Prior to joining BlackRock in 2004, Mr. Keenan
held roles within credit research and trading from 1998 to 2003 at UBS Global Asset Management and at Columbia Management Group.
Mr. Keenan also serves
on Notre Dames Wall Street Committee & Athletic Advisory Council and the Board of Good Shepherd.
Mr. Keenan earned a BBA degree in finance from
the University of Notre Dame in 1998
Mitchell Garfin, CFA, Managing Director of BlackRock, is the Co-Head of U.S. High Yield within
BlackRocks Global Credit team. He is also responsible for managing US High Yield and Global High Yield strategies.
Mr. Garfin joined BlackRock in
1997 as an analyst in the Account Management Group working with taxable financial institutional clients. He joined the Portfolio Management Group in 2000 as a credit research analyst and in 2005 moved to portfolio management. Mr. Garfin moved
to his current role in 2007 and serves as Head of the Global Credit Human Capital Committee.
Mr. Garfin earned a BA degree, with distinction, in finance
from the University of Michigan in 1997, and an MBA degree in finance and economics from New York University in 2005.
Scott MacLellan, Managing
Director of BlackRock, is a portfolio manager in BlackRocks Americas Fixed Income Group. He focuses on The BlackRock Obsidian Fund and short duration portfolios.
Prior to assuming his current responsibilities in 2008, Mr. MacLellan was a member of the Global Client Group, covering Japanese clients. He also served as a
product specialist for short duration and LIBOR-benchmarked fixed income products. Previously, Mr. MacLellan spent four years with Nomura BlackRock Asset Management (NBAM), a former joint venture between BlackRock and Nomura Asset Management Co.,
Ltd, in Tokyo as an account manager. Prior to joining NBAM in 2001, Mr. MacLellan spent a year in the Global Finance and Investment Department of IBJ Leasing in Tokyo.
Mr. MacLellan earned a BS degree, with honors, in economics and international development studies from Kings College in 1997.
David Delbos, Managing Director of BlackRock is the Co-Head of U.S. High Yield within BlackRocks Global Credit team. He is also responsible for
managing Global High Yield strategies.
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Mr. Delbos joined BlackRock in 2002 as a credit research analyst in the Leveraged Finance Group. He
transitioned to a portfolio management role in 2012.
Prior to joining the Leveraged Finance team at BlackRock in 2002, Mr. Delbos was an analyst at
Deutsche Bank Securities Inc.
Mr. Delbos earned a BA degree, Magna Cum Laude, in history from Tufts University in 2000.
Akiva Dickstein is head of Customized Multi-Sector, US Short Duration and co-head of Global Inflation Linked Portfolios within BlackRocks
Fundamental Fixed Income group, and a member of the Global Fixed Income executive team. He is also a portfolio manager of closed-end funds, BlackRocks Core Bond, Low Duration Bond and BGF USD Short Duration Bond Funds and associated separate
accounts.
Prior to taking on his current responsibilities, Mr. Dickstein was the lead portfolio manager on BlackRocks mortgage portfolios. Before
joining BlackRock in 2009, Mr. Dickstein spent eight years at Merrill Lynch, where he served as Managing Director and head of the U.S. Rates & Structured Credit Research Group. He was responsible for the team that produced MBS, ABS, CMBS,
Treasuries, swaps, and interest rate derivatives research. Mr. Dicksteins publications on MBS strategy included the weekly Mortgage Investor as well as numerous lengthier articles on topics such as optimal loan modifications, the valuation of
credit-sensitive MBS and ABS, and the pricing of mortgage derivatives, options, and pass-throughs. In addition, he developed Merrills prepayment models for fixed rate and hybrid MBS.
He earned a BA degree in economics, summa cum laude, from Yale University in 1990, and an MA degree in physics from Princeton University in 1993.
The SAI provides additional information about other accounts managed by the portfolio management team, the compensation of each
portfolio manager and the ownership of the Trusts securities by each portfolio manager.
Investment Management Agreements
Pursuant to an investment management agreement between the Advisor and the Trust (the Investment Management Agreement), the Trust has agreed to
pay the Advisor a monthly management fee at an annual rate equal to 0.55% of the average weekly value of the Trusts Managed Assets. Managed Assets means the total assets of the Trust (including any assets attributable
to money borrowed for investment purposes) minus the sum of the Trusts accrued liabilities (other than money borrowed for investment purposes).
The
Advisor, and not the Trust, pays an annual sub-advisory fee to the Sub-Advisors. For that portion of the Trust for which each Sub-Advisor acts as sub-advisor, the Advisor will pay to such Sub-Advisor, an annual sub-advisory fee equal to a percentage of the management fee received by the Advisor from the Trust with respect to the average daily value of the Managed Assets of the Trust allocated to such Sub-Advisor.
A discussion regarding the basis for the approval of the Investment Management Agreement
and the sub-advisory agreements between the Advisor and each Sub-Advisor is available in the Trusts semi-annual report to shareholders for the period ended
June 30, 2021.
Except as otherwise described in this Prospectus, the Trust pays, in addition to the fees paid to the Advisor, all other costs and
expenses of its operations, including compensation of its Trustees (other than those affiliated with the Advisor), custodian, leveraging expenses, transfer and dividend disbursing agent expenses, legal fees, rating agency fees, listing fees and
expenses, expenses of independent auditors, expenses of repurchasing shares, expenses of preparing, printing and distributing shareholder reports, notices, proxy statements and reports to governmental agencies and taxes, if any.
The Trust and the Advisor have entered into the Fee Waiver Agreement, pursuant to which the Advisor has contractually agreed to waive the management fee with
respect to any portion of the Trusts assets attributable to investments in any equity and fixed-income mutual funds and ETFs managed by the Advisor or its affiliates that have a contractual management fee, through June 30, 2023. In
addition, pursuant to the Fee Waiver Agreement, the Advisor has contractually agreed to waive its management fees by the amount of investment advisory fees the Trust pays to the Advisor indirectly through its investment in money market
funds advised by the Advisor or its affiliates, through June 30, 2023. The Fee Waiver Agreement may be continued from year to year thereafter, provided that such continuance is specifically approved by the Advisor and the Trust (including by a
majority of the Trusts Independent Trustees). Neither the Advisor nor the Trust is obligated to extend the Fee Waiver Agreement. The Fee Waiver Agreement may be terminated at any time, without the payment of any penalty, only by the Trust
(upon the vote of a majority of the Independent Trustees or a majority of the outstanding voting securities of the Trust), upon 90 days written notice by the Trust to the Advisor.
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Administration and Accounting Services
State Street Bank and Trust Company provides certain administration and accounting services to the Trust pursuant to an Administration and Fund
Accounting Services Agreement (the Administration Agreement). Pursuant to the Administration Agreement, State Street Bank and Trust Company provides the Trust with, among other things, customary fund accounting services, including
computing the Trusts NAV and maintaining books, records and other documents relating to the Trusts financial and portfolio transactions, and customary fund administration services, including assisting the Trust with regulatory filings,
tax compliance and other oversight activities. For these and other services it provides to the Trust, State Street Bank and Trust Company is paid a monthly fee from the Trust at an annual rate ranging from 0.0075% to 0.015% of the Trusts
Managed Assets, along with an annual fixed fee ranging from $3,000 to $10,000 for the services it provides to the Trust.
Custodian and Transfer
Agent
The custodian of the assets of the Trust is State Street Bank and Trust Company, whose principal business address is One Lincoln Street,
Boston, Massachusetts 02111. The custodian is responsible for, among other things, receipt of and disbursement of funds from the Trusts accounts, establishment of segregated accounts as necessary, and transfer, exchange and delivery of Trust
portfolio securities.
Computershare Trust Company, N.A., whose principal business address is 150 Royall Street, Canton, Massachusetts 02021, serves as
the Trusts transfer agent with respect to the common shares.
Independent Registered Public Accounting Firm
Deloitte & Touche LLP, whose principal business address is 200 Berkeley Street, Boston, Massachusetts 02116, is the independent
registered public accounting firm of the Trust and is expected to render an opinion annually on the financial statements of the Trust.
NET ASSET VALUE
The NAV of the Trusts common shares will be computed based upon the value of the Trusts portfolio securities and other assets. NAV per common
share will be determined as of the close of the regular trading session on the NYSE on each business day on which the NYSE is open for trading. The Trust calculates NAV per common share by subtracting the Trusts liabilities (including accrued
expenses, dividends payable and any borrowings of the Trust), and the liquidation value of any outstanding preferred shares of the Trust from the Trusts total assets (the value of the securities the Trust holds plus cash or other assets,
including interest accrued but not yet received) and dividing the result by the total number of common shares of the Trust outstanding.
Valuation of
securities held by the Trust is as follows:
Equity Investments. Equity securities traded on a recognized securities exchange (e.g., NYSE), on
separate trading boards of a securities exchange or through a market system that provides contemporaneous transaction pricing information (each, an Exchange) are valued using information obtained via independent pricing services
generally at the Exchange closing price or if an Exchange closing price is not available, the last traded price on that Exchange prior to the time as of which the assets or liabilities are valued. However, under certain circumstances, other means of
determining current market value may be used. If an equity security is traded on more than one Exchange, the current market value of the security where it is primarily traded generally will be used. In the event that there are no sales involving an
equity security held by the Trust on a day on which the Trust values such security, the last bid (long positions) or ask (short positions) price, if available, will be used as the value of such security. If the Trust holds both long and short
positions in the same security, the last bid price will be applied to securities held long and the last ask price will be applied to securities sold short. If no bid or ask price is available on a day on which the Trust values such security, the
prior days price will be used, unless the Advisors determine that such prior days
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price no longer reflects the fair value of the security, in which case such asset would be treated as a Fair Value Asset (as defined below).
Fixed-Income Investments. Fixed-income securities for which market quotations are readily available are generally valued using such securities
current market value. The Trust values fixed-income portfolio securities using the last available bid prices or current market quotations provided by dealers or prices (including evaluated prices) supplied by the Trusts
approved independent third-party pricing services, each in accordance with the policies and procedures approved by the Trusts Board (the Valuation Procedures). The pricing services may use matrix pricing or valuation
models that utilize certain inputs and assumptions to derive values, including transaction data (e.g., recent representative bids and offers), credit quality information, perceived market movements, news, and other relevant information and by other
methods, which may include consideration of: yields or prices of securities of comparable quality, coupon, maturity and type; indications as to values from dealers; general market conditions; and/or other factors and assumptions. Pricing
services generally value fixed-income securities assuming orderly transactions of an institutional round lot size, but the Trust may hold or transact in such securities in smaller, odd lot sizes. Odd lots may trade at lower prices
than institutional round lots. The amortized cost method of valuation may be used with respect to debt obligations with 60 days or less remaining to maturity unless such method does not represent fair value. Certain fixed-income investments
including asset-backed and mortgage related securities may be valued based on valuation models that consider the estimated cash flows of each tranche of the issuer, establish a benchmark yield and develop an estimated tranche specific spread to the
benchmark yield based on the unique attributes of the tranche.
Options, Futures, Swaps and Other Derivatives. Exchange-traded equity options
for which market quotations are readily available are valued at the mean of the last bid and ask prices as quoted on the Exchange or the board of trade on which such options are traded. In the event that there is no mean price available for an
exchange traded equity option held by the Trust on a day on which the Trust values such option, the last bid (long positions) or ask (short positions) price, if available, will be used as the value of such option. If no bid or ask price is available
on a day on which the Trust values such option, the prior days price will be used, unless the Advisors determine that such prior days price no longer reflects the fair value of the option in which case such option will be treated as a
fair value asset. OTC derivatives may be valued using a mathematical model which may incorporate a number of market data factors. Financial futures contracts and options thereon, which are traded on exchanges, are valued at their last sale price or
settle price as of the close of such exchanges. Swap agreements and other derivatives are generally valued daily based upon quotations from market makers or by a pricing service in accordance with the Valuation Procedures.
Underlying Funds. Shares of underlying open-end funds are valued at NAV. Shares of underlying exchange-traded closed-end funds or other ETFs will be valued at their most recent closing price.
General Valuation
Information. In determining the market value of portfolio investments, the Trust may employ independent third party pricing services, which may use, without limitation, a matrix or formula method that takes into consideration market indexes,
matrices, yield curves and other specific inputs and assumptions. This may result in the assets being valued at a price different from the price that would have been determined had the matrix or formula method not been
used. The price the Trust could receive upon the sale of any particular portfolio investment may differ from the Trusts valuation of the investment, particularly for assets that trade in thin or volatile markets or
that are valued using a fair valuation methodology or a price provided by an independent pricing service. As a result, the price received upon the sale of an investment may be less than the value ascribed by the Trust, and the Trust could
realize a greater than expected loss or lesser than expected gain upon the sale of the investment. The Trusts ability to value its investment may also be impacted by technological issues and/or errors by pricing services or other third
party service providers.
All cash, receivables and current payables are carried on the Trusts books at their fair value.
Prices obtained from independent third party pricing services, broker-dealers or market makers to value the Trusts securities and other assets and
liabilities are based on information available at the time the Trust values its assets and liabilities. In the event that a pricing service quotation is revised or updated subsequent to the day on which the Trust valued such security, the revised
pricing service quotation generally will be applied prospectively. Such determination will be made considering pertinent facts and circumstances surrounding the revision.
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In the event that application of the methods of valuation discussed above result in a price for a security
which is deemed not to be representative of the fair market value of such security, the security will be valued by, under the direction of or in accordance with a method approved by the Board as reflecting fair value. All other assets and
liabilities (including securities for which market quotations are not readily available) held by the Trust (including restricted securities) are valued at fair value as determined in good faith by the Board or BlackRocks Valuation Committee
(the Valuation Committee) (its delegate) pursuant to the Valuation Procedures. Any assets and liabilities which are denominated in a foreign currency are translated into U.S. dollars at the prevailing market rates.
Certain of the securities acquired by the Trust may be traded on foreign exchanges or OTC markets on days on which the Trusts NAV is not calculated and
common shares are not traded. In such cases, the NAV of the Trusts common shares may be significantly affected on days when investors can neither purchase nor sell shares of the Trust.
Fair Value. When market quotations are not readily available or are believed by the Advisors to be unreliable, the Trusts investments are valued
at fair value (Fair Value Assets). Fair Value Assets are valued by the Advisors in accordance with the Valuation Procedures. The Advisors may reasonably conclude that a market quotation is not readily available or is unreliable if, among
other things, a security or other asset or liability does not have a price source due to its complete lack of trading, if the Advisors believe a market quotation from a broker-dealer or other source is unreliable (e.g., where it varies significantly
from a recent trade, or no longer reflects the fair value of the security or other asset or liability subsequent to the most recent market quotation), or where the security or other asset or liability is only thinly traded or due to the occurrence
of a significant event subsequent to the most recent market quotation. For this purpose, a significant event is deemed to occur if the Advisors determine, in their reasonable business judgment, that an event has occurred after the close
of trading for an asset or liability but prior to or at the time of pricing the Trusts assets or liabilities, that is likely to cause a material change to the last exchange closing price or closing market price of one or more assets or
liabilities held by the Trust. On any day the NYSE is open and a foreign market or the primary exchange on which a foreign asset or liability is traded is closed, such asset or liability will be valued using the prior days price, provided that
the Advisors are not aware of any significant event or other information that would cause such price to no longer reflect the fair value of the asset or liability, in which case such asset or liability would be treated as a Fair Value Asset. For
certain foreign assets, a third-party vendor supplies evaluated, systematic fair value pricing based upon the movement of a proprietary multi-factor model after the relevant foreign markets have closed. This systematic fair value pricing methodology
is designed to correlate the prices of foreign assets following the close of the local markets to the price that might have prevailed as of the Trusts pricing time.
The Advisors, with input from portfolio management, will submit their recommendations regarding the valuation and/or valuation methodologies for Fair Value
Assets to the Valuation Committee. The Valuation Committee may accept, modify or reject any recommendations. In addition, the Trusts accounting agent periodically endeavors to confirm the prices it receives from all third party pricing
services, index providers and broker-dealers, and, with the assistance of the Advisors, to regularly evaluate the values assigned to the securities and other assets and liabilities of the Trust. The pricing of all Fair Value Assets is subsequently
reported to the Board or a Committee thereof.
When determining the price for a Fair Value Asset, the Valuation Committee will seek to determine the price
that the Trust might reasonably expect to receive from the current sale of that asset or liability in an arms-length transaction on the date on which the asset or liability is being valued, and does not
seek to determine the price the Trust might reasonably expect to receive for selling an asset or liability at a later time or if it holds the asset or liability to maturity. Fair value determinations will be based upon all available factors that the
BlackRock Valuation Committee deems relevant at the time of the determination, and may be based on analytical values determined by the Advisors using proprietary or third party valuation models.
Fair value represents a good faith approximation of the value of an asset or liability. When determining the fair value of an investment, one or more fair
value methodologies may be used (depending on certain factors, including the asset type). For example, the investment may be initially priced based on the original cost of the investment or, alternatively, using proprietary or third-party models
that may rely upon one or more unobservable inputs. Prices of actual, executed or historical transactions in the relevant investment (or comparable instruments) or, where appropriate, an appraisal by a third-party experienced in the valuation of
similar instruments, may also be used as a basis for establishing the fair value of an investment.
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The fair value of one or more assets or liabilities may not, in retrospect, be the price at which those assets or
liabilities could have been sold during the period in which the particular fair values were used in determining the Trusts NAV. As a result, the Trusts sale or repurchase of its shares at NAV, at a time when a holding or holdings are
valued at fair value, may have the effect of diluting or increasing the economic interest of existing shareholders.
The Trusts annual audited
financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP), follow the requirements for valuation set forth in Financial Accounting Standards Board
Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (ASC 820), which defines and establishes a framework for measuring fair value under US GAAP and expands financial statement disclosure
requirements relating to fair value measurements.
Generally, ASC 820 and other accounting rules applicable to investment companies and various assets in
which they invest are evolving. Such changes may adversely affect the Trust. For example, the evolution of rules governing the determination of the fair market value of assets or liabilities to the extent such rules become more stringent would tend
to increase the cost and/or reduce the availability of third-party determinations of fair market value. This may in turn increase the costs associated with selling assets or affect their liquidity due to the Trusts inability to obtain a
third-party determination of fair market value. The SEC recently adopted new Rule 2a-5 under the Investment Company Act, which will establish an updated regulatory framework for registered investment company
valuation practices and may impact the Trusts valuation policies. The Trust will not be required to comply with the new rule until September 8, 2022.
DISTRIBUTIONS
The Trust intends to make regular monthly cash distributions of all or a portion of its net investment income, including current gains,
to common shareholders. The Trust will pay common shareholders at least annually all or substantially all of its investment company taxable income. The Investment Company Act generally limits the Trust to one
capital gain distribution per year, subject to certain exceptions, including as discussed below in connection with the Managed Distribution Plan.
The
Trust has, pursuant to an SEC exemptive order granted to certain of BlackRocks closed-end funds, adopted a plan to support a level distribution of income, capital gains and/or return of capital. The
Managed Distribution Plan has been approved by the Board and is consistent with the Trusts investment objectives and policies. Under the Managed Distribution Plan, the Trust will distribute all available investment income, including current
gains, to its shareholders, consistent with its investment objectives and as required by the Code. If sufficient investment income, including current gains, is not available on a monthly basis, the Trust will distribute long-term capital gains
and/or return of capital to shareholders in order to maintain a level distribution. A return of capital distribution may involve a return of the shareholders original investment. Though not currently taxable, such a distribution may lower a
shareholders basis in the Trust, thus potentially subjecting the shareholder to future tax consequences in connection with the sale of Trust shares, even if sold at a loss to the shareholders original investment. Each monthly
distribution to shareholders is expected to be at a fixed amount established by the Board, except for extraordinary distributions and potential distribution rate increases or decreases to enable the Trust to comply with the distribution requirements
imposed by the Code. Shareholders should not draw any conclusions about the Trusts investment performance from the amount of these distributions or from the terms of the Managed Distribution Plan. The Trusts total return
performance on NAV will be presented in its financial highlights table, which will be available in the Trusts shareholder reports, every six-months. The Board may amend, suspend or terminate the Managed Distribution Plan without prior notice
if it deems such actions to be in the best interests of the Trust or its shareholders. The suspension or termination of the Managed Distribution Plan could have the effect of creating a trading discount (if the Trusts stock is trading at or
above NAV) or widening an existing trading discount. The Trust is subject to risks that could have an adverse impact on its ability to maintain level distributions. Examples of potential risks include, but are not limited to, economic downturns
impacting the markets, decreased market volatility, companies suspending or decreasing corporate dividend distributions and changes in the Code. Please see Risks for a more complete description of the Trusts risks.
The tax treatment and characterization of the Trusts distributions may vary significantly from time to time because of the varied nature of the
Trusts investments. The ultimate tax characterization of the Trusts distributions made in a fiscal year cannot finally be determined until after the end of that fiscal year. As a result, there is a possibility that
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the Trust may make total distributions during a fiscal year in an amount that exceeds the Trusts earnings and profits for U.S. federal income tax purposes. In such situations, the
amount by which the Trusts total distributions exceed earnings and profits would generally be treated as a return of capital reducing the amount of a shareholders tax basis in such shareholders shares, with any amounts exceeding
such basis treated as gain from the sale of shares.
Various factors will affect the level of the Trusts income, including the asset mix
and the Trusts use of hedging. To permit the Trust to maintain a more stable monthly distribution, the Trust may from time to time distribute less than the entire amount of income earned in a particular period. The undistributed income would
be available to supplement future distributions. As a result, the distributions paid by the Trust for any particular monthly period may be more or less than the amount of income actually earned by the Trust during that period.
Undistributed income will add to the Trusts NAV and, correspondingly, distributions from undistributed income will deduct from the Trusts NAV. The Trust intends to distribute any long-term capital gains not
distributed under the Managed Distribution Plan annually.
Under normal market conditions, the Advisor seeks to manage the Trust in a manner such that the
Trusts distributions are reflective of the Trusts current and projected earnings levels. The distribution level of the Trust is subject to change based upon a number of factors, including the current and projected level of the
Trusts earnings, and may fluctuate over time.
The Trust reserves the right to change its distribution policy and the basis for establishing the
rate of its monthly distributions at any time and may do so without prior notice to common shareholders.
Shareholders will automatically have all
dividends and distributions reinvested in common shares of the Trust issued by the Trust or purchased in the open market in accordance with the Trusts dividend reinvestment plan unless an election is made to receive cash. See
Dividend Reinvestment Plan.
DIVIDEND REINVESTMENT PLAN
Please refer to the section of the Trusts most recent annual
report on Form N-CSR entitled Automatic Dividend Reinvestment Plan, which is incorporated by reference herein, for a discussion of the Trusts dividend reinvestment plan.
RIGHTS OFFERINGS
The Trust may in the future, and at its discretion, choose to make offerings of rights to its shareholders to purchase common shares. Rights may be issued
independently or together with any other offered security and may or may not be transferable by the person purchasing or receiving the rights. In connection with a rights offering to shareholders, we would distribute certificates or other
documentation (i.e., rights cards distributed in lieu of certificates) evidencing the rights and a Prospectus Supplement to our shareholders as of the record date that we set for determining the shareholders eligible to receive rights in such rights
offering. Any such future rights offering will be made in accordance with the Investment Company Act. Under the laws of Delaware, the Board is authorized to approve rights offerings without obtaining shareholder approval.
The staff of the SEC has interpreted the Investment Company Act as not requiring shareholder approval of a transferable rights offering to purchase common
shares at a price below the then current NAV so long as certain conditions are met, including: (i) a good faith determination by a funds board that such offering would result in a net benefit to existing shareholders; (ii) the
offering fully protects shareholders preemptive rights and does not discriminate among shareholders (except for the possible effect of not offering fractional rights); (iii) management uses its best efforts to ensure an adequate trading market
in the rights for use by shareholders who do not exercise such rights; and (iv) the ratio of a transferable rights offering does not exceed one new share for each three rights held.
The applicable Prospectus Supplement would describe the following terms of the rights in respect of which this Prospectus is being delivered:
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the period of time the offering would remain open; |
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the underwriter or distributor, if any, of the rights and any associated underwriting fees or discounts
applicable to purchases of the rights; |
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the title of such rights; |
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the exercise price for such rights (or method of calculation thereof); |
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the number of such rights issued in respect of each share; |
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the number of rights required to purchase a single share; |
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the extent to which such rights are transferable and the market on which they may be traded if they are
transferable; |
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if applicable, a discussion of the material U.S. federal income tax considerations applicable to the issuance or
exercise of such rights; |
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the date on which the right to exercise such rights will commence, and the date on which such right will expire
(subject to any extension); |
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the extent to which such rights include an over-subscription privilege with respect to unsubscribed securities
and the terms of such over-subscription privilege; and |
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termination rights we may have in connection with such rights offering. |
A certain number of rights would entitle the holder of the right(s) to purchase for cash such number of common shares at such exercise price as in each case
is set forth in, or be determinable as set forth in, the Prospectus Supplement relating to the rights offered thereby. Rights would be exercisable at any time up to the close of business on the expiration date for such rights set forth in the
Prospectus Supplement. After the close of business on the expiration date, all unexercised rights would become void. Upon expiration of the rights offering and the receipt of payment and the rights certificate or other appropriate documentation
properly executed and completed and duly executed at the corporate trust office of the rights agent, or any other office indicated in the Prospectus Supplement, the common shares purchased as a result of such exercise will be issued as soon as
practicable. To the extent permissible under applicable law, we may determine to offer any unsubscribed offered securities directly to persons other than shareholders, to or through agents, underwriters or dealers or through a combination of such
methods, as set forth in the applicable Prospectus Supplement.
TAX MATTERS
The following discussion is a brief summary of certain U.S. federal income tax considerations affecting the Trust and the purchase, ownership and disposition
of the Trusts common shares. A more detailed discussion of the tax rules applicable to the Trust and its common shareholders can be found in the SAI that is incorporated by reference into this Prospectus. Except as otherwise noted, this
discussion assumes you are a taxable U.S. holder (as defined below) and that you hold your common shares as capital assets for U.S. federal income tax purposes (generally, assets held for investment). This discussion is based upon current provisions
of the Code, the regulations promulgated thereunder and judicial and administrative authorities, all of which are subject to change or differing interpretations by the courts or the Internal Revenue Service, possibly with retroactive effect. No
attempt is made to present a detailed explanation of all U.S. federal tax concerns affecting the Trust and its common shareholders. The Trust has not sought and will not seek any ruling from the Internal Revenue Service regarding any matters
discussed herein. No assurance can be given that the Internal Revenue Service would not assert, or that a court would not sustain, a position contrary to those set forth below. This summary does not discuss any aspects of non-U.S., state or local tax. The discussion set forth herein does not constitute tax advice and potential investors are urged to
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consult their own tax advisers to determine the specific U.S. federal, state, local and foreign tax consequences to them of investing in the Trust.
In addition, no attempt is made to address tax considerations applicable to an investor with a special tax status, such as without limitation, a financial
institution, REIT, insurance company, regulated investment company, individual retirement account, other tax-exempt organization, dealer in securities or currencies, person holding shares of the Trust as part
of a hedging, integrated, conversion or straddle transaction, trader in securities that has elected the mark-to-market method of accounting for its securities, U.S.
holder (as defined below) whose functional currency is not the U.S. dollar, investor with applicable financial statements within the meaning of Section 451(b) of the Code, or non-U.S.
investor. Furthermore, this discussion does not reflect possible application of the alternative minimum tax.
A U.S. holder is a beneficial owner that is
for U.S. federal income tax purposes:
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a citizen or individual resident of the United States (including certain former citizens and
former long-term residents); |
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a corporation or other entity treated as a corporation for U.S. federal income tax purposes, created or organized
in or under the laws of the United States or any state thereof or the District of Columbia; |
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an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
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a trust with respect to which a court within the United States is able to exercise primary supervision over its
administration and one or more U.S. persons have the authority to control all of its substantial decisions or the trust has made a valid election in effect under applicable Treasury regulations to be treated as a U.S. person for U.S. federal income
tax purposes, whose status as a U.S. person is not overridden by an applicable tax treaty. |
Taxation of the Trust
The Trust has elected to be treated as a RIC under Subchapter M of the Code. In order to qualify as a RIC, the Trust must, among other things, satisfy certain
requirements relating to the sources of its income, diversification of its assets, and distribution of its income to its shareholders. First, the Trust must derive at least 90% of its annual gross income from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock or securities or foreign currencies, or other income (including but not limited to gains from options, futures and forward contracts) derived with respect to its business
of investing in such stock, securities or currencies, or net income derived from interests in qualified publicly traded partnerships (as defined in the Code) (the 90% gross income test). Second, the Trust must diversify its
holdings so that, at the close of each quarter of its taxable year, (i) at least 50% of the value of its total assets consists of cash, cash items, U.S. Government securities, securities of other RICs and other securities, with such other
securities limited in respect of any one issuer to an amount not greater in value than 5% of the value of the Trusts total assets and to not more than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of
the market value of the total assets is invested in the securities (other than U.S. Government securities and securities of other RICs) of any one issuer, any two or more issuers controlled by the Trust and engaged in the same, similar or related
trades or businesses, or any one or more qualified publicly traded partnerships.
As long as the Trust qualifies as a RIC, the Trust will
generally not be subject to corporate-level U.S. federal income tax on income and gains that it distributes each taxable year to its shareholders, provided that in such taxable year it distributes at least 90% of the sum of (i) its net tax-exempt interest income, if any, and (ii) its investment company taxable income (which includes, among other items, dividends, taxable interest, taxable original issue discount and market
discount income, income from securities lending, net short-term capital gain in excess of net long-term capital loss, and any other taxable income other than net capital gain (as defined below) and is reduced by deductible expenses)
determined without regard to the deduction for dividends paid. The Trust may retain for investment its net capital gain (which consists of the excess of its net long-term capital gain over its net short-term
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capital loss). However, if the Trust retains any net capital gain or any investment company taxable income, it will be subject to tax at regular corporate rates on the amount retained.
The Code imposes a 4% nondeductible excise tax on the Trust to the extent the Trust does not distribute by the end of any calendar year at least the sum of
(i) 98% of its ordinary income (not taking into account any capital gain or loss) for the calendar year and (ii) 98.2% of its capital gain in excess of its capital loss (adjusted for certain ordinary losses) for a one-year period generally ending on October 31 of the calendar year (unless an election is made to use the Trusts fiscal year). In addition, the minimum amounts that must be distributed in any year to
avoid the excise tax will be increased or decreased to reflect any under-distribution or over-distribution, as the case may be, from the previous year. For purposes of the excise tax, the Trust will be deemed to have distributed any income on which
it paid U.S. federal income tax. While the Trust intends to distribute any income and capital gain in the manner necessary to minimize imposition of the 4% nondeductible excise tax, there can be no assurance that sufficient amounts of the
Trusts taxable income and capital gain will be distributed to entirely avoid the imposition of the excise tax. In that event, the Trust will be liable for the excise tax only on the amount by which it does not meet the foregoing distribution
requirement.
If in any taxable year the Trust should fail to qualify under Subchapter M of the Code for tax treatment as a RIC, the Trust would incur a
regular corporate U.S. federal income tax upon all of its taxable income for that year, and all distributions to its shareholders (including distributions of net capital gain) would be taxable to shareholders as ordinary dividend income for U.S.
federal income tax purposes to the extent of the Trusts earnings and profits. Provided that certain holding period and other requirements were met, such dividends would be eligible (i) to be treated as qualified dividend income in the
case of shareholders taxed as individuals and (ii) for the dividends received deduction in the case of corporate shareholders. In addition, to qualify again to be taxed as a RIC in a subsequent year, the Trust would be required to
distribute to shareholders its earnings and profits attributable to non-RIC years. In addition, if the Trust failed to qualify as a RIC for a period greater than two taxable years, then, in order to qualify as
a RIC in a subsequent year, the Trust would be required to elect to recognize and pay tax on any net built-in gain (the excess of aggregate gain, including items of income, over aggregate loss that would have
been realized if the Trust had been liquidated) or, alternatively, be subject to taxation on such built-in gain recognized for a period of five years.
The remainder of this discussion assumes that the Trust qualifies for taxation as a RIC.
The Trusts Investments. Certain of the Trusts investment practices are subject to special and complex U.S. federal income tax provisions
(including mark-to-market, constructive sale, straddle, wash sale, short sale and other rules) that may, among other things, (i) disallow, suspend or otherwise
limit the allowance of certain losses or deductions, (ii) convert lower taxed long-term capital gains or qualified dividend income into higher taxed short-term capital gains or ordinary income, (iii) convert ordinary loss or a deduction
into capital loss (the deductibility of which is more limited), (iv) cause the Trust to recognize income or gain without a corresponding receipt of cash, (v) adversely affect the time as to when a purchase or sale of stock or securities is
deemed to occur, (vi) adversely alter the characterization of certain complex financial transactions and (vii) produce income that will not be qualified income for purposes of the 90% annual gross income requirement described
above. These U.S. federal income tax provisions could therefore affect the amount, timing and character of distributions to common shareholders. The Trust intends to monitor its transactions and may make certain tax elections and may be required to
dispose of securities to mitigate the effect of these provisions and prevent disqualification of the Trust as a RIC. Additionally, the Trust may be required to limit its activities in derivative instruments in order to enable it to maintain its RIC
status.
The Trust may invest a portion of its net assets in below investment grade securities. Investments in these types of securities may present
special tax issues for the Trust. U.S. federal income tax rules are not entirely clear about issues such as when the Trust may cease to accrue interest, original issue discount or market discount, when and to what extent deductions may be taken for
bad debts or worthless securities, how payments received on obligations in default should be allocated between principal and income and whether modifications or exchanges of debt obligations in a bankruptcy or workout context are taxable. These and
other issues could affect the Trusts ability to distribute sufficient income to preserve its status as a RIC or to avoid the imposition of U.S. federal income or excise tax.
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Certain debt securities acquired by the Trust may be treated as debt securities that were originally issued at a
discount. Generally, the amount of the original issue discount is treated as interest income and is included in taxable income (and required to be distributed by the Trust in order to qualify as a RIC and avoid U.S. federal income tax or the 4%
excise tax on undistributed income) over the term of the security, even though payment of that amount is not received until a later time, usually when the debt security matures.
If the Trust purchases a debt security on a secondary market at a price lower than its adjusted issue price, the excess of the adjusted issue price over the
purchase price is market discount. Unless the Trust makes an election to accrue market discount on a current basis, generally, any gain realized on the disposition of, and any partial payment of principal on, a debt security having
market discount is treated as ordinary income to the extent the gain, or principal payment, does not exceed the accrued market discount on the debt security. Market discount generally accrues in equal daily installments. If the Trust
ultimately collects less on the debt instrument than its purchase price plus the market discount previously included in income, the Trust may not be able to benefit from any offsetting loss deductions.
The Trust may invest in preferred securities or other securities the U.S. federal income tax treatment of which may not be clear or may be subject to
recharacterization by the Internal Revenue Service. To the extent the tax treatment of such securities or the income from such securities differs from the tax treatment expected by the Trust, it could affect the timing or character of income
recognized by the Trust, potentially requiring the Trust to purchase or sell securities, or otherwise change its portfolio, in order to comply with the tax rules applicable to RICs under the Code.
Gain or loss on the sale of securities by the Trust will generally be long-term capital gain or loss if the securities have been held by the Trust for more
than one year. Gain or loss on the sale of securities held for one year or less will be short-term capital gain or loss.
Because the Trust may invest in
foreign securities, its income from such securities may be subject to non-U.S. taxes.
Foreign currency gain or
loss on foreign currency exchange contracts, non-U.S. dollar-denominated securities contracts, and non-U.S. dollar-denominated futures contracts, options and forward
contracts that are not section 1256 contracts (as defined below) generally will be treated as ordinary income and loss.
Income from options on individual
securities written by the Trust will generally not be recognized by the Trust for tax purposes until an option is exercised, lapses or is subject to a closing transaction (as defined by applicable regulations) pursuant to which the
Trusts obligations with respect to the option are otherwise terminated. If the option lapses without exercise, the premiums received by the Trust from the writing of such options will generally be characterized as short-term capital gain. If
the Trust enters into a closing transaction, the difference between the premiums received and the amount paid by the Trust to close out its position will generally be treated as short-term capital gain or loss. If an option written by the Trust is
exercised, thereby requiring the Trust to sell the underlying security, the premium will increase the amount realized upon the sale of the security, and the character of any gain on such sale of the underlying security as short-term or long-term
capital gain will depend on the holding period of the Trust in the underlying security. Because the Trust will not have control over the exercise of the options it writes, such exercises or other required sales of the underlying securities may cause
the Trust to realize gains or losses at inopportune times.
Index options that qualify as section 1256 contracts will generally be marked-to-market for U.S. federal income tax purposes. As a result, the Trust will generally recognize gain or loss on the last day of each taxable year equal to
the difference between the value of the option on that date and the adjusted basis of the option. The adjusted basis of the option will consequently be increased by such gain or decreased by such loss. Any gain or loss with respect to options on
indices and sectors that qualify as section 1256 contracts will be treated as short-term capital gain or loss to the extent of 40% of such gain or loss and long-term capital gain or loss to the extent of 60% of such gain or loss. Because
the mark-to-market rules may cause the Trust to recognize gain in advance of the receipt of cash, the Trust may be required to dispose of investments in order to meet
its distribution requirements. Mark-to-market losses may be suspended or otherwise limited if such losses are part of a straddle or similar transaction.
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Taxation of Common Shareholders
Trust distributions of its tax-exempt interest on municipal securities, if properly reported by the Trust to its
shareholders (exempt-interest dividends), will generally be exempt from regular federal income tax. In order for the Trust to pay exempt-interest dividends, at least 50% of the value of the Trusts total assets must consist of tax-exempt obligations on a quarterly basis. If the Trust does not meet this requirement, it would not be able to pay tax-exempt dividends, and your distributions attributable
to interest received by the Trust from any source (including distributions of tax-exempt interest income) would be taxable as ordinary income to the extent of the Trusts earnings and profits.
The Trust will either distribute or retain for reinvestment all or part of its net capital gain. If any such gain is retained, the Trust will be subject to a
corporate income tax on such retained amount. In that event, the Trust expects to report the retained amount as undistributed capital gain in a notice to its common shareholders, each of whom, if subject to U.S. federal income tax on long-term
capital gains, (i) will be required to include in income for U.S. federal income tax purposes as long-term capital gain its share of such undistributed amounts, (ii) will be entitled to credit its proportionate share of the tax paid by the
Trust against its U.S. federal income tax liability and to claim refunds to the extent that the credit exceeds such liability and (iii) will increase its basis in its common shares by the amount of undistributed capital gains included in the
shareholders income less the tax deemed paid by the shareholder under clause (ii).
Distributions paid to you by the Trust from its net capital
gain, if any, that the Trust properly reports as capital gain dividends (capital gain dividends) are taxable as long-term capital gains, regardless of how long you have held your common shares. All other dividends paid to you by the
Trust (including dividends from net short-term capital gains) from its current or accumulated earnings and profits, other than exempt-interest dividends (ordinary income dividends) are generally subject to tax as ordinary income.
Provided that certain holding period and other requirements are met, ordinary income dividends (if properly reported by the Trust) may qualify (i) for the dividends received deduction in the case of corporate shareholders to the extent that the
Trusts income consists of dividend income from U.S. corporations, and (ii) in the case of individual shareholders, as qualified dividend income eligible to be taxed at long-term capital gains rates to the extent that the Trust
receives qualified dividend income. Qualified dividend income is, in general, dividend income from taxable domestic corporations and certain qualified foreign corporations (e.g., generally, foreign corporations incorporated in a possession of the
United States or in certain countries with a qualifying comprehensive tax treaty with the United States, or whose stock with respect to which such dividend is paid is readily tradable on an established securities market in the United
States). There can be no assurance as to what portion, if any, of the Trusts distributions will constitute qualified dividend income or be eligible for the dividends received deduction.
Any distributions you receive that are in excess of the Trusts current and accumulated earnings and profits will be treated as a return of capital to
the extent of your adjusted tax basis in your common shares, and thereafter as capital gain from the sale of common shares. The amount of any Trust distribution that is treated as a return of capital will reduce your adjusted tax basis in your
common shares, thereby increasing your potential gain or reducing your potential loss on any subsequent sale or other disposition of your common shares.
Common shareholders may be entitled to offset their capital gain dividends with capital losses. The Code contains a number of statutory provisions affecting
when capital losses may be offset against capital gain, and limiting the use of losses from certain investments and activities. Accordingly, common shareholders that have capital losses are urged to consult their tax advisers.
Dividends and other taxable distributions are taxable to you even though they are reinvested in additional common shares of the Trust. Dividends and other
distributions paid by the Trust are generally treated under the Code as received by you at the time the dividend or distribution is made. If, however, the Trust pays you a dividend in January that was declared in the previous October, November or
December to common shareholders of record on a specified date in one of such months, then such dividend will be treated for U.S. federal income tax purposes as being paid by the Trust and received by you on December 31 of the year in which the
dividend was declared. In addition, certain other distributions made after the close of the Trusts taxable year may be spilled back and treated as paid by the Trust (except for purposes of the 4% nondeductible excise tax) during
such taxable year.
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In such case, you will be treated as having received such dividends in the taxable year in which the distributions were actually made.
Interest on certain private activity bonds is an item of tax preference subject to the alternative minimum tax on individuals. The Trust may
invest a portion of its assets in municipal bonds subject to this provision so that a portion of its exempt-interest dividends is an item of tax preference to the extent such dividends represent interest received from these private activity bonds.
Accordingly, investment in the Trust could cause a holder of common shares to be subject to, or result in an increased liability under, the alternative minimum tax.
Exempt-interest dividends are included in determining what portion, if any, of a persons Social Security and railroad retirement benefits will be
includable in gross income subject to federal income tax.
The price of common shares purchased at any time may reflect the amount of a forthcoming
distribution. Those purchasing common shares just prior to the record date of a distribution will receive a distribution which will be taxable to them even though it represents, economically, a return of invested capital.
The Trust will send you information after the end of each year setting forth the amount and tax status of any distributions paid to you by the Trust.
The sale or other disposition of common shares will generally result in capital gain or loss to you and will be long-term capital gain or loss if you have
held such common shares for more than one year at the time of sale. Any loss upon the sale or other disposition of common shares held for six months or less will be treated as long-term capital loss to the extent of any capital gain dividends
received (including amounts credited as an undistributed capital gain dividend) by you with respect to such common shares. Any loss you recognize on a sale or other disposition of common shares will be disallowed if you acquire other common shares
(whether through the automatic reinvestment of dividends or otherwise) within a 61-day period beginning 30 days before and ending 30 days after your sale or exchange of the common shares. In such case, your
tax basis in the common shares acquired will be adjusted to reflect the disallowed loss.
If the Trust liquidates, shareholders generally will realize
capital gain or loss upon such liquidation in an amount equal to the difference between the amount of cash or other property received by the shareholder (including any property deemed received by reason of its being placed in a liquidating trust)
and the shareholders adjusted tax basis in its common shares. Any such gain or loss will be long-term if the shareholder is treated as having a holding period in the Trust shares of greater than one year, and otherwise will be short-term.
Current U.S. federal income tax law taxes both long-term and short-term capital gain of corporations at the rates applicable to ordinary income. For non-corporate taxpayers, short-term capital gain is currently taxed at rates applicable to ordinary income while long-term capital gain generally is taxed at a reduced maximum rate. The deductibility of capital
losses is subject to limitations under the Code.
Certain U.S. holders who are individuals, estates or trusts and whose income exceeds certain thresholds
will be required to pay a 3.8% Medicare tax on all or a portion of their net investment income, which includes dividends received from the Trust and capital gains from the sale or other disposition of the Trusts common shares.
A common shareholder that is a nonresident alien individual or a foreign corporation (a foreign investor) generally will be subject to U.S.
federal withholding tax at the rate of 30% (or possibly a lower rate provided by an applicable tax treaty) on ordinary income dividends (except as discussed below). In general, U.S. federal withholding tax and U.S. federal income tax will not apply
to any gain or income realized by a foreign investor in respect of any distribution of exempt-interest dividends or net capital gain (including amounts credited as an undistributed capital gain dividend) or upon the sale or other disposition of
common shares of the Trust. Different tax consequences may result if the foreign investor is engaged in a trade or business in the United States or, in the case of an individual, is present in the United States for 183 days or more during a taxable
year and certain other conditions are met. Foreign investors should consult their tax advisers regarding the tax consequences of investing in the Trusts common shares.
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Ordinary income dividends properly reported by a RIC are generally exempt from U.S. federal withholding tax where
they (i) are paid in respect of the RICs qualified net interest income (generally, its U.S.-source interest income, other than certain contingent interest and interest from obligations of a corporation or partnership in which
the RIC is at least a 10% shareholder, reduced by expenses that are allocable to such income) or (ii) are paid in respect of the RICs qualified short-term capital gains (generally, the excess of the RICs net short-term
capital gain over its long-term capital loss for such taxable year). Depending on its circumstances, the Trust may report all, some or none of its potentially eligible dividends as such qualified net interest income or as qualified short-term
capital gains, and/or treat such dividends, in whole or in part, as ineligible for this exemption from withholding. In order to qualify for this exemption from withholding, a foreign investor needs to comply with applicable certification
requirements relating to its non-U.S. status (including, in general, furnishing an IRS Form W-8BEN,
W-8BEN-E or substitute Form). In the case of common shares held through an intermediary, the intermediary may have withheld tax even if the Trust reported the payment as
qualified net interest income or qualified short-term capital gain. Foreign investors should contact their intermediaries with respect to the application of these rules to their accounts. There can be no assurance as to what portion of the
Trusts distributions would qualify for favorable treatment as qualified net interest income or qualified short-term capital gains.
In
addition, withholding at a rate of 30% will apply to dividends paid in respect of common shares of the Trust held by or through certain foreign financial institutions (including investment funds), unless such institution enters into an
agreement with the Treasury to report, on an annual basis, information with respect to shares in, and accounts maintained by, the institution to the extent such shares or accounts are held by certain U.S. persons and by certain non-U.S. entities that are wholly or partially owned by U.S. persons and to withhold on certain payments. Accordingly, the entity through which common shares of the Trust are held will affect the determination of
whether such withholding is required. Similarly, dividends paid in respect of common shares of the Trust held by an investor that is a non-financial foreign entity that does not qualify under certain
exemptions will be subject to withholding at a rate of 30%, unless such entity either (i) certifies that such entity does not have any substantial United States owners or (ii) provides certain information regarding the
entitys substantial United States owners, which the Trust or applicable withholding agent will in turn provide to the Secretary of the Treasury. An intergovernmental agreement between the United States and an applicable foreign
country, or future Treasury regulations or other guidance, may modify these requirements. The Trust will not pay any additional amounts to common shareholders in respect of any amounts withheld. Foreign investors are encouraged to consult with their
tax advisers regarding the possible implications of these rules on their investment in the Trusts common shares.
U.S. federal backup withholding
tax may be required on dividends, distributions and sale proceeds payable to certain non-exempt common shareholders who fail to supply their correct taxpayer identification number (in the case of individuals,
generally, their social security number) or to make required certifications, or who are otherwise subject to backup withholding. Backup withholding is not an additional tax and any amount withheld may be refunded or credited against your U.S.
federal income tax liability, if any, provided that you timely furnish the required information to the Internal Revenue Service.
Ordinary income
dividends, capital gain dividends, and gain from the sale or other disposition of common shares of the Trust also may be subject to state, local, and/or foreign taxes. Common shareholders are urged to consult their own tax advisers regarding
specific questions about U.S. federal, state, local or foreign tax consequences to them of investing in the Trust.
The foregoing is a general and
abbreviated summary of certain provisions of the Code and the Treasury regulations currently in effect as they directly govern the taxation of the Trust and its common shareholders. These provisions are subject to change by legislative or
administrative action, and any such change may be retroactive. A more detailed discussion of the tax rules applicable to the Trust and its common shareholders can be found in the SAI that is incorporated by reference into this Prospectus. Common
shareholders are urged to consult their tax advisers regarding specific questions as to U.S. federal, state, local and foreign income or other taxes.
Please refer to the SAI for more detailed information. You are urged to consult your tax adviser.
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TAXATION OF HOLDERS OF RIGHTS
The value of a right will not be includible in the income of a common shareholder at the time the right is issued.
The basis of a right issued to a common shareholder will be zero, and the basis of the share with respect to which the subscription right was issued (the old
share) will remain unchanged, unless either (a) the fair market value of the right on the date of distribution is at least 15% of the fair market value of the old share, or (b) such shareholder affirmatively elects (in the manner set out
in Treasury regulations under the Code) to allocate to the subscription right a portion of the basis of the old share. If either (a) or (b) applies, then except as described below such shareholder must allocate basis between the old share
and the right in proportion to their fair market values on the date of distribution.
The basis of a right purchased in the market will generally be its
purchase price.
The holding period of a right issued to a common shareholder will include the holding period of the old share. No gain or loss will be
recognized by a common shareholder upon the exercise of a right.
No loss will be recognized by a common shareholder if a right distributed to such common
shareholder expires unexercised because the basis of the old share may be allocated to a right only if the right is exercised. If a right that has been purchased in the market expires unexercised, there will be a recognized loss equal to the basis
of the right.
Any gain or loss on the sale of a right will be a capital gain or loss if the right is held as a capital asset (which in the case of rights
issued to common shareholders will depend on whether the old share of beneficial interest is held as a capital asset), and will be a long-term capital gain or loss if the holding period is deemed to exceed one year.
CERTAIN PROVISIONS IN THE AGREEMENT AND DECLARATION OF TRUST AND BYLAWS
The Agreement and Declaration of Trust includes provisions that could have the effect of limiting the ability of other entities or persons to acquire control
of the Trust or to change the composition of the Board. This could have the effect of depriving shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain
control over the Trust. Such attempts could have the effect of increasing the expenses of the Trust and disrupting the normal operation of the Trust. The Board is divided into three classes. At each annual meeting of shareholders or special meeting
in lieu thereof the term of only one class of Trustees expires and only the Trustees in that one class stand for re-election. Trustees standing for election at an annual meeting of shareholders or special
meeting in lieu thereof are elected to a three-year term. This provision could delay for up to two years the replacement of a majority of the Board. A Trustee may be removed from office for cause only, and not without cause, and only by the
action of a majority of the remaining Trustees followed by a vote of the holders of at least 75% of the shares then entitled to vote for the election of the respective Trustee.
In addition, the Trusts Agreement and Declaration of Trust requires the favorable vote or consent of a majority of the Board followed by the favorable
vote of the holders of at least 75% of the outstanding shares of each affected class or series outstanding of the Trust, voting separately as a class or series, to approve, adopt or authorize certain transactions with 5% or greater holders of a
class or series of shares and their associates, unless 80% of the Trustees by resolution have approved a memorandum of understanding with such holders with respect to and substantially consistent with such transaction, in which case approval
by a majority of the outstanding voting securities (as defined in the Investment Company Act) of the Trust will be the only vote of the shareholders required. These voting requirements are in addition to any regulatory relief
required from the SEC with respect to such transaction. For purposes of these provisions, a 5% or greater holder of a class or series of shares (a Principal Shareholder) refers to any corporation, person or other entity who, whether
directly or indirectly and whether alone or together with its affiliates and associates, beneficially owns 5% or more of the outstanding shares of all outstanding classes or series of shares of beneficial interest of the Trust.
The 5% holder transactions subject to these special approval requirements are:
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the merger or consolidation of the Trust or any subsidiary of the Trust with or into any Principal Shareholder;
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the issuance of any securities of the Trust to any Principal Shareholder for cash (other than pursuant to any
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the sale, lease or exchange of all or any substantial part of the assets of the Trust to any Principal
Shareholder, except assets having an aggregate fair market value of less than $1,000,000, aggregating for the purpose of such computation all assets sold, leased or exchanged in any series of similar transactions within a twelve-month period; or
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the sale, lease or exchange to the Trust or any subsidiary of the Trust, in exchange for securities of the Trust,
of any assets of any Principal Shareholder, except assets having an aggregate fair market value of less than $1,000,000, aggregating for purposes of such computation all assets sold, leased or exchanged in any series of similar transactions within a
twelve-month period. |
To convert the Trust to an open-end investment company, the Trusts
Agreement and Declaration of Trust requires the favorable vote of a majority of the Board followed by the favorable vote of the holders of at least 75% of the outstanding shares of each affected class or series of shares of the Trust, voting
separately as a class or series, unless such conversion has been approved by at least 80% of the Trustees, in which case a majority of the outstanding voting securities (as defined in the Investment Company Act) of the Trust shall be
required. The foregoing vote would satisfy a separate requirement in the Investment Company Act that any conversion of the Trust to an open-end investment company be approved by the shareholders. If approved
in the foregoing manner, we anticipate conversion of the Trust to an open-end investment company might not occur until 90 days after the shareholders meeting at which such conversion was approved and
would also require at least 10 days prior notice to all shareholders. Conversion of the Trust to an open-end investment company would require the redemption of any outstanding preferred shares, which
could eliminate or alter the leveraged capital structure of the Trust with respect to the common shares. Following any such conversion, it is also possible that certain of the Trusts investment policies and strategies would have to be modified
to assure sufficient portfolio liquidity, including in order to comply with Rule 22e-4 under the Investment Company Act. In the event of conversion, the common shares would cease to be listed on the NYSE or
other national securities exchanges or market systems. Shareholders of an open-end investment company may require the company to redeem their shares at any time, except in certain circumstances as authorized
by or under the Investment Company Act, at their NAV, less such redemption charge, if any, as might be in effect at the time of a redemption. The Trust expects to pay all such redemption requests in cash, but reserves the right to pay redemption
requests in a combination of cash or securities. If such partial payment in securities were made, investors may incur brokerage costs in converting such securities to cash. If the Trust were converted to an
open-end fund, it is likely that new shares would be sold at NAV plus a sales load. The Board believes, however, that the closed-end structure is desirable in light of
the Trusts investment objective and policies. Therefore, you should assume that it is not likely that the Board would vote to convert the Trust to an open-end fund.
To dissolve the Trust, the Trusts Agreement and Declaration of Trust requires the approval of a resolution by a majority of the Board followed by the
favorable vote of the holders of at least 75% of the outstanding shares of each affected class or series of the Trust, voting separately as a class or series, unless such resolution has been approved by at least 80% of the Trustees, in which case
a majority of the outstanding voting securities (as defined in the Investment Company Act) of the Trust shall be required.
For the purposes
of calculating a majority of the outstanding voting securities under the Trusts Agreement and Declaration of Trust, each class and series of the Trust shall vote together as a single class, except to the extent required by the
Investment Company Act or the Trusts Agreement and Declaration of Trust with respect to any class or series of shares. If a separate vote is required, the applicable proportion of shares of the class or series, voting as a separate class or
series, also will be required.
The Board has determined that provisions with respect to the Board and the shareholder voting requirements described
above, which voting requirements are greater than the minimum requirements under Delaware law or the
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Investment Company Act, are in the best interests of shareholders generally. Reference should be made to the Agreement and Declaration of Trust on file with the SEC for the full text of these
provisions.
The Trusts Bylaws generally require that advance notice be given to the Trust in the event a shareholder desires to nominate a person
for election to the Board or to transact any other business at an annual meeting of shareholders. Notice of any such nomination or business must be delivered to or received at the principal executive offices of the Trust not less than 120 calendar
days nor more than 150 calendar days prior to the anniversary date of the prior years annual meeting (subject to certain exceptions). Any notice by a shareholder must be accompanied by certain information as provided in the Bylaws. Reference
should be made to the Bylaws on file with the SEC for the full text of these provisions.
CLOSED-END FUND STRUCTURE
The Trust is a diversified, closed-end management
investment company (commonly referred to as a closed-end fund). Closed-end funds differ from open-end funds (which are generally
referred to as mutual funds) in that closed-end funds generally list their shares for trading on a stock exchange and do not redeem their shares at the request of the shareholder. This means that if you wish
to sell your shares of a closed-end fund you must trade them on the stock exchange like any other stock at the prevailing market price at that time. In a mutual fund, if the shareholder wishes to sell shares
of the fund, the mutual fund will redeem or buy back the shares at NAV. Also, mutual funds generally offer new shares on a continuous basis to new investors and closed-end funds generally do not. The
continuous inflows and outflows of assets in a mutual fund can make it difficult to manage the funds investments. By comparison, closed-end funds are generally able to stay more fully invested in
securities that are consistent with their investment objective and also have greater flexibility to make certain types of investments and to use certain investment strategies, such as financial leverage and investments in illiquid securities.
Shares of closed-end funds frequently trade at a discount to their NAV. Because of this possibility and the
recognition that any such discount may not be in the interest of shareholders, the Board might consider from time to time engaging in open-market repurchases, tender offers for shares or other programs intended to reduce the discount. We cannot
guarantee or assure, however, that the Board will decide to engage in any of these actions. Nor is there any guarantee or assurance that such actions, if undertaken, would result in the shares trading at a price equal or close to the NAV per share.
See Repurchase of Common Shares below and Repurchase of Common Shares in the SAI. The Board might also consider converting the Trust to an open-end mutual fund, which would also require
a vote of the shareholders of the Trust.
REPURCHASE OF COMMON SHARES
Shares of closed-end investment companies often trade at a discount to their NAVs and the Trusts common shares
may also trade at a discount to their NAV, although it is possible that they may trade at a premium above NAV. The market price of the Trusts common shares will be determined by such factors as relative demand for and supply of such common
shares in the market, the Trusts NAV, general market and economic conditions and other factors beyond the control of the Trust. See Net Asset Value and Description of SharesCommon Shares. Although the Trusts
common shareholders will not have the right to redeem their common shares, the Trust may take action to repurchase common shares in the open market or make tender offers for its common shares. This may have the effect of reducing any market discount
from NAV.
There is no assurance that, if action is undertaken to repurchase or tender for common shares, such action will result in the common
shares trading at a price which approximates their NAV. Although share repurchases and tender offers could have a favorable effect on the market price of the Trusts common shares, you should be aware that the acquisition of common shares
by the Trust will decrease the capital of the Trust and, therefore, may have the effect of increasing the Trusts expense ratio and decreasing the asset coverage with respect to any borrowings or preferred shares outstanding. Any share
repurchases or tender offers will be made in accordance with the requirements of the Securities Exchange Act of 1934, the Investment Company Act and the principal stock exchange on which the common shares are traded. For additional information, see
Repurchase of Common Shares in the SAI.
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Common Stock Repurchase Program:
On September 24, 2021, the Board approved a renewal of the Trusts open market share repurchase program through November 30, 2022. Commencing
on December 1, 2021, the Trust may purchase through November 30, 2022, up to 5% of its shares outstanding as of the close of business on November 30, 2021, subject to certain conditions. The amount and timing of any repurchases under
the Trusts share repurchase program will be determined either at the discretion of the Trusts management or pursuant to predetermined parameters and instructions subject to market conditions.
There is no assurance that the Trust will repurchase common shares in any particular amount. The share repurchase program seeks to enhance shareholder value
by purchasing the Trusts common shares trading at a discount from their NAV per share. For the year ended December 31, 2021, the Trust did not repurchase any shares.
PLAN OF DISTRIBUTION
We may sell common shares, including to existing shareholders in a rights offering, through underwriters or dealers, directly to one or more purchasers
(including existing shareholders in a rights offering), through agents, to or through underwriters or dealers, or through a combination of any such methods of sale. The applicable Prospectus Supplement will identify any underwriter or agent involved
in the offer and sale of our common shares, any sales loads, discounts, commissions, fees or other compensation paid to any underwriter, dealer or agent, the offering price, net proceeds and use of proceeds and the terms of any sale. In the case of
a rights offering, the applicable Prospectus Supplement will set forth the number of our common shares issuable upon the exercise of each right and the other terms of such rights offering.
The distribution of our common shares may be effected from time to time in one or more transactions at a fixed price or prices, which may be changed, at
prevailing market prices at the time of sale, at prices related to such prevailing market prices, or at negotiated prices. Sales of our common shares may be made in transactions that are deemed to be at the market as defined in Rule 415
under the Securities Act, including sales made directly on the NYSE or sales made to or through a market maker other than on an exchange.
We may sell our
common shares directly to, and solicit offers from, institutional investors or others who may be deemed to be underwriters as defined in the Securities Act for any resales of the securities. In this case, no underwriters or agents would be involved.
We may use electronic media, including the Internet, to sell offered securities directly.
In connection with the sale of our common shares, underwriters
or agents may receive compensation from us in the form of discounts, concessions or commissions. Underwriters may sell our common shares to or through dealers, and such dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the purchasers for whom they may act as agents. Underwriters, dealers and agents that participate in the distribution of our common shares may be deemed to be underwriters under the
Securities Act, and any discounts and commissions they receive from us and any profit realized by them on the resale of our common shares may be deemed to be underwriting discounts and commissions under the Securities Act. Any such underwriter or
agent will be identified and any such compensation received from us will be described in the applicable Prospectus Supplement. The maximum amount of compensation to be received by any Financial Industry Regulatory Authority member or independent
broker-dealer will not exceed eight percent for the sale of any securities being offered pursuant to Rule 415 under the Securities Act. We will not pay any compensation to any underwriter or agent in the form of warrants, options, consulting or
structuring fees or similar arrangements. In connection with any rights offering to existing shareholders, we may enter into a standby underwriting arrangement with one or more underwriters pursuant to which the underwriter(s) will purchase common
shares remaining unsubscribed after the rights offering.
If a Prospectus Supplement so indicates, we may grant the underwriters an option to purchase
additional common shares at the public offering price, less the underwriting discounts and commissions, within 45 days from the date of the Prospectus Supplement, to cover any over-allotments.
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Under agreements into which we may enter, underwriters, dealers and agents who participate in the distribution of
our common shares may be entitled to indemnification by us against certain liabilities, including liabilities under the Securities Act. Underwriters, dealers and agents may engage in transactions with us, or perform services for us, in the ordinary
course of business.
If so indicated in the applicable Prospectus Supplement, we will ourselves, or will authorize underwriters or other persons acting as
our agents to solicit offers by certain institutions to purchase our common shares from us pursuant to contracts providing for payment and delivery on a future date. Institutions with which such contacts may be made include commercial and savings
banks, insurance companies, pension funds, investment companies, educational and charitable institutions and others, but in all cases such institutions must be approved by us. The obligation of any purchaser under any such contract will be subject
to the condition that the purchase of the common shares shall not at the time of delivery be prohibited under the laws of the jurisdiction to which such purchaser is subject. The underwriters and such other agents will not have any responsibility in
respect of the validity or performance of such contracts. Such contracts will be subject only to those conditions set forth in the Prospectus Supplement, and the Prospectus Supplement will set forth the commission payable for solicitation of such
contracts.
To the extent permitted under the Investment Company Act and the rules and regulations promulgated thereunder, the underwriters may from time
to time act as brokers or dealers and receive fees in connection with the execution of our portfolio transactions after the underwriters have ceased to be underwriters and, subject to certain restrictions, each may act as a broker while it is an
underwriter.
A Prospectus and accompanying Prospectus Supplement in electronic form may be made available on the websites maintained by underwriters. The
underwriters may agree to allocate a number of securities for sale to their online brokerage account holders. Such allocations of securities for Internet distributions will be made on the same basis as other allocations. In addition, securities may
be sold by the underwriters to securities dealers who resell securities to online brokerage account holders.
In order to comply with the securities laws
of certain states, if applicable, our common shares offered hereby will be sold in such jurisdictions only through registered or licensed brokers or dealers.
INCORPORATION BY REFERENCE
This Prospectus is part of a registration statement that we have filed with the SEC. We are allowed to incorporate by reference the information
that we file with the SEC, which means that we can disclose important information to you by referring you to those documents. We incorporate by reference into this Prospectus the documents listed below and any future filings we make with the SEC
under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, including any filings on or after the date of this Prospectus from the date of filing (excluding any information furnished, rather than filed), until we have sold all of the offered
securities to which this Prospectus and any accompanying prospectus supplement relates or the offering is otherwise terminated. The information incorporated by reference is an important part of this Prospectus. Any statement in a document
incorporated by reference into this Prospectus will be deemed to be automatically modified or superseded to the extent a statement contained in (1) this Prospectus or (2) any other subsequently filed document that is incorporated by
reference into this Prospectus modifies or supersedes such statement. The documents incorporated by reference herein include:
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our annual
report on Form N-CSR for the fiscal year ended December 31, 2021 filed with the SEC on March 4, 2022; and |
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the description of the Trusts
common shares contained in our Registration Statement on Form 8-A (File No. 001-31741) filed with the SEC on July 22, 2003, including any amendment or
report filed for the purpose of updating such description prior to the termination of the offering registered hereby. |
The Trust will
provide without charge to each person, including any beneficial owner, to whom this Prospectus is delivered, upon written or oral request, a copy of any and all of the documents that have been or may be
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incorporated by reference in this Prospectus or the accompanying prospectus supplement. You should direct requests for documents by calling:
Client Services Desk
(800) 882-0052
The Trust makes available this Prospectus, SAI and the Trusts annual and semi-annual reports, free of
charge, at http://www.blackrock.com. You may also obtain this Prospectus, the SAI, other documents incorporated by
reference and other information the Trust files electronically, including reports and proxy statements, on the SEC website (http://www.sec.gov) or with the payment of a duplication fee, by electronic request at publicinfo@sec.gov. Information contained in, or that can be accessed through, the Trusts website is not incorporated by reference into
this Prospectus and should not be considered to be part of this Prospectus or the accompanying prospectus supplement.
PRIVACY PRINCIPLES OF THE TRUST
The Trust is committed to maintaining the privacy of shareholders and to safeguarding their non-public personal information. The following information is provided to help you understand what personal information the Trust collects, how we protect that information, and why in certain cases we may share such
information with select other parties.
The Trust does not receive any non-public personal information relating to
its shareholders who purchase shares through their broker-dealers. In the case of shareholders who are record holders of the Trust, the Trust receives personal non-public information on account applications or
other forms. With respect to these shareholders, the Trust also has access to specific information regarding their transactions in the Trust.
The Trust
does not disclose any non-public personal information about its shareholders or former shareholders to anyone, except as permitted by law or as is necessary in order to service our shareholders accounts
(for example, to a transfer agent).
The Trust restricts access to non-public personal information about its
shareholders to BlackRock employees with a legitimate business need for the information. The Trust maintains physical, electronic and procedural safeguards designed to protect the non-public personal
information of our shareholders.
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10,000,000 Shares
BLACKROCK LIMITED DURATION INCOME
TRUST
Common Shares of
Beneficial Interest
Rights to Purchase Common Shares of Beneficial Interest
PROSPECTUS
March
[●], 2022
The information in this Prospectus Supplement is not complete and may be changed. BlackRock
Limited Duration Income Trust may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Prospectus Supplement is not an offer to sell these securities and is not soliciting
offers to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO
COMPLETION, DATED [●], 2022
PROSPECTUS SUPPLEMENT
(To Prospectus dated [●], 2022)
Filed
Pursuant to Rule 424(b)([●])
Registration Statement No. 333-262366
BLACKROCK LIMITED DURATION INCOME TRUST
Up to [●] Common Shares of Beneficial Interest
BlackRock Limited Duration Income Trust (the
Trust, we, us or our) is offering for sale [●] of our common shares of beneficial interest (common shares). Our common shares are listed on the New York Stock Exchange
(NYSE) under the symbol BLW. As of the close of business on [●], 2022, the last reported net asset value per share of our common shares was $[●] and the last reported sales price per share of our common shares on
the NYSE was $[●].
The Trust is a diversified, closed-end management investment company registered
under the Investment Company Act of 1940, as amended (the Investment Company Act). The Trusts investment objective is to provide current income and capital appreciation. The Trusts investment adviser is BlackRock Advisors,
LLC (the Advisor), and the Advisors affiliates, BlackRock International Limited and BlackRock (Singapore) Limited), act as the Trusts sub-advisors.
Sales of our common shares, if any, under this Prospectus Supplement and the accompanying Prospectus may be made in negotiated transactions or transactions
that are deemed to be at the market as defined in Rule 415 under the Securities Act of 1933, as amended (the Securities Act), including sales made directly on the NYSE or sales made to or through a market maker other
than on an exchange.
Investing in the Trusts common shares involves certain risks, including risks of leverage, that are described in the
Risks section beginning on page [52] of the accompanying Prospectus.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS
APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS SUPPLEMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[●], 2022
S-1
This Prospectus Supplement, together with the accompanying Prospectus, sets forth concisely the information about
the Trust that a prospective investor should know before investing. You should read this Prospectus Supplement and the accompanying Prospectus, which contain important information, before deciding whether to invest in the common shares. You should
retain the accompanying Prospectus and this Prospectus Supplement for future reference. A Statement of Additional Information (SAI), dated [●], 2022, containing additional information about the Trust, has been filed with the
Securities and Exchange Commission (SEC) and, as amended from time to time, is incorporated by reference in its entirety into this Prospectus Supplement and the accompanying Prospectus. This Prospectus Supplement, the accompanying
Prospectus and the SAI are part of a shelf registration statement filed with the SEC. This Prospectus Supplement describes the specific details regarding this offering, including the method of distribution. If information in this
Prospectus Supplement is inconsistent with the accompanying Prospectus or the SAI, you should rely on this Prospectus Supplement. You may call (800) 882-0052, visit the Trusts website
(http://www.blackrock.com) or write to the Trust to obtain, free of charge, copies of the SAI and the Trusts semi-annual and annual reports, as well as to obtain other information about the Trust or to make shareholder inquiries. The SAI, as
well as the Trusts semi-annual and annual reports, are also available for free on the SECs website (http://www.sec.gov). You may also e-mail requests for these documents to publicinfo@sec.gov.
Information contained in, or that can be accessed through, the Trusts website is not part of this Prospectus Supplement or the accompanying Prospectus.
You should not construe the contents of this Prospectus Supplement and the accompanying Prospectus as legal, tax or financial advice. You should consult with
your own professional advisors as to the legal, tax, financial or other matters relevant to the suitability of an investment in the Trust.
The common
shares do not represent a deposit or an obligation of, and are not guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or
any other government agency.
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You should rely only on the information contained or incorporated by reference in this Prospectus Supplement
and the accompanying Prospectus. Neither the Trust nor the underwriters have authorized anyone to provide you with different information. The Trust is not making an offer to sell these securities in any jurisdiction where the offer or sale is not
permitted. You should not assume that the information contained in this Prospectus Supplement and the accompanying Prospectus is accurate as of any date other than the date of this Prospectus Supplement and the accompanying Prospectus, respectively.
Our business, financial condition, results of operations and prospects may have changed since those dates. In this Prospectus Supplement and in the accompanying Prospectus, unless otherwise indicated, Trust, us,
our and we refer to BlackRock Limited Duration Income Trust, a Delaware statutory trust.
TABLE OF CONTENTS
Prospectus Supplement
Prospectus
S-3
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus Supplement, the accompanying Prospectus and the SAI contain forward-looking statements. Forward-looking statements can be
identified by the words may, will, intend, expect, estimate, continue, plan, anticipate, and similar terms and the negative of such terms. Such
forward-looking statements may be contained in this Prospectus Supplement as well as in the accompanying Prospectus. By their nature, all forward-looking statements involve risks and uncertainties, and actual results could differ materially from
those contemplated by the forward-looking statements. Several factors that could materially affect our actual results are the performance of the portfolio of securities we hold, the price at which our shares will trade in the public markets and
other factors discussed in our periodic filings with the SEC.
Although we believe that the expectations expressed in our forward-looking statements are
reasonable, actual results could differ materially from those projected or assumed in our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and are
subject to inherent risks and uncertainties, such as those disclosed in the Risks section of the accompanying Prospectus. All forward-looking statements contained or incorporated by reference in this Prospectus Supplement or the
accompanying Prospectus are made as of the date of this Prospectus Supplement or the accompanying Prospectus, as the case may be. Except for our ongoing obligations under the federal securities laws, we do not intend, and we undertake no obligation,
to update any forward-looking statement. The forward-looking statements contained in this Prospectus Supplement, the accompanying Prospectus and the SAI are excluded from the safe harbor protection provided by Section 27A of the Securities Act.
Currently known risk factors that could cause actual results to differ materially from our expectations include, but are not limited to, the factors
described in the Risks section of the accompanying Prospectus. We urge you to review carefully those sections for a more detailed discussion of the risks of an investment in our common shares.
S-4
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by reference to the more detailed information included elsewhere in this Prospectus Supplement and in
the accompanying Prospectus and in the SAI.
The Trust
The Trust is a diversified, closed-end management investment company. The Trusts investment objective is to
provide current income and capital appreciation. There can be no assurance that the Trusts investment objective will be achieved or that the Trusts investment program will be successful. The Trusts common shares are listed for
trading on the NYSE under the symbol BLW.
Investment Advisor and Sub-Advisors
BlackRock Advisors, LLC (previously defined as the Advisor) is the Trusts investment adviser. The Advisor receives an annual fee, payable
monthly, in an amount equal to 0.55% of the average weekly value of the Trusts Managed Assets. BlackRock International Limited (BIL) and BlackRock (Singapore) Limited (BSL and together with BIL, the Sub-Advisors and collectively with the Advisor, the Advisors) serve as the Trusts sub-advisors. The Advisor, and not the Trust,
pays an annual sub-advisory fee to the Sub-Advisors. For that portion of the Trust for which each
Sub-Advisor acts as sub-advisor, the Advisor will pay to such Sub-Advisor, an annual
sub-advisory fee equal to a percentage of the management fee received by the Advisor from the Trust with respect to the average daily value of the Managed Assets of the Trust allocated to such Sub-Advisor.
The Offering
[The provisions of the Investment Company Act generally require that the public offering price of common shares (less any underwriting commissions and
discounts) must equal or exceed the net asset value per share of a companys common shares (calculated within 48 hours of pricing).
Sales of our
common shares, if any, under this Prospectus Supplement and the accompanying Prospectus may be made in negotiated transactions or transactions that are deemed to be at the market as defined in Rule 415 under the Securities Act, including
sales made directly on the NYSE or sales made to or through a market maker other than on an exchange.]
Use of Proceeds
We currently anticipate that we will be able to invest all of the net proceeds of any sales of common shares pursuant to this Prospectus Supplement in
accordance with our investment objective and policies as described in the accompanying Prospectus under The Trusts Investments within approximately three months of the receipt of such proceeds. Pending such investment, it is
anticipated that the proceeds will be invested in short-term, tax-exempt or taxable investment grade securities or in high quality, short-term money market instruments. Depending on market conditions and
operations, a portion of the cash held by the Trust, including any proceeds raised from the offering, may be used to pay distributions in accordance with the Trusts distribution policy and may be a return of capital.
SUMMARY OF TRUST EXPENSES
The following table and example are intended to assist you in understanding the various costs and expenses directly or indirectly associated with investing in
our common shares.
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Shareholder Transaction Expenses |
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Sales load paid by you (as a percentage of offering price)(1) |
|
|
[●] |
% |
Offering expenses borne by the Trust (as a percentage of offering price)(1) |
|
|
[●] |
% |
Dividend reinvestment plan fees |
|
|
$[●] per share for open-market purchases of common shares(2) |
|
S-5
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|
|
|
Dividend reinvestment plan sale transaction fee |
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|
$2.50(2) |
|
Estimated Annual Expenses (as a percentage of net assets attributable to common
shares) |
|
|
|
|
Management fees(4)(5) |
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|
[●] |
% |
Other Expenses(3) |
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|
[●] |
% |
Miscellaneous Other Expenses |
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|
[●]% |
|
Interest Expense(6) |
|
|
[●]% |
|
Total Annual Trust Operating Expenses |
|
|
[●] |
% |
Fee Waivers and/or Expense
Reimbursements(5) |
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|
|
|
Total Annual Trust Operating Expenses after Fee Waivers and/or Expense Reimbursements (5) |
|
|
[●] |
% |
(1) |
Trust shareholders will pay all offering expenses involved with this offering. |
(2) |
Computershare Trust Company, N.A.s (the Reinvestment Plan Agent) fees for the handling of the
reinvestment of dividends will be paid by the Trust. However, you will pay a $0.02 per share fee incurred in connection with open-market purchases, which will be deducted from the value of the dividend. You will also be charged a $2.50 sales fee and
pay a $0.15 per share fee if you direct the Reinvestment Plan Agent to sell your common shares held in a dividend reinvestment account. Per share fees include any applicable brokerage commissions the Reinvestment Plan Agent is required to pay.
|
(3) |
Other expenses have been restated to reflect current fees. |
(4) |
The Trust currently pays the Advisor a monthly fee at an annual contractual investment management fee rate of
0.55% of the average weekly value of the Trusts Managed Assets, plus the proceeds of ay debt securities or outstanding borrowings used for leverage. Managed Assets means the total assets of the Trust (including any assets
attributable to money borrowed for investment purposes) minus the sum of the Trusts accrued liabilities (other than money borrowed for investment purposes). |
(5) |
The Trust and the Advisor have entered into a fee waiver agreement (the Fee Waiver Agreement),
pursuant to which the Advisor has contractually agreed to waive the management fee with respect to any portion of the Trusts assets attributable to investments in any equity and fixed-income mutual funds and exchange-traded funds managed by
the Advisor or its affiliates that have a contractual management fee, through June 30, 2023. In addition, pursuant to the Fee Waiver Agreement, the Advisor has contractually agreed to waive its management fees by the amount of investment
advisory fees the Trust pays to the Advisor indirectly through its investment in money market funds managed by the Advisor or its affiliates, through June 30, 2023. The Fee Waiver Agreement may be terminated at any time, without the payment of
any penalty, only by the Trust (upon the vote of a majority of the Trustees who are not interested persons (as defined in the Investment Company Act) of the Trust or a majority of the outstanding voting securities of the Trust), upon 90
days written notice by the Trust to the Advisor. |
(6) |
Assumes the use of leverage in the form of reverse repurchase agreements representing [●]% of Managed
Assets at an annual interest expense to the Trust of [●]%, which is based on current market conditions. The actual amount of interest expense borne by the Trust will vary over time in accordance with the level of the Trusts use of
reverse repurchase agreements and variations in market interest rates. Interest expense is required to be treated as an expense of the Trust for accounting purposes. |
Example
The following example illustrates the expenses
(including the sales load of $[●] and offering costs of $[●]) that you would pay on a $1,000 investment in common shares, assuming (i) total net annual expenses of [●]% of net assets attributable to common shares and
(ii) a 5% annual return:
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1 Year |
|
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3 Years |
|
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5 Years |
|
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10 Years |
|
Total expenses incurred |
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$ |
[●] |
|
|
$ |
[●] |
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$ |
[●] |
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|
$ |
[●] |
|
The example should not be considered a representation of future expenses. The example assumes that the estimated
Other expenses set forth in the Estimated Annual Expenses table are accurate and that all dividends and distributions are reinvested at net asset value. Actual expenses may be greater or less than those assumed. Moreover, the
Trusts actual rate of return may be greater or less than the hypothetical 5% return shown in the example.
S-6
USE OF PROCEEDS
We estimate the total net proceeds of the offering to be $[●], based on the public offering price of $[●] per share and after deducting
underwriting discounts and commissions and estimated offering expenses payable by us.
The net proceeds from the issuance of common shares hereunder will
be invested in accordance with the Trusts investment objective and policies as set forth in this Prospectus Supplement and the accompanying Prospectus. We currently anticipate that we will be able to invest all of the net proceeds in
accordance with our investment objective and policies within approximately three months of the receipt of such proceeds. Pending such investment, it is anticipated that the proceeds will be invested in short-term,
tax-exempt or taxable investment grade securities or in high quality, short-term money market instruments. Depending on market conditions and operations, a portion of the cash held by the Trust, including any
proceeds raised from the offering, may be used to pay distributions in accordance with the Trusts distribution policy and may be a return of capital. A return of capital is a return to investors of a portion of their original investment in the
Trust. In general terms, a return of capital would involve a situation in which a Trust distribution (or a portion thereof) represents a return of a portion of a shareholders investment in the Trust, rather than making a distribution that is
funded from the Trusts earned income or other profits. Although return of capital distributions may not be currently taxable, such distributions would decrease the basis of a shareholders shares, and therefore, may increase a
shareholders tax liability for capital gains upon a sale of shares, even if sold at a loss to the shareholders original investments.
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Trust as of [●], 2022 and its adjusted capitalization assuming the common shares
available in the offering discussed in this Prospectus Supplement had been issued.
[To be provided.]
PLAN OF DISTRIBUTION
[To be provided.]
LEGAL MATTERS
Certain legal matters in connection with the common shares will be passed upon for the Trust by Willkie Farr & Gallagher
LLP, New York, New York, counsel to the Trust. Willkie Farr & Gallagher LLP may rely as to certain matters of Delaware law on the opinion of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware. [Certain legal matters will be
passed on by [●] as special counsel to the Underwriters in connection with the offering.]
ADDITIONAL INFORMATION
This Prospectus Supplement and the accompanying Prospectus constitute part of a Registration Statement filed by the Trust with the SEC under the Securities
Act and the Investment Company Act. This Prospectus Supplement and the accompanying Prospectus omit certain of the information contained in the Registration Statement, and reference is hereby made to the Registration Statement and related exhibits
for further information with respect to the Trust and the common shares offered hereby. Any statements contained herein concerning the provisions of any document are not necessarily complete, and, in each instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement or otherwise filed with the SEC. Each such statement is qualified in its entirety by such reference. The complete Registration Statement may be obtained from the SEC upon payment of the
fee prescribed by its rules and regulations or free of charge through the SECs website (http://www.sec.gov).
S-7
BLACKROCK LIMITED DURATION
INCOME TRUST
[●] Common Shares of Beneficial Interest
PROSPECTUS SUPPLEMENT
[●], 2022
Until
[ ], 2022 (25 days after the date of this Prospectus Supplement), all dealers that buy, sell or trade the common shares, whether or not participating in this offering, may be required to deliver a prospectus. This is in
addition to the dealers obligation to deliver a prospectus when acting as underwriters.
The information in this Prospectus Supplement is not complete and may be changed. BlackRock
Limited Duration Income Trust may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Prospectus Supplement is not an offer to sell these securities and is not soliciting
offers to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO
COMPLETION, DATED [●], 2022
Filed Pursuant to Rule 424
Registration Statement No. 333-262366
PROSPECTUS SUPPLEMENT
(To Prospectus dated [●],
2022)
BLACKROCK LIMITED DURATION INCOME TRUST
[●] Rights for [●] Shares of Beneficial Interest
Issuable Upon the Exercise of
Transferrable Subscription Rights to Acquire Shares of Beneficial Interest
BlackRock Limited Duration Income Trust (the Trust, we, us or our) is issuing transferrable subscription rights
(the Rights) to our common shareholders (the Common Shareholders) to subscribe for an aggregate of [●] common shares of beneficial interest (each, a Common Share and collectively, the Common
Shares).
The Trust is a diversified, closed-end management investment company registered under the
Investment Company Act of 1940, as amended. The Trusts investment objective is to provide current income and capital appreciation. The Trusts investment adviser is BlackRock Advisors, LLC (the Advisor), and the Advisors
affiliates, BlackRock International Limited and BlackRock (Singapore) Limited, act as the Trusts sub-advisors.
The Common Shares are listed on the New York Stock Exchange (NYSE) under the symbol BLW. Common Shareholders of record on [●],
2022 (the Record Date) will receive [●] Right for each Common Share held. These Rights are transferable and will allow the holders thereof to purchase additional Common Shares. The Rights will be listed for trading on the [●]
under the symbol [●] during the course of the Rights offering.
The Rights entitle their holders to purchase [●] new Common Share
for every [●] Rights held. Any Common Shareholder who owns fewer than [●] Common Shares as of the close of business on the Record Date may subscribe for [●] full Common Share. Common Shareholders as of the close of business on the
Record Date who fully exercise all Rights initially issued to them (other than those Rights that cannot be exercised because they represent the right to acquire less than one Common Share) will be entitled to subscribe for additional Common Shares
that remain unsubscribed as a result of any unexercised Rights. This over-subscription privilege is subject to a number of limitations and subject to allotment.
The subscription price per Common Share (the Subscription Price) will be determined based upon a formula equal to [●]% of the average of the
last reported sales price of a Common Share on the NYSE on the date on which the Rights offering expires, as such date may be extended from time to time, and each of the [● (●)] preceding trading days (the Formula
Price). If, however, the Formula Price is less than [●]% of the net asset value (NAV) per Common Share at the close of trading on the NYSE on the Expiration Date (as defined below), then the Subscription Price will be
[●]% of the Trusts NAV per Common Share at the close of trading on the NYSE on the Expiration Date. All offering expenses, including sales commissions, will be borne by the Advisor, and not the Trust or any
R-1
Common Shareholders. The Rights offering will expire at 5:00 p.m., Eastern time, on [●], 2022, unless extended as described in this Prospectus Supplement (the Expiration Date).
On [●], 2022 (the last trading date prior to the Common Shares trading ex-Rights), the last reported net
asset value per share of the Common Shares was $[●] and the last reported sales price per share of Common Shares on the NYSE was $[●], representing a [premium] to net asset value of [●]%.
This Prospectus Supplement, together with the accompanying Prospectus, sets forth concisely the information about the Trust that a prospective investor should
know before investing. You should read this Prospectus Supplement and the accompanying Prospectus, which contain important information, before deciding whether to invest in the Common Shares. You should retain the accompanying Prospectus and this
Prospectus Supplement for future reference. A Statement of Additional Information (SAI), dated [ ], 2022, containing additional information about the Trust, has been filed with the Securities and Exchange Commission (SEC)
and, as amended from time to time, is incorporated by reference in its entirety into this Prospectus Supplement and the accompanying Prospectus. This Prospectus Supplement, the accompanying Prospectus and the SAI are part of a shelf
registration statement filed with the SEC. This Prospectus Supplement describes the specific details regarding this offering, including the method of distribution. If information in this Prospectus Supplement is inconsistent with the accompanying
Prospectus or the SAI, you should rely on this Prospectus Supplement. You may call (800) 882-0052, visit the Trusts website (http://www.blackrock.com) or write to the Trust to obtain, free of charge,
copies of the SAI and the Trusts semi-annual and annual reports, as well as to obtain other information about the Trust or to make shareholder inquiries. The SAI, as well as the Trusts semi-annual and annual reports, are also available
for free on the SECs website (http://www.sec.gov). You may also e-mail requests for these documents to publicinfo@sec.gov. Information contained in, or that can be accessed through, the Trusts
website is not part of this Prospectus Supplement or the accompanying Prospectus. Common Shareholders please call toll-free at [●] (banks and brokers please call [●]) or please send written requests to [●].
Investing in Common Shares through Rights involves certain risks, including risks of leverage, that are described in the Special Characteristics and
Risks of the Rights Offering section of this Prospectus Supplement.
SHAREHOLDERS WHO DO NOT FULLY EXERCISE THEIR RIGHTS MAY, AT THE
COMPLETION OF THE RIGHTS OFFERING, OWN A SMALLER PROPORTIONAL INTEREST IN THE TRUST THAN IF THEY EXERCISED THEIR RIGHTS. AS A RESULT OF THE RIGHTS OFFERING YOU MAY EXPERIENCE SUBSTANTIAL DILUTION OF THE AGGREGATE NET ASSET VALUE OF YOUR COMMON
SHARES DEPENDING UPON WHETHER THE TRUSTS NET ASSET VALUE PER COMMON SHARE IS ABOVE OR BELOW THE SUBSCRIPTION PRICE ON THE EXPIRATION DATE. RIGHTS EXERCISED BY A SHAREHOLDER ARE IRREVOCABLE.
THE TRUST HAS DECLARED MONTHLY DISTRIBUTIONS PAYABLE ON [●], 2022 WITH A RECORD DATE OF [●], 2022. ANY COMMON
SHARES ISSUED AS A RESULT OF THE RIGHTS OFFERING WILL NOT BE RECORD DATE SHARES FOR THE TRUSTS MONTHLY DISTRIBUTION TO BE PAID ON [●], 2022 AND WILL NOT BE ENTITLED TO RECEIVE SUCH DISTRIBUTION.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS SUPPLEMENT IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Per Common Share |
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Total(1) |
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Estimated subscription price of Common Shares to shareholders exercising Rights(2) |
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$ |
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[●] |
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$ |
[●] |
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Underwriting discounts and commissions |
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$ |
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[●] |
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$ |
[●] |
|
Estimated proceeds, before expenses, to the
Trust(3) (4) |
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$ |
|
[●] |
|
$ |
[●] |
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(1) |
Assumes that all Rights are exercised at the estimated Subscription Price (as described below). All of the
Rights may not be exercised, and the estimated Subscription Price may be higher or lower than the actual Subscription Price. |
R-2
(2) |
The estimated Subscription Price to the public is based upon [●]% of the last reported sales price of the
Trusts Common Shares on the NYSE on [●], 2022 and each of the [● (●)] preceding trading days. See Terms of the Rights OfferingSubscription Price. |
(3) |
Before deduction of expenses related to the Rights offering, which are estimated approximately at $[●].
Any offering expenses are paid indirectly by shareholders. Such fees and expenses will immediately reduce the net asset value per share of each Common Share purchased by an investor in the Rights offering. The indirect expenses of the offering that
shareholders will pay are estimated to be $[●] in the aggregate and $[●] per share. The amount of proceeds to the Trust net of any fees and expenses of the offering are estimated to be $[●] in the aggregate and $[●] per
share. Shareholders will not directly bear any offering expenses. |
(4) |
Funds received by check prior to the final due date of the Rights offering will be deposited into a segregated
account pending proration and distribution of Common Shares. The Subscription Agent (as defined in this Prospectus Supplement) may receive investment earnings on the funds deposited into such account. |
The Common Shares are expected to be ready for delivery in book-entry form through the [insert depository name] on or about [●], 2022 [, unless
extended. If the offering is extended, the Common Shares are expected to be ready for delivery in book-entry form through the [●] on or about [●], 2022.]
You should not construe the contents of this Prospectus Supplement and the accompanying Prospectus as legal, tax or financial advice. You should consult with
your own professional advisors as to the legal, tax, financial or other matters relevant to the suitability of an investment in the Trust.
The
Trusts Common Shares do not represent a deposit or an obligation of, and are not guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.
The date of this Prospectus Supplement is [●], 2022.
R-3
You should rely only on the information contained or incorporated by reference in this Prospectus Supplement
and the accompanying Prospectus. The Trust has not authorized anyone to provide you with different information. The Trust is not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not
assume that the information contained in this Prospectus Supplement and the accompanying Prospectus is accurate as of any date other than the date of this Prospectus Supplement and the accompanying Prospectus, respectively. This Prospectus
Supplement will be amended to reflect material changes to the information contained herein and will be delivered to shareholders. Our business, financial condition, results of operations and prospects may have changed since those dates. In this
Prospectus Supplement and in the accompanying Prospectus, unless otherwise indicated, Trust, us, our and we refer to BlackRock Limited Duration Income Trust, a Delaware statutory trust.
TABLE OF CONTENTS
Prospectus Supplement
Prospectus
R-4
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus Supplement, the accompanying Prospectus and the SAI contain forward-looking statements. Forward-looking statements can be
identified by the words may, will, intend, expect, estimate, continue, plan, anticipate, and similar terms and the negative of such terms. Such
forward-looking statements may be contained in this Prospectus Supplement as well as in the accompanying Prospectus and in the SAI. By their nature, all forward-looking statements involve risks and uncertainties, and actual results could differ
materially from those contemplated by the forward-looking statements. Several factors that could materially affect our actual results are the performance of the portfolio of securities we hold, the price at which our shares will trade in the public
markets and other factors discussed in our periodic filings with the SEC.
Although we believe that the expectations expressed in our forward-looking
statements are reasonable, actual results could differ materially from those projected or assumed in our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to
change and are subject to inherent risks and uncertainties, such as those disclosed in the Risks section of the accompanying Prospectus and Special Characteristics and Risks of the Rights Offering in this Prospectus
Supplement. All forward-looking statements contained or incorporated by reference in this Prospectus Supplement or the accompanying Prospectus, or in the SAI, are made as of the date of this Prospectus Supplement or the accompanying Prospectus or
SAI, as the case may be. Except for our ongoing obligations under the federal securities laws, we do not intend, and we undertake no obligation, to update any forward-looking statement. The forward-looking statements contained in this Prospectus
Supplement, the accompanying Prospectus and the SAI are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended (the Securities Act).
Currently known risk factors that could cause actual results to differ materially from our expectations include, but are not limited to, the factors described
in the Risks section of the accompanying Prospectus as well as in the Special Characteristics and Risks of the Rights Offering section of this Prospectus Supplement. We urge you to review carefully those sections for a more
detailed discussion of the risks of an investment in the Common Shares.
SUMMARY OF THE TERMS OF THE
RIGHTS OFFERING
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Purpose of the Rights Offering |
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[To come.] |
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Terms of the Rights Offering |
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[●] transferable subscription right (a Right) will be issued for each common share of the Trust (each, a Common
Share, and collectively, the Common Shares) held on the Record Date (as defined below). Rights are expected to trade on the [●] under the symbol [●]. The Rights will allow Common Shareholders to subscribe
for new Common Shares of the Trust. [●] Common Shares of the Trust are outstanding as of [●], 2022. [●] Rights will be required to purchase one Common Share. Shares of the Trust, as a
closed-end fund, can trade at a discount to net asset value (NAV). Upon exercise of the Rights offering, Trust shares are expected to be issued at a price below NAV per Common Share. [An
over-subscription privilege will be offered, [subject to the right of the Board of Trustees of the Trust (the Board) to eliminate the over-subscription privilege.] [●] Common Shares of the Trust will be issued if all Rights are
exercised. See Terms of the Rights Offering. The Trust has declared
monthly distributions payable on [●], 2022 with a record date of [●], 2022. Any Common Shares issued as a result of the Rights offering will not be record date shares for the Trusts monthly distribution to be paid on [●],
2022 and will not be entitled to receive such distribution. The exercise of Rights
by a Rights holder is irrevocable. |
R-5
Title |
Subscription Rights to Acquire Common Shares of Beneficial Interest |
Subscription Price |
The final subscription price per Common Share (the Subscription Price) will be determined based upon a formula equal to [●]% of the average of the last reported sales price of the Trusts Common Shares on the New York
Stock Exchange (NYSE ) on the Expiration Date (as defined below) and each of the [●] preceding trading days (the Formula Price). If, however, the Formula Price is less than [●]% of the NAV per Common Share of the
Trusts Common Shares at the close of trading on the NYSE on the Expiration Date, then the Subscription Price will be [●]% of the Trusts NAV per Common Share at the close of trading on the NYSE on that day. See Terms of the
Rights Offering. |
Record Date |
Rights will be issued to Common Shareholders of record as of the close of business on [●], 2022 (the Record Date). See Terms of the Rights Offering. |
Number of Rights Issued |
[●] Right will be issued in respect of each Common Share of the Trust outstanding as of the close of business on the Record Date. See Terms of the Rights Offering. |
Number of Rights Required to Purchase One Common Share |
A holder of Rights may purchase [●] Common Share of the Trust for every [●] Rights exercised. The number of Rights to be issued to a shareholder as of the close of business on the Record Date will be rounded up to the nearest number
of Rights evenly divisible by [●]. See Terms of the Rights Offering. |
Over-Subscription Privilege |
Common Shareholders as of the close of business on the Record Date (Record Date Shareholders) who fully exercise all Rights initially issued to them (other than those Rights that cannot be exercised because they represent the right
to acquire less than one Common Share) generally are entitled, subject to the limitations described herein, to buy those Common Shares, referred to as primary over-subscription shares, that were not purchased by other Rights holders at
the same Subscription Price. If enough primary over-subscription shares are available, all such requests will be honored in full. If the requests for primary over-subscription shares exceed the primary over-subscription shares available, the
available primary over-subscription shares will be allocated pro rata among those fully exercising Record Date Shareholders who over-subscribe based on the number of Rights originally issued to them by the Trust. Common Shares acquired pursuant to
the primary over-subscription privilege are subject to allotment. Holders of Rights acquired in the secondary market may not participate in the primary over-subscription privilege. |
|
[In addition, the Trust, in its sole discretion, may determine to issue additional Common Shares at the same Subscription Price in an amount of up to
[●]% of the shares issued pursuant to the primary subscription, referred to as secondary over-subscription shares. Should the Trust determine to issue some or all of the secondary over-subscription shares, they will be allocated
only among Record Date Shareholders who submitted over-subscription requests. Secondary over-subscription shares will be allocated pro rata among those fully exercising Record Date Shareholders who over-subscribe based on the number of Rights
originally issued to them by the Trust. Rights acquired in the secondary |
R-6
|
market may not participate in the secondary over-subscription privilege.] |
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Notwithstanding the above, the Board has the right in its absolute discretion to eliminate the primary over-subscription privilege and/or secondary over-subscription privilege (together, the over-subscription
privilege) if it considers it to be in the best interest of the Trust to do so. The Board may make that determination at any time, without prior notice to Rights holders or others, up to and including the fifth day following the Expiration
Date (as defined below). See Over-Subscription Privilege. |
|
Any Common Shares issued pursuant to the over-subscription privilege will be shares registered under the Prospectus. |
Transfer of Rights |
The Rights will be transferable. See Terms of the Rights Offering, Sale of Rights and Method of Transferring Rights. |
Subscription Period |
The Rights may be exercised at any time after issuance and prior to expiration of the Rights (the Subscription Period), which will be [5:00 PM Eastern Time] on [●], 2022 (the Expiration Date), unless otherwise
extended. See Terms of the Rights Offering and Method of Exercise of Rights. The Rights offering may be terminated [or extended] by the Trust at any time for any reason before the Expiration Date. If the Trust terminates the
Rights offering, the Trust will issue a press release announcing such termination and will direct the Subscription Agent (defined below) to return, without interest, all subscription proceeds received to such shareholders who had elected to purchase
Common Shares. |
Distribution Arrangements |
[●] |
Offering Expenses |
The expenses of the Rights offering are expected to be approximately $[●] and will be borne by holders of the Trusts Common Shares. See Use of Proceeds. |
Sale of Rights |
The Rights are transferable until the completion of the Subscription Period and will be admitted for trading on the [●] under the symbol [●]. Although no assurance can be given that a market for the Rights will develop,
trading in the Rights on the [●] is expected to begin two Business Days prior to the Record Date and may be conducted until the close of trading on the last [●] trading day prior to the Expiration Date. For purposes of this Prospectus
Supplement, a Business Day shall mean any day on which trading is conducted on the [●]. |
|
The value of the Rights, if any, will be reflected by their market price on the [●]. Rights may be sold by individual holders through their broker or financial advisor or may be submitted to the Subscription Agent
(defined below) for sale. Any Rights submitted to the Subscription Agent for sale must be received by the Subscription Agent prior to [5:00 PM, Eastern Time], on or before [●], 2022, [●] Business Days prior to the Expiration Date (or, if
the Subscription Period is extended, prior to [5:00 PM, Eastern Time], on the [●] Business Day prior to the extended Expiration Date). |
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|
Rights that are sold will not confer any right to acquire any Common Shares in any over-subscription, and any Record Date Shareholder who sells any Rights will not be eligible to participate in the over-subscription
privilege, if any. |
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Trading of the Rights on the [●] will be conducted on a when-issued basis until and including the date on which the Subscription Certificates (as defined below) are mailed to Record Date Shareholders of record and thereafter will be
conducted on a regular-way basis until and including the last [●] trading day prior to the completion of the Subscription Period. The shares are expected to begin trading
ex-Rights one Business Day prior to the Record Date. |
|
If the Subscription Agent receives Rights for sale in a timely manner, the Subscription Agent will use its best efforts to sell the Rights on the [●]. The Subscription Agent will also attempt to sell any Rights attributable to shareholders
of record whose addresses are outside the United States, or who have an APO or FPO address. See Foreign Restrictions. The Subscription Agent will attempt to sell such Rights, including by first offering such Rights to the Dealer Manager
(defined below) for purchase by the Dealer Manager at the then-current market price on the [●]. The Subscription Agent will offer Rights to the Dealer Manager before attempting to sell them on the [●]. |
|
Any commissions will be paid by the selling Rights holders. Neither the Trust nor the Subscription Agent will be responsible if Rights cannot be sold and neither has guaranteed any minimum sales price for the Rights. If the Rights can be sold,
sales of these Rights will be deemed to have been effected at the weighted average price received by the Subscription Agent on the day such Rights are sold, less any applicable brokerage commissions, taxes and other expenses (i.e., costs
incidental to the sale of Rights). |
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For a discussion of actions that may be taken by [●] (the Dealer Manager) to seek to facilitate the trading market for Rights and the placement of Common Shares pursuant to the exercise of Rights, including the purchase of
Rights and the sale during the Subscription Period by the Dealer Manager of Common Shares acquired through the exercise of Rights and the terms on which such sales will be made, see Plan of Distribution. |
|
Shareholders are urged to obtain a recent trading price for the Rights on the [●] from their broker, bank, financial advisor or the financial press. |
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Banks, broker-dealers and trust companies that hold shares for the accounts of others are advised to notify those persons that purchase Rights in the secondary market that such Rights will not participate in any over-subscription privilege. See
Terms of the Rights Offering. |
Use of Proceeds |
The Trust estimates the net proceeds of the Rights offering to be approximately $[●]. This figure is based on the Subscription Price per Common Share of $[●] ([●]% of the last reported sales price of the Trusts Common
Shares on the NYSE on [●], 2022 and each of the [● (●)] preceding trading days) and assumes all new Common Shares |
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|
offered are sold and that the expenses related to the Rights offering estimated at approximately $[●] are paid. |
|
The Advisor anticipates that investment of the proceeds will be made in accordance with the Trusts investment objective and policies as appropriate investment opportunities are identified, which is expected to be
substantially completed in approximately [three] months; however, the identification of appropriate investment opportunities pursuant to the Trusts investment style or changes in market conditions may cause the investment period to extend as
long as [six] months. Pending such investment, the proceeds will be held in [short-term, tax-exempt or taxable investment grade securities or in high quality, short-term money market instruments].
|
|
Depending on market conditions and operations, a portion of the cash held by the Trust, including any proceeds raised from the offering, may be used to pay distributions in accordance with the Trusts distribution
policy and may be a return of capital. A return of capital is a return to investors of a portion of their original investment in the Trust. In general terms, a return of capital would involve a situation in which a Trust distribution (or a portion
thereof) represents a return of a portion of a shareholders investment in the Trust, rather than making a distribution that is funded from the Trusts earned income or other profits. Although return of capital distributions may not be
currently taxable, such distributions would decrease the basis of a shareholders shares, and therefore, may increase a shareholders tax liability for capital gains upon a sale of shares, even if sold at a loss to the shareholders
original investments. See Use of Proceeds. |
Taxation/ERISA |
See Taxation and Employee Benefit Plan and IRA Considerations. |
Subscription Agent |
[●]. See Subscription Agent. |
Information Agent |
[●]. See Information Agent. |
DESCRIPTION OF THE RIGHTS OFFERING
Terms of the Rights Offering
The Trust is
issuing to Record Date Shareholders Rights to subscribe for Common Shares of the Trust. Each Record Date Shareholder is being issued one transferable Right for each Common Share owned on the Record Date. The Rights entitle the holder to acquire, at
a subscription price per Common Share (the Subscription Price) determined based upon a formula equal to [●]% of the average of the last reported sales price of the Trusts Common Shares on the NYSE on the Expiration Date (as
defined below) and each of the [●] preceding trading days (the Formula Price), [●] new Common Shares for each [●] Rights held. If, however, the Formula Price is less than [●]% of the NAV per share of the
Trusts Common Shares at the close of trading on the NYSE on the Expiration Date, then the Subscription Price will be [●]% of the Trusts NAV per Common Share at the close of trading on the NYSE on that day.
The estimated Subscription Price to the public of $[●] is based upon [●]% of the last reported sales price of the Trusts Common Shares on
the NYSE on [●], 2022. Fractional shares will not be issued upon the exercise of the Rights. Accordingly, Common Shares may be purchased only pursuant to the exercise of Rights in integral multiples of [●]. The number of Rights to be
issued to a Record Date Shareholder will be rounded up to the nearest number of Rights evenly divisible by [●]. In the case of Common Shares held of record by Cede & Co. (Cede), as nominee
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for the Depository Trust Company (DTC)], or any other depository or nominee, the number of Rights issued to Cede or such other depository or nominee will be adjusted to permit
rounding up (to the nearest number of Rights evenly divisible by [●]) of the Rights to be received by beneficial owners for whom it is the holder of record only if [insert nominee name] or such other depository or nominee provides to the Trust
on or before the close of business on [●], 2022 written representation of the number of Rights required for such rounding. Rights may be exercised at any time during the period (the Subscription Period) which commences on
[●], 2022, and ends at [5:00 PM Eastern Time] on [●], 2022 (the Expiration Date), unless otherwise extended. Shares of the Trust, as a closed-end fund, can trade at a discount to NAV.
Upon exercise of the Rights offering, Trust shares may be issued at a price below NAV per Common Share. The right to acquire one Common Share for each [●] Rights held during the Subscription Period (or any extension of the Subscription Period)
at the Subscription Price will be referred to in the remainder of this Prospectus Supplement as the Rights offering. Rights will expire on the Expiration Date and thereafter may not be exercised.
The Trust has declared monthly distributions payable on [●], 2022 with a record date of [●], 2022. Any Common Shares issued as a result of
the Rights offering will not be Record Date shares for the Trusts monthly distribution to be paid on [●], 2022 and will not be entitled to receive such distribution.
The Trust has entered into a dealer manager agreement with [●] (the Dealer Manager) that allows the Dealer Manager to take actions to seek
to facilitate the trading market for Rights and the placement of Common Shares pursuant to the exercise of Rights. Those actions are expected to involve the Dealer Manager purchasing and exercising Rights during the Subscription Period at prices
determined at the time of such exercise, which are expected to vary from the Subscription Price. See Plan of Distribution for additional information.
Rights may be evidenced by subscription certificates or may be uncertificated and evidenced by other appropriate documentation (i.e., a rights card
distributed to registered shareholders in lieu of a subscription certificate) (Subscription Certificates). The number of Rights issued to each holder will be stated on the Subscription Certificate delivered to the holder. The method by
which Rights may be exercised and Common Shares paid for is set forth below in Method of Exercise of Rights, Payment for Shares and Plan of Distribution. A holder of Rights will have no right to rescind a purchase
after [●] (the Subscription Agent) has received payment. See Payment for Shares below. It is anticipated that the Common Shares issued pursuant to an exercise of Rights will be listed on the [●].
[Holders of Rights [who are Record Date Shareholders] are entitled to subscribe for additional Common Shares at the same Subscription Price pursuant to the
over-subscription privilege, subject to certain limitations, allotment and the right of the Board to eliminate the primary over-subscription privilege [or secondary] over-subscription privilege. See Over-Subscription Privilege below.]
For purposes of determining the maximum number of Common Shares that may be acquired pursuant to the Rights offering, broker-dealers, trust companies,
banks or others whose shares are held of record by Cede or by any other depository or nominee will be deemed to be the holders of the Rights that are held by Cede or such other depository or nominee on their behalf.
The Rights are transferable until the completion of the Subscription Period and will be admitted for trading on the [●] under the symbol
[●]. Assuming a market exists for the Rights, the Rights may be purchased and sold through usual brokerage channels and also sold through the Subscription Agent. Although no assurance can be given that a market for the Rights will
develop, trading in the Rights on the [●] is expected to begin two Business Days prior to the Record Date and may be conducted until the close of trading on the last [●] trading day prior to the Expiration Date. Trading of the Rights on
the [●] is expected to be conducted on a when-issued basis until and including the date on which the Subscription Certificates are mailed to Record Date Shareholders of record and thereafter is expected to be conducted on a regular way basis
until and including the last [●] trading day prior to the Expiration Date. The method by which Rights may be transferred is set forth below under Method of Transferring Rights. The Common Shares are expected to begin trading ex-Rights one Business Day prior to the Record Date as determined and announced by the [●]. The Rights offering may be terminated or extended by the Trust at any time for any reason before the Expiration Date.
If the Trust terminates the Rights offering, the Trust will issue a press release announcing such termination and will direct the Subscription Agent to return, without interest, all subscription proceeds received to such shareholders who had elected
to purchase Common Shares.
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Nominees who hold the Trusts Common Shares for the account of others, such as banks, broker-dealers,
trustees or depositories for securities, should notify the respective beneficial owners of such shares as soon as possible to ascertain such beneficial owners intentions and to obtain instructions with respect to the Rights. If the beneficial
owner so instructs, the nominee should complete the Subscription Certificate and submit it to the Subscription Agent with proper payment. In addition, beneficial owners of the Common Shares or Rights held through such a nominee should contact the
nominee and request the nominee to effect transactions in accordance with such beneficial owners instructions.
[Participants in the Trusts
Dividend Reinvestment Plan (the Plan) will be issued Rights in respect of the Common Shares held in their accounts in the Plan. Participants wishing to exercise these Rights must exercise the Rights in accordance with the procedures set
forth in Method of Exercise of Rights and Payment for Shares.]
Conditions of the Rights Offering
The Rights offering is being made in accordance with the Investment Company Act of 1940, as amended (the Investment Company Act), without
shareholder approval. The staff of the SEC has interpreted the Investment Company Act as not requiring shareholder approval of a transferable rights offering to purchase common shares at a price below the then current NAV so long as certain
conditions are met, including: (i) a good faith determination by a funds board that such offering would result in a net benefit to existing shareholders; (ii) the offering fully protects shareholders preemptive rights and does
not discriminate among shareholders (except for the possible effect of not offering fractional rights); (iii) management uses its best efforts to ensure an adequate trading market in the rights for use by shareholders who do not exercise such
rights; and (iv) the ratio of a transferable rights offering does not exceed one new share for each three rights held.
Important Dates to
Remember
[Please note that the dates in the table below may change if the Rights offering is extended.]
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Event |
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Date |
Record Date |
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[●], 2022 |
Subscription Period |
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[●], 2022 through [●], 2022 |
Final Date Rights Will Trade |
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Expiration Date* |
|
[●], 2022 |
Payment for Common Shares and Subscription Certificate or Notice of Guaranteed Delivery
Due* |
|
[●], 2022 |
Issuance Date |
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[●], 2022 |
Confirmation Date |
|
[●], 2022 |
* |
A shareholder exercising Rights must deliver to the Subscription Agent by [5:00 PM Eastern Time] on [●],
2022 (unless the Rights offering is extended) either (a) a Subscription Certificate and payment for Common Shares or (b) a notice of guaranteed delivery and payment for Common Shares. |
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Unless the Rights offering is extended. |
[Over-Subscription Privilege
Rights holders [who are
Record Date Shareholders and who fully exercise all Rights initially issued to them (other than those Rights that cannot be exercised because they represent the right to acquire less than one Common Share)] are entitled to subscribe for additional
Common Shares at the same Subscription Price pursuant to the over-subscription privilege, subject to certain limitations and subject to allotment. The Board has the right in its absolute discretion to eliminate the over-subscription privilege with
respect to primary over-subscription shares and secondary over-subscription shares if it considers it to be in the best interest of the Trust to do so. The Board may make that determination at any time, without prior notice to Rights holders or
others, up to and including the fifth day following the Expiration Date. If the primary over-subscription privilege is not eliminated, it will operate as set forth below.
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[Record Date Shareholders who fully exercise all Rights initially issued to them (other than those Rights that
cannot be exercised because they represent the right to acquire less than one Common Share)] are entitled to buy those Common Shares, referred to as primary over-subscription shares, that were not purchased by other holders of Rights at
the same Subscription Price. If enough primary over-subscription shares are available, all such requests will be honored in full. If the requests for primary over-subscription shares exceed the primary over-subscription shares available, the
available primary over-subscription shares will be allocated pro rata among those fully exercising [Record Date Shareholders] who over-subscribe based on the number of Rights originally issued to them by the Trust. Common Shares acquired
pursuant to the over-subscription privilege are subject to allotment.
[In addition, the Trust, in its sole discretion, may determine to issue
additional Common Shares at the same Subscription Price in an amount of up to [ ]% of the shares issued pursuant to the primary subscription, referred to as secondary over-subscription shares. Should the Trust determine to issue some or
all of the secondary over-subscription shares, they will be allocated only among Record Date Shareholders who submitted over-subscription requests. Secondary over-subscription shares will be allocated pro rata among those fully exercising Record
Date Shareholders who over-subscribe based on the number of Rights originally issued to them by the Trust. Holders of Rights acquired in the secondary market may not participate in the over-subscription privilege. In the event
that the Subscription Price is lower than the Trusts NAV per share, any secondary over-subscription shares issued by the Trust will not result in the ratio of the Rights offering exceeding one new share for each three Rights.]
Record Date Shareholders who are fully exercising their Rights during the Subscription Period should indicate, on the Subscription Certificate that they
submit with respect to the exercise of the Rights issued to them, how many Common Shares they are willing to acquire pursuant to the over-subscription privilege.
To the extent sufficient Common Shares are not available to fulfill all over-subscription requests, unsubscribed Common Shares (the Excess Shares)
will be allocated pro rata among those Record Date Shareholders who over-subscribe based on the number of Rights issued to them by the Trust. The allocation process may involve a series of allocations in order to assure that the total number of
Common Shares available for over-subscriptions is distributed on a pro rata basis.
The formula to be used in allocating the Excess Shares is as follows:
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Shareholders Record Date Position
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X |
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|
Excess Shares Remaining |
Total Record Date Position of All Over-Subscribers |
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Banks, broker-dealers, trustees and other nominee holders of Rights will be required to certify to the Subscription Agent,
before any over-subscription privilege may be exercised with respect to any particular beneficial owner, as to the aggregate number of Rights exercised during the Subscription Period and the number of Common Shares subscribed for pursuant to the
over-subscription privilege by such beneficial owner and that such beneficial owners subscription was exercised in full. Nominee holder over-subscription forms and beneficial owner certification forms will be distributed to banks,
broker-dealers, trustees and other nominee holders of Rights with the Subscription Certificates. [Nominees should also notify holders purchasing Rights in the secondary market that such Rights may not participate in the over-subscription privilege.]
The Trust will not otherwise offer or sell any Common Shares that are not subscribed for pursuant to the primary subscription, the primary
over-subscription privilege or the secondary over-subscription privilege pursuant to the Rights offering.]
[Dealer Manager
[●] (previously defined as the Dealer Manager), a registered broker-dealer, may also act on behalf of its clients to purchase or sell Rights
in the open market and may receive commissions from its clients for such services. Holders of Rights attempting to sell any unexercised Rights in the open market through a broker-dealer other than the Dealer Manager may be charged a different
commission and should consider the commissions and fees charged by the broker-dealer prior to selling their Rights on the open market. The Dealer Manager is not expected to purchase
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Rights as principal for its own account in order to seek to facilitate the trading market for Rights or otherwise. See Plan of Distribution for additional information.]
Sale of Rights
The Rights are transferable and will be
admitted for trading on the [●] under the symbol [●]. Although no assurance can be given that a market for the Rights will develop, trading in the Rights on the [●] is expected to begin two Business Days prior to the
Record Date and may be conducted until the close of trading on the last [●] trading day prior to the Expiration Date.
The value of the Rights, if
any, will be reflected by the market price. Rights may be sold by individual holders through their broker or other financial intermediary. Holders of Rights attempting to sell any unexercised Rights in the open market through their broker or
financial advisor may be charged a commission or incur other transaction expenses and should consider the commissions and fees charged prior to selling their Rights on the open market.
[Rights that are sold will not confer any right to acquire any Common Shares in any primary over-subscription privilege or secondary over-subscription
privilege, if any, and any Record Date Shareholder who sells any Rights will not be eligible to participate in the primary over-subscription privilege or secondary over-subscription privilege, if any.]
Trading of the Rights on the [●] will be conducted on a when-issued basis until and including the date on which the Subscription Certificates are mailed
to Record Date Shareholders of record and thereafter will be conducted on a regular-way basis until and including the last [●] trading day prior to the Expiration Date. The Common Shares are expected to
begin trading ex-Rights one Business Day prior to the Record Date.
Shareholders are urged to obtain a recent
trading price for the Rights on the [●] from their broker, bank, financial advisor or the financial press.
Holders of Rights who are unable or do
not wish to exercise any or all of their Rights may contact the Subscription Agent to facilitate the sale of any unexercised Rights. The Subscription Agent will contact the Dealer Manager or other brokers in order to assist Rights holders whose
Rights are not currently held at a broker-dealer or other applicable financial intermediary to facilitate the sale of the Rights. Shareholders of record whose addresses are outside the United States, or who have an APO or FPO address, are encouraged
to contact the Subscription Agent to facilitate the sale of their Rights if they are otherwise unable or unwilling to exercise the Rights. The selling Rights holder will pay all applicable brokerage commissions incurred. There can be no assurance
that the Subscription Agent will be able to facilitate the sale of any of Rights and neither the Trust nor the Subscription Agent has guaranteed any minimum sales price for the Rights.
Method of Transferring Rights
The Rights evidenced by a
single Subscription Certificate may be transferred in whole by endorsing the Subscription Certificate for transfer in accordance with the accompanying instructions. A portion of the Rights evidenced by a single Subscription Certificate (but not
fractional Rights) may be transferred by delivering to the Subscription Agent a Subscription Certificate properly endorsed for transfer, with instructions to register the portion of the Rights evidenced thereby in the name of the transferee (and to
issue a new Subscription Certificate to the transferee evidencing the transferred Rights). In this event, a new Subscription Certificate evidencing the balance of the Rights will be issued to the Rights holder or, if the Rights holder so instructs,
to an additional transferee.
Holders wishing to transfer all or a portion of their Rights (but not fractional Rights) should promptly transfer such
Rights to ensure that: (i) the transfer instructions will be received and processed by the Subscription Agent, (ii) a new Subscription Certificate will be issued and transmitted to the transferee or transferees with respect to transferred
Rights, and to the holder with respect to retained Rights, if any, and (iii) the Rights evidenced by the new Subscription Certificates may be exercised or sold by the recipients thereof prior to the Expiration Date. Neither the Trust nor the
Subscription Agent shall have any liability to a transferee or holder of Rights if Subscription Certificates are not received in time for exercise or sale prior to the Expiration Date.
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Except for the fees charged by the Subscription Agent (which will be paid by the Trust as described below), all
commissions, fees and other expenses (including brokerage commissions and transfer taxes) incurred in connection with the purchase, sale, transfer or exercise of Rights will be for the account of the holder of the Rights, and none of these
commissions, fees or expenses will be borne by the Trust or the Subscription Agent.
The Trust anticipates that the Rights will be eligible for transfer
through, and that the exercise of the Rights may be effected through, the facilities of [insert depository] (Rights exercised through [insert depository] are referred to as [insert depository] Exercised Rights).
Subscription Agent
The Subscription Agent is [●].
The Subscription Agent will receive from the Trust an amount estimated to be $[●], comprised of the fee for its services and the reimbursement for certain expenses related to the Rights offering. The shareholders of the Trust will indirectly
pay such amount.
Information Agent
INQUIRIES BY
ALL HOLDERS OF RIGHTS SHOULD BE DIRECTED TO: THE INFORMATION AGENT, [●]; HOLDERS PLEASE CALL TOLL-FREE AT [●]; BANKS AND BROKERS PLEASE CALL [●].
Method of Exercise of Rights
Rights may be exercised by
completing and signing the Subscription Certificate and delivering the completed and signed Subscription Certificate to the Subscription Agent, together with payment for the Common Shares as described below under Payment for Shares.
Rights may also be exercised through the broker of a holder of Rights, who may charge the holder of Rights a servicing fee in connection with such exercise. See Plan of Distribution for additional information regarding the purchase and
exercise of Rights by the Dealer Manager.
Completed Subscription Certificates and payment must be received by the Subscription Agent prior to [5:00 PM
Eastern Time], on the Expiration Date (unless payment is effected by means of a notice of guaranteed delivery as described below under Payment for Shares). Your broker, bank, trust company or other intermediary may impose a deadline for
exercising Rights earlier than [5:00 PM, Eastern Time], on the Expiration Date. The Subscription Certificate and payment should be delivered to the Subscription Agent at the following address:
If By Mail:
BlackRock Limited Duration Income Trust
[●]
If By Overnight Courier:
BlackRock Limited Duration Income Trust
[●]
Payment for Shares
Holders of Rights who acquire Common
Shares in the Rights offering may choose between the following methods of payment:
|
(1) |
A holder of Rights can send the Subscription Certificate, together with payment in the form of a check (which
must include the name of the shareholder on the check) for the Common Shares subscribed for in the Rights offering and, if eligible, for any additional Common Shares subscribed for pursuant to the over-subscription privilege, to the Subscription
Agent based on the Subscription Price. To be accepted, |
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|
the payment, together with the executed Subscription Certificate, must be received by the Subscription Agent at one of the addresses noted above prior to [5:00 PM Eastern Time] on the Expiration
Date. The Subscription Agent will deposit all share purchase checks received by it prior to the final due date into a segregated account pending proration and distribution of Common Shares. The Subscription Agent will not accept cash as a means of
payment for Common Shares. |
|
(2) |
Alternatively, a subscription will be accepted by the Subscription Agent if, prior to [5:00 PM Eastern Time] on
the Expiration Date, the Subscription Agent has received a written notice of guaranteed delivery by mail or email from a bank, trust company, or a NYSE member, guaranteeing delivery of a properly completed and executed Subscription Certificate. In
order for the notice of guarantee to be valid, full payment for the Common Shares at the Subscription Price must be received with the notice. The Subscription Agent will not honor a notice of guaranteed delivery unless a properly completed and
executed Subscription Certificate is received by the Subscription Agent by the close of business on the [second] Business Day after the Expiration Date. The notice of guaranteed delivery must be emailed to the Subscription Agent at [●] or
delivered to the Subscription Agent at one of the addresses noted above. |
A PAYMENT PURSUANT TO THIS METHOD MUST BE IN UNITED STATES
DOLLARS BY CHECK (WHICH MUST INCLUDE THE NAME OF THE SHAREHOLDER ON THE CHECK) DRAWN ON A BANK LOCATED IN THE CONTINENTAL UNITED STATES, MUST BE PAYABLE TO BLACKROCK LIMITED DURATION INCOME TRUST AND MUST ACCOMPANY AN EXECUTED SUBSCRIPTION
CERTIFICATE TO BE ACCEPTED.
The method and timing of payment for Common Shares acquired by the Dealer Manager through the exercise of Rights is described
under Plan of Distribution.
If a holder of Rights who acquires Common Shares pursuant to the subscription makes payment of an
insufficient amount, the Trust reserves the right to take any or all of the following actions: (i) reallocate such subscribed and unpaid-for Common Shares to Record Date Shareholders exercising the
over-subscription privilege who did not receive the full over-subscription requested; (ii) apply any payment actually received by it toward the purchase of the greatest whole number of Common Shares which could be acquired by such holder upon
exercise of the Rights or any over-subscription privilege; and (iii) exercise any and all other rights or remedies to which it may be entitled, including, without limitation, the right to set off against payments actually received by it with
respect to such subscribed Common Shares (in other words, retain such payments) and to enforce the exercising Rights holders relevant payment obligation.
Any payment required from a holder of Rights must be received by the Subscription Agent prior to [5:00 PM Eastern Time] on the Expiration Date. Issuance and
delivery of the Common Shares purchased are subject to collection of checks.
Within [●] Business Days following the Expiration Date (the
Confirmation Date), a confirmation will be sent by the Subscription Agent to each holder of Rights (or, if the Common Shares are held by [insert nominee name] or any other depository or nominee, to [insert nominee name] or such other
depository or nominee), showing (i) the number of Common Shares acquired pursuant to the subscription, (ii) the number of Common Shares, if any, acquired pursuant to the over-subscription privilege, and (iii) the per share and total
purchase price for the Common Shares. Any payment required from a holder of Rights must be received by the Subscription Agent on or prior to the Expiration Date. Any excess payment to be refunded by the Trust to a holder of Rights, or to be paid to
a holder of Rights as a result of sales of Rights on its behalf by the Subscription Agent, will be mailed by the Subscription Agent to the holder within [●] Business Days after the Expiration Date.
A holder of Rights will have no right to rescind a purchase after the Subscription Agent has received payment either by means of a notice of guaranteed
delivery or a check, which must include the name of the shareholder on the check.
Upon acceptance of a subscription, all funds received by the
Subscription Agent shall be held by the Subscription Agent as agent for the Trust and deposited in one or more bank accounts. Such funds may be invested by the Subscription Agent in: bank accounts, short-term certificates of deposit, bank repurchase
agreements, and
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disbursement accounts with commercial banks meeting certain standards. The Subscription Agent may receive interest, dividends or other earnings in connection with such deposits or investments.
Holders, such as broker-dealers, trustees or depositories for securities, who hold Common Shares for the account of others, should notify the respective
beneficial owners of the Common Shares as soon as possible to ascertain such beneficial owners intentions and to obtain instructions with respect to the Rights. If the beneficial owner so instructs, the record holder of the Rights should
complete Subscription Certificates and submit them to the Subscription Agent with the proper payment. In addition, beneficial owners of Common Shares or Rights held through such a holder should contact the holder and request that the holder effect
transactions in accordance with the beneficial owners instructions. [Banks, broker-dealers, trustees and other nominee holders that hold Common Shares of the Trust for the accounts of others are advised to notify those persons that purchase
Rights in the secondary market that such Rights may not participate in any over-subscription privilege offered.]
THE INSTRUCTIONS ACCOMPANYING THE
SUBSCRIPTION CERTIFICATES SHOULD BE READ CAREFULLY AND FOLLOWED IN DETAIL. DO NOT SEND SUBSCRIPTION CERTIFICATES TO THE TRUST.
THE METHOD OF DELIVERY OF
SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT WILL BE AT THE ELECTION AND RISK OF THE RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT THE CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL,
PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO [5:00 PM EASTERN TIME], ON THE EXPIRATION DATE BECAUSE UNCERTIFIED
PERSONAL CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR.
All questions concerning the timeliness, validity, form and eligibility of any exercise of
Rights will be determined by the Trust, whose determinations will be final and binding. The Trust in its sole discretion may waive any defect or irregularity, or permit a defect or irregularity to be corrected within such time as it may determine,
or reject the purported exercise of any Right. Subscriptions will not be deemed to have been received or accepted until all irregularities have been waived or cured within such time as the Trust determines in its sole discretion. Neither the Trust
nor the Subscription Agent will be under any duty to give notification of any defect or irregularity in connection with the submission of Subscription Certificates or incur any liability for failure to give such notification.
Foreign Restrictions
Offering documents, including
Subscription Certificates, will not be mailed to Record Date Shareholders whose addresses are outside the United States (for these purposes, the United States includes the District of Columbia and the territories and possessions of the United
States) or who have an APO or FPO address (the Foreign Shareholders) if such mailing cannot be made into the non-U.S. jurisdiction without additional registration and incurring other expense that
the Board has determined is not in the best interest of the Trust and its shareholders. In such cases, unless determined to be not in the best interest of the Trust and its shareholders in accordance with the previous sentence, the Subscription
Agent will send a letter via regular mail to Foreign Shareholders who own Common Shares directly (Direct Foreign Shareholders), as opposed to in street name with a broker or other financial intermediary, to notify them of the
Rights offering. Direct Foreign Shareholders who wish to exercise their Rights should contact the Information Agent, as described above under Information Agent, to facilitate the exercise of such Rights and for instructions or any other
special requirements that may apply in order for such Direct Foreign Shareholder to exercise its Rights. Direct Foreign Shareholders who wish to sell their Rights should contact the Subscription Agent and follow the procedures described above under
Sale of Rights. Direct Foreign Shareholders are encouraged to contact the Trust or the Subscription Agent as far in advance of the Expiration Date as possible to ensure adequate time for their Rights to be exercised or sold. Foreign
Shareholders who own Common Shares in street name through a broker or other financial intermediary should contact such broker or other financial intermediary with respect to any exercise or sale of Rights.
R-16
Employee Benefit Plan and IRA Considerations
[Holders of Rights that are employee benefit plans subject to limitations imposed by the Internal Revenue Code of 1986, as amended (the Code),
such as employee plans subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA), Keogh Plans and Individual Retirement Accounts (IRA) (each a Benefit Plan and collectively, Benefit
Plans), should be aware that the use of additional contributions of cash outside of the Benefit Plan to exercise Rights may be treated as additional contributions to the Benefit Plan. When taken together with contributions previously made,
such deemed additional contributions may be in excess of tax limitations and subject the Rights holder to excise taxes for excess or nondeductible contributions. In the case of Benefit Plans qualified under Section 401(a) of the Code,
additional contributions could cause the maximum contribution limitations of Section 415 of the Code or other qualification rules to be violated. Benefit Plans contemplating making additional contributions to exercise Rights should consult with
their legal and tax counsel prior to making such contributions.
Benefit Plans and other tax exempt entities, including governmental plans, should also be
aware that if they borrow to finance their exercise of Rights, they may become subject to the tax on unrelated business taxable income (UBTI) under Section 511 of the Code. If any portion of an IRA is used as security for a loan,
the portion so used may also be treated as distributed to the IRA depositor.
A Benefit Plan may also be subject to laws, such as ERISA, that impose
certain requirements on the Benefit Plan and on those persons who are fiduciaries with respect to the Benefit Plans. Such requirements may include prudence and diversification requirements and require that investments be made in accordance with the
documents governing the fiduciary. The exercise of Rights by a fiduciary for a Benefit Plan should be considered in light of such fiduciary requirements.
In addition, ERISA and the Code prohibit certain transactions involving the assets of a Benefit Plan and certain persons (referred to as parties in
interest for purposes of ERISA and disqualified persons for purposes of the Code) having certain relationships to such Benefit Plans, unless a statutory or administrative exemption is applicable to the transaction. A party in
interest or disqualified person who engages in a nonexempt prohibited transaction may be subject to excise taxes and other penalties and liabilities under ERISA and the Code (or with respect to certain Benefit Plans, such as IRAs, a prohibited
transaction may cause the Benefit Plan to lose its tax-exempt status). In this regard, the U.S. Department of Labor has issued prohibited transaction class exemptions (PTCEs) that may apply to the
exercise of the Rights and holding of the Common Shares. These class exemptions include, without limitation, PTCE 84-14 respecting transactions determined by independent qualified professional asset managers,
PTCE 90-1 respecting insurance company pooled separate accounts, PTCE 91-38 respecting bank collective investment funds, PTCE
95-60 respecting life insurance company general accounts and PTCE 96-23 respecting transactions determined by in-house asset
managers, PTCE 84-24 governing purchases of shares in investment companies) and PTCE 75-1 respecting sales of securities. In addition, Section 408(b)(17) of ERISA
and Section 4975(d)(20) of the Code each provides a limited exemption, commonly referred to as the service provider exemption, from the prohibited transaction provisions of ERISA and Section 4975 of the Code for certain
transactions between a Benefit Plan and a person that is a party in interest and/or a disqualified person (other than a fiduciary or an affiliate that, directly or indirectly, has or exercises any discretionary authority or control or renders any
investment advice with respect to the assets of any Benefit Plan involved in the transaction) solely by reason of providing services to the Benefit Plan or by relationship to a service provider, provided that the Benefit Plan receives no less, nor
pays no more, than adequate consideration. There can be no assurance that all of the conditions of any such exemptions or any other exemption will be satisfied at the time that the Rights are exercised, or thereafter while the Common Shares are
held, if the facts relied upon for utilizing a prohibited transaction exemption change.
Due to the complexity of these rules and the penalties for
noncompliance, fiduciaries of Benefit Plans should consult with their legal and tax counsel regarding the consequences of their exercise of Rights under ERISA, the Code and other similar laws.]
R-17
SUMMARY OF TRUST EXPENSES
The following table and example are intended to assist you in understanding the various costs and expenses directly or indirectly associated with investing in
our Common Shares as a percentage of net assets attributable to Common Shares. Amounts are for the current fiscal year after giving effect to anticipated net proceeds of the Rights offering..
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Shareholder Transaction Expenses |
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Sales load paid by you (as a percentage of offering price)(1) |
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[●]% |
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Offering expenses borne by the Trust (as a percentage of offering price)(1) |
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[●]% |
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Dividend reinvestment plan fees |
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$[●] per share for open-market purchases of common shares(2) |
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Dividend reinvestment plan sale transaction fee |
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$ |
2.50(2) |
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Estimated Annual Expenses (as a percentage of net assets attributable to common
shares) |
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Management fees(3) (4) |
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[●]% |
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Other Expenses(5) |
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[●]% |
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Miscellaneous Other Expenses |
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[●]% |
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Interest Expense(6) |
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[●]% |
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Total Annual Trust Operating Expenses |
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[●]% |
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Fee Waivers and/or Expense
Reimbursements(4) |
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Total Annual Trust Operating Expenses after Fee Waivers and/or Expense Reimbursements(4)(6) |
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[●]% |
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(1) |
Trust shareholders will pay all offering expenses involved with this offering. |
(2) |
Computershare Trust Company, N.A.s (in such capacity, the Reinvestment Plan Agent) fees for
the handling of the reinvestment of dividends will be paid by the Trust. However, you will pay a $0.02 per share fee incurred in connection with open-market purchases, which will be deducted from the value of the dividend. You will also be charged a
$2.50 sales fee and pay a $0.15 per share fee if you direct the Reinvestment Plan Agent to sell your Common Shares held in a dividend reinvestment account. Per share fees include any applicable brokerage commissions the Reinvestment Plan Agent is
required to pay. |
(3) |
The Trust currently pays the Advisor a monthly fee at an annual contractual investment management fee rate of
0.55% of the average weekly value of the Trusts Managed Assets, plus the proceeds of ay debt securities or outstanding borrowings used for leverage. Managed Assets means the total assets of the Trust (including any assets
attributable to money borrowed for investment purposes) minus the sum of the Trusts accrued liabilities (other than money borrowed for investment purposes). |
(4) |
The Trust and the Advisor have entered into a fee waiver agreement (the Fee Waiver Agreement),
pursuant to which the Advisor has contractually agreed to waive the management fee with respect to any portion of the Trusts assets attributable to investments in any equity and fixed-income mutual funds and exchange-traded funds managed by
the Advisor or its affiliates that have a contractual management fee, through June 30, 2023. In addition, pursuant to the Fee Waiver Agreement, the Advisor has contractually agreed to waive its management fees by the amount of investment
advisory fees the Trust pays to the Advisor indirectly through its investment in money market funds managed by the Advisor or its affiliates, through June 30, 2023. The Fee Waiver Agreement may be terminated at any time, without the payment of
any penalty, only by the Trust (upon the vote of a majority of the Trustees who are not interested persons (as defined in the Investment Company Act) of the Trust) or a majority of the outstanding voting securities of the Trust), upon 90
days written notice by the Trust to the Advisor. |
(5) |
Other expenses are estimated assuming net proceeds of the Rights offering to be approximately $[●], based
on the estimated Subscription Price per Common Share of $[●] ([●]% of the average of the last reported sales price of the Trusts Common Shares on the NYSE on [●], 2022 and each of the [● (●)] preceding trading
days), assuming all new Common Shares offered are sold and that the expenses related to the Rights offering estimated at approximately $[●] are paid. |
(6) |
Assumes the use of leverage in the form of reverse repurchase agreements representing [●]% of Managed
Assets at an annual interest expense to the Trust of [●]%, which is based on current market conditions. The actual amount of interest expense borne by the Trust will vary over time in accordance with the level of the Trusts use of
reverse repurchase agreements and variations in market interest rates. Interest expense is required to be treated as an expense of the Trust for accounting purposes. |
The purpose of the table above and the examples below is to help you understand all fees and expenses that you, as a holder of Common Shares, would bear
directly or indirectly.
R-18
Example
The
following example illustrates the expenses (including the sales load of $[●] and offering costs of $[●]) that you would pay on a $1,000 investment in common shares, assuming (i) total net annual expenses of [●]% of net assets
attributable to common shares, and (ii) a 5% annual return:
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1 Year |
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3 Years |
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5 Years |
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10 Years |
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Total expenses incurred* |
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$ |
[●] |
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$ |
[●] |
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$ |
[●] |
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$ |
[●] |
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* |
The example should not be considered a representation of future expenses. The example assumes that the
estimated Other expenses set forth in the Estimated Annual Expenses table are accurate and that all dividends and distributions are reinvested at NAV. Actual expenses may be greater or less than those assumed. Moreover, the Trusts
actual rate of return may be greater or less than the hypothetical 5% return shown in the example. |
USE OF PROCEEDS
The Trust estimates the net proceeds of the Rights offering to be approximately $[●], based on the estimated Subscription
Price per Common Share of $[●] ([●]% of the last reported sales price of the Trusts Common Shares on the NYSE on [●], 2022 and each of the [● (●)] preceding trading days), assuming all new Common Shares
offered are sold and that the expenses related to the Rights offering estimated at approximately $[●] are paid.
The net proceeds from the Rights
offering hereunder will be invested in accordance with the Trusts investment objective and policies as set forth in this Prospectus Supplement and the accompanying Prospectus. We currently anticipate that we will be able to invest all of the
net proceeds in accordance with our investment objective and policies within approximately three months of the receipt of such proceeds. Pending such investment, it is anticipated that the proceeds will be invested in short-term, tax-exempt or taxable investment grade securities. Depending on market conditions and operations, a portion of the cash held by the Trust, including any proceeds raised from the offering, may be used to pay
distributions in accordance with the Trusts distribution policy and may be a return of capital. A return of capital is a return to investors of a portion of their original investment in the Trust. In general terms, a return of capital would
involve a situation in which a Trust distribution (or a portion thereof) represents a return of a portion of a shareholders investment in the Trust, rather than making a distribution that is funded from the Trusts earned income or other
profits. Although return of capital distributions may not be currently taxable, such distributions would decrease the basis of a shareholders shares, and therefore, may increase a shareholders tax liability for capital gains upon a sale
of shares, even if sold at a loss to the shareholders original investments.
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Trust as of [●], 2022 and its adjusted capitalization assuming the Common
Shares available in the Rights offering discussed in this Prospectus Supplement had been issued.
[To be provided.]
SPECIAL CHARACTERISTICS AND RISKS OF THE RIGHTS OFFERING
Risk is inherent in all investing. Therefore, before investing in the Common Shares you should consider the risks associated with such an investment
carefully. See Risks in the Prospectus. The following summarizes some of the matters that you should consider before investing in the Trust through the Rights offering:
Dilution. Record Date Shareholders who do not fully exercise their Rights will, at the completion of the Rights offering, own a smaller proportional
interest in the Trust than owned prior to the Rights offering. The completion of the Rights offering will result in immediate voting dilution for such shareholders. [Further, both the sales load and the expenses associated with the Rights offering
will immediately reduce the NAV of each outstanding Common Share.] In addition, if the Subscription Price is less than the NAV per Common Share as of the Expiration Date, the
R-19
completion of this Rights offering will result in an immediate dilution of the NAV per Common Share for all existing Common Shareholders (i.e., will cause the NAV per Common Share to
decrease). As a result, existing Common Shareholders may experience immediate dilution even if they fully exercise their Rights. Such dilution, if any, is not currently determinable because it is not known how many Common Shares will be subscribed
for, what the NAV per Common Share or market price of the Common Shares will be on the Expiration Date or what the Subscription Price per Common Share will be. If the Subscription Price is substantially less than the current NAV per Common Share,
this dilution could be substantial. The Trust will pay expenses associated with the Rights offering, estimated at approximately $[●]. In addition, the Trust has agreed to pay a dealer manager fee (sales load) equal to [●]% of the
Subscription Price per Common Share issued pursuant to the exercise of Rights (including pursuant to the Over-Subscription Privilege). The Trust, not investors, pays the sales load, which is ultimately borne by all Common Shareholders. All of the
costs of the Rights offering will be borne by the Trusts Common Shareholders. See Table of Fees and Expenses in this Prospectus Supplement and Summary of Trust Expenses in the accompanying Prospectus for more
information.
You will experience an immediate dilution of the aggregate NAV per Common Share if you do not participate in the Rights offering and will
experience a reduction in the NAV per Common Share whether or not you exercise your Rights, if the Subscription Price is below the Trusts NAV per Common Share on the Expiration Date, because:
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the offered Common Shares are being sold at less than their current NAV; |
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you will indirectly bear the expenses of the Rights offering; and |
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the number of Common Shares outstanding after the Rights offering will have increased proportionately more than
the increase in the amount of the Trusts net assets. |
On the other hand, if the Subscription Price is above the Trusts NAV
per Common Share on the Expiration Date, you may experience an immediate accretion of the aggregate NAV per share of your Common Shares even if you do not exercise your Rights and an immediate increase in the NAV per Common Share whether or not you
participate in the Rights offering, because:
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the offered Common Shares are being sold at more than their current NAV after deducting the expenses of the
Rights offering; and |
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the number of Common Shares outstanding after the Rights offering will have increased proportionately less than
the increase in the amount of the Trusts net assets. |
[Furthermore, if you do not participate in the secondary over-subscription,
if it is available, your percentage ownership will also be diluted.] The Trust cannot state precisely the amount of any dilution because it is not known at this time what the NAV per Common Share will be on the Expiration Date or what proportion of
the Rights will be exercised or what the Subscription Price per Common Share will be. The impact of the Rights offering on NAV per Common Share is shown by the following examples, assuming the Rights offering is fully subscribed and the estimated
Subscription Price of $[●]:
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[Scenario 1: (assumes NAV per share is above Subscription Price)(1) |
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NAV(2) |
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[●] |
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Subscription Price(3) |
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[●] |
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Reduction in NAV ($)(4) |
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[●] |
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Reduction in NAV (%) |
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[●]] |
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[Scenario 2: (assumes NAV per share is below Subscription
Price)(1) |
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NAV(2) |
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[●] |
Subscription Price(3) |
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[●] |
Increase in NAV ($)(4) |
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[●] |
R-20
(1) |
Both examples assume the full primary subscription [and secondary over-subscription privilege] are exercised.
Actual amounts may vary due to rounding. |
(2) |
For illustrative purposes only. It is not known at this time what the NAV per Common Share will be on the
Expiration Date. |
(3) |
For illustrative purposes only; reflects an estimated Subscription Price of $[●] based upon [●]% of
the last reported sales price of the Trusts Common Shares on the NYSE on [●], 2022 and each of the [● (●)] preceding trading days. It is not known at this time what the Subscription Price will be on the Expiration Date.
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(4) |
Assumes $[●] in estimated offering expenses. |
If you do not wish to exercise your Rights, you should consider selling them as set forth in this Prospectus Supplement. Any cash you receive from selling
your Rights may serve as partial compensation for any possible dilution of your interest in the Trust. The Trust cannot give assurance, however, that a market for the Rights will develop or that the Rights will have any marketable value.
[The Trusts largest shareholders could increase their percentage ownership in the Trust through the exercise of the primary subscription and
over-subscription privilege.]
Risks of Investing in Rights. Shares of closed-end funds such as the Trust
frequently trade at a discount to NAV. The Subscription Price may be greater than the market price of a Common Share on the Expiration Date. If that is the case, the Rights will have no value, and a person who exercises Rights will experience an
immediate loss of value.
Leverage. Leverage creates a greater risk of loss, as well as a potential for more gain, for the Common Shares than if
leverage were not used. Following the completion of the Rights offering, the Trusts amount of leverage outstanding will decrease. The leverage of the Trust as of [●], 2022 was approximately [●]% of the Trusts Managed Assets.
After the completion of the Rights offering, the amount of leverage outstanding is expected to decrease to approximately [●]% of the Trusts Managed Assets. The use of leverage for investment purposes creates opportunities for greater
total returns but at the same time increases risk. When leverage is employed, the NAV and market price of the Common Shares and the yield to holders of Common Shares may be more volatile. Any investment income or gains earned with respect to the
amounts borrowed in excess of the interest due on the borrowing will augment the Trusts income. Conversely, if the investment performance with respect to the amounts borrowed fails to cover the interest on such borrowings, the value of the
Trusts Common Shares may decrease more quickly than would otherwise be the case, and distributions on the Common Shares could be reduced or eliminated. Interest payments and fees incurred in connection with such borrowings will reduce the
amount of net income available for distribution to holders of the Common Shares.
Because the fee paid to the Advisor is calculated on the basis of the
Trusts Managed Assets, which include the proceeds of leverage, the dollar amount of the management fee paid by the Trust to the Advisor will be higher (and the Advisor will be benefited to that extent) when leverage is used. The Advisor will
use leverage only if it believes such action would result in a net benefit to the Trusts shareholders after taking into account the higher fees and expenses associated with leverage (including higher management fees).
The Trusts leveraging strategy may not be successful.
Increase in Share Price Volatility; Decrease in Share Price. The Rights offering may result in an increase in trading of the Common Shares, which may
increase volatility in the market price of the Common Shares. The Rights offering may result in an increase in the number of shareholders wishing to sell their Common Shares, which would exert downward price pressure on the price of Common Shares.
Under-Subscription. It is possible that the Rights offering will not be fully subscribed. Under-subscription of the Rights offering would have an
impact on the net proceeds of the Rights offering and whether the Trust achieves any benefits.
R-21
TAXATION
The following is a general summary of the U.S. federal income tax consequences of the Rights offering to Record Date Shareholders who are U.S. persons for
U.S. federal income tax purposes. The following summary supplements the discussion set forth in the accompanying Prospectus and SAI and is subject to the qualifications and assumptions set forth therein. The discussion set forth herein does not
constitute tax advice and potential investors are urged to consult their own tax advisers to determine the tax consequences of investing in the Trust.
Please refer to the Tax Matters sections in the Trusts Prospectus and SAI for a description of the consequences of investing in the
Trusts Common Shares. Special tax considerations relating to this Rights offering are summarized below:
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The value of a Right will not be includible in the income of a Common Shareholder at the time the subscription
Right is issued. |
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The basis of a Right issued to a Common Shareholder will be zero, and the basis of the share with respect to
which the Right was issued (the old share) will remain unchanged, unless either (a) the fair market value of the Right on the date of distribution is at least 15% of the fair market value of the old share, or (b) such Common Shareholder
affirmatively elects (in the manner set out in Treasury regulations under the Code) to allocate to the Right a portion of the basis of the old share. If either (a) or (b) applies, such Common Shareholder must allocate basis between the old
share and the Right in proportion to their fair market values on the date of distribution. |
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The basis of a Right purchased in the market will generally be its purchase price. |
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The holding period of a Right issued to a Common Shareholder will include the holding period of the old share.
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No loss will be recognized by a Common Shareholder if a Right distributed to such Common Shareholder expires
unexercised because the basis of the old share may be allocated to a Right only if the Right is exercised. If a Right that has been purchased in the market expires unexercised, there will be a recognized loss equal to the basis of the Right.
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Any gain or loss on the sale of a Right will be a capital gain or loss if the Right is held as a capital asset
(which in the case of a Right issued to Record Date Shareholders will depend on whether the old share is held as a capital asset), and will be a long term capital gain or loss if the holding period is deemed to exceed one year.
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No gain or loss will be recognized by a Common Shareholder upon the exercise of a Right, and the basis of any
Common Share acquired upon exercise (the new Common Share) will equal the sum of the basis, if any, of the Right and the subscription price for the new Common Share. The holding period for the new Common Share will begin on the date when the Right
is exercised (or, in the case of a Right purchased in the market, potentially the day after the date of exercise). |
The foregoing is
a general and abbreviated summary of the provisions of the Code and the Treasury regulations in effect as they directly govern the taxation of the Trust and holders of its Common Shares, with respect to U.S. federal income taxation only. Other tax
issues such as state and local taxation may apply. Investors are urged to consult their own tax advisers to determine the tax consequences of investing in the Trust. These provisions are subject to change by legislative or administrative action, and
any such change may be retroactive.
R-22
PLAN OF DISTRIBUTION
[Distribution Arrangements
[●] will act as Dealer
Manager for this Rights offering. Under the terms and subject to the conditions contained in the Dealer Manager Agreement among the Dealer Manager, the Trust and the Advisor, the Dealer Manager will provide financial structuring and solicitation
services in connection with the Rights offering and will solicit the exercise of Rights and participation in the over-subscription privilege. The Rights offering is not contingent upon any number of Rights being exercised. The Dealer Manager will
also be responsible for forming and managing a group of selling broker-dealers (each, a Selling Group Member and collectively, the Selling Group Members), whereby each Selling Group Member will enter into a Selling Group
Agreement with the Dealer Manager to solicit the exercise of Rights and to sell Common Shares purchased by the Selling Group Member from the Dealer Manager. In addition, the Dealer Manager will enter into a Soliciting Dealer Agreement with other
soliciting broker-dealers (each, a Soliciting Dealer and collectively, the Soliciting Dealers) to solicit the exercise of Rights. See Compensation to Dealer Manager for a discussion of fees and other
compensation to be paid to the Dealer Manager, Selling Group Members and Soliciting Dealers in connection with the Rights offering.
The Trust and the
Advisor have each agreed to indemnify the Dealer Manager for losses arising out of certain liabilities, including liabilities under the Securities Act. The Dealer Manager Agreement also provides that the Dealer Manager will not be subject to any
liability to the Trust in rendering the services contemplated by the Dealer Manager Agreement except for any act of willful misfeasance, bad faith or gross negligence of the Dealer Manager or reckless disregard by the Dealer Manager of its
obligations and duties under the Dealer Manager Agreement.
In order to seek to facilitate the trading market in the Rights for the benefit of non-exercising shareholders, and the placement of the Common Shares to new or existing investors pursuant to the exercise of the Rights, the Dealer Manager Agreement provides for special arrangements with the Dealer
Manager. Under these arrangements, the Dealer Manager is expected to purchase Rights on the [●], as well as Rights received by the Subscription Agent for sale by Record Date Shareholders and offered to the Dealer Manager and unexercised Rights
of Record Date Shareholders whose record addresses are outside the United States that are held by the Subscription Agent and for which no instructions are received. The number of rights, if any, purchased by the Dealer Manager will be determined by
the Dealer Manager in its sole discretion. The Dealer Manager is not obligated to purchase Rights or Common Shares as principal for its own account to facilitate the trading market for Rights or for investment purposes. Rather, its purchases are
expected to be closely related to interest in acquiring Common Shares generated by the Dealer Manager through its marketing and soliciting activities. The Dealer Manager intends to exercise Rights purchased by it during the Subscription Period but
prior to the Expiration Date. The Dealer Manager may exercise those Rights at its option on one or more dates, which are expected to be prior to the Expiration Date. The Subscription Price for the Common Shares issued through the exercise of Rights
by the Dealer Manager prior to the Expiration Date will be the greater of [●]% of the last reported sale price of a Common Share on the NYSE on the date of exercise or [●]% of the last reported NAV of a Common Share on the date prior to
the date of exercise. The price and timing of these exercises are expected to differ from those described herein for the Rights offering. The Subscription Price will be paid to the Trust and the dealer manager fee with respect to such proceeds will
be paid by the Trust on the applicable settlement date(s) of such exercise(s).
In connection with the exercise of Rights and receipt of Common Shares,
the Dealer Manager intends to offer those Common Shares for sale to the public and/or through a group of selling members it has established. The Dealer Manager may set the price for those Common Shares at any price that it determines, in its sole
discretion. The Dealer Manager has advised that the price at which such Common Shares are offered is expected to be at or slightly below the closing price of the Common Shares on the NYSE on the date the Dealer Manager exercises Rights. No portion
of the amount paid to the Dealer Manager or to a Selling Group Member from the sale of Common Shares in this manner will be paid to the Trust. If the sales price of the Common Shares is greater than the Subscription Price paid by the Dealer Manager
for such Common Shares plus the costs to purchase Rights for the purpose of acquiring those Common Shares, the Dealer Manager will receive a gain. Alternatively, if the sales price of the Common Shares is less than the Subscription Price for such
Common Shares plus the costs to purchase Rights for the purpose of acquiring those Common Shares, the Dealer Manager will incur a loss. The Dealer Manager will pay a concession to Selling Group Members in an amount equal to approximately [2.50]% of
the aggregate price of the Common Shares sold by the respective Selling Group Member. Neither the Trust nor the Advisor has a role in setting the
R-23
terms, including the sales price, on which the Dealer Manager offers for sale and sells Common Shares it has acquired through purchasing and exercising Rights or the timing of the exercise of
Rights or sales of Common Shares by the Dealer Manager. Persons who purchase Common Shares from the Dealer Manager or the selling group will purchase shares at a price set by the Dealer Manager, which may be more or less than the Subscription Price,
and at a time set by the Dealer Manager, which is expected to be prior to the Expiration Date.
The Dealer Manager may purchase Rights as principal or act
as agent on behalf of its clients for the resale of such Rights. The Dealer Manager may realize gains (or losses) in connection with the purchase and sale of Rights and the sale of Common Shares, although such transactions are intended by the Dealer
Manager to facilitate the trading market in the Rights and the placement of the Common Shares to new or existing investors pursuant to the exercise of the Rights. Any gains (or losses) realized by the Dealer Manager from the purchase and sale of
Rights and the sale of Common Shares is independent of and in addition to its fee as Dealer Manager. The Dealer Manager has advised that any such gains (or losses) are expected to be immaterial relative to its fee as Dealer Manager.
Since neither the Dealer Manager nor persons who purchase Common Shares from the Dealer Manager or members of the selling group were Record Date Shareholders,
they would not be able to participate in the over-subscription privilege.
Persons who purchase Common Shares from the Dealer Manager or the selling group
will not purchase shares at the Subscription Price based on the formula price mechanism through which Common Shares will be sold in the Rights offering. Instead, those persons will purchase Common Shares at a price set by the Dealer Manager, which
may be more or less than the Subscription Price, and will not have the uncertainty of waiting for the determination of the Subscription Price on the Expiration Date.
There is no limit on the number of Rights the Dealer Manager can purchase or exercise. Common Shares acquired by the Dealer Manager pursuant to the exercise
of Rights acquired by it will reduce the number of Common Shares available pursuant to the over-subscription privilege, perhaps materially, depending on the number of Rights purchased and exercised by the Dealer Manager.
Although the Dealer Manager can seek to facilitate the trading market for Rights as described above, investors can acquire Common Shares at the Subscription
Price by acquiring Rights on the [●] and exercising them in the method described above under Description of the RightsMethod of Exercise of Rights and Description of the RightsPayment for Shares.
[The Dealer Manager and selling members may engage in stabilizing activities, which may have the effect of lowering or otherwise affecting the market price of
the common shares.]
In the ordinary course of their businesses, the Dealer Manager and/or its affiliates may engage in investment banking or
financial transactions with the Trust, the Advisor and their affiliates. In addition, in the ordinary course of their businesses, the Dealer Manager and/or its affiliates may, from time to time, own securities of the Trust or its affiliates.
The principal business address of the Dealer Manager is [●].
Compensation to Dealer Manager
Pursuant to the Dealer
Manager Agreement, the Trust has agreed to pay the Dealer Manager a fee for its financial structuring and solicitation services equal to [●]% of the Subscription Price per Common Share for each Common Share issued pursuant to the exercise of
Rights, including the over-subscription privilege.
The Dealer Manager will reallow to Selling Group Members in the selling group to be formed and managed
by the Dealer Manager selling fees equal to [●]% of the Subscription Price for each Common Share issued pursuant to the Rights offering or the over-subscription privilege as a result of their selling efforts. In addition, the Dealer Manager
will reallow to Soliciting Dealers that have executed and delivered a Soliciting Dealer Agreement and have solicited the exercise of Rights, solicitation fees equal to [●]% of the Subscription Price for each Common Share issued
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pursuant to the exercise of Rights as a result of their soliciting efforts, subject to a maximum fee based on the number of Common Shares held by such Soliciting Dealer through [insert
depository] on the Record Date. Fees will be paid to the broker-dealer designated on the applicable portion of the subscription certificates or, in the absence of such designation, to the Dealer Manager.
In addition, the Trust, has agreed to pay the Dealer Manager an amount up to $[●] as a partial reimbursement of its expenses incurred in connection with
the Rights offering, including reasonable out-of-pocket fees and expenses, if any and not to exceed $[●], incurred by the Dealer Manager, Selling Group Members,
Soliciting Dealers and other brokers, dealers and financial institutions in connection with their customary mailing and handling of materials related to the Rights offering to their customers. No other fees will be payable by the Trust or the
Advisor to the Dealer Manager in connection with the Rights offering.
LEGAL MATTERS
Certain legal matters in connection with the Common Shares will be passed upon for the Trust by Willkie Farr & Gallagher LLP, New York, New York,
counsel to the Trust. Willkie Farr & Gallagher LLP may rely as to certain matters of Delaware law on the opinion of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware. [Certain legal matters will be passed on by [●]
as special counsel to the Dealer Manager in connection with the Rights offering.]
FINANCIAL STATEMENTS
The audited annual financial statements of the Trust for the fiscal year ended December 30, 202[●] [and the unaudited financial statements
for the six months ended June 31, 202[●]] are incorporated by reference into this Prospectus Supplement, the accompanying Prospectus and the SAI.
ADDITIONAL INFORMATION
This Prospectus Supplement and the accompanying Prospectus constitute part of a Registration Statement filed by the Trust with the SEC under the Securities
Act and the Investment Company Act. This Prospectus Supplement and the accompanying Prospectus omit certain of the information contained in the Registration Statement, and reference is hereby made to the Registration Statement and related exhibits
for further information with respect to the Trust and the common shares offered hereby. Any statements contained herein concerning the provisions of any document are not necessarily complete, and, in each instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement or otherwise filed with the SEC. Each such statement is qualified in its entirety by such reference. The complete Registration Statement may be obtained from the SEC upon payment of the
fee prescribed by its rules and regulations or free of charge through the SECs website (http://www.sec.gov).
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BLACKROCK LIMITED
DURATION INCOME
TRUST
[●] Rights for [●] Common Shares of Beneficial Interest
Subscription Rights to Acquire Common Shares of Beneficial Interest
Issuable Upon Exercise of Rights to Subscribe for
Such Common Shares of Beneficial Interest
PROSPECTUS SUPPLEMENT
[●], 2022
Until
[ ], 2022 (25 days after the date of this Prospectus Supplement), all dealers that buy, sell or trade the common shares, whether or not participating in this offering, may be required to deliver a prospectus. This is in
addition to the dealers obligation to deliver a prospectus when acting as underwriters.
Subject to Completion
Dated March 18, 2022
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES
UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
BlackRock Limited Duration Income Trust
STATEMENT OF ADDITIONAL INFORMATION
BlackRock Limited Duration Income Trust (the Trust) is a diversified, closed-end management investment
company. This Statement of Additional Information (SAI) relating to the Trusts common shares of beneficial interest (common shares) does not constitute a prospectus, but should be read in conjunction with the Prospectus
relating thereto dated March [●], 2022 (the Prospectus) and any related prospectus supplement. This SAI, which is not a prospectus, does not include all information that a prospective investor should consider before purchasing
common shares, and investors should obtain and read the Prospectus and any related prospectus supplement prior to purchasing such shares. A copy of the Prospectus and any related prospectus supplement may be obtained without charge by calling (800) 882-0052. You may also obtain a copy of the Prospectus on the Securities and Exchange Commissions (the SEC) website (http://www.sec.gov). Capitalized terms used but not defined in this SAI have the
meanings ascribed to them in the Prospectus.
References to the Investment Company Act of 1940, as amended (the Investment Company Act),
or other applicable law, will include any rules promulgated thereunder and any guidance, interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, including court interpretations, and exemptive, no-action or other relief or permission from the SEC, SEC staff or other authority.
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TABLE OF CONTENTS
This Statement of Additional Information is dated March [●], 2022.
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THE TRUST
The Trust is a diversified, closed-end management investment company registered under the Investment Company Act. The
Trust was formed as a Delaware statutory trust on May 16, 2003, pursuant to an Agreement and Declaration of Trust, as subsequently amended and restated, governed by the laws of the State of Delaware and the Certificate of Trust filed with the
Secretary of State of the State of Delaware. The Trusts investment adviser is BlackRock Advisors, LLC (the Advisor). BlackRock International Limited (BIL) and BlackRock (Singapore) Limited (BSL and together
with BIL, the Sub-Advisors and collectively with the Advisor, the Advisors) serve as the Trusts sub-advisors.
The common shares of the Trust are listed on the New York Stock Exchange (NYSE) under the symbol BLW. As of February 28, 2022, the
Trust has outstanding 35,711,253 common shares.
INVESTMENT OBJECTIVE AND POLICIES
Investment Restrictions
The Trust has adopted
restrictions and policies relating to the investment of the Trusts assets and its activities. Certain of the restrictions are fundamental policies of the Trust and may not be changed without the approval of the holders of a majority of the
Trusts outstanding voting securities (which for this purpose and under the Investment Company Act means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or
(ii) more than 50% of the outstanding shares), including class approval by a majority of the Trusts outstanding shares of preferred shares (preferred shares), if any (which for this purpose and under the Investment Company Act
means the lesser of (i) 67% of the preferred shares, as a single class, represented at a meeting at which more than 50% of the Trusts outstanding preferred shares are represented or (ii) more than 50% of the outstanding preferred shares).
Fundamental Investment Restrictions. Under these fundamental investment restrictions, the Trust may not:
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Purchase any security if as a result 25% or more of the total assets of the Trust would be invested in the
securities of issuers having their principal business activities in the same industry (with respect to loan participations in which the Trust may invest, the Trust intends to treat as issuers the corporate borrower, the bank selling such
participation interests and any other person interpositioned between the bank and the Trust). |
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With respect to 75% of its total assets, invest more than 5% of the value of its total assets in the securities
of any single issuer or purchase more than 10% of the outstanding voting securities of any one issuer. |
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Purchase commodities or commodity contracts, except that the Trust may purchase and sell options, futures
contracts and options thereon and may engage in interest rate and foreign currency transactions. |
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Purchase, hold or deal in real estate or real estate mortgage loans, or oil, gas or other mineral leases or
exploration or development programs, except that the Trust may (a) purchase and sell securities that are secured by, or issued by companies that invest or deal in, real estate, oil, gas or other minerals, or interests therein and (b) hold
or sell any such assets acquired in connection with its investment in portfolio securities. |
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Issue senior securities or borrow money, except as permitted by the Investment Company Act.
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Make loans to others, except through the purchase of debt obligations (including senior loans), the entry into
repurchase agreements and the lending of its portfolio securities. |
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Act as an underwriter of securities of other issuers, except to the extent the Trust may be deemed an
underwriter under the Securities Act, by virtue of its purchase or sale of portfolio securities. |
For purposes of applying the
limitation set forth in subparagraphs (1) and (2) above, securities of the U.S. government, its agencies, or instrumentalities, and securities backed by the credit of a governmental entity are not
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considered to represent industries. However, obligations backed principally by the assets and revenues of non-governmental issuers may for this purpose be
deemed to be issued by such non-governmental issuers.
For the purpose of applying the limitation set forth
in subparagraph (1) above, a governmental issuer shall be deemed the sole issuer of a security when its assets and revenues are separate from other governmental entities and its securities are backed only by its assets and revenues. Similarly,
in the case of a non-governmental issuer, such as an industrial corporation or a privately owned or operated hospital, if the security is backed only by the assets and revenues of the non-governmental issuer, then such non-governmental issuer would be deemed to be the sole issuer. Where a security is backed by the enforceable obligation of a superior or
unrelated governmental entity, it will be included in the computation of securities owned that are issued by such governmental entity. When a security is backed by the enforceable obligation of a superior or unrelated
non-governmental entity (other than a bond insurer), it will also be included in the computation of securities owned that are issued by such non-governmental entity.
Where a security is guaranteed by a governmental entity or some other facility, such as a bank guarantee or letter of credit, such a guarantee or letter of credit would be considered a separate security and would be treated as an issue of such
government, other entity or bank. When a municipal security is insured by bond insurance, it shall not be considered a security that is issued or guaranteed by the insurer; instead, the issuer of such municipal security will be determined in
accordance with the principles set forth above. The foregoing restrictions do not limit the percentage of the Trusts assets that may be invested in municipal securities insured by any given insurer.
Under the Investment Company Act, the Trust may invest up to 10% of its total assets in the aggregate in shares of other investment companies and up to 5% of
its total assets in any one investment company, provided the investment does not represent more than 3% of the voting stock of the acquired investment company at the time such shares are purchased. The Trust may invest a greater percentage of its
assets in money market funds to the extent permitted by the Investment Company Act or the Securities and Exchange Commission.
Non-Fundamental Investment Restrictions. Any policies of the Trust not described as fundamental in this Prospectus may be changed by the Trusts Board of Trustees (the Board) without
shareholder approval, provide that the Trust may not:
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Make any short sale of securities except in conformity with applicable laws, rules and regulations and unless
after giving effect to such sale, the market value of all securities sold short does not exceed 25% of the value of the Trusts managed assets and the Trusts aggregate short sales of a particular class of securities of an issuer does not
exceed 25% of the then outstanding securities of that class. The Trust may also make short sales against the box without respect to such limitations. In this type of short sale, at the time of the sale, the Trust owns or has the
immediate and unconditional right to acquire at no additional cost the identical security. |
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Purchase securities of open-end or
closed-end investment companies except in compliance with the Investment Company Act or any exemptive relief obtained thereunder. |
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Purchase securities of companies for the purpose of exercising control. |
The restrictions and other limitations set forth in the Trusts Prospectus and in this SAI will apply only at the time of purchase of securities and will
not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of the acquisition of securities. Any investment policy or restriction described in the Prospectus or in this SAI is deemed to be a non-fundamental policy or restriction of the Trust, unless otherwise stated.
If the Trust offers preferred shares, it
may apply for ratings for such preferred shares from Moodys, S&P and/or Fitch. In order to obtain and maintain the required ratings, the Trust may be required to comply with investment quality, diversification and other
guidelines established by Moodys, S&P and/or Fitch. Such guidelines may be more restrictive than the restrictions set forth above. The Trust does not anticipate that such guidelines would have a material adverse effect on the
Trusts holders of common shares or its ability to achieve its investment objective. The Trust presently anticipates that any preferred shares issued would be initially given the highest ratings by Moodys (Aaa) or by S&P or Fitch
(AAA), but no assurance can be given that such ratings will be obtained. No minimum rating is required for the issuance of preferred shares by the Trust. Moodys, S&P and Fitch receive fees in connection with their ratings issuances.
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INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Trusts investment objective, policies and techniques that are described in the Prospectus.
Special Purpose Acquisition Companies
The Trust
may invest in stock, warrants, rights and other interests issued by special purpose acquisition companies (SPACs) or similar special purpose entities that pool funds to seek potential acquisition opportunities, including the
founders shares and warrants described below. A SPAC is a publicly traded company that raises investment capital via an initial public offering (IPO) for the purpose of identifying and acquiring one or more operating
businesses or assets. In connection with forming a SPAC, the SPACs sponsors acquire founders shares, generally for nominal consideration, and warrants that will result in the sponsors owning a specified percentage (typically
20%) of the SPACs outstanding common stock upon completion of the IPO. At the time a SPAC conducts an IPO, it has selected a management team but has not yet identified a specific acquisition opportunity. Unless and until an acquisition is
completed, a SPAC generally invests its assets in U.S. government securities, money market securities and cash. If an acquisition that meets the requirements for the SPAC is not completed within a
pre-established period of time, the invested funds are returned to the SPACs public shareholders, the warrants expire, and the founders shares and such warrants become worthless.
Because SPACs and similar entities are in essence blank check companies without operating histories or ongoing business operations (other than identifying and pursuing acquisitions), the potential for the long term capital appreciation
of their securities is particularly dependent on the ability of the SPACs management to identify and complete a profitable acquisition. There is no guarantee that the SPACs in which the Trust invests will complete an acquisition or that any
acquisitions completed by the SPACs in which the Trust invests will be profitable. Some SPACs may pursue acquisitions only within certain industries or regions, which may ultimately lead to an increase in the volatility of their prices following the
acquisition. In addition, some of these securities may be considered illiquid and/or subject to restrictions on resale.
Environmental, Social and
Governance (ESG) Integration
Although the Trust does not seek to implement a specific ESG, impact or sustainability strategy, Trust
management will consider ESG characteristics as part of the investment process for actively managed funds such as the Trust. These considerations will vary depending on a funds particular investment strategies and may include consideration of
third-party research as well as consideration of proprietary research of the Advisors across the ESG risks and opportunities regarding an issuer. Trust management will consider those ESG characteristics it deems relevant or additive when making
investment decisions for the Trust. The ESG characteristics utilized in the Trusts investment process are anticipated to evolve over time and one or more characteristics may not be relevant with respect to all issuers that are eligible for
investment.
ESG characteristics are not the sole considerations when making investment decisions for the Trust. Further, investors can differ in their
views of what constitutes positive or negative ESG characteristics. As a result, the Trust may invest in issuers that do not reflect the beliefs and values with respect to ESG of any particular investor. ESG considerations may affect the
Trusts exposure to certain companies or industries and the Trust may forego certain investment opportunities. While Trust management views ESG considerations as having the potential to contribute to the Trusts long-term performance,
there is no guarantee that such results will be achieved.
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ADDITIONAL RISK FACTORS
Risk Factors in Strategic Transactions and Derivatives
The Trusts use of derivative instruments involves risks different from, and possibly greater than, the risks associated with investing directly in
securities and other traditional investments. Derivatives are subject to a number of risks such as credit risk, leverage risk, illiquidity risk, correlation risk and index risk as described below:
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Credit Riskthe risk that the counterparty in a derivative transaction will be unable to honor its
financial obligation to the Trust, or the risk that the reference entity in a derivative will not be able to honor its financial obligations. In particular, derivatives traded in OTC markets often are not guaranteed by an exchange or clearing
corporation and often do not require payment of margin, and to the extent that the Trust has unrealized gains in such instruments or has deposited collateral with its counterparties the Trust is at risk that its counterparties will become bankrupt
or otherwise fail to honor their obligations. |
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Currency Riskthe risk that changes in the exchange rate between two currencies will adversely affect
the value (in U.S. dollar terms) of an investment. |
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Leverage Riskthe risk associated with certain types of investments or trading strategies (such as,
for example, borrowing money to increase the amount of investments) that relatively small market movements may result in large changes in the value of an investment. Certain transactions in derivatives (such as futures transactions or sales of put
options) involve substantial leverage risk and may expose the Trust to potential losses that exceed the amount originally invested by the Trust. When the Trust engages in such a transaction, the Trust will deposit in a segregated account, or earmark
on its books and records, liquid assets with a value at least equal to the Trusts exposure, on a mark-to-market basis, to the transaction (as calculated pursuant
to requirements of the SEC). Such segregation or earmarking will ensure that the Trust has assets available to satisfy its obligations with respect to the transaction, but will not limit the Trusts exposure to loss. |
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Illiquidity Riskthe risk that certain securities may be difficult or impossible to sell at the time
that the Trust would like or at the price that the Trust as seller believes the security is currently worth. There can be no assurance that, at any specific time, either a liquid secondary market will exist for a derivative or the Trust will
otherwise be able to sell such instrument at an acceptable price. It may, therefore, not be possible to close a position in a derivative without incurring substantial losses, if at all. The absence of liquidity may also make it more difficult for
the Trust to ascertain a market value for such instruments. Although both OTC and exchange-traded derivatives markets may experience a lack of liquidity, certain derivatives traded in OTC markets, including swaps and OTC options, involve substantial
illiquidity risk. The illiquidity of the derivatives markets may be due to various factors, including congestion, disorderly markets, limitations on deliverable supplies, the participation of speculators, government regulation and intervention, and
technical and operational or system failures. In addition, the liquidity of a secondary market in an exchange-traded derivative contract may be adversely affected by daily price fluctuation limits established by the exchanges which limit
the amount of fluctuation in an exchange-traded contract price during a single trading day. Once the daily limit has been reached in the contract, no trades may be entered into at a price beyond the limit, thus preventing the liquidation of open
positions. Prices have in the past moved beyond the daily limit on a number of consecutive trading days. If it is not possible to close an open derivative position entered into by the Trust, the Trust would continue to be required to make daily cash
payments of variation margin in the event of adverse price movements. In such a situation, if the Trust has insufficient cash, it may have to sell portfolio securities to meet daily variation margin requirements at a time when it may be
disadvantageous to do so. |
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Correlation Riskthe risk that changes in the value of a derivative will not match the changes in the
value of the portfolio holdings that are being hedged or of the particular market or security to which the Trust seeks exposure through the use of the derivative. There are a number of factors which may
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prevent a derivative instrument from achieving the desired correlation (or inverse correlation) with an underlying asset, rate or index, such as the impact of fees, expenses and transaction
costs, the timing of pricing, and disruptions or illiquidity in the markets for such derivative instrument. |
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Index Riskif the derivative is linked to the performance of an index, it will be subject to the
risks associated with changes in that index. If the index changes, the Trust could receive lower interest payments or experience a reduction in the value of the derivative to below the price that the Trust paid for such derivative.
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Volatility Riskthe risk that the Trusts use of derivatives may reduce income or gain and/or
increase volatility. Volatility is defined as the characteristic of a security, an index or a market to fluctuate significantly in price over a defined time period. The Trust could suffer losses related to its derivative positions as a result of
unanticipated market movements, which losses are potentially unlimited. |
When a derivative is used as a hedge against a position that
the Trust holds, any loss generated by the derivative generally should be substantially offset by gains on the hedged investment, and vice versa. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. Hedges are
sometimes subject to imperfect matching between the derivative and the underlying security, and there can be no assurance that the Trusts hedging transactions will be effective. The Trust could also suffer losses related to its derivative
positions as a result of unanticipated market movements, which losses are potentially unlimited. The Advisors may not be able to predict correctly the direction of securities prices, interest rates and other economic factors, which could cause the
Trusts derivatives positions to lose value. In addition, some derivatives are more sensitive to interest rate changes and market price fluctuations than other securities. The possible lack of a liquid secondary market for derivatives and the
resulting inability of the Trust to sell or otherwise close a derivatives position could expose the Trust to losses and could make derivatives more difficult for the Trust to value accurately.
When engaging in a hedging transaction, the Trust may determine not to seek to establish a perfect correlation between the hedging instruments utilized and
the portfolio holdings being hedged. Such an imperfect correlation may prevent the Trust from achieving the intended hedge or expose the Trust to a risk of loss. The Trust may also determine not to hedge against a particular risk because it does not
regard the probability of the risk occurring to be sufficiently high as to justify the cost of the hedge or because it does do not foresee the occurrence of the risk. It may not be possible for the Trust to hedge against a change or event at
attractive prices or at a price sufficient to protect the assets of the Trust from the decline in value of the portfolio positions anticipated as a result of such change. The Trust may also be restricted in its ability to effectively manage the
portion of its assets that are segregated or earmarked to cover its obligations. In addition, it may not be possible to hedge at all against certain risks.
If the Trust invests in a derivative instrument it could lose more than the principal amount invested. Moreover, derivatives raise certain tax, legal,
regulatory and accounting issues that may not be presented by investments in securities, and there is some risk that certain issues could be resolved in a manner that could adversely impact the performance of the Trust.
The Trust is not required to use derivatives or other portfolio strategies to seek to increase return or to seek to hedge its portfolio and may choose not to
do so. Also, suitable derivative transactions may not be available in all circumstances and there can be no assurance that the Trust will engage in these transactions to reduce exposure to other risks when that would be beneficial. Although the
Advisors seek to use derivatives to further the Trusts investment objective, there is no assurance that the use of derivatives will achieve this result.
Options Risk. There are several risks associated with transactions in options on securities and indexes. For example, there are significant differences
between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objective. In addition, a liquid secondary market for particular options, whether traded
OTC or on a recognized securities exchange (e.g., NYSE), separate trading boards of a securities exchange or through a market system that provides contemporaneous transaction pricing information (an Exchange) may be absent for reasons
which include the following: there may be insufficient trading interest in certain options; restrictions may be imposed by an Exchange on opening
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transactions or closing transactions or both; trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options or underlying securities;
unusual or unforeseen circumstances may interrupt normal operations on an Exchange; the facilities of an Exchange or the OCC may not at all times be adequate to handle current trading volume; or one or more Exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that Exchange (or in that class or series of options) would cease to
exist, although outstanding options that had been issued by the OCC as a result of trades on that Exchange would continue to be exercisable in accordance with their terms.
Futures Transactions and Options Risk. The primary risks associated with the use of futures contracts and options are (a) the imperfect
correlation between the change in market value of the instruments held by the Trust and the price of the futures contract or option; (b) possible lack of a liquid secondary market for a futures contract and the resulting inability to close a
futures contract when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; (d) the Advisors inability to predict correctly the direction of securities prices, interest rates, currency
exchange rates and other economic factors; and (e) the possibility that the counterparty will default in the performance of its obligations.
Investment in futures contracts involves the risk of imperfect correlation between movements in the price of the futures contract and the price of the
security being hedged. The hedge will not be fully effective when there is imperfect correlation between the movements in the prices of two financial instruments. For example, if the price of the futures contract moves more or less than the price of
the hedged security, the Trust will experience either a loss or gain on the futures contract which is not completely offset by movements in the price of the hedged securities. To compensate for imperfect correlations, the Trust may purchase or sell
futures contracts in a greater dollar amount than the hedged securities if the volatility of the hedged securities is historically greater than the volatility of the futures contracts. Conversely, the Trust may purchase or sell fewer futures
contracts if the volatility of the price of the hedged securities is historically lower than that of the futures contracts.
The particular securities
comprising the index underlying a securities index financial futures contract may vary from the securities held by the Trust. As a result, the Trusts ability to hedge effectively all or a portion of the value of its securities through the use
of such financial futures contracts will depend in part on the degree to which price movements in the index underlying the financial futures contract correlate with the price movements of the securities held by the Trust. The correlation may be
affected by disparities in the average maturity, ratings, geographical mix or structure of the Trusts investments as compared to those comprising the securities index and general economic or political factors. In addition, the correlation
between movements in the value of the securities index may be subject to change over time as additions to and deletions from the securities index alter its structure. The correlation between futures contracts on U.S. Government securities and the
securities held by the Trust may be adversely affected by similar factors and the risk of imperfect correlation between movements in the prices of such futures contracts and the prices of securities held by the Trust may be greater. The trading of
futures contracts also is subject to certain market risks, such as inadequate trading activity, which could at times make it difficult or impossible to liquidate existing positions.
The Trust may liquidate futures contracts it enters into through offsetting transactions on the applicable contract market. There can be no assurance,
however, that a liquid secondary market will exist for any particular futures contract at any specific time. Thus, it may not be possible to close out a futures position. In the event of adverse price movements, the Trust would continue to be
required to make daily cash payments of variation margin. In such situations, if the Trust has insufficient cash, it may be required to sell portfolio securities to meet daily variation margin requirements at a time when it may be disadvantageous to
do so. The inability to close out futures positions also could have an adverse impact on the Trusts ability to hedge effectively its investments in securities. The liquidity of a secondary market in a futures contract may be adversely affected
by daily price fluctuation limits established by commodity exchanges which limit the amount of fluctuation in a futures contract price during a single trading day. Once the daily limit has been reached in the contract, no trades may be
entered into at a price beyond the limit, thus preventing the liquidation of open futures positions. Prices have in the past moved beyond the daily limit on a number of consecutive trading days.
The successful use of transactions in futures and related options also depends on the ability of the Advisors to forecast correctly the direction and extent
of interest rate movements within a given time frame. To the extent
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interest rates remain stable during the period in which a futures contract or option is held by the Trust or such rates move in a direction opposite to that anticipated, the Trust may realize a
loss on the Strategic Transaction which is not fully or partially offset by an increase in the value of portfolio securities. As a result, the Trusts total return for such period may be less than if it had not engaged in the Strategic
Transaction.
Because of low initial margin deposits made upon the opening of a futures position, futures transactions involve substantial leverage. As a
result, relatively small movements in the price of the futures contracts can result in substantial unrealized gains or losses. There is also the risk of loss by the Trust of margin deposits in the event of bankruptcy of a broker with which the Trust
has an open position in a financial futures contract. Because the Trust will engage in the purchase and sale of futures contracts for hedging purposes or to seek to enhance the Trusts return, any losses incurred in connection therewith may, if
the strategy is successful, be offset in whole or in part by increases in the value of securities held by the Trust or decreases in the price of securities the Trust intends to acquire.
The amount of risk the Trust assumes when it purchases an option on a futures contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option on a futures contract also entails the risk that changes in the value of the underlying futures contract will not be fully reflected in the value of the option purchased.
General Risk Factors in Hedging Foreign Currency. Hedging transactions involving Currency Instruments involve substantial risks, including
correlation risk. While the Trusts use of Currency Instruments to effect hedging strategies is intended to reduce the volatility of the NAV of the Trusts common shares, the NAV of the Trusts common shares will fluctuate. Moreover,
although Currency Instruments may be used with the intention of hedging against adverse currency movements, transactions in Currency Instruments involve the risk that anticipated currency movements will not be accurately predicted and that the
Trusts hedging strategies will be ineffective. To the extent that the Trust hedges against anticipated currency movements that do not occur, the Trust may realize losses and decrease its total return as the result of its hedging transactions.
Furthermore, the Trust will only engage in hedging activities from time to time and may not be engaging in hedging activities when movements in currency exchange rates occur.
It may not be possible for the Trust to hedge against currency exchange rate movements, even if correctly anticipated, in the event that (i) the currency
exchange rate movement is so generally anticipated that the Trust is not able to enter into a hedging transaction at an effective price, or (ii) the currency exchange rate movement relates to a market with respect to which Currency Instruments
are not available and it is not possible to engage in effective foreign currency hedging. The cost to the Trust of engaging in foreign currency transactions varies with such factors as the currencies involved, the length of the contract period and
the market conditions then prevailing. Since transactions in foreign currency exchange usually are conducted on a principal basis, no fees or commissions are involved.
Foreign Currency Forwards Risk. Forward foreign currency exchange contracts do not eliminate fluctuations in the value of Non-U.S. Securities (as defined in the Prospectus) but rather allow the Trust to establish a fixed rate of exchange for a future point in time. This strategy can have the effect of reducing returns and minimizing
opportunities for gain.
In connection with its trading in forward foreign currency contracts, the Trust will contract with a foreign or domestic bank, or
foreign or domestic securities dealer, to make or take future delivery of a specified amount of a particular currency. There are no limitations on daily price moves in such forward contracts, and banks and dealers are not required to continue to
make markets in such contracts. There have been periods during which certain banks or dealers have refused to quote prices for such forward contracts or have quoted prices with an unusually wide spread between the price at which the bank or dealer
is prepared to buy and that at which it is prepared to sell. Governmental imposition of credit controls might limit any such forward contract trading. With respect to its trading of forward contracts, if any, the Trust will be subject to the risk of
bank or dealer failure and the inability of, or refusal by, a bank or dealer to perform with respect to such contracts. Any such default would deprive the Trust of any profit potential or force the Trust to cover its commitments for resale, if any,
at the then market price and could result in a loss to the Trust.
S-9
The Trust may also engage in proxy hedging transactions to reduce the effect of currency fluctuations on the
value of existing or anticipated holdings of portfolio securities. Proxy hedging is often used when the currency to which the Trust is exposed is difficult to hedge or to hedge against the dollar. Proxy hedging entails entering into a forward
contract to sell a currency whose changes in value are generally considered to be linked to a currency or currencies in which some or all of the Trusts securities are, or are expected to be, denominated, and to buy U.S. dollars. Proxy hedging
involves some of the same risks and considerations as other transactions with similar instruments. Currency transactions can result in losses to the Trust if the currency being hedged fluctuates in value to a degree or in a direction that is not
anticipated. In addition, there is the risk that the perceived linkage between various currencies may not be present or may not be present during the particular time that the Trust is engaging in proxy hedging. The Trust may also cross-hedge
currencies by entering into forward contracts to sell one or more currencies that are expected to decline in value relative to other currencies to which the Trust has or in which the Trust expects to have portfolio exposure. For example, the Trust
may hold both Canadian government bonds and Japanese government bonds, and the Advisors may believe that Canadian dollars will deteriorate against Japanese yen. The Trust would sell Canadian dollars to reduce its exposure to that currency and buy
Japanese yen. This strategy would be a hedge against a decline in the value of Canadian dollars, although it would expose the Trust to declines in the value of the Japanese yen relative to the U.S. dollar.
Some of the forward non-U.S. currency contracts entered into by the Trust may be classified as non-deliverable forwards (NDFs). NDFs are cash-settled, short-term forward contracts that may be thinly traded or are denominated in non-convertible foreign
currency, where the profit or loss at the time at the settlement date is calculated by taking the difference between the agreed upon exchange rate and the spot rate at the time of settlement, for an agreed upon notional amount of funds. All NDFs
have a fixing date and a settlement date. The fixing date is the date at which the difference between the prevailing market exchange rate and the agreed upon exchange rate is calculated. The settlement date is the date by which the payment of the
difference is due to the party receiving payment. NDFs are commonly quoted for time periods of one month up to two years, and are normally quoted and settled in U.S. dollars. They are often used to gain exposure to and/or hedge exposure to foreign
currencies that are not internationally traded.
Currency Futures Risk. The Trust may also seek to hedge against the decline in the value of a
currency or to enhance returns through use of currency futures or options thereon. Currency futures are similar to forward foreign exchange transactions except that futures are standardized, exchange-traded contracts while forward foreign exchange
transactions are traded in the OTC market. Currency futures involve substantial currency risk, and also involve leverage risk.
Currency Options
Risk. The Trust may also seek to hedge against the decline in the value of a currency or to enhance returns through the use of currency options. Currency options are similar to options on securities. For example, in consideration for an option
premium the writer of a currency option is obligated to sell (in the case of a call option) or purchase (in the case of a put option) a specified amount of a specified currency on or before the expiration date for a specified amount of another
currency. The Trust may engage in transactions in options on currencies either on exchanges or OTC markets. Currency options involve substantial currency risk, and may also involve credit, leverage or illiquidity risk.
Currency Swaps Risk. The Trust may enter into currency swaps, which are transactions in which one currency is simultaneously bought for a second
currency on a spot basis and sold for the second currency on a forward basis. Currency swaps involve the exchange of the rights of the Trust and another party to make or receive payments in specified currencies. Currency swaps usually involve the
delivery of the entire principal value of one designated currency in exchange for the other designated currency. Because currency swaps usually involve the delivery of the entire principal value of one designated currency in exchange for the other
designated currency, the entire principal value of a currency swap is subject to the risk that the other party to the swap will default on its contractual delivery obligations.
Over-the-Counter Trading Risk. The derivative instruments that may be
purchased or sold by the Trust may include instruments not traded on an exchange. The risk of nonperformance by the counterparty to an instrument may be greater than, and the ease with which the Trust can dispose of or enter into closing
transactions with respect to an instrument may be less than, the risk associated with an exchange traded instrument. In addition, significant disparities may exist between bid and asked prices for derivative instruments that
are not traded on an exchange.
S-10
The absence of liquidity may make it difficult or impossible for the Trust to sell such instruments promptly at an acceptable price. Derivative instruments not traded on exchanges also are not
subject to the same type of government regulation as exchange traded instruments, and many of the protections afforded to participants in a regulated environment may not be available in connection with the transactions. Because derivatives traded in
OTC markets generally are not guaranteed by an exchange or clearing corporation and generally do not require payment of margin, to the extent that the Trust has unrealized gains in such instruments or has deposited collateral with its counterparties
the Trust is at risk that its counterparties will become bankrupt or otherwise fail to honor its obligations.
Dodd-Frank Act Risk. Title VII of
the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) (the Derivatives Title) imposed a substantially new regulatory structure on derivatives markets, with particular emphasis on swaps
(which are subject to oversight by the CFTC) and security-based swaps (which are subject to oversight by the SEC). The regulatory framework covers a broad range of swap market participants, including banks,
non-banks, credit unions, insurance companies, broker-dealers and investment advisers. Prudential regulators were granted authority to regulate margining of swaps and security-based swaps of banks and
bank-related entities.
Current regulations for swaps require the mandatory central clearing and mandatory exchange trading of particular types of
interest rate swaps and index credit default swaps (together, Covered Swaps). The Trust is required to clear its Covered Swaps through a clearing broker, which requires, among other things, posting initial margin and variation margin to
the Trusts clearing broker in order to enter into and maintain positions in Covered Swaps. Covered Swaps generally are required to be executed through a swap execution facility (SEF), which can involve additional transaction fees.
Additionally, with respect to uncleared swaps, swap dealers are required to collect variation margin from the Trust and may be required by applicable
regulations to collect initial margin from the Trust. Both initial and variation margin may be comprised of cash and/or securities, subject to applicable regulatory haircuts. Shares of investment companies (other than certain money market funds) may
not be posted as collateral under applicable regulations. As capital and margin requirements for swap dealers and capital and margin requirements for security-based swaps are implemented, such requirements may make certain types of trades and/or
trading strategies more costly. There may be market dislocations due to uncertainty during the implementation period of any new regulation and the Advisor cannot know how the derivatives market will adjust to such new regulations.
In addition, regulations adopted by global prudential regulators that are now in effect require certain bank-regulated counterparties and certain of their
affiliates to include in qualified financial contracts, including many derivatives contracts as well as repurchase agreements and securities lending agreements, terms that delay or restrict the rights of counterparties to terminate such
contracts, foreclose upon collateral, exercise other default rights or restrict transfers of affiliate credit enhancements (such as guarantees) in the event that the bank-regulated counterparty and/or its affiliates are subject to certain types of
resolution or insolvency proceedings.
Legal and Regulatory Risk. At any time after the date hereof, legislation or additional regulations may be
enacted that could negatively affect the assets of the Trust. Changing approaches to regulation may have a negative impact on the securities in which the Trust invests. Legislation or regulation may also change the way in which the Trust itself is
regulated. There can be no assurance that future legislation, regulation or deregulation will not have a material adverse effect on the Trust or will not impair the ability of the Trust to achieve its investment objective. In addition, as new rules
and regulations resulting from the passage of the Dodd-Frank Act are implemented and new international capital and liquidity requirements are introduced under the Basel III Accords, the market may not react the way the Advisors expect. Whether the
Trust achieves its investment objective may depend on, among other things, whether the Advisors correctly forecast market reactions to this and other legislation. In the event the Advisors incorrectly forecast market reaction, the Trust may not
achieve its investment objective.
S-11
MANAGEMENT OF THE TRUST
Investment Management Agreement
Although the Advisor
intends to devote such time and effort to the business of the Trust as is reasonably necessary to perform its duties to the Trust, the services of the Advisor are not exclusive and the Advisor provides similar services to other investment companies
and other clients and may engage in other activities.
The investment management agreement between the Advisor and the Trust (the Investment
Management Agreement) also provides that except for a loss resulting from a breach of fiduciary duty with respect to the receipt of compensation or a loss resulting from willful misfeasance, bad faith, gross negligence or reckless disregard by
the Advisor of its duties under the Investment Management Agreement, the Advisor is not liable for any error of judgment or mistake of law or for any loss suffered by the Advisor or the Trust in connection with the performance of the Investment
Management Agreement. The Investment Management Agreement also provides for indemnification by the Trust of the Advisor and each of the Advisors directors, officers, employees, agents, associates and controlling persons, and the directors,
partners, members, officers, employees and agents thereof (including any individual who serves at the Advisors request as director, officer, partner, member, trustee or the like of another entity) for liabilities and expenses incurred by them
in connection with their services to the Trust, subject to certain limitations and conditions.
The Investment Management Agreement provides for the
Trust to pay a monthly management fee at an annual rate equal to 0.55% of the average weekly value of the Trusts managed assets, plus the proceeds of ay debt securities or outstanding borrowings used for leverage. Managed Assets
means the total assets of the Trust (including any assets attributable to money borrowed for investment purposes) minus the sum of the Trusts accrued liabilities (other than money borrowed for investment purposes).
The Trust and the Advisor have entered into a fee waiver agreement (the Fee Waiver Agreement), pursuant to which the Advisor has contractually
agreed to waive the management fee with respect to any portion of the Trusts assets attributable to investments in any equity and fixed-income mutual funds and ETFs managed by the Advisor or its affiliates that have a contractual management
fee, through June 30, 2023. In addition, effective December 1, 2019, pursuant to the Fee Waiver Agreement, the Advisor has contractually agreed to waive its management fees by the amount of investment advisory fees the Trust pays to the
Advisor indirectly through its investment in money market funds advised by the Advisor or its affiliates, through June 30, 2023. The Fee Waiver Agreement may be continued from year to year thereafter, provided that such continuance is
specifically approved by the Advisor and the Trust (including by a majority of the Trustees who are not interested persons (as defined in the Investment Company Act) (the Independent Trustees)). Neither the Advisor nor the
Trust is obligated to extend the Fee Waiver Agreement. The Fee Waiver Agreement may be terminated at any time, without the payment of any penalty, only by the Trust (upon the vote of a majority of the Independent Trustees or a majority of the
outstanding voting securities of the Trust), upon 90 days written notice by the Trust to the Advisor. Prior to December 1, 2019, the agreement to waive a portion of the Trusts management fee in connection with the Trusts
investment in affiliated money market funds was voluntary.
The Investment Management Agreement will continue in effect from year to year provided that
each continuance is specifically approved at least annually by both (1) the vote of a majority of the Board or the vote of a majority of the outstanding voting securities of the Trust (as such term is defined in the Investment Company Act) and
(2) by the vote of a majority of the Trustees who are not parties to the Investment Management Agreement or interested persons (as such term is defined in the Investment Company Act) of any such party, cast in person at a meeting
called for the purpose of voting on such approval. The Investment Management Agreement may be terminated as a whole at any time by the Trust, without the payment of any penalty, upon the vote of a majority of the Trustees or a majority of the
outstanding voting securities of the Trust or by the Advisor, on 60 days written notice by either party to the other which can be waived by the non-terminating party. The Investment Management Agreement
will terminate automatically in the event of its assignment (as such term is defined in the Investment Company Act and the rules thereunder).
The table below sets forth information about the total management fees paid by the Trust to the Advisor, and the amounts waived by the Advisor, for the
periods indicated:
S-12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended/Period (as applicable) |
|
Paid to the Advisor |
|
|
Waived by the Advisor |
|
December 31, 2021 |
|
$ |
|
|
|
|
4,981,162 |
|
|
$ |
|
|
|
|
6,478 |
|
December 31, 2020 |
|
$ |
|
|
|
|
4,562,948 |
|
|
$ |
|
|
|
|
10,616 |
|
December 31, 20191 |
|
$ |
|
|
|
|
1,490,181 |
|
|
$ |
|
|
|
|
1,339 |
|
August 31, 2019 |
|
$ |
|
|
|
|
4,443,460 |
|
|
$ |
|
|
|
|
5,603 |
|
1 The Trust changed its fiscal year from August 31 to December 31 effective
December 31, 2019.
Sub-Investment Advisory Agreements
BlackRock International Limited and BlackRock (Singapore) Limited (previously defined as the
Sub-Advisors), each a wholly owned subsidiary of BlackRock, will perform certain of
the day-to-day investment management of the Trust pursuant to separate sub-investment advisory agreements. The Sub-Advisors receive a portion of the management fee paid by the Trust to the Advisor. The Advisor, and not the Trust, will pay an
annual sub-advisory fee to the Sub-Advisors. For that portion of the Trust for which each Sub-Advisor acts as
sub-advisor, the Advisor will pay to such Sub-Advisor, an annual sub-advisory fee equal to a percentage of the management fee
received by the Advisor from the Trust with respect to the average daily value of the Managed Assets of the Trust allocated to such Sub-Advisor.
The sub-investment advisory agreements provide that, in the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations thereunder, the Trust will indemnify the Sub-Advisors and with respect to BIL, its directors, officers, employees, agents, associates and control
persons for liabilities incurred by them in connection with their services to the Trust, subject to certain limitations.
Although the Sub-Advisors intend to devote such time and effort to the business of the Trust as is reasonably necessary to perform its duties to the Trust, the services of
the Sub-Advisors are not exclusive and the Sub-Advisors provide similar services to other investment companies and other clients and may engage in
other activities.
The sub-investment advisory agreements will continue in effect for a period of two
years from its effective date, and if not sooner terminated, will continue in effect for successive periods of 12 months thereafter, provided that each continuance is specifically approved at least annually by both (1) the vote of a majority of
the Board or the vote of a majority of the outstanding voting securities of the Trust (as defined in the Investment Company Act) and (2) by the vote of a majority of the trustees who are not parties to such agreement or interested persons (as
such term is defined in the Investment Company Act) of any such party, cast in person at a meeting called for the purpose of voting on such approval. The sub-investment advisory agreements may be
terminated as a whole at any time by the Trust without the payment of any penalty, upon the vote of a majority of the Board or a majority of the outstanding voting securities of the Trust or by the Advisor or
the Sub-Advisor, on 60 days written notice by either party to the other. The sub-investment advisory agreements will also terminate
automatically in the event of their assignment (as such term is defined in the Investment Company Act and the rules thereunder).
Biographical
Information Pertaining to the Trustees
The Board consists of eleven individuals (each, a Trustee), nine of whom are Independent Trustees.
The registered investment companies advised by the Advisor or its affiliates (the BlackRock-advised Funds) are organized into one complex of closed-end funds and
open-end non-index fixed-income funds (the BlackRock Fixed-Income Complex), one complex of open-end equity,
multi-asset, index and money market funds (the BlackRock Multi-Asset Complex) and one complex of exchange-traded funds (each, a BlackRock Fund Complex). The Trust is included in the BlackRock Fund Complex referred to as
the BlackRock Fixed-Income Complex. The Trustees also oversee as board members the operations of the other open-end and closed-end registered investment companies
included in the BlackRock Fixed-Income Complex.
S-13
Please refer to the section of the Trusts June 8, 2021 definitive proxy statement on Schedule 14A
for the annual meeting of the Trusts shareholders entitled: Proposal 1 - Board Members/Nominees Biographical Information
, which is incorporated by reference herein, for a discussion of the Trusts Trustees other than Lorenzo A. Flores, their principal occupations and other affiliates during the past five years, the number of portfolios in the
Fixed-Income Complex that they oversee, and other information about them.
Effective July 30, 2021, Lorenzo A. Flores was appointed to the Board
as an Independent Trustee. Certain biographical and other information relating to Lorenzo A. Flores is set forth below, including his year of birth, his principal occupation for at least the last five years, the length of time served, the total
number of BlackRock-advised Funds overseen and any public directorships or trusteeships.
|
|
|
|
|
|
|
|
|
Name and Year of Birth1,2 |
|
Position(s) Held (Length of Service) |
|
Principal Occupation(s) During Past Five Years |
|
Number of BlackRock-Advised Registered Investment Companies
(RICs) Consisting of Investment Portfolios (Portfolios) Overseen |
|
Public Company and Other Investment Company Directorships Held During Past Five Years |
|
|
|
|
|
Lorenzo A. Flores 1964 |
|
Trustee (Since 2021) |
|
Vice Chairman, Kioxia, Inc. since 2019; Chief
Financial Officer, Xilinx, Inc. from 2016 to 2019; Corporate Controller, Xilinx, Inc. from 2008 to 2016. |
|
73 RICs consisting of 100 Portfolios |
|
None |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
The address of each Trustee is c/o BlackRock, Inc., 55 East 52nd Street, New York, New York 10055.
|
2 |
Each Independent Trustee holds office until his or her successor is duly elected and qualifies or until his or
her earlier death, resignation, retirement or removal as provided by the Trusts bylaws or charter or statute, or until December 31 of the year in which he or she turns 75. Trustees who are interested persons, as defined in the
Investment Company Act, serve until their successor is duly elected and qualifies or until their earlier death, resignation, retirement or removal as provided by the Trusts bylaws or statute, or until December 31 of the year in which they
turn 72. The Board may determine to extend the terms of Independent Trustees on a case-by-case basis, as appropriate. |
The table below discusses some of the experiences, qualifications and skills of Lorenzo A. Flores that support the conclusion that he should serve on the
Board.
|
|
|
Trustee |
|
Experience, Qualifications and Skills |
Lorenzo A. Flores |
|
The Board benefits from Lorenzo A. Floress many years of business, leadership and financial experience in his roles at various public and private companies. In particular, Mr. Floress service as Chief Financial
Officer and Corporate Controller of Xilinx, Inc. and Vice Chairman of Kioxia, Inc. and his long experience in the technology industry allow him to provide insight to into financial, business and technology trends. Mr. Floress knowledge of
financial and accounting matters qualifies him to serve as a member of the Audit Committee. Mr. Floress independence from the Trust and the Advisor enhances his service as a member of the Performance Oversight Committee. |
Effective December 31, 2021, Michael J. Castellano and Richard E. Cavanagh each retired as a Trustee of the Trust.
Ms. Robards intends to retire as a Trustee of the Trust and, in that regard, has resigned as a Trustee of the Trust effective as of May 31,
2022.
S-14
Board Leadership Structure and Oversight
Please refer to the sections of the Trusts definitive proxy statement on Schedule 14A for the annual meeting of the Trusts shareholders entitled:
Proposal 1 - Board Leadership Structure and Oversight and Appendix
E - Committees of the Board which is incorporated by reference herein, for a discussion of the Boards leadership structure and oversight other than as noted below.
During the Trusts fiscal year ended December 31, 2021, the Boards Audit Committee, Governance and Nominating Committee, Compliance Committee,
Performance Oversight Committee and Executive Committee met the following number of times:
|
|
|
|
|
|
|
|
|
Number
of Audit Committee Meetings |
|
Number
of Governance Committee Meetings |
|
Number
of Compliance Committee Meetings |
|
Number
of Performance Oversight Committee Meetings |
|
Number
of Executive Committee Meetings |
12 |
|
7 |
|
4 |
|
4 |
|
0 |
Effective July 30, 2021, J. Phillip Holloman was appointed to the Audit Committee of the Board and Stayce D. Harris
was appointed to the Compliance Committee of the Board. Effective August 5, 2021, Lorenzo A. Flores was appointed to the Audit Committee of the Board.
Effective November 18, 2021, Lorenzo A. Flores, Stayce D. Harris and J. Phillip Holloman were each appointed to the Performance Oversight Committee of
the Board.
Effective January 1, 2022, R. Glenn Hubbard was appointed to serve as a Chair of the Board and as a member and Chair of the
Executive Committee of the Board; W. Carl Kester was appointed to serve as Vice Chair of the Board, as a member and Chair of the Governance and Nominating Committee of the Board and as a member of the Executive Committee of the Board; Catherine A.
Lynch was appointed to serve as Chair of the Audit Committee of the Board; and Karen P. Robards no longer serves as Co-Chair of the Board.
Trustee Share Ownership
Information relating to each
Trustees share ownership in the Trust and in all BlackRock-advised Funds that are currently overseen by the respective Trustee (Supervised Funds) as of December 31, 2021 is set forth in the chart below:
|
|
|
|
|
Name of Trustee |
|
Dollar Range of Equity
Securities in the Trust* |
|
Aggregate Dollar Range of Equity
Securities in Supervised Funds* |
Independent Trustees |
|
|
|
|
|
|
|
Cynthia L. Egan |
|
None |
|
Over $ 100,000 |
|
|
|
Frank J. Fabozzi |
|
Over $ 100,000 |
|
Over $ 100,000 |
|
|
|
Lorenzo A. Flores |
|
$ 10,001-$ 50,000 |
|
Over $ 100,000 |
|
|
|
Stayce D. Harris |
|
$ 10,001-$ 50,000 |
|
Over $ 100,000 |
|
|
|
J. Phillip Holloman |
|
$ 10,001-$ 50,000 |
|
Over $ 100,000 |
|
|
|
R. Glenn Hubbard |
|
Over $ 100,000 |
|
Over $ 100,000 |
S-15
|
|
|
|
|
|
|
Name of Trustee |
|
Dollar Range of Equity Securities in the Trust* |
|
|
Aggregate Dollar Range of Equity
Securities in Supervised Funds* |
|
|
|
W. Carl Kester |
|
|
Over $ 100,000 |
|
|
Over $ 100,000 |
|
|
|
Catherine A. Lynch |
|
|
$ 50,001-$ 100,000 |
|
|
Over $ 100,000 |
|
|
|
Karen P. Robards |
|
|
None |
|
|
Over $ 100,000 |
|
|
|
Interested Trustees |
|
|
|
|
|
|
|
|
|
Robert Fairbairn |
|
|
None |
|
|
Over $ 100,000 |
|
|
|
John M. Perlowski |
|
|
None |
|
|
Over $ 100,000 |
* |
Includes share equivalents owned under the deferred compensation plan in the Supervised Funds by certain
Independent Trustees who have participated in the deferred compensation plan of the Supervised Funds. |
Compensation of Trustees
Each Trustee who is an Independent Trustee is paid an annual retainer of $370,000 per year for his or her services as a Board member of the
BlackRock-advised Funds, including the Trust, and each Independent Trustee may also receive a $10,000 Board meeting fee for special unscheduled meetings or meetings in excess of six Board meetings held in a calendar year, together with out-of-pocket expenses in accordance with a Board policy on travel and other business expenses relating to attendance at meetings. In addition, the Chair of the Board is paid
an additional annual retainer of $100,000. The Chairs of the Audit Committee, Performance Oversight Committee, Compliance Committee, and Governance and Nominating Committee are paid an additional annual retainer of $45,000, $37,500, $45,000 and
$37,500, respectively. Each of the members of the Audit Committee and Compliance Committee are paid an additional annual retainer of $30,000 and $25,000, respectively, for his or her service on such committee. Effective January 1, 2022, the
Vice Chair of the Board is paid an additional annual retainer of $60,000. The Trust will pay a pro rata portion quarterly (based on relative net assets) of the foregoing Trustee fees paid by the funds in the BlackRock Fixed-Income Complex.
The Independent Trustees have agreed that a maximum of 50% of each Independent Trustees total compensation paid by funds in the BlackRock Fixed-Income
Complex may be deferred pursuant to the BlackRock Fixed-Income Complexs deferred compensation plan. Under the deferred compensation plan, deferred amounts earn a return for the Independent Trustees as though equivalent dollar amounts had been
invested in shares of certain funds in the BlackRock Fixed-Income Complex selected by the Independent Trustees. This has approximately the same economic effect for the Independent Trustees as if they had invested the deferred amounts in such funds
in the BlackRock Fixed-Income Complex. The deferred compensation plan is not funded and obligations thereunder represent general unsecured claims against the general assets of a fund and are recorded as a liability for accounting purposes.
The following table sets forth the compensation paid to the Trustees by the Trust for the fiscal year ended December 31, 2021, and the aggregate
compensation, including deferred compensation amounts, paid to them by all BlackRock-advised Funds for the calendar year ended December 31, 2021. Messrs. Fairbairn and Perlowski serve without compensation from the Trust because of their
affiliation with BlackRock, Inc. and the Advisor.
|
|
|
|
|
|
|
Name(1) |
|
Compensation from the Trust |
|
Estimated Annual Benefits upon Retirement |
|
Aggregate Compensation from
the BlackRock-Advised Funds(2)(3)
|
Independent Trustees |
|
|
|
|
|
|
Michael J. Castellano(4) |
|
$3,790 |
|
None |
|
$445,000 |
Richard E. Cavanagh(5) |
|
$4,213 |
|
None |
|
$495,000 |
S-16
|
|
|
|
|
|
|
Name(1) |
|
Compensation from the Trust |
|
Estimated Annual Benefits upon Retirement |
|
Aggregate Compensation from
the BlackRock-Advised Funds(2)(3)
|
Cynthia L. Egan |
|
$3,747 |
|
None |
|
$440,000 |
Frank J. Fabozzi |
|
$3,726 |
|
None |
|
$478,750 |
Lorenzo A. Flores(6) |
|
$1,243 |
|
None |
|
$167,988 |
Stayce D. Harris(7) |
|
$1,639 |
|
None |
|
$216,875 |
J. Phillip Holloman(8) |
|
$1,654 |
|
None |
|
$218,981 |
R. Glenn Hubbard |
|
$3,683 |
|
None |
|
$432,500 |
W. Carl Kester |
|
$3,366 |
|
None |
|
$443,750 |
Catherine A. Lynch |
|
$3,408 |
|
None |
|
$441,250 |
Karen P. Robards |
|
$4,256 |
|
None |
|
$500,000 |
Interested Trustees |
|
|
|
|
|
|
Robert Fairbairn |
|
None |
|
None |
|
None |
John M. Perlowski |
|
None |
|
None |
|
None |
(1) |
For the number of BlackRock-advised Funds from which each Trustee receives compensation, see the Biographical
Information chart beginning on page S-13. |
(2) |
For the Independent Trustees, this amount represents the aggregate compensation earned from the funds in the
BlackRock Fixed-Income Complex during the calendar year ended December 31, 2021. Of this amount, Mr. Castellano, Mr. Cavanagh, Dr. Fabozzi, Mr. Flores, Ms. Harris, Mr. Holloman,
Dr. Hubbard, Dr. Kester and Ms. Lynch deferred $133,500, $163,350, $71,812, $50,000, $51,514, $52,567, $216,250,
$20,000 and $66,187, respectively, pursuant to the BlackRock Fixed-Income Complexs deferred compensation plan. |
(3) |
Total amount of deferred compensation payable by the BlackRock Fixed-Income Complex to Mr. Castellano,
Mr. Cavanagh, Dr. Fabozzi, Mr. Flores, Ms. Harris, Mr. Holloman, Dr. Hubbard, Dr. Kester and Ms. Lynch
is $1,563,029, $2,322,521, $1,263,915, $50,820, $52,360, $53,430, $3,749,161, $1,769,688 and $395,097, respectively, as of
December 31, 2021. Ms. Egan and Ms. Robards did not participate in the deferred compensation plan as of December 31, 2021. |
(4) |
Mr. Castellano retired as a Trustee of the Trust and Chair of the Audit Committee effective
December 31, 2021. |
(5) |
Mr. Cavanagh retired as a Trustee of the Trust and Co-Chair of the
Board effective December 31, 2021. |
(6) |
Mr. Flores was appointed as a Trustee of the Trust effective July 30, 2021, a member of the Audit
Committee effective August 5, 2021 and a member of the Performance Oversight Committee effective November 18, 2021. |
(7) |
Ms. Harris was appointed as a Trustee of the Trust effective June 10, 2021, a member of the Compliance
Committee effective July 30, 2021 and a member of the Performance Oversight Committee effective November 18, 2021. |
(8) |
Mr. Holloman was appointed as a Trustee of the Trust effective June 10, 2021, a member of the Audit
Committee effective July 30, 2021 and a member of the Performance Oversight Committee effective November 18, 2021. |
Independent Trustee Ownership of Securities
As of
December 31, 2021, none of the Independent Trustees of the Trust or their immediate family members owned beneficially or of record any securities of BlackRock or any affiliate of any BlackRock person controlling, controlled by or under common
control with BlackRock nor did any Independent Trustee of the Trust or their immediate family member have any material interest in any transaction, or series of similar transactions, during the most recently completed two calendar years involving
the Trust, BlackRock or any affiliate of any BlackRock person controlling, controlled by or under common control with the Trust or BlackRock.
As of the date of this SAI, the officers and Trustees of the Trust, as a group, beneficially owned less than 1% of the outstanding common shares
of the Trust.
Information Pertaining to the Officers
Please refer to the section of the Trusts definitive proxy statement on Schedule 14A for the annual meeting of the Trusts shareholders entitled:
Appendix F Information Pertaining to the Executive Officers of the Funds, which is incorporated by reference
herein, for certain biographical and other information relating to the officers of the Trust who are not Trustees.
S-17
Indemnification of Trustees and Officers
The governing documents of the Trust generally provide that, to the extent permitted by applicable law, the Trust will indemnify its Trustees and officers
against liabilities and expenses incurred in connection with litigation in which they may be involved because of their offices with the Trust unless, as to liability to the Trust or its investors, it is finally adjudicated that they engaged in
willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in their offices. In addition, the Trust will not indemnify Trustees with respect to any matter as to which Trustees did not act in good faith in the
reasonable belief that his or her action was in the best interest of the Trust or, in the case of any criminal proceeding, as to which Trustees had reasonable cause to believe that the conduct was unlawful. Indemnification provisions contained in
the Trusts governing documents are subject to any limitations imposed by applicable law.
Closed-end funds
in the BlackRock Fixed-Income Complex, including the Trust, have also entered into a separate indemnification agreement with the board members of each board of such funds (the Indemnification Agreement). The Indemnification Agreement
(i) extends the indemnification provisions contained in a funds governing documents to board members who leave that funds board and serve on an advisory board of a different fund in the BlackRock Fixed-Income Complex; (ii) sets
in place the terms of the indemnification provisions of a funds governing documents once a board member retires from a board; and (iii) in the case of board members who left the board of a fund in connection with or prior to the board
consolidation that occurred in 2007 as a result of the merger of BlackRock and Merrill Lynch & Co., Inc.s investment management business, clarifies that such fund continues to indemnify the trustee for claims arising out of his or her
past service to that fund.
Portfolio Management
Portfolio Manager Assets Under Management
The following
table sets forth information about funds and accounts other than the Trust for which the portfolio managers are primarily responsible for the day-to-day portfolio
management as of December 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Other Accounts Managed
and Assets by Account Type |
|
Number of Other Accounts and
Assets for Which Advisory Fee is
Performance-Based |
Name of
Portfolio Manager |
|
Other Registered
Investment
Companies |
|
Other
Pooled Investment
Vehicles |
|
Other Accounts |
|
Other Registered
Investment
Companies |
|
Other Pooled
Investment
Vehicles |
|
Other
Accounts |
James E. Keenan |
|
28 |
|
35 |
|
19 |
|
0 |
|
0 |
|
5 |
|
|
$43.74 Billion |
|
$16.41 Billion |
|
$10.46 Billion |
|
$0 |
|
$0 |
|
$1.23 Billion |
Mitchell Garfin |
|
27 |
|
27 |
|
61 |
|
0 |
|
0 |
|
5 |
|
|
$45.64 Billion |
|
$15.54 Billion |
|
$16.87 Billion |
|
$0 |
|
$0 |
|
$1.03 Billion |
Scott MacLellan |
|
13 |
|
15 |
|
132 |
|
0 |
|
0 |
|
2 |
|
|
$16.33 Billion |
|
$4.24 Billion |
|
$61.02 Billion |
|
$0 |
|
$0 |
|
$754.0 Million |
David Delbos |
|
31 |
|
25 |
|
61 |
|
0 |
|
0 |
|
5 |
|
|
$41.97 Billion |
|
$15.82 Billion |
|
$17.55 Billion |
|
$0 |
|
$0 |
|
$1.03 Billion |
Akiva Dickstein |
|
22 |
|
26 |
|
264 |
|
0 |
|
0 |
|
5 |
|
|
$29.93 Billion |
|
$9.97 Billion |
|
$104.2 Billion |
|
$0 |
|
$0 |
|
$1.63 Billion |
Portfolio Manager Compensation Overview
S-18
The discussion below describes the portfolio managers compensation as of December 31, 2021.
The Advisors financial arrangements with its portfolio managers, its competitive compensation and its career path emphasis at all levels reflect the
value senior management places on key resources. Compensation may include a variety of components and may vary from year to year based on a number of factors. The principal components of compensation include a base salary, a performance-based
discretionary bonus, participation in various benefits programs and one or more of the incentive compensation programs established by the Advisor.
Base Compensation. Generally, portfolio managers receive base compensation based on their position with the firm.
Discretionary Incentive Compensation. Discretionary incentive compensation is a function of several components: the performance of BlackRock, Inc., the
performance of the portfolio managers group within the Advisor, the investment performance, including risk-adjusted returns, of the firms assets under management or supervision by that portfolio manager relative to predetermined
benchmarks, and the individuals performance and contribution to the overall performance of these portfolios and the Advisor. In most cases, these benchmarks are the same as the benchmark or benchmarks against which the performance of the Trust
or other accounts managed by the portfolio managers are measured. Among other things, the Advisors Chief Investment Officers make a subjective determination with respect to each portfolio managers compensation based on the performance of
the Trust and other accounts managed by each portfolio manager relative to the various benchmarks. Performance of fixed income funds is measured on a pre-tax and/or
after-tax basis over various time periods including 1-, 3- and 5- year periods, as
applicable. With respect to these portfolio managers, such benchmarks for the Trust and other accounts are:
|
|
|
Portfolio Managers |
|
Applicable Benchmarks |
James Keenan
Mitchell Garfin David Delbos |
|
A combination of market-based indices (e.g., The Bloomberg U.S. Corporate High Yield 2% Issuer Cap Index),
certain customized indices and certain fund industry peer groups. |
Scott MacLellan |
|
A combination of market-based indices (e.g., Bank of America Merrill Lynch U.S. Corporate &
Government Index, 1-3 Years), certain customized indices and certain fund industry peer groups. |
Akiva Dickstein |
|
A combination of market-based indices (e.g. Bloomberg US Aggregate Index, Bloomberg US Universal Index and
Bloomberg Intermediate Aggregate Index), certain customized indices and certain fund industry peer groups. |
Distribution of Discretionary Incentive Compensation. Discretionary incentive compensation is distributed to
portfolio managers in a combination of cash, deferred BlackRock, Inc. stock awards, and/or deferred cash awards that notionally track the return of certain Advisor investment products.
Portfolio managers receive their annual discretionary incentive compensation in the form of cash. Portfolio managers whose total compensation is above a
specified threshold also receive deferred BlackRock, Inc. stock awards annually as part of their discretionary incentive compensation. Paying a portion of discretionary incentive compensation in the form of deferred BlackRock, Inc. stock puts
compensation earned by a portfolio manager for a given year at risk based on the Advisors ability to sustain and improve its performance over future periods. In some cases, additional deferred BlackRock, Inc. stock may be granted
to certain key employees as part of a long-term incentive award to aid in retention, align interests with long-term shareholders and motivate performance. Deferred BlackRock, Inc. stock awards are generally granted in the form of BlackRock, Inc.
restricted stock units that vest pursuant to the terms of the applicable plan and, once vested, settle in BlackRock, Inc. common stock. The portfolio managers of this Trust have deferred BlackRock, Inc. stock awards.
S-19
For certain portfolio managers, a portion of the discretionary incentive compensation is also distributed in
the form of deferred cash awards that notionally track the returns of select Advisor investment products they manage, which provides direct alignment of portfolio manager discretionary incentive compensation with investment product results. Deferred
cash awards vest ratably over a number of years and, once vested, settle in the form of cash. Only portfolio managers who manage specified products and whose total compensation is above a specified threshold are eligible to participate in the
deferred cash award program.
Other Compensation Benefits. In addition to base salary and discretionary incentive compensation, portfolio
managers may be eligible to receive or participate in one or more of the following:
Incentive Savings PlansBlackRock, Inc. has
created a variety of incentive savings plans in which BlackRock, Inc. employees are eligible to participate, including a 401(k) plan, the BlackRock Retirement Savings Plan (RSP), and the BlackRock Employee Stock Purchase Plan (ESPP). The
employer contribution components of the RSP include a company match equal to 50% of the first 8% of eligible pay contributed to the plan capped at $5,000 per year, and a company retirement contribution equal
to 3-5% of eligible compensation up to the Internal Revenue Service limit ($290,000 for 2021). The RSP offers a range of investment options, including registered investment companies and collective
investment funds managed by the firm. BlackRock, Inc. contributions follow the investment direction set by participants for their own contributions or, absent participant investment direction, are invested into a target date fund that corresponds
to, or is closest to, the year in which the participant attains age 65. The ESPP allows for investment in BlackRock, Inc. common stock at a 5% discount on the fair market value of the stock on the purchase date. Annual participation in the
ESPP is limited to the purchase of 1,000 shares of common stock or a dollar value of $25,000 based on its fair market value on the purchase date. All of the eligible portfolio managers are eligible to participate in these plans.
Securities Ownership of Portfolio Managers
As of
December 31, 2021, the end of the Trusts most recently completed fiscal year end, the dollar range of securities beneficially owned by each portfolio manager in the Trust is shown below:
|
|
|
Portfolio Manager |
|
Dollar Range of Equity
Securities of the Trust
Beneficially Owned |
James E. Keenan |
|
None |
Mitchell Garfin |
|
None |
Scott MacLellan |
|
$10,001-$50,000 |
David Delbos |
|
None |
Akiva Dickstein |
|
None |
Potential Material Conflicts of Interest
The Advisors have built a professional working environment, firm-wide compliance culture and compliance procedures and systems designed to protect against
potential incentives that may favor one account over another. The Advisors have adopted policies and procedures that address the allocation of investment opportunities, execution of portfolio transactions, personal trading by employees and other
potential conflicts of interest that are designed to ensure that all client accounts are treated equitably over time. Nevertheless, the Advisors furnish investment management and advisory services to numerous clients in addition to the Trust, and
the Advisors may, consistent with applicable law, make investment recommendations to other clients or accounts (including accounts which are hedge funds or have performance or higher fees paid to the Advisors, or in which portfolio managers have a
personal interest in the receipt of such fees), which may be the same as or different from those made to the Trust. In addition, BlackRock, Inc., its affiliates and significant shareholders and any officer, director, shareholder or employee may or
may not have an interest in the securities whose purchase and sale the Advisors recommend to the Trust. BlackRock, Inc. or any of its affiliates or significant shareholders, or any officer, director, shareholder, employee or any member of their
families may take different actions than those recommended to the Trust by the
S-20
Advisors with respect to the same securities. Moreover, the Advisors may refrain from rendering any advice or
services concerning securities of companies of which any of BlackRock, Inc.s (or its affiliates or significant shareholders) officers, directors or employees are directors or officers, or companies as to which BlackRock, Inc. or
any of its affiliates or significant shareholders or the officers, directors and employees of any of them has any substantial economic interest or possesses material non-public information. Certain portfolio
managers also may manage accounts whose investment strategies may at times be opposed to the strategy utilized for a fund. It should also be noted that a portfolio manager may be managing certain hedge fund and/or long only accounts, or may be part
of a team managing certain hedge fund and/or long only accounts, subject to incentive fees. Such portfolio managers may therefore be entitled to receive a portion of any incentive fees earned on such accounts. Currently, the portfolio managers of
this fund are not entitled to receive a portion of incentive fees of other accounts.
As fiduciaries, the Advisors owe a duty of loyalty to its clients
and must treat each client fairly. When the Advisors purchase or sell securities for more than one account, the trades must be allocated in a manner consistent with its fiduciary duties. The Advisors attempt to allocate investments in a fair and
equitable manner among client accounts, with no account receiving preferential treatment. To this end, BlackRock, Inc. has adopted policies that are intended to ensure reasonable efficiency in client transactions and provide the Advisors with
sufficient flexibility to allocate investments in a manner that is consistent with the particular investment discipline and client base, as appropriate.
Proxy Voting Policies
The Board has delegated the
voting of proxies for the Trusts securities to the Advisor pursuant to the Advisors proxy voting guidelines. Under these guidelines, the Advisor will vote proxies related to Trust securities in the best interests of the Trust and its
shareholders. From time to time, a vote may present a conflict between the interests of the Trusts shareholders, on the one hand, and those of the Advisor, or any affiliated person of the Trust or the Advisor, on the other. In such event,
provided that the Advisors Equity Investment Policy Oversight Committee, or a sub-committee thereof (the Oversight Committee), is aware of the real or potential conflict, if the matter to be
voted on represents a material, non-routine matter and if the Oversight Committee does not reasonably believe it is able to follow its general voting guidelines (or if the particular proxy matter is not
addressed in the guidelines) and vote impartially, the Oversight Committee may retain an independent fiduciary to advise the Oversight Committee on how to vote or to cast votes on behalf of the Advisors clients. If the Advisor determines not
to retain an independent fiduciary, or does not desire to follow the advice of such independent fiduciary, the Oversight Committee shall determine how to vote the proxy after consulting with the Advisors Portfolio Management Group and/or the
Advisors Legal and Compliance Department and concluding that the vote cast is in its clients best interest notwithstanding the conflict. A copy of the Closed-End Fund Proxy Voting Policy is
included as Appendix B to this SAI. Information on how the Trust voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 will be available (i) at
www.blackrock.com and (ii) on the SECs website at http://www.sec.gov.
Codes of Ethics
The Trust and the Advisors have adopted codes of ethics pursuant to Rule 17j-1 under the Investment Company Act.
These codes permit personnel subject to the codes to invest in securities, including securities that may be purchased or held by the Trust. These codes may be obtained by calling the SEC at (202) 551-8090.
These codes of ethics are available on the EDGAR Database on the SECs website (http://www.sec.gov), and copies of these codes may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov.
Other Information
BlackRock, Inc. is independent in ownership and governance, with no single majority stockholder and a majority of independent directors.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board, the Advisor is primarily responsible for the execution of the Trusts portfolio transactions
and the allocation of brokerage. The Advisor does not execute transactions through any particular broker or dealer, but seeks to obtain the best net results for the Trust, taking into account such factors as
S-21
price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution, operational facilities of the firm and the firms risk and skill in
positioning blocks of securities. While the Advisor generally seeks reasonable trade execution costs, the Trust does not necessarily pay the lowest spread or commission available, and payment of the lowest commission or spread is not necessarily
consistent with obtaining the best price and execution in particular transactions. Subject to applicable legal requirements, the Advisor may select a broker based partly upon brokerage or research services provided to the Advisor and its clients,
including the Trust. In return for such services, the Advisor may cause the Trust to pay a higher commission than other brokers would charge if the Advisor determines in good faith that the commission is reasonable in relation to the services
provided.
In selecting brokers or dealers to execute portfolio transactions, the Advisor and the Sub-Advisors
seek to obtain the best price and most favorable execution for the Trust, taking into account a variety of factors including: (i) the size, nature and character of the security or instrument being traded and the markets in which it is purchased
or sold; (ii) the desired timing of the transaction; (iii) the Advisors knowledge of the expected commission rates and spreads currently available; (iv) the activity existing and expected in the market for the particular
security or instrument, including any anticipated execution difficulties; (v) the full range of brokerage services provided; (vi) the brokers or dealers capital; (vii) the quality of research and research services
provided; (viii) the reasonableness of the commission, dealer spread or its equivalent for the specific transaction; and (ix) the Advisors knowledge of any actual or apparent operational problems of a broker or dealer.
Section 28(e) of the Exchange Act (Section 28(e)) permits an investment adviser, under certain circumstances and, if applicable, subject
to the restrictions of MIFID II as described further below, to cause an account to pay a broker or dealer a commission for effecting a transaction that exceeds the amount another broker or dealer would have charged for effecting the same transaction
in recognition of the value of brokerage and research services provided by that broker or dealer. This includes commissions paid on riskless principal transactions under certain conditions. Brokerage and research services include:
(1) furnishing advice as to the value of securities, including pricing and appraisal advice, credit analysis, risk measurement analysis, performance and other analysis, as well as the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of securities; (2) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of
accounts; and (3) effecting securities transactions and performing functions incidental to securities transactions (such as clearance, settlement, and custody). The Advisor believes that access to independent investment research is beneficial
to its investment decision-making processes and, therefore, to the Trust.
The Advisor, unless prohibited by applicable law, may participate in client
commission arrangements under which the Advisor may execute transactions through a broker-dealer and request that the broker-dealer allocate a portion of the commissions or commission credits to another firm that provides research to the Advisor.
The Advisor believes that research services obtained through soft dollar or commission sharing arrangements enhance its investment decision-making capabilities, thereby increasing the prospects for higher investment returns. The Advisor will engage
only in soft dollar or commission sharing transactions that comply with the requirements of Section 28(e) and MiFID II. Under MiFID II, European Union (EU) investment managers, including BIL, pay for any research out of their own
resources and not through soft dollars or commission sharing arrangements. The Advisor regularly evaluates the soft dollar products and services utilized, as well as the overall soft dollar and commission sharing arrangements to ensure that trades
are executed by firms that are regarded as best able to execute trades for client accounts, while at the same time providing access to the research and other services the Advisor views as impactful to its trading results.
The Advisor, unless prohibited by applicable law, may utilize soft dollars and related services, including research (whether prepared by the broker-dealer or
prepared by a third-party and provided to the Advisor by the broker-dealer) and execution or brokerage services within applicable rules and the Advisors policies to the extent that such permitted services do not compromise the Advisors
ability to seek to obtain best execution. In this regard, the portfolio management investment and/or trading teams may consider a variety of factors, including the degree to which the broker-dealer: (a) provides access to company management;
(b) provides access to their analysts; (c) provides meaningful/insightful research notes on companies or other potential investments; (d) facilitates calls on which meaningful or insightful ideas about companies or potential
investments are discussed; (e) facilitates conferences at which meaningful or insightful ideas about companies or potential investments are discussed; or
S-22
(f) provides research tools such as market data, financial analysis, and other third party related research and brokerage tools that aid in the investment process.
Research-oriented services for which the Advisor, unless prohibited by applicable law, might pay with Trust commissions may be in written form or through
direct contact with individuals and may include information as to particular companies or industries and securities or groups of securities, as well as market, economic, or institutional advice and statistical information, political developments and
technical market information that assists in the valuation of investments. Except as noted immediately below, research services furnished by brokers may be used in servicing some or all client accounts and not all services may be used in connection
with the Trust or account that paid commissions to the broker providing such services. In some cases, research information received from brokers by investment company management personnel, or personnel principally responsible for the Advisors
individually managed portfolios, is not necessarily shared by and between such personnel. Any investment advisory or other fees paid by the Trust to the Advisor are not reduced as a result of the Advisors receipt of research services. In some
cases, the Advisor may receive a service from a broker that has both a research and a non-research use. When this occurs the Advisor makes a good faith allocation, under all the
circumstances, between the research and non-research uses of the service. The percentage of the service that is used for research purposes may be paid for with client commissions, while the Advisor will use
its own funds to pay for the percentage of the service that is used for non-research purposes. In making this good faith allocation, the Advisor faces a potential conflict of interest, but the Advisor believes
that its allocation procedures are reasonably designed to ensure that it appropriately allocates the anticipated use of such services to their research and non-research uses.
Effective January 3, 2018 under MiFID II, investment managers in the EU, including the Sub-Advisor, are no longer
able to use soft dollars to pay for research from brokers. Investment managers in the EU are required to either pay for research out of their own profit and loss or agree with clients to have research costs paid by clients through research payment
accounts that are funded out of execution commissions or by a specific client research charge, provided that the payments for research are unbundled from the payments for execution. MiFID II restricts the use of soft dollars by the Sub-Advisor. The Sub-Advisor will pay for any research out of its own resources and not through soft dollars or commission sharing arrangements.
Payments of commissions to brokers who are affiliated persons of the Trust will be made in accordance with Rule 17e-1
under the Investment Company Act.
From time to time, the Trust may purchase new issues of securities in a fixed price offering. In these situations,
the broker may be a member of the selling group that will, in addition to selling securities, provide the Advisor with research services. The Financial Industry Regulatory Authority, Inc. has adopted rules expressly permitting these types of
arrangements under certain circumstances. Generally, the broker will provide research credits in these situations at a rate that is higher than that available for typical secondary market transactions. These arrangements may not fall
within the safe harbor of Section 28(e).
The Advisor does not consider sales of shares of the investment companies it advises as a factor in the
selection of brokers or dealers to execute portfolio transactions for the Trust; however, whether or not a particular broker or dealer sells shares of the investment companies advised by the Advisor neither qualifies nor disqualifies such broker or
dealer to execute transactions for those investment companies.
The Trust anticipates that its brokerage transactions involving foreign securities
generally will be conducted primarily on the principal stock exchanges of the applicable country. Foreign equity securities may be held by the Trust in the form of depositary receipts, or other securities convertible into foreign equity securities.
Depositary receipts may be listed on stock exchanges, or traded in OTC markets in the United States or Europe, as the case may be. American Depositary Receipts, like other securities traded in the United States, will be subject to negotiated
commission rates.
The Trust may invest in certain securities traded in the OTC market and intends to deal directly with the dealers who make a market in
the particular securities, except in those circumstances in which better prices and execution are available elsewhere. Under the Investment Company Act, persons affiliated with the Trust and persons who are affiliated with such affiliated persons
are prohibited from dealing with the Trust as principal in the purchase and sale of securities unless a permissive order allowing such transactions is obtained from the SEC. Since transactions in the
S-23
OTC market usually involve transactions with the dealers acting as principal for their own accounts, the Trust will not deal with affiliated persons in connection with such transactions. However,
an affiliated person of the Trust may serve as its broker in OTC transactions conducted on an agency basis provided that, among other things, the fee or commission received by such affiliated broker is reasonable and fair compared to the fee or
commission received by non-affiliated brokers in connection with comparable transactions.
OTC issues, including
most fixed-income securities such as corporate debt and U.S. Government securities, are normally traded on a net basis without a stated commission, through dealers acting for their own account and not as brokers. The Trust will primarily
engage in transactions with these dealers or deal directly with the issuer unless a better price or execution could be obtained by using a broker. Prices paid to a dealer with respect to both foreign and domestic securities will generally include a
spread, which is the difference between the prices at which the dealer is willing to purchase and sell the specific security at the time, and includes the dealers normal profit.
Purchases of money market instruments by the Trust are made from dealers, underwriters and issuers. The Trust does not currently expect to incur any brokerage
commission expense on such transactions because money market instruments are generally traded on a net basis with dealers acting as principal for their own accounts without a stated commission. The price of the security, however, usually
includes a profit to the dealer.
Securities purchased in underwritten offerings include a fixed amount of compensation to the underwriter, generally
referred to as the underwriters concession or discount. When securities are purchased or sold directly from or to an issuer, no commissions or discounts are paid.
The Advisor or the Sub-Advisors may seek to obtain an undertaking from issuers of commercial paper or dealers selling
commercial paper to consider the repurchase of such securities from the Trust prior to maturity at their original cost plus interest (sometimes adjusted to reflect the actual maturity of the securities), if it believes that the Trusts
anticipated need for liquidity makes such action desirable. Any such repurchase prior to maturity reduces the possibility that the Trust would incur a capital loss in liquidating commercial paper, especially if interest rates have risen since
acquisition of such commercial paper.
Investment decisions for the Trust and for other investment accounts managed by the Advisor or the Sub-Advisors are made independently of each other in light of differing conditions. The Advisor allocates investments among client accounts in a fair and equitable manner. A variety of factors will be considered in
making such allocations. These factors include: (i) investment objectives or strategies for particular accounts, including sector, industry, country or region and capitalization weightings, (ii) tax considerations of an account,
(iii) risk or investment concentration parameters for an account, (iv) supply or demand for a security at a given price level, (v) size of available investment, (vi) cash availability and liquidity requirements for accounts,
(vii) regulatory restrictions, (viii) minimum investment size of an account, (ix) relative size of account, and (x) such other factors as may be approved by the Advisors general counsel. Moreover, investments may not be
allocated to one client account over another based on any of the following considerations: (i) to favor one client account at the expense of another, (ii) to generate higher fees paid by one client account over another or to produce
greater performance compensation to the Advisor, (iii) to develop or enhance a relationship with a client or prospective client, (iv) to compensate a client for past services or benefits rendered to the Advisor or to induce future services
or benefits to be rendered to the Advisor, or (v) to manage or equalize investment performance among different client accounts.
Equity
securities will generally be allocated among client accounts within the same investment mandate on a pro rata basis. This pro-rata allocation may result in the Trust receiving less of a particular security
than if pro-ration had not occurred. All allocations of equity securities will be subject, where relevant, to share minimums established for accounts and compliance constraints.
Initial public offerings of securities may be over-subscribed and subsequently trade at a premium in the secondary market. When the Advisor is given an
opportunity to invest in such an initial offering or new or hot issue, the supply of securities available for client accounts is often less than the amount of securities the accounts would otherwise take. In order to allocate
these investments fairly and equitably among client accounts over time, each portfolio manager or a member of his or her respective investment team will indicate to the Advisors trading desk their level of interest in a particular offering
with respect to eligible client accounts for which that team is responsible. Initial public offerings of U.S. equity securities will be identified as eligible for particular client
S-24
accounts that are managed by portfolio teams who have indicated interest in the offering based on market capitalization of the issuer of the security and the investment mandate of the client
account and in the case of international equity securities, the country where the offering is taking place and the investment mandate of the client account. Generally, shares received during the initial public offering will be allocated among
participating client accounts within each investment mandate on a pro rata basis. In situations where supply is too limited to be allocated among all accounts for which the investment is eligible, portfolio managers may rotate such investment
opportunities among one or more accounts so long as the rotation system provides for fair access for all client accounts over time. Other allocation methodologies that are considered by the Advisor to be fair and equitable to clients may be used as
well.
Because different accounts may have differing investment objectives and policies, the Advisor may buy and sell the same securities at the same time
for different clients based on the particular investment objective, guidelines and strategies of those accounts. For example, the Advisor may decide that it may be entirely appropriate for a growth fund to sell a security at the same time a value
fund is buying that security. To the extent that transactions on behalf of more than one client of the Advisor or its affiliates during the same period may increase the demand for securities being purchased or the supply of securities being sold,
there may be an adverse effect on price. For example, sales of a security by the Advisor on behalf of one or more of its clients may decrease the market price of such security, adversely impacting other of the Advisors clients that still hold
the security. If purchases or sales of securities arise for consideration at or about the same time that would involve the Trust or other clients or funds for which the Advisor or an affiliate act as investment manager, transactions in such
securities will be made, insofar as feasible, for the respective funds and clients in a manner deemed equitable to all.
In certain instances, the Advisor
may find it efficient for purposes of seeking to obtain best execution, to aggregate or bunch certain contemporaneous purchases or sale orders of its advisory accounts. In general, all contemporaneous trades for client accounts under
management by the same portfolio manager or investment team will be bunched in a single order if the trader believes the bunched trade would provide each client with an opportunity to achieve a more favorable execution at a potentially lower
execution cost. The costs associated with a bunched order will be shared pro rata among the clients in the bunched order. Generally, if an order for a particular portfolio manager or management team is filled at several different prices through
multiple trades, all accounts participating in the order will receive the average price except in the case of certain international markets where average pricing is not permitted. While in some cases this practice could have a detrimental effect
upon the price or value of the security as far as the Trust is concerned, in other cases it could be beneficial to the Trust. Transactions effected by the Advisor on behalf of more than one of its clients during the same period may increase the
demand for securities being purchased or the supply of securities being sold, causing an adverse effect on price. The trader will give the bunched order to the broker dealer that the trader has identified as being able to provide the best execution
of the order. Orders for purchase or sale of securities will be placed within a reasonable amount of time of the order receipt and bunched orders will be kept bunched only long enough to execute the order.
The Trust will not purchase securities during the existence of any underwriting or selling group relating to such securities of which the Advisor or any
affiliated person (as defined in the Investment Company Act) thereof is a member except pursuant to procedures adopted by the Board in accordance with Rule 10f-3 under the Investment Company Act. In no
instance will portfolio securities be purchased from or sold to the Advisor or any affiliated person of the foregoing entities except as permitted by SEC exemptive order or by applicable law.
While the Trust generally does not expect to engage in trading for short-term gains, it will effect portfolio transactions without regard to any holding
period if, in the Advisors judgment, such transactions are advisable in light of a change in circumstances of a particular company or within a particular industry or in general market, economic or financial conditions. The portfolio turnover
rate is calculated by dividing the lesser of the Trusts annual sales or purchases of portfolio securities (exclusive of purchases or sales of U.S. Government Securities and all other securities whose maturities at the time of acquisition were
one year or less) by the monthly average value of the securities in the portfolio during the year. A high rate of portfolio turnover results in certain tax consequences, such as increased capital gain dividends and/or ordinary income dividends, and
in correspondingly greater transaction costs in the form of dealer spreads and brokerage commissions, which are borne directly by the Trust.
Information about the brokerage commissions paid by the Trust, including commissions paid to affiliates, for the last three fiscal years, is set forth in the
following table:
S-25
|
|
|
|
|
|
|
|
|
Fiscal Year/Period
Ended |
|
Aggregate Brokerage Commissions Paid |
|
|
Commissions Paid to Affiliates |
|
December 31, 2021 |
|
$ |
58,102 |
|
|
$ |
0 |
|
December 31, 2020 |
|
$ |
63,425 |
|
|
$ |
0 |
|
December 31, 20191 |
|
$ |
20,231 |
|
|
$ |
0 |
|
August 31, 2019 |
|
$ |
58,128 |
|
|
$ |
0 |
|
1 The Trust changed its fiscal year from August 31 to
December 31 effective December 31, 2019.
For the fiscal year ended December 31, 2021, the brokerage commissions paid to affiliates by the
Trust represented 0% of the aggregate brokerage commissions paid and involved 0% of the dollar amount of transactions involving payment of commissions during the year.
The following table shows the dollar amount of brokerage commissions paid to brokers for providing third-party research services and the approximate dollar
amount of the transactions involved for the fiscal year ended December 31, 2021. The provision of third-party research services was not necessarily a factor in the placement of all brokerage business with such brokers.
|
|
|
Amount of Commissions Paid to Brokers
for Providing Research Services |
|
Amount of Brokerage Transactions Involved |
$0 |
|
$0 |
As of December 31, 2021, the Trust held securities of its regular brokers or dealers (as defined in Rule 10b-1 under the Investment Company Act) whose shares were purchased during the fiscal year ended December 31, 2021, as follows:
|
|
|
|
|
Regular Broker or Dealer
|
|
Debt (D) / Equity (E)
|
|
Aggregate Holdings
(000s) |
Barclays Plc |
|
D |
|
$4,471 |
BNP Paribas |
|
D |
|
$1,505 |
J P Morgan Chase & Co |
|
D |
|
$3,299 |
Wells Fargo & Company |
|
D |
|
$2,377 |
CONFLICTS OF INTEREST
Certain activities of BlackRock, Inc., the Advisor or the Sub-Advisors and the other
subsidiaries of BlackRock, Inc. (collectively referred to in this section as BlackRock) and their respective directors, officers or employees, with respect to the Trust and/or other accounts managed by BlackRock, may give rise to actual
or perceived conflicts of interest such as those described below.
BlackRock is one of the worlds largest asset management firms. BlackRock, its
subsidiaries and their respective directors, officers and employees, including the business units or entities and personnel who may be involved in the investment activities and business operations of the Trust, are engaged worldwide in businesses,
including managing equities, fixed-income securities, cash and alternative investments, and other financial services, and have interests other than that of managing the Trust. These are considerations of which investors in the Trust should be aware,
and which may cause conflicts of interest that could disadvantage the Trust and its shareholders. These businesses and interests include potential multiple advisory, transactional, financial and other relationships with, or interests in companies
and interests in securities or other instruments that may be purchased or sold by the Trust.
BlackRock has proprietary interests in, and may manage or
advise with respect to, accounts or funds (including separate accounts and other funds and collective investment vehicles) that have investment objectives similar to those of the Trust and/or that engage in transactions in the same types of
securities, currencies and instruments as the Trust. BlackRock is also a major participant in the global currency, equities, swap and fixed-income markets, in
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each case, for the accounts of clients and, in some cases, on a proprietary basis. As such, BlackRock is or may be actively engaged in transactions in the same securities, currencies, and
instruments in which the Trust invests. Such activities could affect the prices and availability of the securities, currencies, and instruments in which the Trust invests, which could have an adverse impact on the Trusts performance. Such
transactions, particularly in respect of most proprietary accounts or client accounts, will be executed independently of the Trusts transactions and thus at prices or rates that may be more or less favorable than those obtained by the Trust.
When BlackRock seeks to purchase or sell the same assets for client accounts, including the Trust, the assets actually purchased or sold may be allocated
among the accounts on a basis determined in its good faith discretion to be equitable. In some cases, this system may adversely affect the size or price of the assets purchased or sold for the Trust. In addition, transactions in investments by one
or more other accounts managed by BlackRock may have the effect of diluting or otherwise disadvantaging the values, prices or investment strategies of the Trust, particularly, but not limited to, with respect to small capitalization, emerging market
or less liquid strategies. This may occur with respect to BlackRock-advised accounts when investment decisions regarding the Trust are based on research or other information that is also used to support decisions for other accounts. When BlackRock
implements a portfolio decision or strategy on behalf of another account ahead of, or contemporaneously with, similar decisions or strategies for the Trust, market impact, liquidity constraints, or other factors could result in the Trust receiving
less favorable trading results and the costs of implementing such decisions or strategies could be increased or the Trust could otherwise be disadvantaged. BlackRock may, in certain cases, elect to implement internal policies and procedures designed
to limit such consequences, which may cause the Trust to be unable to engage in certain activities, including purchasing or disposing of securities, when it might otherwise be desirable for it to do so. Conflicts may also arise because portfolio
decisions regarding the Trust may benefit other accounts managed by BlackRock. For example, the sale of a long position or establishment of a short position by the Trust may impair the price of the same security sold short by (and therefore benefit)
BlackRock or its other accounts or funds, and the purchase of a security or covering of a short position in a security by the Trust may increase the price of the same security held by (and therefore benefit) BlackRock or its other accounts or funds.
BlackRock, on behalf of other client accounts, on the one hand, and the Trust, on the other hand, may invest in or extend credit to different parts of
the capital structure of a single issuer. BlackRock may pursue rights, provide advice or engage in other activities, or refrain from pursuing rights, providing advice or engaging in other activities, on behalf of other clients with respect to an
issuer in which the Trust has invested, and such actions (or refraining from action) may have a material adverse effect on the Trust. In situations in which clients of BlackRock (including the Trust) hold positions in multiple parts of the capital
structure of an issuer, BlackRock may not pursue certain actions or remedies that may be available to the Trust, as a result of legal and regulatory requirements or otherwise. BlackRock addresses these and other potential conflicts of interest based
on the facts and circumstances of particular situations. For example, BlackRock may determine to rely on information barriers between different business units or portfolio management teams. BlackRock may also determine to rely on the actions of
similarly situated holders of loans or securities rather than, or in connection with, taking such actions itself on behalf of the Trust.
In addition, to
the extent permitted by applicable law, the Trust may invest its assets in other funds advised by BlackRock, including funds that are managed by one or more of the same portfolio managers, which could result in conflicts of interest relating to
asset allocation, timing of Trust purchases and redemptions, and increased remuneration and profitability for BlackRock and/or its personnel, including portfolio managers.
In certain circumstances, BlackRock, on behalf of the Trust, may seek to buy from or sell securities to another fund or account advised by BlackRock.
BlackRock may (but is not required to) effect purchases and sales between BlackRock clients (cross trades), including the Trust, if BlackRock believes such transactions are appropriate based on each partys investment objectives and
guidelines, subject to applicable law and regulation. There may be potential conflicts of interest or regulatory issues relating to these transactions which could limit BlackRocks decision to engage in these transactions for the Trust.
BlackRock may have a potentially conflicting division of loyalties and responsibilities to the parties in such transactions.
BlackRock and its clients
may pursue or enforce rights with respect to an issuer in which the Trust has invested, and those activities may have an adverse effect on the Trust. As a result, prices, availability, liquidity and terms of the Trusts investments may be
negatively impacted by the activities of BlackRock or its clients, and transactions for the
S-27
Trust may be impaired or effected at prices or terms that may be less favorable than would otherwise have been the case.
The results of the Trusts investment activities may differ significantly from the results achieved by BlackRock for its proprietary accounts or other
accounts (including investment companies or collective investment vehicles) that it manages or advises. It is possible that one or more accounts managed or advised by BlackRock and such other accounts will achieve investment results that are
substantially more or less favorable than the results achieved by the Trust. Moreover, it is possible that the Trust will sustain losses during periods in which one or more proprietary or other accounts managed or advised by BlackRock achieve
significant profits. The opposite result is also possible.
From time to time, the Trust may be restricted from purchasing or selling securities, or from
engaging in other investment activities because of regulatory, legal or contractual requirements applicable to BlackRock or other accounts managed or advised by BlackRock, and/or the internal policies of BlackRock designed to comply with such
requirements. As a result, there may be periods, for example, when BlackRock will not initiate or recommend certain types of transactions in certain securities or instruments with respect to which BlackRock is performing services or when position
limits have been reached. For example, the investment activities of BlackRock for its proprietary accounts and accounts under its management may limit the investment opportunities for the Trust in certain emerging and other markets in which
limitations are imposed upon the amount of investment, in the aggregate or in individual issuers, by affiliated foreign investors.
In connection with
its management of the Trust, BlackRock may have access to certain fundamental analysis and proprietary technical models developed by BlackRock. BlackRock will not be under any obligation, however, to effect transactions on behalf of the Trust in
accordance with such analysis and models. In addition, BlackRock will not have any obligation to make available any information regarding its proprietary activities or strategies, or the activities or strategies used for other accounts managed by
them, for the benefit of the management of the Trust and it is not anticipated that BlackRock will have access to such information for the purpose of managing the Trust. The proprietary activities or portfolio strategies of BlackRock or the
activities or strategies used for accounts managed by BlackRock or other client accounts could conflict with the transactions and strategies employed by BlackRock in managing the Trust.
In addition, certain principals and certain employees of the Advisor are also principals or employees of other business units or entities within BlackRock. As
a result, these principals and employees may have obligations to such other business units or entities or their clients and such obligations to other business units or entities or their clients may be a consideration of which investors in the Trust
should be aware.
BlackRock may enter into transactions and invest in securities, instruments and currencies on behalf of the Trust in which clients
of BlackRock, or, to the extent permitted by the SEC and applicable law, BlackRock, serves as the counterparty, principal or issuer. In such cases, such partys interests in the transaction will be adverse to the interests of the Trust, and
such party may have no incentive to assure that the Trust obtains the best possible prices or terms in connection with the transactions. In addition, the purchase, holding and sale of such investments by the Trust may enhance the profitability of
BlackRock.
BlackRock may also create, write or issue derivatives for clients, the underlying securities, currencies or instruments of which may be those
in which the Trust invests or which may be based on the performance of the Trust. BlackRock has entered into an arrangement with Markit Indices Limited, the index provider for underlying fixed-income indexes used by certain iShares ETFs, related to
derivative fixed-income products that are based on such iShares ETFs. BlackRock will receive certain payments for licensing intellectual property belonging to BlackRock and for facilitating provision of data in connection with such derivative
products, which may include payments based on the trading volumes of, or revenues generated by, the derivative products. The Trust and other accounts managed by BlackRock may from time to time transact in such derivative products where permitted by
the Trusts investment strategy, which could contribute to the viability of such derivative products by making them more appealing to funds and accounts managed by third parties, and in turn lead to increased payments to BlackRock. Trading
activity in these derivative products could also potentially lead to greater liquidity for such products, increased purchase activity with respect to these iShares ETFs and increased assets under management for BlackRock.
S-28
The Trust may, subject to applicable law, purchase investments that are the subject of an underwriting or other
distribution by BlackRock and may also enter into transactions with other clients of BlackRock where such other clients have interests adverse to those of the Trust. At times, these activities may cause business units or entities within BlackRock to
give advice to clients that may cause these clients to take actions adverse to the interests of the Trust. To the extent such transactions are permitted, the Trust will deal with BlackRock on an arms-length basis.
To the extent authorized by applicable law, BlackRock may act as broker, dealer, agent, lender or adviser or in other commercial capacities for the Trust. It
is anticipated that the commissions, mark-ups, mark-downs, financial advisory fees, underwriting and placement fees, sales fees, financing and commitment fees, brokerage fees, other fees, compensation or
profits, rates, terms and conditions charged by BlackRock will be in its view commercially reasonable, although BlackRock, including its sales personnel, will have an interest in obtaining fees and other amounts that are favorable to BlackRock and
such sales personnel, which may have an adverse effect on the Trust.
Subject to applicable law, BlackRock (and its personnel and other distributors)
will be entitled to retain fees and other amounts that they receive in connection with their service to the Trust as broker, dealer, agent, lender, adviser or in other commercial capacities. No accounting to the Trust or its shareholders will be
required, and no fees or other compensation payable by the Trust or its shareholders will be reduced by reason of receipt by BlackRock of any such fees or other amounts.
When BlackRock acts as broker, dealer, agent, adviser or in other commercial capacities in relation to the Trust, BlackRock may take commercial steps in its
own interests, which may have an adverse effect on the Trust.
The Trust will be required to establish business relationships with its counterparties
based on the Trusts own credit standing. BlackRock will not have any obligation to allow its credit to be used in connection with the Trusts establishment of its business relationships, nor is it expected that the Trusts
counterparties will rely on the credit of BlackRock in evaluating the Trusts creditworthiness.
BlackRock Investment Management, LLC
(BIM), an affiliate of BlackRock, pursuant to SEC exemptive relief, acts as securities lending agent to, and receives a share of securities lending revenues from, the Trust. BlackRock may receive compensation for managing the
reinvestment of the cash collateral from securities lending. There are potential conflicts of interests in managing a securities lending program, including but not limited to: (i) BlackRock as securities lending agent may have an incentive to
increase or decrease the amount of securities on loan or to lend particular securities in order to generate additional risk-adjusted revenue for BlackRock and its affiliates; and (ii) BlackRock as securities lending agent may have an incentive
to allocate loans to clients that would provide more revenue to BlackRock. As described further below, BlackRock seeks to mitigate this conflict by providing its securities lending clients with equal lending opportunities over time in order to
approximate pro rata allocation.
As part of its securities lending program, BlackRock indemnifies certain clients and/or funds against a shortfall
in collateral in the event of borrower default. BlackRock calculates, on a regular basis, its potential dollar exposure to the risk of collateral shortfall upon counterparty default (shortfall risk) under the securities lending program
for both indemnified and non-indemnified clients. On a periodic basis, BlackRock also determines the maximum amount of potential indemnified shortfall risk arising from securities lending activities
(indemnification exposure limit) and the maximum amount of counterparty-specific credit exposure (credit limits) BlackRock is willing to assume as well as the programs operational complexity. BlackRock oversees the risk
model that calculates projected shortfall values using loan-level factors such as loan and collateral type and market value as well as specific borrower counterparty credit characteristics. When necessary, BlackRock may further adjust other
securities lending program attributes by restricting eligible collateral or reducing counterparty credit limits. As a result, the management of the indemnification exposure limit may affect the amount of securities lending activity BlackRock may
conduct at any given point in time and impact indemnified and non-indemnified clients by reducing the volume of lending opportunities for certain loans (including by asset type, collateral type and/or revenue
profile).
BlackRock uses a predetermined systematic process in order to approximate pro rata allocation over time. In order to allocate a loan to a
portfolio: (i) BlackRock as a whole must have sufficient lending capacity pursuant to the various program limits (i.e. indemnification exposure limit and counterparty credit limits); (ii) the lending portfolio must hold the asset at the time a
loan opportunity arrives; and (iii) the lending portfolio must also have enough inventory, either on its own or when aggregated with other portfolios into one single market delivery, to satisfy the
S-29
loan request. In doing so, BlackRock seeks to provide equal lending opportunities for all portfolios, independent
of whether BlackRock indemnifies the portfolio. Equal opportunities for lending portfolios does not guarantee equal outcomes. Specifically, short and long-term outcomes for individual clients may vary due to asset mix, asset/liability spreads on
different securities, and the overall limits imposed by the firm.
Purchases and sales of securities and other assets for the Trust may be bunched or
aggregated with orders for other BlackRock client accounts, including with accounts that pay different transaction costs solely due to the fact that they have different research payment arrangements. BlackRock, however, is not required to bunch or
aggregate orders if portfolio management decisions for different accounts are made separately, or if they determine that bunching or aggregating is not practicable or required, or in cases involving client direction.
Prevailing trading activity frequently may make impossible the receipt of the same price or execution on the entire volume of securities purchased or sold.
When this occurs, the various prices may be averaged, and the Trust will be charged or credited with the average price. Thus, the effect of the aggregation may operate on some occasions to the disadvantage of the Trust. In addition, under certain
circumstances, the Trust will not be charged the same commission or commission equivalent rates in connection with a bunched or aggregated order.
As
discussed in the section entitled Portfolio Transactions and Brokerage in this SAI, BlackRock, unless prohibited by applicable law, may cause the Trust or account to pay a broker or dealer a commission for effecting a transaction that
exceeds the amount another broker or dealer would have charged for effecting the same transaction in recognition of the value of brokerage and research services provided by that broker or dealer. Under MiFID II, EU investment managers, including
BIL, pay for research from brokers and dealers directly out of their own resources, rather than through client commissions.
Subject to applicable
law, BlackRock may select brokers that furnish BlackRock, the Trust, other BlackRock client accounts or personnel, directly or through correspondent relationships, with research or other appropriate services which provide, in BlackRocks view,
appropriate assistance to BlackRock in the investment decision-making process (including with respect to futures, fixed-price offerings and OTC transactions). Such research or other services may include, to the extent permitted by law, research
reports on companies, industries and securities; economic and financial data; financial publications; proxy analysis; trade industry seminars; computer data bases; research-oriented software and other services and products.
Research or other services obtained in this manner may be used in servicing any or all of the Trust and other BlackRock client accounts, including in
connection with BlackRock client accounts other than those that pay commissions to the broker relating to the research or other service arrangements. Such products and services may disproportionately benefit other BlackRock client accounts relative
to the Trust based on the amount of brokerage commissions paid by the Trust and such other BlackRock client accounts. For example, research or other services that are paid for through one clients commissions may not be used in managing that
clients account. In addition, other BlackRock client accounts may receive the benefit, including disproportionate benefits, of economies of scale or price discounts in connection with products and services that may be provided to the Trust and
to such other BlackRock client accounts. To the extent that BlackRock uses soft dollars, it will not have to pay for those products and services itself.
BlackRock, unless prohibited by applicable law, may endeavor to execute trades through brokers who, pursuant to such arrangements, provide research or other
services in order to ensure the continued receipt of research or other services BlackRock believes are useful in its investment decision-making process. BlackRock may from time to time choose not to engage in the above described arrangements to
varying degrees. BlackRock, unless prohibited by applicable law, may also enter into commission sharing arrangements under which BlackRock may execute transactions through a broker-dealer and request that the broker-dealer allocate a portion of the
commissions or commission credits to another firm that provides research to BlackRock. To the extent that BlackRock engages in commission sharing arrangements, many of the same conflicts related to traditional soft dollars may exist.
BlackRock may utilize certain electronic crossing networks (ECNs) (including, without limitation, ECNs in which BlackRock has an investment or
other interest, to the extent permitted by applicable law) in executing client securities transactions for certain types of securities. These ECNs may charge fees for their services, including access fees and transaction fees. The transaction fees,
which are similar to commissions or markups/markdowns,
S-30
will generally be charged to clients and, like commissions and markups/markdowns, would generally be included in
the cost of the securities purchased. Access fees may be paid by BlackRock even though incurred in connection with executing transactions on behalf of clients, including the Trust. In certain circumstances, ECNs may offer volume discounts that will
reduce the access fees typically paid by BlackRock. BlackRock will only utilize ECNs consistent with its obligation to seek to obtain best execution in client transactions.
BlackRock owns a minority interest in, and is a member of, Members Exchange (MEMX), a newly created U.S. stock exchange. Transactions for the
Trust may be executed on MEMX if third party brokers select MEMX as the appropriate venue for execution of orders placed by BlackRock traders on behalf of client portfolios.
BlackRock has adopted policies and procedures designed to prevent conflicts of interest from influencing proxy voting decisions that it makes on behalf of
advisory clients, including the Trust, and to help ensure that such decisions are made in accordance with BlackRocks fiduciary obligations to its clients. Nevertheless, notwithstanding such proxy voting policies and procedures, actual proxy
voting decisions of BlackRock may have the effect of favoring the interests of other clients or businesses of other divisions or units of BlackRock, provided that BlackRock believes such voting decisions to be in accordance with its fiduciary
obligations. For a more detailed discussion of these policies and procedures, see Appendix B.
It is possible that the Trust may invest in
securities of, or engage in transactions with, companies in which BlackRock has significant debt or equity investments or other interests. The Trust may also invest in issuances (such as structured notes) by entities for which BlackRock provides and
is compensated for cash management services relating to the proceeds from the sale of such issuances. In making investment decisions for the Trust, BlackRock is not permitted to obtain or use material
non-public information acquired by any unit of BlackRock, in the course of these activities. In addition, from time to time, the activities of BlackRock may limit the Trusts flexibility in purchases and
sales of securities. As indicated below, BlackRock may engage in transactions with companies in which BlackRock-advised funds or other clients of BlackRock have an investment.
BlackRock may provide valuation assistance to certain clients with respect to certain securities or other investments and the valuation recommendations made
for such clients accounts may differ from the valuations for the same securities or investments assigned by the Trusts pricing vendors, especially if such valuations are based on broker-dealer quotes or other data sources unavailable to
the Trusts pricing vendors. While BlackRock will generally communicate its valuation information or determinations to the Trusts pricing vendors and/or fund accountants, there may be instances where the Trusts pricing vendors or
fund accountants assign a different valuation to a security or other investment than the valuation for such security or investment determined or recommended by BlackRock.
As disclosed in more detail in Net Asset Value in the Prospectus, when market quotations are not readily available or are believed by BlackRock to
be unreliable, the Trusts investments are valued at fair value by BlackRocks Valuation Committee (the Valuation Committee), in accordance with policies and procedures approved by the Trusts Board of Trustees (the
Valuation Procedures). When determining a fair value price, the Valuation Committee seeks to determine the price that the Trust might reasonably expect to receive from the current sale of that asset or liability in an arms-length transaction. The price generally may not be determined based on what the Trust might reasonably expect to receive for selling an asset or liability at a later time or if it holds the asset or
liability to maturity. While fair value determinations will be based upon all available factors that BlackRock deems relevant at the time of the determination, and may be based on analytical values determined by BlackRock using proprietary or third
party valuation models, fair value represents only a good faith approximation of the value of an asset or liability. The fair value of one or more assets or liabilities may not, in retrospect, be the price at which those assets or liabilities could
have been sold during the period in which the particular fair values were used in determining the Trusts net asset value. As a result, the Trusts sale or repurchase of its shares at net asset value, at a time when a holding or holdings
are valued by the Valuation Committee at fair value, may have the effect of diluting or increasing the economic interest of existing shareholders and may affect the amount of revenue received by BlackRock with respect to services for which it
receives an asset-based fee.
To the extent permitted by applicable law, the Trust may invest all or some of its short-term cash investments in any money
market fund or similarly-managed private fund advised or managed by BlackRock. In connection with any such investments, the Trust, to the extent permitted by the Investment Company Act, may pay its share of expenses
S-31
of a money market fund or other similarly-managed private fund in which it invests, which may result in the Trust bearing some additional expenses.
BlackRock and its directors, officers and employees, may buy and sell securities or other investments for their own accounts and may have conflicts of
interest with respect to investments made on behalf of the Trust. As a result of differing trading and investment strategies or constraints, positions may be taken by directors, officers and employees of BlackRock that are the same, different from
or made at different times than positions taken for the Trust. To lessen the possibility that the Trust will be adversely affected by this personal trading, the Trust and the Advisor each have adopted a Code of Ethics in compliance with
Section 17(j) of the Investment Company Act that restricts securities trading in the personal accounts of investment professionals and others who normally come into possession of information regarding the Trusts portfolio transactions.
Each Code of Ethics is also available on the EDGAR Database on the SECs Internet site at http://www.sec.gov, and copies may be obtained, after paying a duplicating fee, by e-mail at publicinfo@sec.gov.
BlackRock will not purchase securities or other property from, or sell securities or other property to, the Trust, except that the Trust may in
accordance with rules or guidance adopted under the Investment Company Act engage in transactions with another fund or accounts that are affiliated with the Trust as a result of common officers, directors, or investment advisers or pursuant to
exemptive orders granted to the Trust and/or BlackRock by the SEC. These transactions would be effected in circumstances in which BlackRock determined that it would be appropriate for the Trust to purchase and another client of BlackRock to sell, or
the Trust to sell and another client of BlackRock to purchase, the same security or instrument on the same day. From time to time, the activities of the Trust may be restricted because of regulatory requirements applicable to BlackRock and/or
BlackRocks internal policies designed to comply with, limit the applicability of, or otherwise relate to such requirements. A client not advised by BlackRock would not be subject to some of those considerations. There may be periods when
BlackRock may not initiate or recommend certain types of transactions, or may otherwise restrict or limit its advice in certain securities or instruments issued by or related to companies for which BlackRock is performing advisory or other services
or has proprietary positions. For example, when BlackRock is engaged to provide advisory or risk management services for a company, BlackRock may be prohibited from or limited in purchasing or selling securities of that company on behalf of the
Trust, particularly where such services result in BlackRock obtaining material non-public information about the company (e.g., in connection with participation in a creditors committee). Similar
situations could arise if personnel of BlackRock serve as directors of companies the securities of which the Trust wishes to purchase or sell. However, if permitted by applicable law, and where consistent with BlackRocks policies and
procedures (including the necessary implementation of appropriate information barriers), the Trust may purchase securities or instruments that are issued by such companies, are the subject of an advisory or risk management assignment by BlackRock,
or where personnel of BlackRock are directors or officers of the issuer.
The investment activities of BlackRock for its proprietary accounts and for
client accounts may also limit the investment strategies and rights of the Trust. For example, in certain circumstances where the Trust invests in securities issued by companies that operate in certain regulated industries, in certain emerging or
international markets, or are subject to corporate or regulatory ownership restrictions, or invest in certain futures and derivative transactions, there may be limits on the aggregate amount invested by BlackRock for its proprietary accounts and for
client accounts (including the Trust) that may not be exceeded without the grant of a license or other regulatory or corporate consent, or, if exceeded, may cause BlackRock, the Trust or other client accounts to suffer disadvantages or business
restrictions. If certain aggregate ownership thresholds are reached or certain transactions undertaken, the ability of BlackRock on behalf of clients (including the Trust) to purchase or dispose of investments, or exercise rights or undertake
business transactions, may be restricted by regulation or otherwise impaired. As a result, BlackRock on behalf of its clients (including the Trust) may limit purchases, sell existing investments, or otherwise restrict, forgo or limit the exercise of
rights (including transferring, outsourcing or limiting voting rights or forgoing the right to receive dividends) when BlackRock, in its sole discretion, deems it appropriate in light of potential regulatory or other restrictions on ownership or
other consequences resulting from reaching investment thresholds.
In those circumstances where ownership thresholds or limitations must be observed,
BlackRock seeks to allocate limited investment opportunities equitably among clients (including the Trust), taking into consideration benchmark weight and investment strategy. When ownership in certain securities nears an applicable threshold,
BlackRock may limit purchases in such securities to the issuers weighting in the applicable benchmark used by BlackRock to manage the Trust. If client (including Trust) holdings of an issuer exceed an applicable threshold and BlackRock is
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unable to obtain relief to enable the continued holding of such investments, it may be necessary to sell down these positions to meet the applicable limitations. In these cases, benchmark
overweight positions will be sold prior to benchmark positions being reduced to meet applicable limitations.
In addition to the foregoing, other
ownership thresholds may trigger reporting requirements to governmental and regulatory authorities, and such reports may entail the disclosure of the identity of a client or BlackRocks intended strategy with respect to such security or asset.
BlackRock may maintain securities indices. To the extent permitted by applicable laws, the Trust may seek to license and use such indices as part of
their investment strategy. Index based funds that seek to track the performance of securities indices also may use the name of the index or index provider in the fund name. Index providers, including BlackRock (to the extent permitted by applicable
law), may be paid licensing fees for use of their index or index name. BlackRock is not obligated to license its indices to the Trust and the Trust is under no obligation to use BlackRock indices. The Trust cannot be assured that the terms of any
index licensing agreement with BlackRock will be as favorable as those terms offered to other licensees.
BlackRock may enter into contractual
arrangements with third-party service providers to the Trust (e.g., custodians, administrators and index providers) pursuant to which BlackRock receives fee discounts or concessions in recognition of BlackRocks overall relationship with such
service providers. To the extent that BlackRock is responsible for paying these service providers out of its management fee, the benefits of any such fee discounts or concessions may accrue, in whole or in part, to BlackRock.
BlackRock owns or has an ownership interest in certain trading, portfolio management, operations and/or information systems used by Trust service providers.
These systems are, or will be, used by the Trust service provider in connection with the provision of services to accounts managed by BlackRock and funds managed and sponsored by BlackRock, including the Trust, that engage the service provider
(typically the custodian). The Trusts service provider remunerates BlackRock for the use of the systems. The Trusts service providers payments to BlackRock for the use of these systems may enhance the profitability of BlackRock.
BlackRocks receipt of fees from a service provider in connection with the use of systems provided by BlackRock may create an incentive for
BlackRock to recommend that the Trust enter into or renew an arrangement with the service provider.
In recognition of a BlackRock clients overall
relationship with BlackRock, BlackRock may offer special pricing arrangements for certain services provided by BlackRock. Any such special pricing arrangements will not affect Trust fees and expenses applicable to such clients investment in
the Trust.
Present and future activities of BlackRock and its directors, officers and employees, in addition to those described in this section, may give
rise to additional conflicts of interest.
DESCRIPTION OF SHARES
Common Shares
The Trust intends to hold annual
meetings of shareholders so long as the common shares are listed on a national securities exchange and such meetings are required as a condition to such listing.
Preferred Shares
The Trust currently does not intend to
issue preferred shares. Although the terms of any preferred shares that the Trust might issue in the future, including dividend rate, liquidation preference and redemption provisions, will be determined by the Board, subject to applicable law and
the Agreement and Declaration of Trust, it is likely that any such preferred shares issued would be structured to carry a relatively short-term dividend rate reflecting interest rates on short-term debt securities, by providing for the periodic
redetermination of the dividend rate at relatively short intervals through a fixed spread or remarketing procedure, subject to a maximum rate which would increase
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over time in the event of an extended period of unsuccessful remarketing. The Trust also believes that it is likely that the liquidation preference, voting rights and redemption provisions of any
such preferred shares would be similar to those stated below.
Liquidation Preference. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Trust, the holders of shares of any outstanding preferred shares will be entitled to receive a preferential liquidating distribution (expected to equal the original purchase price per share plus an amount equal to
accumulated but unpaid dividends, whether or not earned or declared) before any distribution of assets is made to holders of beneficial interests. After payment of the full amount of the liquidating distribution to which they are entitled, it is
expected that preferred shareholders will not be entitled to any further participation in any distribution of assets by the Trust. A consolidation or merger of the Trust with or into any other corporation or corporations or a sale of all or
substantially all of the assets of the Trust will not be deemed to be a liquidation, dissolution or winding up of the Trust.
Voting Rights. Except
as otherwise indicated in the Prospectus and except as otherwise required by applicable law, holders of shares of any outstanding preferred shares will have equal voting rights with holders of shares of beneficial interests (one vote per share) and
will vote together with holders of beneficial interests as a single class. In connection with the election of the Trusts Trustees, holders of shares of any outstanding preferred shares, voting as a separate class, will be entitled to elect two
of the Trusts Trustees, and the remaining Trustees will be elected by all holders of capital stock, voting as a single class. So long as any preferred share is outstanding, it is expected that the Trust will have not less than five Trustees.
If at any time dividends on shares of any outstanding preferred share shall be unpaid in an amount equal to two full years dividends thereon, the holders of all outstanding shares of preferred shares, voting as a separate class, will be
entitled to elect a majority of the Trusts Trustees until all dividends in default have been paid or declared and set apart for payment. It is expected that the affirmative vote of the holders of a majority of the outstanding shares of any
outstanding preferred shares, voting as a separate class, will be required to (i) authorize, create or issue any class or series of stock ranking prior to any series of preferred shares with respect to payment of dividends or the distribution
of assets on liquidation or (ii) amend, alter or repeal the provisions of the Agreement and Declaration of Trust, whether by merger, consolidation or otherwise, so as to adversely affect any of the contract rights expressly set forth in the
Agreement and Declaration of Trust of holders of preferred shares.
Redemption Provisions. It is anticipated that any outstanding shares of
preferred shares will generally be redeemable at the option of the Trust at a price equal to their liquidation preference plus accumulated but unpaid dividends to the date of redemption plus, under certain circumstances, a redemption premium. Shares
of preferred shares will also be subject to mandatory redemption at a price equal to their liquidation preference plus accumulated but unpaid dividends to the date of redemption upon the occurrence of certain specified events, such as the failure of
the Trust to maintain asset coverage requirements for the preferred shares specified by the Investment Company Act and rating services that issue ratings on the preferred shares.
Liquidity Feature. Preferred shares may include a liquidity feature that allows holders of preferred shares to have their shares purchased by a
liquidity provider in the event that sell orders have not been matched with purchase orders and successfully settled in a remarketing. The Trust would pay a fee to the provider of this liquidity feature, which would be borne by common shareholders
of the Trust. The terms of such liquidity feature may require the Trust to redeem preferred shares still owned by the liquidity provider following a certain period of continuous, unsuccessful remarketing, which may adversely impact the Trust.
The discussion above describes the possible offering of preferred shares by the Trust. If the Board determines to proceed with such an offering, the terms
of the preferred shares may be the same as, or different from, the terms described above, subject to applicable law and the Trusts Agreement and Declaration of Trust. The Board, without the approval of the holders of common shares, may
authorize an offering of preferred shares or may determine not to authorize such an offering, and may fix the terms of the preferred shares to be offered.
Other Shares
The Board (subject to applicable law
and the Trusts Agreement and Declaration of Trust) may authorize an offering, without the approval of the holders of common shares and, depending on their terms, any preferred shares
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outstanding at that time, of other classes of shares, or other classes or series of shares, as they determine to be necessary, desirable or appropriate, having such terms, rights, preferences,
privileges, limitations and restrictions as the Board sees fit. The Trust currently does not expect to issue any other classes of shares, or series of shares, except for the common shares.
REPURCHASE OF COMMON SHARES
The Trust is a closed-end management investment company and as such its shareholders will not have the right
to cause the Trust to redeem their shares. Instead, the Trusts common shares will trade in the open market at a price that will be a function of several factors, including dividend levels (which are in turn affected by expenses), NAV, call
protection for portfolio securities, dividend stability, liquidity, relative demand for and supply of the common shares in the market, general market and economic conditions and other factors. Because shares of
a closed-end investment company may frequently trade at prices lower than NAV, the Board may consider action that might be taken to reduce or eliminate any material discount from NAV in respect of
common shares, which may include the repurchase of such shares in the open market or in private transactions, the making of a tender offer for such shares, or the conversion of the Trust to
an open-end investment company. The Board may decide not to take any of these actions. In addition, there can be no assurance that share repurchases or tender offers, if undertaken, will reduce
market discount.
Notwithstanding the foregoing, at any time when the Trust has preferred shares outstanding, the Trust may not purchase, redeem or
otherwise acquire any of its common shares unless (1) all accrued preferred share dividends have been paid and (2) at the time of such purchase, redemption or acquisition, the NAV of the Trusts portfolio (determined after deducting
the acquisition price of the common shares) is at least 200% of the liquidation value of any outstanding preferred shares (expected to equal the original purchase price per share plus any accrued and unpaid dividends thereon). Any service fees
incurred in connection with any tender offer made by the Trust will be borne by the Trust and will not reduce the stated consideration to be paid to tendering shareholders.
Subject to its investment restrictions, the Trust may borrow to finance the repurchase of shares or to make a tender offer. Interest on any borrowings to
finance share repurchase transactions or the accumulation of cash by the Trust in anticipation of share repurchases or tender offers will reduce the Trusts net income. Any share repurchase, tender offer or borrowing that might be approved by
the Board would have to comply with the Exchange Act, the Investment Company Act and the rules and regulations thereunder.
Although the decision to take
action in response to a discount from NAV will be made by the Board at the time it considers such issue, it is the Boards present policy, which may be changed by the Board, not to authorize repurchases of common shares or a tender offer for
such shares if: (i) such transactions, if consummated, would (a) result in the delisting of the common shares from the NYSE, or (b) impair the Trusts status as a RIC under the Code, (which would make the Trust a taxable entity,
causing the Trusts income to be taxed at the corporate level in addition to the taxation of shareholders who receive dividends from the Trust) or as a registered closed-end investment company under
the Investment Company Act; (ii) the Trust would not be able to liquidate portfolio securities in an orderly manner and consistent with the Trusts investment objective and policies in order to repurchase shares; or (iii) there is, in
the Boards judgment, any (a) material legal action or proceeding instituted or threatened challenging such transactions or otherwise materially adversely affecting the Trust, (b) general suspension of or limitation on prices for
trading securities on the NYSE, (c) declaration of a banking moratorium by federal or state authorities or any suspension of payment by United States or New York banks, (d) material limitation affecting the Trust or the issuers of its
portfolio securities by federal or state authorities on the extension of credit by lending institutions or on the exchange of foreign currency, (e) commencement of war, armed hostilities or other international or national calamity directly or
indirectly involving the United States, or (f) other event or condition which would have a material adverse effect (including any adverse tax effect) on the Trust or its shareholders if shares were repurchased. The Board may in the future
modify these conditions in light of experience.
The repurchase by the Trust of its shares at prices below NAV will result in an increase in the NAV of
those shares that remain outstanding. However, there can be no assurance that share repurchases or tender offers at or below NAV will result in the Trusts common shares trading at a price equal to their NAV. Nevertheless, the fact that the
Trusts common shares may be the subject of repurchases or tender offers from time to time, or that the Trust may
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be converted to an open-end investment company, may reduce any spread between market price and NAV that might otherwise exist.
In addition, a purchase by the Trust of its common shares will decrease the Trusts net assets which would likely have the effect of increasing the
Trusts expense ratio. Any purchase by the Trust of its common shares at a time when preferred shares are outstanding will increase the leverage applicable to the outstanding common shares then remaining.
Before deciding whether to take any action if the common shares trade below NAV, the Board would likely consider all relevant factors, including the extent
and duration of the discount, the liquidity of the Trusts portfolio, the impact of any action that might be taken on the Trust or its shareholders and market considerations. Based on these considerations, even if the Trusts common shares
should trade at a discount, the Board may determine that, in the interest of the Trust and its shareholders, no action should be taken.
TAX MATTERS
The following is a description of certain U.S. federal income tax consequences to a shareholder of acquiring, holding and disposing of common shares of the
Trust. Except as otherwise noted, this discussion assumes you are a taxable U.S. holder (as defined below). This discussion is based upon current provisions of the Internal Revenue Code of 1986, as amended (the Code), the regulations
promulgated thereunder and judicial and administrative authorities, all of which are subject to change or differing interpretations by the courts or the Internal Revenue Service, possibly with retroactive effect. No attempt is made to present a
detailed explanation of all U.S. federal income tax concerns affecting the Trust and its shareholders, and the discussions set forth herein do not constitute tax advice. This discussion assumes that investors hold common shares of the Trust as
capital assets for U.S. federal income tax purposes (generally, assets held for investment). The Trust has not sought and will not seek any ruling from the Internal Revenue Service regarding any matters discussed herein. No assurance can be given
that the Internal Revenue Service would not assert, or that a court would not sustain, a position contrary to those set forth below. This summary does not discuss any aspects of non-U.S., state or local tax.
Prospective investors must consult their own tax advisers as to the U.S. federal income tax consequences (including the alternative minimum tax consequences) of acquiring, holding and disposing of the Trusts common shares, as well as the
effects of state, local and non-U.S. tax laws.
In addition, no attempt is made to address tax considerations
applicable to an investor with a special tax status, such as a financial institution, REIT, insurance company, regulated investment company, individual retirement account, other tax-exempt organization, dealer
in securities or currencies, person holding shares of the Trust as part of a hedging, integrated, conversion or straddle transaction, trader in securities that has elected the
mark-to-market method of accounting for its securities, U.S. holder (as defined below) whose functional currency is not the U.S. dollar, investor with applicable
financial statements within the meaning of Section 451(b) of the Code, or non-U.S. investor. Furthermore, this discussion does not reflect possible application of the alternative minimum tax.
A U.S. holder is a beneficial owner that is for U.S. federal income tax purposes:
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a citizen or individual resident of the United States (including certain former citizens and former long-term
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a corporation or other entity treated as a corporation for U.S. federal income tax purposes, created or organized
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an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
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a trust with respect to which a court within the United States is able to exercise primary supervision over its
administration and one or more U.S. persons have the authority to control all of its substantial decisions or the trust has made a valid election in effect under applicable Treasury regulations to be treated as a U.S. person for U.S. federal income
tax purposes, whose status as a U.S. person is not overridden by an applicable tax treaty. |
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Taxation of the Trust
The Trust intends to elect to be treated and to qualify to be taxed as a RIC under Subchapter M of the Code. In order to qualify as a RIC, the Trust must,
among other things, satisfy certain requirements relating to the sources of its income, diversification of its assets, and distribution of its income to its shareholders. First, the Trust must derive at least 90% of its annual gross income from
dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock or securities or foreign currencies, or other income (including but not limited to gains from options, futures and forward contracts)
derived with respect to its business of investing in such stock, securities or currencies, or net income derived from interests in qualified publicly traded partnerships (as defined in the Code) (the 90% gross income test).
Second, the Trust must diversify its holdings so that, at the close of each quarter of its taxable year, (i) at least 50% of the value of its total assets consists of cash, cash items, U.S. Government securities, securities of other RICs and
other securities, with such other securities limited in respect of any one issuer to an amount not greater in value than 5% of the value of the Trusts total assets and to not more than 10% of the outstanding voting securities of such issuer,
and (ii) not more than 25% of the market value of the Trusts total assets is invested in the securities (other than U.S. Government securities and securities of other RICs) of any one issuer, any two or more issuers controlled by the
Trust and engaged in the same, similar or related trades or businesses, or any one or more qualified publicly traded partnerships.
As
long as the Trust qualifies as a RIC, the Trust will generally not be subject to corporate-level U.S. federal income tax on income and gains that it distributes each taxable year to its shareholders, provided that in such taxable year it distributes
at least 90% of the sum of (i) its net tax-exempt interest income, if any, and (ii) its investment company taxable income (which includes, among other items, dividends, taxable interest,
taxable original issue discount and market discount income, income from securities lending, net short-term capital gain in excess of net long-term capital loss, and any other taxable income other than net capital gain (as defined below)
and is reduced by deductible expenses) determined without regard to the deduction for dividends paid. The Trust may retain for investment its net capital gain (which consists of the excess of its net long-term capital gain over its net short-term
capital loss). However, if the Trust retains any net capital gain or any investment company taxable income, it will be subject to tax at regular corporate rates on the amount retained.
The Code imposes a 4% nondeductible excise tax on the Trust to the extent the Trust does not distribute by the end of any calendar year at least the sum of
(i) 98% of its ordinary income (not taking into account any capital gain or loss) for the calendar year and (ii) 98.2% of its capital gain in excess of its capital loss (adjusted for certain ordinary losses) for a one-year period generally ending on October 31 of the calendar year (unless an election is made to use the Trusts fiscal year). In addition, the minimum amounts that must be distributed in any year to
avoid the excise tax will be increased or decreased to reflect any under-distribution or over-distribution, as the case may be, from the previous year. For purposes of the excise tax, the Trust will be deemed to have distributed any income on which
it paid U.S. federal income tax. While the Trust intends to distribute any income and capital gain in the manner necessary to minimize imposition of the 4% nondeductible excise tax, there can be no assurance that sufficient amounts of the
Trusts taxable income and capital gain will be distributed to entirely avoid the imposition of the excise tax. In that event, the Trust will be liable for the excise tax only on the amount by which it does not meet the foregoing distribution
requirement.
If in any taxable year the Trust should fail to qualify under Subchapter M of the Code for tax treatment as a RIC, the Trust would incur a
regular corporate U.S. federal income tax upon all of its taxable income for that year, and all distributions to its shareholders (including distributions of net capital gain) would be taxable to shareholders as ordinary dividend income for U.S.
federal income tax purposes to the extent of the Trusts earnings and profits. Provided that certain holding period and other requirements were met, such dividends would be eligible (i) to be treated as qualified dividend income in the
case of shareholders taxed as individuals and (ii) for the dividends received deduction in the case of corporate shareholders. In addition, to qualify again to be taxed as a RIC in a subsequent year, the Trust would be required to
distribute to shareholders its earnings and profits attributable to non-RIC years. In addition, if the Trust failed to qualify as a RIC for a period greater than two taxable years, then, in order to qualify as
a RIC in a subsequent year, the Trust would be required to elect to recognize and pay tax on any net built-in gain (the excess of aggregate gain, including items of income, over aggregate loss that would have
been realized if the Trust had been liquidated) or, alternatively, be subject to taxation on such built-in gain recognized for a period of five years.
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The remainder of this discussion assumes that the Trust qualifies for taxation as a RIC.
The Trusts Investments
Certain of the
Trusts investment practices are subject to special and complex U.S. federal income tax provisions (including mark-to-market, constructive sale, straddle, wash
sale, short sale and other rules) that may, among other things, (i) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (ii) convert lower taxed long-term capital gains or qualified dividend income into
higher taxed short-term capital gains or ordinary income, (iii) convert ordinary loss or a deduction into capital loss (the deductibility of which is more limited), (iv) cause the Trust to recognize income or gain without a corresponding
receipt of cash, (v) adversely affect the time as to when a purchase or sale of stock or securities is deemed to occur, (vi) adversely alter the characterization of certain complex financial transactions and (vii) produce income that
will not be qualified income for purposes of the 90% annual gross income requirement described above. These U.S. federal income tax provisions could therefore affect the amount, timing and character of distributions to common
shareholders. The Trust intends to monitor its transactions and may make certain tax elections and may be required to dispose of securities to mitigate the effect of these provisions and prevent disqualification of the Trust as a RIC. Additionally,
the Trust may be required to limit its activities in derivative instruments in order to enable it to maintain its RIC status.
The Trust may invest a
portion of its net assets in below investment grade securities, commonly known as junk securities. Investments in these types of securities may present special tax issues for the Trust. U.S. federal income tax rules are not entirely
clear about issues such as when the Trust may cease to accrue interest, original issue discount or market discount, when and to what extent deductions may be taken for bad debts or worthless securities, how payments received on obligations in
default should be allocated between principal and income and whether modifications or exchanges of debt obligations in a bankruptcy or workout context are taxable. These and other issues could affect the Trusts ability to distribute sufficient
income to preserve its status as a RIC or to avoid the imposition of U.S. federal income or excise tax.
Certain debt securities acquired by the Trust may
be treated as debt securities that were originally issued at a discount. Generally, the amount of the original issue discount is treated as interest income and is included in taxable income (and required to be distributed by the Trust in order to
qualify as a RIC and avoid U.S. federal income tax or the 4% excise tax on undistributed income) over the term of the security, even though payment of that amount is not received until a later time, usually when the debt security matures.
If the Trust purchases a debt security on a secondary market at a price lower than its adjusted issue price, the excess of the adjusted issue price over the
purchase price is market discount. Unless the Trust makes an election to accrue market discount on a current basis, generally, any gain realized on the disposition of, and any partial payment of principal on, a debt security having
market discount is treated as ordinary income to the extent the gain, or principal payment, does not exceed the accrued market discount on the debt security. Market discount generally accrues in equal daily installments. If the Trust
ultimately collects less on the debt instrument than its purchase price plus the market discount previously included in income, the Trust may not be able to benefit from any offsetting loss deductions.
The Trust may invest in preferred securities or other securities the U.S. federal income tax treatment of which may not be clear or may be subject to
recharacterization by the Internal Revenue Service. To the extent the tax treatment of such securities or the income from such securities differs from the tax treatment expected by the Trust, it could affect the timing or character of income
recognized by the Trust, potentially requiring the Trust to purchase or sell securities, or otherwise change its portfolio, in order to comply with the tax rules applicable to RICs under the Code.
Gain or loss on the sale of securities by the Trust will generally be long-term capital gain or loss if the securities have been held by the Trust for more
than one year. Gain or loss on the sale of securities held for one year or less will be short-term capital gain or loss.
Because the Trust may invest in
foreign securities, its income from such securities may be subject to non-U.S. taxes.
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Foreign currency gain or loss on foreign currency exchange contracts,
non-U.S. dollar-denominated securities contracts, and non-U.S. dollar-denominated futures contracts, options and forward contracts that are not section 1256 contracts
(as defined below) generally will be treated as ordinary income and loss.
Income from options on individual securities written by the Trust will
generally not be recognized by the Trust for tax purposes until an option is exercised, lapses or is subject to a closing transaction (as defined by applicable regulations) pursuant to which the Trusts obligations with respect to
the option are otherwise terminated. If the option lapses without exercise, the premiums received by the Trust from the writing of such options will generally be characterized as short-term capital gain. If the Trust enters into a closing
transaction, the difference between the premiums received and the amount paid by the Trust to close out its position will generally be treated as short-term capital gain or loss. If an option written by the Trust is exercised, thereby requiring the
Trust to sell the underlying security, the premium will increase the amount realized upon the sale of the security, and the character of any gain on such sale of the underlying security as short-term or long-term capital gain will depend on the
holding period of the Trust in the underlying security. Because the Trust will not have control over the exercise of the options it writes, such exercises or other required sales of the underlying securities may cause the Trust to realize gains or
losses at inopportune times.
Options on indices of securities and sectors of securities that qualify as section 1256 contracts will generally
be marked-to-market for U.S. federal income tax purposes. As a result, the Trust will generally recognize gain or loss on the last day of each taxable year
equal to the difference between the value of the option on that date and the adjusted basis of the option. The adjusted basis of the option will consequently be increased by such gain or decreased by such loss. Any gain or loss with respect to
options on indices and sectors that qualify as section 1256 contracts will be treated as short-term capital gain or loss to the extent of 40% of such gain or loss and long-term capital gain or loss to the extent of 60% of such gain
or loss. Because the mark-to-market rules may cause the Trust to recognize gain in advance of the receipt of cash, the Trust may be required to dispose of investments in
order to meet its distribution requirements. Mark-to-market losses may be suspended or otherwise limited if such losses are part of a straddle or similar
transaction.
Taxation of Common Shareholders
Trust
distributions of its tax-exempt interest on municipal securities, if properly reported by the Trust to its shareholders (exempt-interest dividends), will generally be exempt from regular federal
income tax. In order for the Trust to pay exempt-interest dividends, at least 50% of the value of the Trusts total assets must consist of tax-exempt obligations on a quarterly basis. Although the Trust
intends to meet this requirement, no assurance can be given in this regard. If the Trust failed to do so, it would not be able to pay tax-exempt dividends, and your distributions attributable to interest
received by the Trust from any source (including distributions of tax-exempt interest income) would be taxable as ordinary income to the extent of the Trusts earnings and profits.
The Trust will either distribute or retain for reinvestment all or part of its net capital gain. If any such gain is retained, the Trust will be subject to a
corporate income tax on such retained amount. In that event, the Trust expects to report the retained amount as undistributed capital gain in a notice to its common shareholders, each of whom, if subject to U.S. federal income tax on long-term
capital gains, (i) will be required to include in income for U.S. federal income tax purposes as long-term capital gain its share of such undistributed amounts, (ii) will be entitled to credit its proportionate share of the tax paid by the
Trust against its U.S. federal income tax liability and to claim refunds to the extent that the credit exceeds such liability and (iii) will increase its basis in its common shares by the amount of undistributed capital gains included in the
shareholders income less the tax deemed paid by the shareholder under clause (ii).
Distributions paid to you by the Trust from its net capital
gain, if any, that the Trust properly reports as capital gain dividends (capital gain dividends) are taxable as long-term capital gains, regardless of how long you have held your common shares. All other dividends paid to you by the
Trust (including dividends from net short-term capital gains) from its current or accumulated earnings and profits, other than exempt-interest dividends (ordinary income dividends), are generally subject to tax as ordinary income.
Provided that certain holding period and other requirements are met, ordinary income dividends (if properly reported by the Trust) may qualify (i) for the dividends received deduction in the case of corporate shareholders to the extent that the
Trusts income consists of dividend income from U.S. corporations, and (ii) in the case of individual shareholders, as qualified dividend income
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eligible to be taxed at long-term capital gains rates to the extent that the Trust receives qualified dividend income. Qualified dividend income is, in general, dividend income from taxable
domestic corporations and certain qualified foreign corporations (e.g., generally, foreign corporations incorporated in a possession of the United States or in certain countries with a qualifying comprehensive tax treaty with the United States, or
whose stock with respect to which such dividend is paid is readily tradable on an established securities market in the United States). There can be no assurance as to what portion, if any, of the Trusts distributions will constitute qualified
dividend income or be eligible for the dividends received deduction.
Any distributions you receive that are in excess of the Trusts current and
accumulated earnings and profits will be treated as a return of capital to the extent of your adjusted tax basis in your common shares, and thereafter as capital gain from the sale of common shares. The amount of any Trust distribution that is
treated as a return of capital will reduce your adjusted tax basis in your common shares, thereby increasing your potential gain or reducing your potential loss on any subsequent sale or other disposition of your common shares.
Common shareholders may be entitled to offset their capital gain dividends with capital losses. The Code contains a number of statutory provisions affecting
when capital losses may be offset against capital gain, and limiting the use of losses from certain investments and activities. Accordingly, common shareholders that have capital losses are urged to consult their tax advisers.
Dividends and other taxable distributions are taxable to you even though they are reinvested in additional common shares of the Trust. Dividends and other
distributions paid by the Trust are generally treated under the Code as received by you at the time the dividend or distribution is made. If, however, the Trust pays you a dividend in January that was declared in the previous October, November or
December to common shareholders of record on a specified date in one of such months, then such dividend will be treated for U.S. federal income tax purposes as being paid by the Trust and received by you on December 31 of the year in which the
dividend was declared. In addition, certain other distributions made after the close of the Trusts taxable year may be spilled back and treated as paid by the Trust (except for purposes of the 4% nondeductible excise tax) during
such taxable year. In such case, you will be treated as having received such dividends in the taxable year in which the distributions were actually made.
Interest on certain private activity bonds is an item of tax preference subject to the alternative minimum tax on individuals. The Trust may
invest a portion of its assets in municipal bonds subject to this provision so that a portion of its exempt-interest dividends is an item of tax preference to the extent such dividends represent interest received from these private activity bonds.
Accordingly, investment in the Trust could cause a holder of common shares to be subject to, or result in an increased liability under, the alternative minimum tax.
Exempt-interest dividends are included in determining what portion, if any, of a persons Social Security and railroad retirement benefits will be
includable in gross income subject to federal income tax.
The price of common shares purchased at any time may reflect the amount of a forthcoming
distribution. Those purchasing common shares just prior to the record date for a distribution will receive a distribution which will be taxable to them even though it represents, economically, a return of invested capital.
The Trust will send you information after the end of each year setting forth the amount and tax status of any distributions paid to you by the Trust.
The sale or other disposition of common shares will generally result in capital gain or loss to you and will be long-term capital gain or loss if you have
held such common shares for more than one year at the time of sale. Any loss upon the sale or other disposition of common shares held for six months or less will be treated as long-term capital loss to the extent of any capital gain dividends
received (including amounts credited as an undistributed capital gain dividend) by you with respect to such common shares. Any loss you recognize on a sale or other disposition of common shares will be disallowed if you acquire other common shares
(whether through the automatic reinvestment of dividends or otherwise) within a 61-day period beginning 30 days before and ending 30 days after your sale or exchange of the common shares. In such case,
your tax basis in the common shares acquired will be adjusted to reflect the disallowed loss.
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If the Trust conducts a tender offer for its shares, a repurchase by the Trust of a shareholders shares
pursuant to such tender offer generally will be treated as a sale or exchange of the shares by a shareholder provided that either (i) the shareholder tenders, and the Trust repurchases, all of such shareholders shares, thereby reducing
the shareholders percentage ownership of the Trust, whether directly or by attribution under Section 318 of the Code, to 0%, (ii) the shareholder meets numerical safe harbors under the Code with respect to percentage voting interest
and reduction in ownership of the Trust following completion of the tender offer, or (iii) the tender offer otherwise results in a meaningful reduction of the shareholders ownership percentage interest in the Trust, which
determination depends on a particular shareholders facts and circumstances.
If a tendering shareholders proportionate ownership of the Trust
(determined after applying the ownership attribution rules under Section 318 of the Code) is not reduced to the extent required under the tests described above, such shareholder will be deemed to receive a distribution from the Trust under
Section 301 of the Code with respect to the shares held (or deemed held under Section 318 of the Code) by the shareholder after the tender offer (a Section 301 distribution). The amount of this distribution will equal the
price paid by the Trust to such shareholder for the shares sold, and will be taxable as a dividend, i.e., as ordinary income, to the extent of the Trusts current or accumulated earnings and profits allocable to such distribution, with
the excess treated as a return of capital reducing the shareholders tax basis in the shares held after the tender offer, and thereafter as capital gain. Any Trust shares held by a shareholder after a tender offer will be subject to basis
adjustments in accordance with the provisions of the Code.
Provided that no tendering shareholder is treated as receiving a Section 301 distribution
as a result of selling shares pursuant to a particular tender offer, shareholders who do not sell shares pursuant to that tender offer will not realize constructive distributions on their shares as a result of other shareholders selling shares in
the tender offer. In the event that any tendering shareholder is deemed to receive a Section 301 distribution, it is possible that shareholders whose proportionate ownership of the Trust increases as a result of that tender offer, including
shareholders who do not tender any shares, will be deemed to receive a constructive distribution under Section 305(c) of the Code in an amount equal to the increase in their percentage ownership of the Trust as a result of the tender offer.
Such constructive distribution will be treated as a dividend to the extent of current or accumulated earnings and profits allocable to it.
Use of the
Trusts cash to repurchase shares may adversely affect the Trusts ability to satisfy the distribution requirements for treatment as a regulated investment company described above. The Trust may also recognize income in connection with the
sale of portfolio securities to fund share purchases, in which case the Trust would take any such income into account in determining whether such distribution requirements have been satisfied.
If the Trust liquidates, shareholders generally will realize capital gain or loss upon such liquidation in an amount equal to the difference between the
amount of cash or other property received by the shareholder (including any property deemed received by reason of its being placed in a liquidating trust) and the shareholders adjusted tax basis in its shares. Any such gain or loss will be
long-term if the shareholder is treated as having a holding period in Trust shares of greater than one year, and otherwise will be short-term.
The
foregoing discussion does not address the tax treatment of shareholders who do not hold their shares as a capital asset. Such shareholders should consult their own tax advisors on the specific tax consequences to them of participating or not
participating in the tender offer or upon liquidation of the Trust.
Current U.S. federal income tax law taxes both long-term and short-term capital gain
of corporations at the rates applicable to ordinary income. For non-corporate taxpayers, short-term capital gain is currently taxed at rates applicable to ordinary income while long-term capital gain generally
is taxed at a reduced maximum rate. The deductibility of capital losses is subject to limitations under the Code.
Certain U.S. holders who are
individuals, estates or trusts and whose income exceeds certain thresholds will be required to pay a 3.8% Medicare tax on all or a portion of their net investment income, which includes dividends received from the Trust and capital gains
from the sale or other disposition of the Trusts common shares.
A common shareholder that is a nonresident alien individual or a foreign
corporation (a foreign investor) generally will be subject to U.S. federal withholding tax at the rate of 30% (or possibly a lower rate provided by an applicable
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tax treaty) on ordinary income dividends (except as discussed below). In general, U.S. federal withholding tax and U.S. federal income tax will not apply to any gain or income realized by a
foreign investor in respect of any distribution of exempt-interest dividends or net capital gain (including amounts credited as an undistributed capital gain dividend) or upon the sale or other disposition of common shares of the Trust. Different
tax consequences may result if the foreign investor is engaged in a trade or business in the United States or, in the case of an individual, is present in the United States for 183 days or more during a taxable year and certain other conditions are
met. Foreign investors should consult their tax advisers regarding the tax consequences of investing in the Trusts common shares.
Ordinary income
dividends properly reported by the RIC are generally exempt from U.S. federal withholding tax where they (i) are paid in respect of the RICs qualified net interest income (generally, its U.S.-source interest income, other than
certain contingent interest and interest from obligations of a corporation or partnership in which the RIC is at least a 10% shareholder, reduced by expenses that are allocable to such income) or (ii) are paid in respect of the RICs
qualified short-term capital gains (generally, the excess of the RICs net short-term capital gain over its long-term capital loss for such taxable year). Depending on its circumstances, the Trust may report all, some or none of its
potentially eligible dividends as such qualified net interest income or as qualified short-term capital gains, and/or treat such dividends, in whole or in part, as ineligible for this exemption from withholding. In order to qualify for this
exemption from withholding, a foreign investor needs to comply with applicable certification requirements relating to its non-U.S. status (including, in general, furnishing an IRS Form W-8BEN, W-8BEN-E, or substitute Form). In the case of common shares held through an intermediary, the intermediary may have withheld
tax even if the Trust reported the payment as qualified net interest income or qualified short-term capital gain. Foreign investors should contact their intermediaries with respect to the application of these rules to their accounts. There can be no
assurance as to what portion of the Trusts distributions would qualify for favorable treatment as qualified net interest income or qualified short-term capital gains if the provision is extended.
In addition withholding at a rate of 30% will apply to dividends paid in respect of common shares of the Trust held by or through certain foreign financial
institutions (including investment funds), unless such institution enters into an agreement with the Treasury to report, on an annual basis, information with respect to shares in, and accounts maintained by, the institution to the extent such shares
or accounts are held by certain U.S. persons and by certain non-U.S. entities that are wholly or partially owned by U.S. persons and to withhold on certain payments. Accordingly, the entity through which
common shares of the Trust are held will affect the determination of whether such withholding is required. Similarly, dividends paid in respect of common shares of the Trust held by an investor that is a
non-financial foreign entity that does not qualify under certain exemptions will be subject to withholding at a rate of 30%, unless such entity either (i) certifies that such entity does not have any
substantial United States owners or (ii) provides certain information regarding the entitys substantial United States owners, which the applicable withholding agent will in turn provide to the Secretary of the
Treasury. An intergovernmental agreement between the United States and an applicable foreign country, or future Treasury regulations or other guidance, may modify these requirements. The Trust will not pay any additional amounts to common
shareholders in respect of any amounts withheld. Foreign investors are encouraged to consult with their tax advisers regarding the possible implications of these rules on their investment in the Trusts common shares.
U.S. federal backup withholding tax may be required on dividends, distributions and sale proceeds payable to certain
non-exempt common shareholders who fail to supply their correct taxpayer identification number (in the case of individuals, generally, their social security number) or to make required certifications, or who
are otherwise subject to backup withholding. Backup withholding is not an additional tax and any amount withheld may be refunded or credited against your U.S. federal income tax liability, if any, provided that you timely furnish the required
information to the Internal Revenue Service.
Ordinary income dividends, capital gain dividends, and gain from the sale or other disposition of common
shares of the Trust also may be subject to state, local, and/or foreign taxes. Common shareholders are urged to consult their own tax advisers regarding specific questions about U.S. federal, state, local or foreign tax consequences to them of
investing in the Trust.
Under U.S. Treasury regulations, if a common shareholder recognizes a loss with respect to common shares of $2 million or
more for an individual shareholder in a single taxable year (or $4 million or more in any combination of taxable years in which the transaction is entered into and the five succeeding taxable years) or $10 million or more
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for a corporate shareholder in any single taxable year (or $20 million or more in any combination of taxable years in which the transaction is entered into and the five succeeding taxable
years), the shareholder must file with the Internal Revenue Service a disclosure statement on Internal Revenue Service Form 8886. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the
taxpayers treatment of the loss is proper. Common shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.
***
The foregoing is a general and
abbreviated summary of certain provisions of the Code and the Treasury Regulations presently in effect as they directly govern the taxation of the Trust and its shareholders. For complete provisions, reference should be made to the pertinent Code
sections and Treasury Regulations. The Code and the Treasury Regulations are subject to change by legislative or administrative action, and any such change may be retroactive with respect to Trust transactions. Holders of common shares are advised
to consult their own tax advisers for more detailed information concerning the U.S. federal income taxation of the Trust and the income tax consequences to its holders of common shares.
CUSTODIAN AND TRANSFER AGENT
The custodian of the assets of the Trust is State Street Bank and Trust Company, whose principal business address is One Lincoln Street, Boston, Massachusetts
02111. The custodian is responsible for, among other things, receipt of and disbursement of funds from the Trusts accounts, establishment of segregated accounts as necessary, and transfer, exchange and delivery of Trust portfolio securities.
Computershare Trust Company, N.A., whose principal business address is 150 Royall Street, Canton, Massachusetts 02021, serves as the Trusts
transfer agent with respect to the common shares.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP, whose principal business address is 200 Berkeley Street, Boston, Massachusetts 02116, is the independent registered public
accounting firm of the Trust and is expected to render an opinion annually on the financial statements of the Trust.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
A control person is a person who beneficially owns, either directly or indirectly, more
than 25% of the voting securities of a company. As of February 28, 2022 the Trust did not know of any person or entity who controlled the Trust. As of February 28, 2022, to the knowledge of the Trust, the following person(s)
owned of record or beneficially 5% or more of the outstanding common shares of any class of the Trust:
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Name |
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Address |
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Class |
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Percentage of Shares Held |
Morgan Stanley
Morgan Stanley Smith Barney |
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1585 Broadway New York, NY 10036 |
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Common Stock |
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9.10% |
INCORPORATION BY REFERENCE
This SAI is part of a registration statement that we have filed with the SEC. We are allowed to incorporate by reference the information that we
file with the SEC, which means that we can disclose important information to you by referring you to those documents. We incorporate by reference into this SAI the documents listed below and any future filings we make with the SEC under Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act, including any filings on or after the date of this SAI from the date of filing (excluding any information furnished, rather than filed), until we have sold all of the offered securities to which this
SAI, the Prospectus and any accompanying prospectus supplement relates or the offering is otherwise terminated. The information incorporated by reference is an important part of this SAI. Any statement in a document incorporated by reference into
this SAI will be deemed to be automatically modified or superseded to the extent a statement contained in (1) this SAI or (2) any other
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subsequently filed document that is incorporated by reference into this SAI modifies or supersedes such statement. The documents incorporated by reference herein include:
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The Trusts Prospectus, dated March [●], 2022, filed with this SAI; |
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our annual
report on Form N-CSR for the fiscal year ended December 31, 2021 filed with the SEC on March 4, 2022; |
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the description of the Trusts
common shares contained in our Registration Statement on Form 8-A (File No. 001-31741) filed with the SEC on July 22, 2003, including any amendment or
report filed for the purpose of updating such description prior to the termination of the offering registered hereby. |
The Trust will
provide without charge to each person, including any beneficial owner, to whom this SAI is delivered, upon written or oral request, a copy of any and all of the documents that have been or may be incorporated by reference in this SAI, the Prospectus
or the accompanying prospectus supplement. You should direct requests for documents by calling:
Client Services Desk
(800) 882-0052
The Trust makes available the Prospectus, SAI and the Trusts annual and semi-annual reports, free of charge, at http://www.blackrock.com. You may also obtain this SAI, the Prospectus, other documents incorporated by reference and other
information the Trust files electronically, including reports and proxy statements, on the SEC website (http://www.sec.gov) or with the payment of a duplication fee, by electronic request at publicinfo@sec.gov. Information contained in, or that can be accessed through, the Trusts website is not part of this SAI, the Prospectus
or the accompanying prospectus supplement.
FINANCIAL STATEMENTS
The audited financial statements and financial highlights included in the annual
report to the Trusts shareholders for the fiscal year ended December 31, 2021 (the 2021 Annual Report), together with the report of Deloitte
& Touche LLP on the financial statements and financial highlights included in the Trusts 2021 Annual Report, are incorporated herein.
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APPENDIX A
Description of Bond Ratings
A
Description of Moodys Investors Service, Inc.s (Moodys) Global Rating Scales
Ratings assigned on Moodys global
long-term and short-term rating scales are forward-looking opinions of the relative credit risks of financial obligations issued by non-financial corporates, financial institutions, structured finance
vehicles, project finance vehicles, and public sector entities. Moodys defines credit risk as the risk that an entity may not meet its contractual financial obligations as they come due and any estimated financial loss in the event of default
or impairment. The contractual financial obligations addressed by Moodys ratings are those that call for, without regard to enforceability, the payment of an ascertainable amount, which may vary based upon standard sources of variation (e.g.,
floating interest rates), by an ascertainable date. Moodys rating addresses the issuers ability to obtain cash sufficient to service the obligation, and its willingness to pay. Moodys ratings do not address non-standard sources of variation in the amount of the principal obligation (e.g., equity indexed), absent an express statement to the contrary in a press release accompanying an initial rating. Long-term ratings
are assigned to issuers or obligations with an original maturity of one year or more and reflect both on the likelihood of a default or impairment on contractual financial obligations and the expected financial loss suffered in the event of default
or impairment. Short-term ratings are assigned for obligations with an original maturity of thirteen months or less and reflect both on the likelihood of a default or impairment on contractual financial obligations and the expected financial loss
suffered in the event of default or impairment. Moodys issues ratings at the issuer level and instrument level on both the long-term scale and the short-term scale. Typically, ratings are made publicly available although private and
unpublished ratings may also be assigned.
Moodys differentiates structured finance ratings from fundamental ratings (i.e., ratings on nonfinancial
corporate, financial institution, and public sector entities) on the global long-term scale by adding (sf) to all structured finance ratings. The addition of (sf) to structured finance ratings should eliminate any presumption that such ratings and
fundamental ratings at the same letter grade level will behave the same. The (sf) indicator for structured finance security ratings indicates that otherwise similarly rated structured finance and fundamental securities may have different risk
characteristics. Through its current methodologies, however, Moodys aspires to achieve broad expected equivalence in structured finance and fundamental rating performance when measured over a long period of time.
Description of Moodys Global Long-Term Rating Scale
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Aaa |
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Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk. |
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Aa |
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Obligations rated Aa are judged to be of high quality and are subject to very low credit risk. |
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A |
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Obligations rated A are judged to be upper-medium grade and are subject to low credit risk. |
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Baa |
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Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics. |
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Ba |
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Obligations rated Ba are judged to be speculative and are subject to substantial credit risk. |
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B |
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Obligations rated B are considered speculative and are subject to high credit risk. |
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Caa |
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Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk. |
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Ca |
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Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest. |
A-1
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C |
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Obligationsrated C are the lowest rated and are typically in default, with little prospect for
recovery of principal or interest. |
Note: Moodys appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa
through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category. Additionally, a (hyb) indicator is appended to all ratings of hybrid securities issued by banks, insurers, finance companies, and securities firms.
By their terms, hybrid securities allow for the omission of scheduled dividends, interest, or principal payments, which can potentially result in impairment
if such an omission occurs. Hybrid securities may also be subject to contractually allowable write-downs of principal that could result in impairment. Together with the hybrid indicator, the long-term obligation rating assigned to a hybrid security
is an expression of the relative credit risk associated with that security.
Description of Moodys Global Short-Term Rating
Scale
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P-1 |
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Ratingsof Prime-1 reflect a superior ability to repay
short-term obligations. |
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P-2 |
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Ratingsof Prime-2 reflect a strong ability to repay
short-term obligations. |
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P-3 |
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Ratingsof Prime-3 reflect an acceptable ability to repay
short-term obligations. |
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NP |
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Issuers(or supporting institutions) rated Not Prime do not fall within any of the Prime rating
categories. |
Description of Moodys U.S. Municipal Short-Term Debt and Demand Obligation Ratings
Description of Moodys Short-Term Obligation Ratings
Moodys uses the global short-term Prime rating scale for commercial paper issued by U.S. municipalities and nonprofits. These commercial paper programs
may be backed by external letters of credit or liquidity facilities, or by an issuers self-liquidity.
For other short-term municipal obligations,
Moodys uses one of two other short-term rating scales, the Municipal Investment Grade (MIG) and Variable Municipal Investment Grade (VMIG) scales discussed below.
Moodys uses the MIG scale for U.S. municipal cash flow notes, bond anticipation notes and certain other short-term obligations, which typically mature
in three years or less. Under certain circumstances, Moodys uses the MIG scale for bond anticipation notes with maturities of up to five years.
MIG Scale
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MIG 1 |
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This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to the market for refinancing. |
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MIG 2 |
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This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group. |
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MIG 3 |
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This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely to be less well-established. |
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SG |
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This designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection. |
A-2
Description of Moodys Demand Obligation Ratings
In the case of variable rate demand obligations (VRDOs), a two-component rating is assigned. The
components are a long-term rating and a short-term demand obligation rating. The long-term rating addresses the issuers ability to meet scheduled principal and interest payments. The short-term demand obligation rating addresses the ability of
the issuer or the liquidity provider to make payments associated with the purchase-price-upon-demand feature (demand feature) of the VRDO. The short-term demand obligation rating uses the VMIG scale. VMIG ratings with liquidity support
use as an input the short-term Counterparty Risk Assessment of the support provider, or the long-term rating of the underlying obligor in the absence of third party liquidity support. Transitions of VMIG ratings of demand obligations with
conditional liquidity support differ from transitions on the Prime scale to reflect the risk that external liquidity support will terminate if the issuers long-term rating drops below investment grade.
Moodys typically assigns the VMIG short-term demand obligation rating if the frequency of the demand feature is less than every three years. If the
frequency of the demand feature is less than three years but the purchase price is payable only with remarketing proceeds, the short-term demand obligation rating is NR.
VMIG Scale
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VMIG 1 |
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This designation denotes superior credit quality. Excellent protection is afforded by the superior short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of
purchase price upon demand. |
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VMIG 2 |
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This designation denotes strong credit quality. Good protection is afforded by the strong short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price
upon demand. |
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VMIG 3 |
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This designation denotes acceptable credit quality. Adequate protection is afforded by the satisfactory short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of
purchase price upon demand. |
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SG |
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This designation denotes speculative-grade credit quality. Demand features rated in this category may be supported by a liquidity provider that does not have a sufficiently strong short-term rating or may lack the structural or
legal protections necessary to ensure the timely payment of purchase price upon demand. |
Description of S&P Global Ratings (S&P), a Division of S&P Global Inc., Issue Credit Ratings
An S&P issue credit rating is a forward-looking opinion about the creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program (including ratings on medium-term note programs and commercial paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The opinion reflects S&Ps view of the obligors capacity and willingness to meet its financial commitments as they come
due, and this opinion may assess terms, such as collateral security and subordination, which could affect ultimate payment in the event of default.
Issue
credit ratings can be either long-term or short-term. Short-term issue credit ratings are generally assigned to those obligations considered short-term in the relevant market, typically with an original maturity of no more than 365 days. Short-term
issue credit ratings are also used to indicate the creditworthiness of an obligor with respect to put features on long-term obligations. S&P would typically assign a long-term issue credit rating to an obligation with an original maturity of
greater than 365 days. However, the ratings S&P assigns to certain instruments may diverge from these guidelines based on market practices. Medium-term notes are assigned long-term ratings.
Issue credit ratings are based, in varying degrees, on S&Ps analysis of the following considerations:
A-3
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The likelihood of paymentthe capacity and willingness of the obligor to meet its financial commitments on
an obligation in accordance with the terms of the obligation; |
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The nature and provisions of the financial obligation, and the promise S&P imputes; and
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The protection afforded by, and relative position of, the financial obligation in the event of a bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors rights. |
An issue rating is
an assessment of default risk but may incorporate an assessment of relative seniority or ultimate recovery in the event of default. Junior obligations are typically rated lower than senior obligations, to reflect lower priority in bankruptcy, as
noted above. (Such differentiation may apply when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations.)
Long-Term Issue Credit Ratings*
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AAA |
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An obligation rated AAA has the highest rating assigned by S&P. The obligors capacity to meet its financial commitments on the obligation is extremely strong. |
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AA |
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An obligation rated AA differs from the highest-rated obligations only to a small degree. The obligors capacity to meet its financial commitments on the obligation is very strong. |
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A |
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An obligation rated A is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligors capacity to meet its
financial commitments on the obligation is still strong. |
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BBB |
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An obligation rated BBB exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to weaken the obligors capacity to meet its financial commitments on
the obligation. |
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BB, B,
CCC, CC, and C |
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Obligations rated BB, B, CCC, CC, and C are regarded as having significant speculative characteristics. BB indicates the least degree of speculation and
C the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposure to adverse conditions. |
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BB |
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An obligation rated BB is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to
the obligors inadequate capacity to meet its financial commitments on the obligation. |
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B |
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An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but the obligor currently has the capacity to meet its financial commitments on the obligation. Adverse business, financial,
or economic conditions will likely impair the obligors capacity or willingness to meet its financial commitments on the obligation. |
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CCC |
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An obligation rated CCC is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitments on the obligation. In the event
of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitments on the obligation. |
A-4
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CC |
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An obligation rated CC is currently highly vulnerable to nonpayment. The CC rating is used when a default has not yet occurred but S&P expects default to be a virtual certainty, regardless of the
anticipated time to default. |
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C |
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An obligation rated C is currently highly vulnerable to nonpayment, and the obligation is expected to have lower relative seniority or lower ultimate recovery compared with obligations that are rated higher. |
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D |
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An obligation rated D is in default or in breach of an imputed promise. For non-hybrid capital instruments, the D rating category is used when payments on an obligation are not made on the date due, unless
S&P believes that such payments will be made within five business days in the absence of a stated grace period or within the earlier of the stated grace period or 30 calendar days. The D rating also will be used upon the filing of a
bankruptcy petition or the taking of similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions. A rating on an obligation is lowered to D if it is subject to a distressed debt
restructuring. |
* Ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show
relative standing within the rating categories.
Short-Term Issue Credit Ratings
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A-1 |
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A short-term obligation rated A-1 is rated in the highest category by S&P. The obligors capacity to meet its financial commitments on the obligation is strong. Within
this category, certain obligations are designated with a plus sign (+). This indicates that the obligors capacity to meet its financial commitments on these obligations is extremely strong. |
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A-2 |
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A short-term obligation rated A-2 is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating
categories. However, the obligors capacity to meet its financial commitments on the obligation is satisfactory. |
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A-3 |
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A short-term obligation rated A-3 exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to weaken an
obligors capacity to meet its financial commitments on the obligation. |
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B |
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A short-term obligation rated B is regarded as vulnerable and has significant speculative characteristics. The obligor currently has the capacity to meet its financial commitments; however, it faces major ongoing
uncertainties that could lead to the obligors inadequate capacity to meet its financial commitments. |
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C |
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A short-term obligation rated C is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitments on the
obligation. |
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D |
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A short-term obligation rated D is in default or in breach of an imputed promise. For non-hybrid capital instruments, the D rating category is used when payments on an
obligation are not made on the date due, unless S&P believes that such payments will be made within any stated grace period. However, any stated grace period longer than five business days will be treated as five business days. The D
rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions. A rating on an obligation is lowered to
D if it is subject to a distressed debt restructuring. |
Description of S&Ps Municipal Short-Term Note Ratings
An S&P U.S. municipal note rating reflects S&Ps opinion about the liquidity factors and market access risks unique to the notes. Notes due in
three years or less will likely receive a note rating. Notes with an original maturity of more
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than three years will most likely receive a long-term debt rating. In determining which type of rating, if any, to assign, S&Ps analysis will review the following considerations:
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Amortization schedulethe larger the final maturity relative to other
maturities, the more likely it will be treated as a note; and |
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Source of paymentthe more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note. |
S&Ps municipal short-term note rating symbols are as follows:
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SP-1 |
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Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+) designation. |
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SP-2 |
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Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes. |
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SP-3 |
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Speculative capacity to pay principal and interest. |
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D |
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D is assigned upon failure to pay the note when due, completion of a distressed debt restructuring, or the filing of a bankruptcy petition or the taking of similar action and where default on an obligation is a
virtual certainty, for example due to automatic stay provisions. |
Description of Fitch Ratings (Fitchs)
Credit Ratings Scales
Fitch Ratings publishes opinions on a variety of scales. The most common of these are credit ratings, but the agency also
publishes ratings, scores and other relative opinions relating to financial or operational strength. For example, Fitch also provides specialized ratings of servicers of residential and commercial mortgages, asset managers and funds. In each case,
users should refer to the definitions of each individual scale for guidance on the dimensions of risk covered in each assessment.
Fitchs credit
ratings relating to issuers are an opinion on the relative ability of an entity to meet financial commitments, such as interest, preferred dividends, repayment of principal, insurance claims or counterparty obligations. Credit ratings relating to
securities and obligations of an issuer can include a recovery expectation. Credit ratings are used by investors as indications of the likelihood of receiving the money owed to them in accordance with the terms on which they invested. The
agencys credit ratings cover the global spectrum of corporate, sovereign financial, bank, insurance, and public finance entities (including supranational and sub-national entities) and the securities or
other obligations they issue, as well as structured finance securities backed by receivables or other financial assets.
The terms investment
grade and speculative grade have established themselves over time as shorthand to describe the categories AAA to BBB (investment grade) and BB to D (speculative grade). The terms
investment grade and speculative grade are market conventions and do not imply any recommendation or endorsement of a specific security for investment purposes. Investment grade categories indicate relatively low to moderate credit risk, while
ratings in the speculative categories either signal a higher level of credit risk or that a default has already occurred.
For the convenience of
investors, Fitch may also include issues relating to a rated issuer that are not and have not been rated on its web page. Such issues are also denoted as NR.
Credit ratings express risk in relative rank order, which is to say they are ordinal measures of credit risk and are not predictive of a specific frequency of
default or loss. For information about the historical performance of ratings
A-6
please refer to Fitchs Ratings Transition and Default studies which detail the historical default rates and their meaning. The European Securities and Markets Authority also maintains a
central repository of historical default rates.
Fitchs credit ratings do not directly address any risk other than credit risk. In particular,
ratings do not deal with the risk of a market value loss on a rated security due to changes in interest rates, liquidity and other market considerations. However, in terms of payment obligation on the rated liability, market risk may be considered
to the extent that it influences the ability of an issuer to pay upon a commitment.
Ratings nonetheless do not reflect market risk to the extent that
they influence the size or other conditionality of the obligation to pay upon a commitment (for example, in the case of index-linked bonds).
In the
default components of ratings assigned to individual obligations or instruments, the agency typically rates to the likelihood of non-payment or default in accordance with the terms of that instruments
documentation. In limited cases, Fitch may include additional considerations (i.e. rate to a higher or lower standard than that implied in the obligations documentation).
The primary credit rating scales can be used to provide a rating of privately issued obligations or certain note issuance programs or for private ratings. In
this case the rating is not published, but only provided to the issuer or its agents in the form of a rating letter.
The primary credit rating scales may
also be used to provide ratings for a more narrow scope, including interest strips and return of principal or in other forms of opinions such as credit opinions or rating assessment services. Credit opinions are either a notch- or category-specific
view using the primary rating scale and omit one or more characteristics of a full rating or meet them to a different standard. Credit opinions will be indicated using a lower case letter symbol combined with either an * (e.g.
bbb+*) or (cat) suffix to denote the opinion status. Credit opinions will be point-in-time typically but may be monitored if the analytical group believes
information will be sufficiently available. Rating assessment services are a notch-specific view using the primary rating scale of how an existing or potential rating may be changed by a given set of hypothetical circumstances. While credit opinions
and rating assessment services are point-in-time and are not monitored, they may have a directional watch or outlook assigned, which can signify the trajectory of the
credit profile.
Description of Fitchs Long-Term Corporate Finance Obligations Rating Scales
Ratings of individual securities or financial obligations of a corporate issuer address relative vulnerability to default on an ordinal scale. In addition,
for financial obligations in corporate finance, a measure of recovery given default on that liability is also included in the rating assessment. This notably applies to covered bonds ratings, which incorporate both an indication of the probability
of default and of the recovery given a default of this debt instrument. On the contrary, Ratings of debtor-in-possession (DIP) obligations incorporate the
expectation of full repayment.
The relationship between the issuer scale and obligation scale assumes a generic
historical average recovery. Individual obligations can be assigned ratings higher, lower, or the same as that entitys issuer rating or issuer default rating (IDR), based on their relative ranking, relative vulnerability to
default or based on explicit Recovery Ratings.
As a result, individual obligations of entities, such as corporations, are assigned ratings higher,
lower, or the same as that entitys issuer rating or IDR, except DIP obligation ratings that are not based off an IDR. At the lower end of the ratings scale, Fitch publishes explicit Recovery Ratings in many cases to complement issuer and
obligation ratings.
Fitch long-term obligations rating scales are as follows:
A-7
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AAA |
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Highest Credit Quality. AAA ratings denote the lowest expectation of credit risk. They are assigned only in cases of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to
be adversely affected by foreseeable events. |
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AA |
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Very High Credit Quality. AA ratings denote expectations of very low credit risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable
events. |
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A |
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High Credit Quality. A ratings denote expectations of low credit risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or
economic conditions than is the case for higher ratings. |
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BBB |
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Good Credit Quality. BBB ratings indicate that expectations of credit risk are currently low. The capacity for payment of financial commitments is considered adequate, but adverse business or economic conditions are more
likely to impair this capacity. |
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BB |
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Speculative. BB ratings indicate an elevated vulnerability to credit risk, particularly in the event of adverse changes in business or economic conditions over time; however, business or financial alternatives may be
available to allow financial commitments to be met. |
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B |
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Highly Speculative. B ratings indicate that material credit risk is present. |
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CCC |
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Substantial Credit Risk. CCC ratings indicate that substantial credit risk is present. |
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CC |
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Very High Levels of Credit Risk. CC ratings indicate very high levels of credit risk. |
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C |
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Exceptionally High Levels of Credit Risk. C indicates exceptionally high levels of credit risk. |
Within rating categories, Fitch may use modifiers. The modifiers + or - may be
appended to a rating to denote relative status within major rating categories.
For example, the rating category AA has three notch-specific
rating levels (AA+; AA; AA; each a rating level). Such suffixes are not added to AAA ratings and ratings below the CCC category. For the short-term rating category of F1,
a + may be appended.
Description of Fitchs Short-Term Ratings Assigned to Issuers and Obligations
A short-term issuer or obligation rating is based in all cases on the short-term vulnerability to default of the rated entity and relates to the capacity to
meet financial obligations in accordance with the documentation governing the relevant obligation. Short-term deposit ratings may be adjusted for loss severity. Short-term ratings are assigned to obligations whose initial
maturity is viewed as short term based on market convention. Typically, this means up to 13 months for corporate, sovereign, and structured obligations and up to 36 months for obligations in U.S. public finance markets.
Fitch short-term ratings are as follows:
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F1 |
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Highest Short-Term Credit Quality. Indicates the strongest intrinsic capacity for timely payment of financial commitments; may have an added + to denote any exceptionally strong credit feature. |
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F2 |
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Good Short-Term Credit Quality. Good intrinsic capacity for timely payment of financial commitments. |
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F3 |
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Fair Short-Term Credit Quality. The intrinsic capacity for timely payment of financial commitments is adequate. |
A-8
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B |
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Speculative Short-Term Credit Quality. Minimal capacity for timely payment of financial commitments, plus heightened vulnerability to near term adverse changes in financial and economic conditions. |
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C |
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High Short-Term Default Risk. Default is a real possibility. |
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RD |
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Restricted Default. Indicates an entity that has defaulted on one or more of its financial commitments, although it continues to meet other financial obligations. Typically applicable to entity ratings only. |
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D |
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Default. Indicates a broad-based default event for an entity, or the default of a short-term obligation. |
A-9
APPENDIX B
Closed-End Fund Proxy Voting Policy
August 1, 2021
Effective Date: August 1, 2021
Applies to the following types of Funds registered under the 1940 Act:
☐ |
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Open-End Mutual Funds (including money market funds)
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Money Market Funds Only |
☐ |
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iShares and BlackRock ETFs |
Objective and Scope
Set forth below is the Closed-End Fund Proxy Voting Policy.
Policy / Document Requirements and Statements
The
Boards of Trustees/Directors (the Directors) of the closed-end funds advised by BlackRock Advisors, LLC (BlackRock) (the Funds) have the responsibility for the oversight of
voting proxies relating to portfolio securities of the Funds, and have determined that it is in the best interests of the Funds and their shareholders to delegate that responsibility to BlackRock as part of BlackRocks authority to manage,
acquire and dispose of account assets, all as contemplated by the Funds respective investment management agreements.
BlackRock has adopted
guidelines and procedures (together and as from time to time amended, the BlackRock Proxy Voting Guidelines) governing proxy voting by accounts managed by BlackRock.
BlackRock will cast votes on behalf of each of the Funds on specific proxy issues in respect of securities held by each such Fund in accordance with the
BlackRock Proxy Voting Guidelines; provided, however, that in the case of underlying closed-end funds (including business development companies and other similarly-situated asset pools) held by the Funds that
have, or are proposing to adopt, a classified board structure, BlackRock will typically (a) vote in favor of proposals to adopt classification and against proposals to eliminate classification, and (b) not vote against directors as a
result of their adoption of a classified board structure.
BlackRock will report on an annual basis to the Directors on (1) a summary of all proxy
votes that BlackRock has made on behalf of the Funds in the preceding year together with a representation that all votes were in accordance with the BlackRock Proxy Voting Guidelines (as modified pursuant to the immediately preceding paragraph), and
(2) any changes to the BlackRock Proxy Voting Guidelines that have not previously been reported.
B-1
BlackRock
Investment
Stewardship
Global Principles
Effective
as of January 2022
BlackRock
B-2
CONTENTS
The purpose of this document is to provide an overarching explanation of BlackRocks approach globally
to our responsibilities as a shareholder on behalf of our clients, our expectations of companies, and our commitments to clients in terms of our own governance and transparency.
B-3
INTRODUCTION TO BLACKROCK
BlackRocks purpose is to help more and more people experience financial well-being. We manage assets on behalf of institutional and individual clients,
across a full spectrum of investment strategies, asset classes, and regions. Our client base includes pension plans, endowments, foundations, charities, official institutions, insurers, and other financial institutions, as well as individuals around
the world. As part of our fiduciary duty to our clients, we have determined that it is generally in the best long-term interest of our clients to promote sound corporate governance as an informed, engaged shareholder. At BlackRock, this is the
responsibility of the Investment Stewardship team.
Philosophy on investment stewardship
Companies are responsible for ensuring they have appropriate governance structures to serve the interests of shareholders and other key stakeholders. We
believe that there are certain fundamental rights attached to shareholding. Companies and their boards should be accountable to shareholders and structured with appropriate checks and balances to ensure that they operate in shareholders best
interests to create sustainable value. Shareholders should have the right to vote to elect, remove, and nominate directors, approve the appointment of the auditor, and amend the corporate charter or by-laws.
Shareholders should be able to vote on key board decisions that are material to the protection of their investment, including but not limited to, changes to the purpose of the business, dilution levels and
pre-emptive rights, and the distribution of income and capital structure. In order to make informed decisions, we believe that shareholders have the right to sufficient and timely information. In addition,
shareholder voting rights should be proportionate to their economic ownershipthe principle of one share, one vote helps achieve this balance.
Consistent with these shareholder rights, we believe BlackRock has a responsibility to monitor and provide feedback to companies in our role as stewards of
our clients investments. Investment stewardship is how we use our voice as an investor to promote sound corporate governance and business practices to help maximize long-term shareholder value for our clients, the vast majority of whom are
investing for long-term goals such as retirement. BlackRock Investment Stewardship (BIS) does this through engagement with management teams and/or board members on material business issues, including but not limited to environmental,
social, and governance (ESG) matters and, for those clients who have given us authority, through voting proxies in their best long-term economic interests. We also participate in the public dialogue to help shape global norms and
industry standards with the goal of supporting a policy framework consistent with our clients interests as long-term shareholders.
BlackRock looks
to companies to provide timely, accurate, and comprehensive disclosure on all material governance and business matters, including ESG-related issues. This transparency allows shareholders to appropriately
understand and assess how relevant risks and opportunities are being effectively identified and managed. Where company reporting and disclosure is inadequate or we believe the approach taken may be inconsistent with sustainable, long-term value
creation, we will engage with a company and/or vote in a manner that encourages progress.
BlackRock views engagement as an important activity; engagement
provides us with the opportunity to improve our understanding of the business and risks and opportunities that are material to the companies in which our clients invest, including those related to ESG. Engagement also informs our voting decisions.
As long-term investors on behalf of clients, we seek to have regular and continuing dialogue with executives and board directors to advance sound governance and sustainable business practices, as well as to understand the effectiveness of the
companys management and oversight of material issues. Engagement is an important mechanism for providing feedback on company practices and disclosures, particularly where we believe they could be enhanced. Similarly, it provides us an
opportunity to hear directly from company boards and management on how they believe their actions are aligned with sustainable, long-term value creation. We primarily engage through direct dialogue, but may use other tools such as written
correspondence, to share our perspectives.
We generally vote in support of management and boards that demonstrate an approach consistent with creating
sustainable, long-term value. If we have concerns about a companys approach, we may choose to explain our
B-4
expectations to the companys board and management. Following our engagement, we may signal through our voting that we have outstanding concerns, generally by voting against the re-election of directors we view as having responsibility for an issue. We apply our regional proxy voting guidelines to achieve the outcome we believe is most aligned with our clients long-term economic
interests.
Key themes
We recognize that accepted standards and norms of corporate governance can differ between markets. However, we believe there are certain fundamental elements
of governance practice that are intrinsic globally to a companys ability to create long-term value. This set of global themes are set out in this overarching set of principles (the Principles), which are anchored in transparency
and accountability. At a minimum, we believe companies should observe the accepted corporate governance standards in their domestic market and ask that, if they do not, they explain how their approach better supports sustainable long-term value
creation.
These Principles cover seven key themes:
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Auditors and audit-related issues |
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Capital structure, mergers, asset sales, and other special transactions |
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Compensation and benefits |
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Environmental and social issues |
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General corporate governance matters and shareholder protections |
Our regional and market-specific voting guidelines explain how these Principles inform our voting decisions in relation to specific ballot items for
shareholder meetings.
Boards and directors
Our primary focus is on the performance of the board of directors. The performance of the board is critical to the economic success of the company and the
protection of shareholders interests. As part of their responsibilities, board members owe fiduciary duties to shareholders in overseeing the strategic direction and operation of the company. For this reason, BIS sees engaging with and the
election of directors as one of our most important and impactful responsibilities.
We support boards whose approach is consistent with creating
sustainable, long-term value. This includes the effective management of strategic, operational, financial, and material ESG factors and the consideration of key stakeholder interests. The board should establish and maintain a framework of robust and
effective governance mechanisms to support its oversight of the companys strategic aims. We look to the board to articulate the effectiveness of these mechanisms in overseeing the management of business risks and opportunities and the
fulfillment of the companys purpose. Disclosure of material issues that affect the companys long-term strategy and value creation, including material ESG factors, is essential for shareholders to be able to appropriately understand and
assess how risks are effectively identified, managed and mitigated.
Where a company has not adequately disclosed and demonstrated it has fulfilled these
responsibilities, we will consider voting against the re-election of directors whom we consider having particular responsibility for the issue. We assess director performance on a case-by-case basis and in light of each companys circumstances, taking into consideration our assessment of their governance, business practices that support
sustainable, long-term value
B-5
creation, and performance. In serving the interests of shareholders, the responsibility of the board of directors includes, but is not limited to, the following:
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Establishing an appropriate corporate governance structure |
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Supporting and overseeing management in setting long-term strategic goals and applicable measures of
value-creation and milestones that will demonstrate progress, and taking steps to address anticipated or actual obstacles to success |
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Providing oversight on the identification and management of material, business operational and
sustainability-related risks |
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Overseeing the financial resilience of the company, the integrity of financial statements, and the robustness
of a companys Enterprise Risk Management1 framework |
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Making decisions on matters that require independent evaluation which may include mergers, acquisitions and
dispositions, activist situations or other similar cases |
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Establishing appropriate executive compensation structures |
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Addressing business issues, including environmental and social risks and opportunities, when they have the
potential to materially impact the companys long-term value |
There should be clear definitions of the role of the board, the
committees of the board, and senior management. Set out below are ways in which boards and directors can demonstrate a commitment to acting in the best long-term economic interests of all shareholders.
We will seek to engage with the appropriate directors where we have concerns about the performance of the company, board, or individual directors and may
signal outstanding concerns in our voting.
Regular accountability
BlackRock believes that directors should stand for re-election on a regular basis, ideally annually. In our
experience, annual re-elections allow shareholders to reaffirm their support for board members or hold them accountable for their decisions in a timely manner. When board members are not re-elected annually, we believe it is good practice for boards to have a rotation policy to ensure that, through a board cycle, all directors have had their appointment
re-confirmed, with a proportion of directors being put forward for re-election at each annual general meeting.
Effective board composition
Regular director elections
also give boards the opportunity to adjust their composition in an orderly way to reflect the evolution of the companys strategy and the market environment. BlackRock believes it is beneficial for new directors to be brought onto the board
periodically to refresh the groups thinking and in a manner that supports both continuity and appropriate succession planning. We consider the average overall tenure of the board, where we are seeking a balance between the knowledge and
experience of longer-serving members and the fresh perspectives of newer members. We expect companies to keep under regular review the effectiveness of their board (including its size), and assess directors nominated for election or re-election in the context of the composition of the board as a whole. This assessment should consider a number of factors, including the potential need to address gaps in skills, experience, diversity, and
independence.
1 |
Enterprise risk management is a process, effected by the entitys board of directors, management, and
other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within the risk appetite, to provide reasonable assurance regarding the achievement of
objectives. (Committee of Sponsoring Organizations of the Treadway Commission (COSO), Enterprise Risk Management Integrated Framework, September 2004, New York, NY). |
B-6
When nominating new directors to the board, we ask that there is sufficient information on the individual
candidates so that shareholders can assess the suitability of each individual nominee and the overall board composition. These disclosures should give an understanding of how the collective experience and expertise of the board aligns with the
companys long-term strategy and business model.
We are interested in diversity in the board room as a means to promoting diversity of thought and
avoiding group think. We ask boards to disclose how diversity is considered in board composition, including demographic characteristics such as gender, race/ethnicity and age; as well as professional characteristics, such as a
directors industry experience, specialist areas of expertise and geographic location. We assess a boards diversity in the context of a companys domicile, business model and strategy. Self-identified board demographic diversity can
usefully be disclosed in aggregate, consistent with local law. We believe boards should aspire to meaningful diversity of membership, at least consistent with local regulatory requirements and best practices, while recognizing that building a
strong, diverse board can take time.
This position is based on our view that diversity of perspective and thought in the board room, in the
management team and throughout the company leads to better long term economic outcomes for companies. Academic research already reveals correlations between specific dimensions of diversity and effects on decision-making processes and
outcomes.2 In our experience, greater diversity in the board room contributes to more robust discussions and more innovative and resilient decisions. Over time, greater diversity in the board room
can also promote greater diversity and resilience in the leadership team, and the workforce more broadly. That diversity can enable companies to develop businesses that more closely reflect and resonate with the customers and communities they serve.
We expect there to be a sufficient number of independent directors, free from conflicts of interest or undue influence from connected parties, to ensure
objectivity in the decision-making of the board and its ability to oversee management. Common impediments to independence may include but are not limited to:
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Current or recent employment at the company or a subsidiary |
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Being, or representing, a shareholder with a substantial shareholding in the company |
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Interlocking directorships |
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Having any other interest, business, or other relationship which could, or could reasonably be perceived to,
materially interfere with a directors ability to act in the best interests of the company and its shareholders. |
BlackRock
believes that boards are most effective at overseeing and advising management when there is a senior independent board leader. This director may chair the board, or, where the chair is also the CEO (or is otherwise not independent), be designated as
a lead independent director. The role of this director is to enhance the effectiveness of the independent members of the board through shaping the agenda, ensuring adequate information is provided to the board, and encouraging independent
participation in board deliberations. The lead independent director or another appropriate director should be available to shareholders in those situations where an independent director is best placed to explain and contextualize a companys
approach.
There are matters for which the board has responsibility that may involve a conflict of interest for executives or for affiliated
directors. BlackRock believes that objective oversight of such matters is best achieved when the board forms committees comprised entirely of independent directors. In many markets, these committees of the board specialize in audit, director
nominations, and compensation matters. An ad hoc committee might also be formed to decide on a special transaction, particularly one involving a related party, or to investigate a significant adverse event.
2 |
For example, the role of gender diversity on team cohesion and participative communication is explored by:
Post, C., 2015, When is female leadership an advantage? Coordination requirements, team cohesion, and team interaction norms, Journal of Organizational Behavior, 36, 1153-1175. http://dx.doi.org/10.1002/job.2031. |
B-7
Sufficient capacity
As the role and expectations of a director are increasingly demanding, directors must be able to commit an appropriate amount of time to board and committee
matters. It is important that directors have the capacity to meet all of their responsibilities - including when there are unforeseen events and therefore, they should not take on an excessive number of roles that would impair their ability
to fulfill their duties.
Auditors and audit-related issues
BlackRock recognizes the critical importance of financial statements, which should provide a true and fair picture of a companys financial condition.
Accordingly, the assumptions made by management and reviewed by the auditor in preparing the financial statements should be reasonable and justified.
The
accuracy of financial statements, inclusive of financial and non-financial information, is of paramount importance to BlackRock. Investors increasingly recognize that a broader range of risks and opportunities
have the potential to materially impact financial performance. Over time, we expect increased scrutiny of the assumptions underlying financial reports, particularly those that pertain to the impact of the transition to a low carbon economy on a
companys business model and asset mix.
In this context, audit committees, or equivalent, play a vital role in a companys financial reporting
system by providing independent oversight of the accounts, material financial and non-financial information, internal control frameworks, and in the absence of a dedicated risk committee, Enterprise Risk
Management systems. BlackRock believes that effective audit committee oversight strengthens the quality and reliability of a companys financial statements and provides an important level of reassurance to shareholders.
We hold members of the audit committee or equivalent responsible for overseeing the management of the audit function. Audit committees or equivalent should
have clearly articulated charters that set out their responsibilities and have a rotation plan in place that allows for a periodic refreshment of the committee membership to introduce fresh perspectives to audit oversight.
We take particular note of critical accounting matters, cases involving significant financial restatements, or ad hoc notifications of material financial
weakness. In this respect, audit committees should provide timely disclosure on the remediation of Key and Critical Audit Matters identified either by the external auditor or Internal Audit function.
The integrity of financial statements depends on the auditor being free of any impediments to being an effective check on management. To that end, we believe
it is important that auditors are, and are seen to be, independent. Where an audit firm provides services to the company in addition to the audit, the fees earned should be disclosed and explained. Audit committees should have in place a procedure
for assessing annually the independence of the auditor and the quality of the external audit process.
Comprehensive disclosure provides investors with a
sense of the companys long-term operational risk management practices and, more broadly, the quality of the boards oversight. The audit committee or equivalent, or a dedicated risk committee, should periodically review the companys
risk assessment and risk management policies and the significant risks and exposures identified by management, the internal auditors or the independent accountants, and managements steps to address them. In the absence of robust disclosures,
we may reasonably conclude that companies are not adequately managing risk.
Capital structure, mergers, asset sales and
other special transactions
The capital structure of a company is critical to shareholders as it impacts the value of their investment and the
priority of their interest in the company relative to that of other equity or debt investors. Pre-emptive rights are a key protection for shareholders against the dilution of their interests.
B-8
Effective voting rights are basic rights of share ownership. We believe strongly in one vote for one share as a
guiding principle that supports effective corporate governance. Shareholders, as the residual claimants, have the strongest interest in protecting company value, and voting power should match economic exposure.
In principle, we disagree with the creation of a share class with equivalent economic exposure and preferential, differentiated voting rights. In our view,
this structure violates the fundamental corporate governance principle of proportionality and results in a concentration of power in the hands of a few shareholders, thus disenfranchising other shareholders and amplifying any potential conflicts of
interest. However, we recognize that in certain markets, at least for a period of time, companies may have a valid argument for listing dual classes of shares with differentiated voting rights. We believe that such companies should review these
share class structures on a regular basis or as company circumstances change. Additionally, they should seek shareholder approval of their capital structure on a periodic basis via a management proposal at the companys shareholder meeting. The
proposal should give unaffiliated shareholders the opportunity to affirm the current structure or establish mechanisms to end or phase out controlling structures at the appropriate time, while minimizing costs to shareholders.
In assessing mergers, asset sales, or other special transactions, BlackRocks primary consideration is the long-term economic interests of our clients as
shareholders. Boards proposing a transaction need to clearly explain the economic and strategic rationale behind it. We will review a proposed transaction to determine the degree to which it can enhance long-term shareholder value. We would prefer
that proposed transactions have the unanimous support of the board and have been negotiated at arms length. We may seek reassurance from the board that executives and/or board members financial interests in a given transaction have
not adversely affected their ability to place shareholders interests before their own. Where the transaction involves related parties, we would expect the recommendation to support it to come from the independent directors, and ideally, the
terms also have been assessed through an independent appraisal process. In addition, it is good practice that it be approved by a separate vote of the non-conflicted parties.
BlackRock believes that shareholders have a right to dispose of company shares in the open market without unnecessary restriction. In our view, corporate
mechanisms designed to limit shareholders ability to sell their shares are contrary to basic property rights. Such mechanisms can serve to protect and entrench interests other than those of the shareholders. We believe that shareholders are
broadly capable of making decisions in their own best interests. We expect any so-called shareholder rights plans proposed by a board to be subject to shareholder approval upon introduction and
periodically thereafter.
Compensation and benefits
BlackRock expects a companys board of directors to put in place a compensation structure that incentivizes and rewards executives appropriately. There
should be a clear link between variable pay and operational and financial performance. Performance metrics should be stretching and aligned with a companys strategy and business model. BIS does not have a position on the use of ESG-related criteria, but believes that where companies choose to include them, they should be as rigorous as other financial or operational targets. Long-term incentive plans should vest over timeframes aligned
with the delivery of long-term shareholder value. Compensation committees should guard against contractual arrangements that would entitle executives to material compensation for early termination of their employment. Finally, pension contributions
and other deferred compensation arrangements should be reasonable in light of market practice.
We are not supportive of
one-off or special bonuses unrelated to company or individual performance. Where discretion has been used by the compensation committee or its equivalent, we expect disclosure relating to how and why the
discretion was used, and how the adjusted outcome is aligned with the interests of shareholders. We acknowledge that the use of peer group evaluation by compensation committees can help ensure competitive pay; however, we are concerned when the
rationale for increases in total compensation at a company is solely based on peer benchmarking rather than a rigorous measure of outperformance. We encourage companies to clearly explain how compensation outcomes have rewarded outperformance
against peer firms.
B-9
We believe consideration should be given to building claw back provisions into incentive plans such that
executives would be required to forgo rewards when they are not justified by actual performance and/or when compensation was based on faulty financial reporting or deceptive business practices. We also favor recoupment from any senior executive
whose behavior caused material financial harm to shareholders, material reputational risk to the company, or resulted in a criminal investigation, even if such actions did not ultimately result in a material restatement of past results.
Non-executive directors should be compensated in a manner that is commensurate with the time and effort expended in
fulfilling their professional responsibilities. Additionally, these compensation arrangements should not risk compromising directors independence or aligning their interests too closely with those of the management, whom they are charged with
overseeing.
We use third party research, in addition to our own analysis, to evaluate existing and proposed compensation structures. We may vote against
members of the compensation committee or equivalent board members for poor compensation practices or structures.
Environmental and social issues
We believe that well-managed companies will deal effectively with material environmental and social (E&S) factors relevant to their
businesses. Governance is the core structure by which boards can oversee the creation of sustainable, long-term value. Appropriate risk oversight of E&S considerations stems from this construct.
Robust disclosure is essential for investors to effectively evaluate companies strategy and business practices related to material E&S risks and
opportunities. Given the increased understanding of material sustainability risks and opportunities, and the need for better information to assess them, BlackRock will advocate for continued improvement in companies reporting, where necessary,
and will express any concerns through our voting where a companys actions or disclosures are inadequate.
BlackRock encourages companies to use the
framework developed by the Task Force on Climate-related Financial Disclosures (TCFD) to disclose their approach to ensuring they have a sustainable business model and to supplement that disclosure with industry-specific metrics such as those
identified by the Sustainability Accounting Standards Board (SASB).3 While the TCFD framework was developed to support climate-related risk disclosure, the four pillars of the TCFD
Governance, Strategy, Risk Management, and Metrics and Targets are a useful way for companies to disclose how they identify, assess, manage, and oversee a variety of sustainability-related risks and opportunities. SASBs
industry-specific guidance (as identified in its materiality map) is beneficial in helping companies identify key performance indicators (KPIs) across various dimensions of sustainability that are considered to be financially material and
decision-useful within their industry. We recognize that some companies may report using different standards, which may be required by regulation, or one of a number of private standards. In such cases, we ask that companies highlight the metrics
that are industry- or company-specific,
Companies may also adopt or refer to guidance on sustainable and responsible business conduct issued by
supranational organizations such as the United Nations or the Organization for Economic Cooperation and Development. Further, industry-specific initiatives on managing specific operational risks may be useful. Companies should disclose any global
standards adopted, the industry initiatives in which they participate, any peer group benchmarking undertaken, and any assurance processes to help investors understand their approach to sustainable and responsible business practices.
3 |
The International Financial Reporting Standards (IFRS) Foundation announced in November 2021 the
formation of an International Sustainability Standards Board (ISSB) to develop a comprehensive global baseline of high-quality sustainability disclosure standards to meet investors information needs. The IFRS Foundation plans to
complete consolidation of the Climate Disclosure Standards Board (CDSBan initiative of CDP) and the Value Reporting Foundation (VRFwhich houses the Integrated Reporting Framework and the SASB Standards) by June 2022.
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Climate risk
BlackRock believes that climate change has become a defining factor in companies long-term prospects. We ask every company to help its
investors understand how it may be impacted by climate-related risk and opportunities, and how these factors are considered within their strategy in a manner consistent with the companys business model and sector. Specifically, we ask
companies to articulate how their business model is aligned to a scenario in which global warming is limited to well below 2°C, moving towards global net zero emissions by 2050.
In Stewardship, we understand that climate change can be very challenging for many companies, as they seek to drive long-term value by
mitigating risks and capturing opportunities. A growing number of companies, financial institutions, as well as governments, have committed to advancing net zero. There is growing consensus that companies can benefit from the more favorable
macro-economic environment under an orderly, timely and just transition to net zero.4 Many companies are asking what their role should be in contributing to a just transition in ensuring a
reliable energy supply and protecting the most vulnerable from energy price shocks and economic dislocation. They are also seeking more clarity as to the public policy path that will help align greenhouse gas reduction actions with commitments.
In this context, we ask companies to disclose a business plan for how they intend to deliver long-term financial performance through the
transition to global net zero, consistent with their business model and sector. We encourage companies to demonstrate that their plans are resilient under likely decarbonization pathways, and the global aspiration to limit warming to 1.5°C.5 We also encourage companies to disclose how considerations related to having a reliable energy supply and just transition affect their plans.
We look to companies to set short-, medium- and long-term science-based targets, where available for their sector, for greenhouse gas
reductions and to demonstrate how their targets are consistent with the long-term economic interests of their shareholders. Companies have an opportunity to use and contribute to the development of alternative energy sources and low-carbon transition technologies that will be essential to reaching net zero. We also recognize that some continued investment is required to maintain a reliable, affordable supply of fossil fuels during the
transition. We ask companies to disclose how their capital allocation across alternatives, transition technologies, and fossil fuel production is consistent with their strategy and their emissions reduction targets.
Key stakeholder interests
We believe
that, to advance long-term shareholders interests, companies should consider the interests of their key stakeholders. It is for each company to determine its key stakeholders based on what is material to its business, but they are likely to
include employees, business partners (such as suppliers and distributors), clients and consumers, government, and the communities in which they operate.
Considering the interests of key stakeholders recognizes the collective nature of long-term value creation and the extent to which each
companys prospects for growth are tied to its ability to foster strong sustainable relationships with and support from those stakeholders. Companies should articulate how they address adverse impacts that could arise from their business
practices and affect critical business relationships with their stakeholders. We expect
4 |
For example, BlackRocks Capital Markets Assumptions anticipate 25 points of cumulative economic gains
over a 20-year period in an orderly transition as compared to the alternative. This better macro environment will support better economic growth, financial stability, job growth, productivity, as well as
ecosystem stability and health outcomes. |
5 |
The global aspiration is reflective of aggregated efforts; companies in developed and emerging markets are not
equally equipped to transition their business and reduce emissions at the same ratethose in developed markets with the largest market capitalization are better positioned to adapt their business models at an accelerated pace. Government policy
and regional targets may be reflective of these realities. |
B-11
companies to implement, to the extent appropriate, monitoring processes (often referred to as due diligence) to identify and mitigate potential adverse impacts and grievance mechanisms to
remediate any actual adverse material impacts. The maintenance of trust within these relationships can be equated with a companys long-term success.
To ensure transparency and accountability, companies should disclose how they have identified their key stakeholders and considered their interests in
business decision-making, demonstrating the applicable governance, strategy, risk management, and metrics and targets. This approach should be overseen by the board, which is well positioned to ensure that the approach taken is informed by and
aligns with the companys strategy and purpose.
General corporate governance matters and shareholder protections
BlackRock believes that shareholders have a right to material and timely information on the financial performance and viability of the companies in
which they invest. In addition, companies should publish information on the governance structures in place and the rights of shareholders to influence these structures. The reporting and disclosure provided by companies help shareholders assess
whether their economic interests have been protected and the quality of the boards oversight of management. We believe shareholders should have the right to vote on key corporate governance matters, including changes to governance mechanisms,
to submit proposals to the shareholders meeting, and to call special meetings of shareholders.
Corporate Form
We believe it is the responsibility of the board to determine the corporate form that is most appropriate given the companys purpose and business model.6 Companies proposing to change their corporate form to a public benefit corporation or similar entity should put it to a shareholder vote if not already required to do so under applicable law.
Supporting documentation from companies or shareholder proponents proposing to alter the corporate form should clearly articulate how the interests of shareholders and different stakeholders would be impacted as well as the accountability and voting
mechanisms that would be available to shareholders. As a fiduciary on behalf of clients, we generally support management proposals if our analysis indicates that shareholders interests are adequately protected. Relevant shareholder proposals
are evaluated on a case-by-case basis.
Shareholder proposals
In
most markets in which BlackRock invests on behalf of clients, shareholders have the right to submit proposals to be voted on by shareholders at a companys annual or extraordinary meeting, as long as eligibility and procedural requirements are
met. The matters that we see put forward by shareholders address a wide range of topics, including governance reforms, capital management, and improvements in the management or disclosure of E&S risks.
BlackRock is subject to certain requirements under antitrust law in the United States that place restrictions and limitations on how BlackRock can interact
with the companies in which we invest on behalf of our clients, including our ability to submit shareholder proposals. As noted above, we can vote on proposals put forth by others.
When assessing shareholder proposals, we evaluate each proposal on its merit, with a singular focus on its implications for long-term value creation. We
consider the business and economic relevance of the issue raised, as well as its materiality and the urgency with which we believe it should be addressed. We take into consideration the legal effect of the proposal, as shareholder proposals may be
advisory or legally binding depending on the jurisdiction. We would not support proposals that we believe would result in over-reaching into the basic business decisions of the issuer.
Where a proposal is focused on a material business risk that we agree needs to be addressed and the intended outcome is consistent with long-term value
creation, we will look to the board and management to demonstrate that the company has met the intent of the request made in the shareholder proposal. Where our analysis and/or
6 |
Corporate form refers to the legal structure by which a business is organized.
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engagement indicate an opportunity for improvement in the companys approach to the issue, we may support shareholder proposals that are reasonable and not unduly constraining on management.
Alternatively, or in addition, we may vote against the re-election of one or more directors if, in our assessment, the board has not responded sufficiently or with an appropriate sense of urgency. We may also
support a proposal if management is on track, but we believe that voting in favor might accelerate progress.
BlackRocks oversight of its investment stewardship activities
Oversight
We hold ourselves to a very high standard in
our investment stewardship activities, including proxy voting. To meet this standard, BIS is comprised of BlackRock employees who do not have other responsibilities other than their roles in BIS. BIS is considered an investment function.
BlackRock maintains three regional advisory committees (Stewardship Advisory Committees) for(a) the Americas; (b) Europe, the Middle East and
Africa (EMEA); and (c) Asia-Pacific, generally consisting of senior BlackRock investment professionals and/or senior employees with practical boardroom experience. The regional Stewardship Advisory Committees review and advise on
amendments to BIS proxy voting guidelines covering markets within each respective region (Guidelines). The advisory committees do not determine voting decisions, which are the responsibility of BIS.
In addition to the regional Stewardship Advisory Committees, the Investment Stewardship Global Oversight Committee (Global Committee) is a
risk-focused committee, comprised of senior representatives from various BlackRock investment teams, a senior legal representative, the Global Head of Investment Stewardship(Global Head), and other senior executives with relevant
experience and team oversight. The Global Oversight Committee does not determine voting decisions, which are the responsibility of BIS.
The Global Head
has primary oversight of the activities of BIS, including voting in accordance with the Guidelines, which require the application of professional judgment and consideration of each companys unique circumstances. The Global Committee reviews
and approves amendments to these Principles. The Global Committee also reviews and approves amendments to the regional Guidelines, as proposed by the regional Stewardship Advisory Committees.
In addition, the Global Committee receives and reviews periodic reports regarding the votes cast by BIS, as well as updates on material process issues,
procedural changes, and other risk oversight considerations. The Global Committee reviews these reports in an oversight capacity as informed by the BIS corporate governance engagement program and the Guidelines.
BIS carries out engagement with companies, monitors and executes proxy votes, and conducts vote operations (including maintaining records of votes cast) in a
manner consistent with the relevant Guidelines. BIS also conducts research on corporate governance issues and participates in industry discussions to contribute to and keep abreast of important developments in the corporate governance field. BIS may
utilize third parties for certain of the foregoing activities and performs oversight of those third parties. BIS may raise complicated or particularly controversial matters for internal discussion with the relevant investment teams and governance
specialists for discussion and guidance prior to making a voting decision.
Vote execution
We carefully consider proxies submitted to funds and other fiduciary account(s) (Fund or Funds) for which we have voting authority.
BlackRock votes (or refrains from voting) proxies for each Fund for which we have voting authority based on our evaluation of the best long-term economic interests of our clients as shareholders, in the exercise of our independent business judgment,
and without regard to the relationship of the issuer of the proxy (or
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any shareholder proponent or dissident shareholder) to the Fund, the Funds affiliates (if any), BlackRock or BlackRocks affiliates, or BlackRock employees (see Conflicts
management policies and procedures, below).
When exercising voting rights, BlackRock will normally vote on specific proxy issues in accordance with
the Guidelines for the relevant market. The Guidelines are reviewed annually and are amended consistent with changes in the local market practice, as developments in corporate governance occur, or as otherwise deemed advisable by the applicable
Stewardship Advisory Committees. BIS analysts may, in the exercise of their professional judgment, conclude that the Guidelines do not cover the specific matter upon which a proxy vote is required or that an exception to the Guidelines would be in
the best long-term economic interests of BlackRocks clients.
In the uncommon circumstance of there being a vote with respect to fixed income
securities or the securities of privately held issuers, the decision generally will be made by a Funds portfolio managers and/or BIS based on their assessment of the particular transactions or other matters at issue.
In certain markets, proxy voting involves logistical issues which can affect BlackRocks ability to vote such proxies, as well as the desirability of
voting such proxies. These issues include, but are not limited to: (i) untimely notice of shareholder meetings; (ii) restrictions on a foreigners ability to exercise votes; (iii) requirements to vote proxies in person; (iv)
share-blocking (requirements that investors who exercise their voting rights surrender the right to dispose of their holdings for some specified period in proximity to the shareholder meeting); (v) potential difficulties in translating
the proxy; (vi) regulatory constraints; and (vii) requirements to provide local agents with unrestricted powers of attorney to facilitate voting instructions. We are not supportive of impediments to the exercise of voting rights such as
share-blocking or overly burdensome administrative requirements.
As a consequence, BlackRock votes proxies in these situations on a
best-efforts basis. In addition, BIS may determine that it is generally in the best interests of BlackRocks clients not to vote proxies (or not to vote our full allocation) if the costs (including but not limited to opportunity
costs associated with share-blocking constraints) associated with exercising a vote are expected to outweigh the benefit the client would derive by voting on the proposal.
Portfolio managers have full discretion to vote the shares in the Funds they manage based on their analysis of the economic impact of a particular ballot item
on their investors. Portfolio managers may, from time to time, reach differing views on how best to maximize economic value with respect to a particular investment. Therefore, portfolio managers may, and sometimes do, vote shares in the Funds under
their management differently from BIS or from one another. However, because BlackRocks clients are mostly long-term investors with long-term economic goals, ballots are frequently cast in a uniform manner.
Conflicts management policies and procedures
BIS maintains policies and procedures that seek to prevent undue influence on BlackRocks proxy voting activity. Such influence might stem from any
relationship between the investee company (or any shareholder proponent or dissident shareholder) and BlackRock, BlackRocks affiliates, a Fund or a Funds affiliates, or BlackRock employees. The following are examples of sources of
perceived or potential conflicts of interest:
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BlackRock clients who may be issuers of securities or proponents of shareholder resolutions
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BlackRock business partners or third parties who may be issuers of securities or proponents of shareholder
resolutions |
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BlackRock employees who may sit on the boards of public companies held in Funds managed by BlackRock
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Significant BlackRock, Inc. investors who may be issuers of securities held in Funds managed by BlackRock
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Securities of BlackRock, Inc. or BlackRock investment funds held in Funds managed by BlackRock
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BlackRock, Inc. board members who serve as senior executives or directors of public companies held in Funds
managed by BlackRock |
BlackRock has taken certain steps to mitigate perceived or potential conflicts including, but not
limited to, the following:
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Adopted the Guidelines which are designed to advance our clients interests in the companies in which
BlackRock invests on their behalf. |
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Established a reporting structure that separates BIS from employees with sales, vendor management, or business
partnership roles. In addition, BlackRock seeks to ensure that all engagements with corporate issuers, dissident shareholders or shareholder proponents are managed consistently and without regard to BlackRocks relationship with such parties.
Clients or business partners are not given special treatment or differentiated access to BIS. BIS prioritizes engagements based on factors including, but not limited to, our need for additional information to make a voting decision or our view on
the likelihood that an engagement could lead to positive outcome(s) over time for the economic value of the company. Within the normal course of business, BIS may engage directly with BlackRock clients, business partners and/or third parties, and/or
with employees with sales, vendor management, or business partnership roles, in discussions regarding our approach to stewardship, general corporate governance matters, client reporting needs, and/or to otherwise ensure that proxy-related client
service levels are met. |
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Determined to engage, in certain instances, an independent fiduciary to vote proxies as a further safeguard to
avoid potential conflicts of interest, to satisfy regulatory compliance requirements, or as may be otherwise required by applicable law. In such circumstances, the independent fiduciary provides BlackRocks proxy voting agent with instructions,
in accordance with the Guidelines, as to how to vote such proxies, and BlackRocks proxy voting agent votes the proxy in accordance with the independent fiduciarys determination. BlackRock uses an independent fiduciary to vote proxies of
BlackRock, Inc. and companies affiliated with BlackRock, Inc. BlackRock may also use an independent fiduciary to vote proxies of: |
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public companies that include BlackRock employees on their boards of directors, |
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public companies of which a BlackRock, Inc. board member serves as a senior executive or a member of the board
of directors, |
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public companies that are the subject of certain transactions involving BlackRock Funds,
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public companies that are joint venture partners with BlackRock, and |
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public companies when legal or regulatory requirements compel BlackRock to use an independent fiduciary.
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In selecting an independent fiduciary, we assess several characteristics, including but not limited to: independence, an ability to
analyze proxy issues and vote in the best economic interest of our clients, reputation for reliability and integrity, and operational capacity to accurately deliver the assigned votes in a timely manner. We may engage more than one independent
fiduciary, in part to mitigate potential or perceived conflicts of interest at an independent fiduciary. The Global Committee appoints and reviews the performance of the independent fiduciaries, generally on an annual basis.
Securities lending
When so authorized, BlackRock acts as a securities lending agent on behalf of Funds. Securities lending is a well-regulated practice that contributes to
capital market efficiency. It also enables funds to generate additional returns for a fund, while allowing fund providers to keep fund expenses lower.
With regard to the relationship between securities lending and proxy voting, BlackRocks approach is informed by our fiduciary responsibility to act in
our clients best interests. In most cases, BlackRock anticipates that the
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potential long-term value to the Fund of voting shares would be less than the potential revenue the loan may provide the Fund. However, in certain instances, BlackRock may determine, in its
independent business judgment as a fiduciary, that the value of voting outweighs the securities lending revenue loss to clients and would therefore recall shares to be voted in those instances.
The decision to recall securities on loan as part of BlackRocks securities lending program in order to vote is based on an evaluation of various factors
that include, but are not limited to, assessing potential securities lending revenue alongside the potential long-term value to clients of voting those securities (based on the information available at the time of recall consideration).7 BIS works with colleagues in the Securities Lending and Risk and Quantitative Analysis teams to evaluate the costs and benefits to clients of recalling shares on loan.
Periodically, BlackRock reviews our process for determining whether to recall securities on loan in order to vote and may modify it as necessary.
Voting guidelines
The
issue-specific Guidelines published for each region/country in which we vote are intended to summarize BlackRocks general philosophy and approach to issues that may commonly arise in the proxy voting context in each market where we invest. The
Guidelines are not intended to be exhaustive. BIS applies the Guidelines on a case-by-case basis, in the context of the individual circumstances of each company and the
specific issue under review. As such, the Guidelines do not indicate how BIS will vote in every instance. Rather, they reflect our view about corporate governance issues generally, and provide insight into how we typically approach issues that
commonly arise on corporate ballots.
Reporting and vote transparency
We are committed to transparency in the stewardship work we do on behalf of clients. We inform clients about our engagement and voting policies and activities
through direct communication and through disclosure on our website. Each year we publish an annual report that provides a global overview of our investment stewardship engagement and voting activities. Additionally, we make public our
market-specific voting guidelines for the benefit of clients and companies with whom we engage. We also publish commentaries to share our perspective on market developments and emerging key themes.
At a more granular level, we publish quarterly our vote record for each company that held a shareholder meeting during the period, showing how we voted on
each proposal and explaining any votes against management proposals or on shareholder proposals. For shareholder meetings where a vote might be high profile or of significant interest to clients, we may publish a vote bulletin after the meeting,
disclosing and explaining our vote on key proposals. We also publish a quarterly list of all companies with which we engaged and the key topics addressed in the engagement meeting.
In this way, we help inform our clients about the work we do on their behalf in promoting the governance and business models that support long-term
sustainable value creation.
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Recalling securities on loan can be impacted by the timing of record dates. In the United States, for example,
the record date of a shareholder meeting typically falls before the proxy statements are released. Accordingly, it is not practicable to evaluate a proxy statement, determine that a vote has a material impact on a fund and recall any shares on loan
in advance of the record date for the annual meeting. As a result, managers must weigh independent business judgement as a fiduciary, the benefit to a funds shareholders of recalling loaned shares in advance of an estimated record date without
knowing whether there will be a vote on matters which have a material impact on the fund (thereby forgoing potential securities lending revenue for the funds shareholders) or leaving shares on loan to potentially earn revenue for the fund
(thereby forgoing the opportunity to vote). |
B-16
BlackRock
Investment
Stewardship
Proxy voting guidelines for U.S. securities
Effective as of January 2022
BlackRock
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CONTENTS
B-18
These guidelines should be read in conjunction with the BlackRock Investment Stewardship Global Principles.
Introduction
We believe
BlackRock has a responsibility to monitor and provide feedback to companies, in our role as stewards of our clients investments. BlackRock Investment Stewardship (BIS) does this through engagement with management teams and/or board
members on material business issues, including environmental, social, and governance (ESG) matters and, for those clients who have given us authority, through voting proxies in the best long-term economic interests of their assets.
The following issue-specific proxy voting guidelines (the Guidelines) are intended to summarize BIS regional philosophy and approach to
engagement and voting on ESG factors, as well as our expectations of directors, for U.S. securities. These Guidelines are not intended to limit the analysis of individual issues at specific companies or provide a guide to how BIS will engage and/or
vote in every instance. They are applied with discretion, taking into consideration the range of issues and facts specific to the company, as well as individual ballot items at annual and special meetings.
Voting guidelines
These
guidelines are divided into eight key themes, which group together the issues that frequently appear on the agenda of annual and extraordinary meetings of shareholders:
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Auditors and audit-related issues |
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Mergers, acquisitions, asset sales, and other special transactions |
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Environmental and social issues |
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General corporate governance matters |
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Shareholder protections |
Boards and directors
The
effective performance of the board is critical to the economic success of the company and the protection of shareholders interests. As part of their responsibilities, board members owe fiduciary duties to shareholders in overseeing the
strategic direction, operations, and risk management of the company. For this reason, BIS sees engagement with and the election of directors as one of our most critical responsibilities.
Disclosure of material issues that affect the companys long-term strategy and value creation, including material ESG factors, is essential for
shareholders to appropriately understand and assess how effectively the board is identifying, managing, and mitigating risks.
Where we conclude that a
board has failed to address or disclose one or more material issues within a specified timeframe, we may hold directors accountable or take other appropriate action in the context of our voting decisions.
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Director elections
Where a board has not adequately demonstrated, through actions and company disclosures, how material issues are appropriately identified, managed, and
overseen, we will consider voting against the re-election of those directors responsible for the oversight of such issues, as indicated below.
Independence
We expect a majority of the directors on
the board to be independent. In addition, all members of key committees, including audit, compensation, and nominating/governance committees, should be independent. Our view of independence may vary from listing standards.
Common impediments to independence may include:
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Employment as a senior executive by the company or a subsidiary within the past five years |
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An equity ownership in the company in excess of 20% |
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Having any other interest, business, or relationship (professional or personal) which could, or could reasonably
be perceived to, materially interfere with the directors ability to act in the best interests of the company |
We may vote against
directors serving on key committees who we do not consider to be independent, including at controlled companies.
Oversight
We expect the board to exercise appropriate oversight of management and the business activities of the company. Where we believe a board has failed to
exercise sufficient oversight, we may vote against the responsible committees and/or individual directors. The following illustrates common circumstances:
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With regard to material ESG risk factors, or where the company has failed to provide shareholders with adequate
disclosure to conclude appropriate strategic consideration is given to these factors by the board, we may vote against directors of the responsible committee, or the most relevant director |
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With regard to accounting practices or audit oversight, e.g., where the board has failed to facilitate quality,
independent auditing. If substantial accounting irregularities suggest insufficient oversight, we will consider voting against the current audit committee, and any other members of the board who may be responsible |
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During a period in which executive compensation appears excessive relative to the performance of the company and
compensation paid by peers, we may vote against the members of the compensation committee |
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Where a company has proposed an equity compensation plan that is not aligned with shareholders interests,
we may vote against the members of the compensation committee |
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Where the board is not comprised of a majority of independent directors (this may not apply in the case of a
controlled company), we may vote against the chair of the nominating/governance committee, or where no chair exists, the nominating/governance committee member with the longest tenure |
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Where it appears the director has acted (at the company or at other companies) in a manner that
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compromises their ability to represent the best long-term economic interests of shareholders, we may vote against that individual |
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Where a director has a multi-year pattern of poor attendance at combined board and applicable committee meetings,
or a director has poor attendance in a single year with no disclosed rationale, we may vote against that individual. Excluding exigent circumstances, BIS generally considers attendance at less than 75% of the combined board and applicable committee
meetings to be poor attendance |
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Where a director serves on an excessive number of boards, which may limit their capacity to focus on each
boards needs, we may vote against that individual. The following identifies the maximum number of boards on which a director may serve, before BIS considers them to be over-committed: |
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Public Company Executive |
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# Outside Public
Boards8 |
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Total # of Public Boards |
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Director A |
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Director B9 |
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Responsiveness to shareholders
We expect a board to be engaged and responsive to its shareholders, including acknowledging voting outcomes for director elections, compensation, shareholder
proposals, and other ballot items. Where we believe a board has not substantially addressed shareholder concerns, we may vote against the responsible committees and/or individual directors. The following illustrates common circumstances:
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The independent chair or lead independent director, members of the nominating/governance committee, and/or the
longest tenured director(s), where we observe a lack of board responsiveness to shareholders, evidence of board entrenchment, and/or failure to plan for adequate board member succession |
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The chair of the nominating/governance committee, or where no chair exists, the nominating/governance committee
member with the longest tenure, where board member(s) at the most recent election of directors have received against votes from more than 25% of shares voted, and the board has not taken appropriate action to respond to shareholder concerns. This
may not apply in cases where BIS did not support the initial against vote |
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The independent chair or lead independent director and/or members of the nominating/governance committee, where a
board fails to consider shareholder proposals that receive substantial support, and the proposals, in our view, have a material impact on the business, shareholder rights, or the potential for long-term value creation |
8 |
In addition to the company under review. |
9 |
Including fund managers whose full-time employment involves responsibility for the investment and
oversight of fund vehicles, and those who have employment as professional investors and provide oversight for those holdings. |
B-21
Shareholder rights
We expect a board to act with integrity and to uphold governance best practices. Where we believe a board has not acted in the best interests of its
shareholders, we may vote against the appropriate committees and/or individual directors. The following illustrates common circumstances:
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The independent chair or lead independent director and members of the nominating/governance committee, where a
board implements or renews a poison pill without shareholder approval |
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The independent chair or lead independent director and members of the nominating/governance committee, where a
board amends the charter/articles/bylaws and where the effect may be to entrench directors or to significantly reduce shareholder rights |
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Members of the compensation committee where the company has repriced options without shareholder approval
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If a board maintains a classified structure, it is possible that the director(s) with whom we have a particular concern may not be
subject to election in the year that the concern arises. In such situations, if we have a concern regarding the actions of a committee and the responsible member(s), we will generally register our concern by voting against all available members of
the relevant committee.
Board composition and effectiveness
We encourage boards to periodically refresh their membership to ensure relevant skills and experience within the boardroom. To this end, regular performance
reviews and skills assessments should be conducted by the nominating/governance committee or the lead independent director. When nominating new directors to the board, we ask that there is sufficient information on the individual candidates so that
shareholders can assess the suitability of each individual nominee and the overall board composition. Where boards find that age limits or term limits are the most efficient and objective mechanism for ensuring periodic board refreshment, we
generally defer to the boards determination in setting such limits. BIS will also consider the average board tenure to evaluate processes for board renewal. We may oppose boards that appear to have an insufficient mix of short-, medium-, and
long-tenured directors.
Furthermore, we expect boards to be comprised of a diverse selection of individuals who bring their personal and professional
experiences to bear in order to create a constructive debate of a variety of views and opinions in the boardroom. We are interested in diversity in the board room as a means to promoting diversity of thought and avoiding groupthink. We
ask boards to disclose how diversity is considered in board composition, including demographic factors such as gender, race, ethnicity, and age; as well as professional characteristics, such as a directors industry experience, specialist areas
of expertise, and geographic location. We assess a boards diversity in the context of a companys domicile, business model, and strategy. We believe boards should aspire to 30% diversity of membership and encourage companies to have at
least two directors on their board who identify as female and at least one who identifies as a member of an underrepresented group.10
We ask that boards disclose:
10 |
Including, but not limited to, individuals who identify as Black or African American, Hispanic or Latinx
, Asian, Native American or Alaska Native, or Native Hawaiian or Pacific Islander; individuals who identify as LGBTQ+; individuals who identify as underrepresented based on national, Indigenous, religious, or cultural identity; individuals with
disabilities; and veterans. |
B-22
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The aspects of diversity that the company believes are relevant to its business and how the diversity
characteristics of the board, in aggregate, are aligned with a companys long-term strategy and business model |
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The process by which candidates are identified and selected, including whether professional firms or other
resources outside of incumbent directors networks have been engaged to identify and/or assess candidates, and whether a diverse slate of nominees is considered for all available board nominations |
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The process by which boards evaluate themselves and any significant outcomes of the evaluation process, without
divulging inappropriate and/or sensitive details |
This position is based on our view that diversity of perspective and thought
in the boardroom, in the management team, and throughout the company leads to better long-term economic outcomes for companies. Academic research already reveals correlations between specific dimensions of diversity and effects on
decision-making processes and outcomes.11 In our experience, greater diversity in the boardroom contributes to more robust
discussions and more innovative and resilient decisions. Over time, it can also promote greater diversity and resilience in the leadership team and workforce more broadly, enabling companies to develop businesses that more closely reflect and
resonate with the customers and communities they serve.
To the extent that, based on our assessment of corporate disclosures, a company has not
adequately accounted for diversity in its board composition within a reasonable timeframe, we may vote against members of the nominating/governance committee for an apparent lack of commitment to board effectiveness. We recognize that building
high-quality, diverse boards can take time. We will look to the largest companies (e.g., S&P 500) for continued leadership. Our publicly available commentary provides more information on our approach to board diversity.
Board size
We typically defer to the board in setting
the appropriate size and believe directors are generally in the best position to assess the optimal board size to ensure effectiveness. However, we may oppose boards that appear too small to allow for the necessary range of skills and experience or
too large to function efficiently.
CEO and management succession planning
There should be a robust CEO and senior management succession plan in place at the board level that is reviewed and updated on a regular basis. We expect
succession planning to cover scenarios over both the long-term, consistent with the strategic direction of the company and identified leadership needs over time, as well as the short-term, in the event of an unanticipated executive departure. We
encourage the company to explain its executive succession planning process, including where accountability lies within the boardroom for this task, without prematurely divulging sensitive information commonly associated with this exercise.
Classified board of directors/staggered terms
We
believe that directors should be re-elected annually; classification of the board generally limits shareholders rights to regularly evaluate a boards performance and select directors. While we will
typically support proposals requesting board de-classification, we may make exceptions, should the board articulate an appropriate strategic rationale for a classified board structure. This may include when a
company needs
11 |
For example, the role of gender diversity on team cohesion and participative communication is explored
by Post, C., 2015, When is female leadership an advantage? Coordination requirements, team cohesion, and team interaction norms, Journal of Organizational Behavior, 36, 1153-1175.
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consistency and stability during a time of transition, e.g., newly public companies or companies undergoing a strategic restructuring. A classified board structure may also be justified at non-operating companies, e.g., closed-end funds or business development companies (BDC),12 in certain circumstances. We would, however, expect boards with a classified structure to periodically review the rationale for such structure and consider when annual elections might be more
appropriate.
Without a voting mechanism to immediately address concerns about a specific director, we may choose to vote against the directors up
for election at the time (see Shareholder rights for additional detail).
Contested director elections
The details of contested elections, or proxy contests, are assessed on a
case-by-case basis. We evaluate a number of factors, which may include: the qualifications of the dissident and management candidates; the validity of the concerns
identified by the dissident; the viability of both the dissidents and managements plans; the ownership stake and holding period of the dissident; the likelihood that the dissidents solutions will produce the desired change; and
whether the dissident represents the best option for enhancing long-term shareholder value.
Cumulative voting
We believe that a majority vote standard is in the best long-term interests of shareholders. It ensures director accountability through the requirement to be
elected by more than half of the votes cast. As such, we will generally oppose proposals requesting the adoption of cumulative voting, which may disproportionately aggregate votes on certain issues or director candidates.
Director compensation and equity programs
We believe
that compensation for directors should be structured to attract and retain directors, while also aligning their interests with those of shareholders. We believe director compensation packages that are based on the companys long-term value
creation and include some form of long-term equity compensation are more likely to meet this goal. In addition, we expect directors to build meaningful share ownership over time.
Majority vote requirements
BIS believes that directors
should generally be elected by a majority of the shares voted and will normally support proposals seeking to introduce bylaws requiring a majority vote standard for director elections. Majority vote standards assist in ensuring that directors who
are not broadly supported by shareholders are not elected to serve as their representatives. Some companies with a plurality voting standard have adopted a resignation policy for directors who do not receive support from at least a majority of votes
cast. Where we believe that the company already has a sufficiently robust majority voting process in place, we may not support a shareholder proposal seeking an alternative mechanism.
We note that majority voting may not be appropriate in all circumstances, for example, in the context of a contested election, or for majority-controlled
companies.
Risk oversight
Companies should have an
established process for identifying, monitoring, and managing business and material ESG risks. Independent directors should have access to relevant management information and outside advice, as appropriate, to ensure they can properly oversee risk.
We encourage companies to provide
12 |
A BDC is a special investment vehicle under the Investment Company Act of 1940 that is designed to
facilitate capital formation for small and middle-market companies. |
B-24
transparency around risk management, mitigation, and reporting to the board. We are particularly interested in understanding how risk oversight processes evolve in response to changes in
corporate strategy and/or shifts in the business and related risk environment. Comprehensive disclosure provides investors with a sense of the companys long-term risk management practices and, more broadly, the quality of the boards
oversight. In the absence of robust disclosures, we may reasonably conclude that companies are not adequately managing risk.
Separation of chair and
CEO
We believe that independent leadership is important in the boardroom. There are two commonly accepted structures for independent board
leadership: 1) an independent chair; or 2) a lead independent director when the roles of chair and CEO are combined.
In the absence of a significant
governance concern, we defer to boards to designate the most appropriate leadership structure to ensure adequate balance and independence.13
In the event that the board chooses a combined chair/CEO model, we generally support the designation of a lead independent director if they have the power to:
1) provide formal input into board meeting agendas; 2) call meetings of the independent directors; and 3) preside at meetings of independent directors. Furthermore, while we anticipate that most directors will be elected annually, we believe an
element of continuity is important for this role to provide appropriate leadership balance to the chair/CEO.
The following table illustrates examples of
responsibilities under each board leadership model:
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Combined Chair/CEO Model |
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Separate Chair Model |
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Chair/CEO |
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Lead Independent Director |
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Chair |
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Board Meetings |
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Authority to call full meetings of the board of directors |
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Attends full meetings of the board of directors |
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Authority to call full meetings of the board of directors |
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Authority to call meetings of independent directors |
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Briefs CEO on issues arising from executive sessions |
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Agenda |
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Primary responsibility for shaping board agendas, consulting with the lead independent director |
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Collaborates with chair/CEO to set board agenda and board information |
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Primary responsibility for shaping board agendas, in conjunction with CEO |
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Board Communications |
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Communicates with all directors on key issues and concerns outside of full board meetings |
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Facilitates discussion among independent directors on key issues and concerns outside of full board meetings, including contributing to the oversight of CEO and
management succession planning |
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Facilitates discussion among independent directors on key issues and concerns outside of full board meetings, including contributing to the oversight of CEO and
management succession planning |
13 |
To this end, we do not view shareholder proposals asking for the separation of chair and CEO to be a
proxy for other concerns we may have at the company for which a vote against directors would be more appropriate. Rather, support for such a proposal might arise in the case of overarching and sustained governance concerns such as lack of
independence or failure to oversee a material risk over consecutive years. |
B-25
Auditors and audit-related issues
BIS recognizes the critical importance of financial statements to provide a complete and accurate portrayal of a companys financial condition.
Consistent with our approach to voting on directors, we seek to hold the audit committee of the board responsible for overseeing the management of the audit function at a company. We may vote against the audit committee members where the board has
failed to facilitate quality, independent auditing. We look to public disclosures for insight into the scope of the audit committee responsibilities, including an overview of audit committee processes, issues on the audit committee agenda, and key
decisions taken by the audit committee. We take particular note of cases involving significant financial restatements or material weakness disclosures, and we expect timely disclosure and remediation of accounting irregularities.
The integrity of financial statements depends on the auditor effectively fulfilling its role. To that end, we favor an independent auditor. In addition, to
the extent that an auditor fails to reasonably identify and address issues that eventually lead to a significant financial restatement, or the audit firm has violated standards of practice, we may also vote against ratification.
From time to time, shareholder proposals may be presented to promote auditor independence or the rotation of audit firms. We may support these proposals when
they are consistent with our views as described above.
Capital structure proposals
Equal voting rights
BIS believes that shareholders
should be entitled to voting rights in proportion to their economic interests. We believe that companies that look to add or that already have dual or multiple class share structures should review these structures on a regular basis, or as company
circumstances change. Companies with multiple share classes should receive shareholder approval of their capital structure on a periodic basis via a management proposal on the companys proxy. The proposal should give unaffiliated shareholders
the opportunity to affirm the current structure or establish mechanisms to end or phase out controlling structures at the appropriate time, while minimizing costs to shareholders.
Blank check preferred stock
We frequently oppose
proposals requesting authorization of a class of preferred stock with unspecified voting, conversion, dividend distribution, and other rights (blank check preferred stock) because they may serve as a transfer of authority from
shareholders to the board and as a possible entrenchment device. We generally view the boards discretion to establish voting rights on a when-issued basis as a potential anti-takeover device, as it affords the board the ability to place a
block of stock with an investor sympathetic to management, thereby foiling a takeover bid without a shareholder vote.
Nonetheless, we may support the
proposal where the company:
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Appears to have a legitimate financing motive for requesting blank check authority |
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Has committed publicly that blank check preferred shares will not be used for anti-takeover purposes
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Has a history of using blank check preferred stock for financings |
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Has blank check preferred stock previously outstanding such that an increase would not necessarily provide
further anti-takeover protection but may provide greater financing flexibility |
B-26
Increase in authorized common shares
BIS will evaluate requests to increase authorized shares on a case-by-case
basis, in conjunction with industry-specific norms and potential dilution, as well as a companys history with respect to the use of its common shares.
Increase or issuance of preferred stock
We generally
support proposals to increase or issue preferred stock in cases where the company specifies the voting, dividend, conversion, and other rights of such stock and where the terms of the preferred stock appear reasonable.
Stock splits
We generally support stock splits that are
not likely to negatively affect the ability to trade shares or the economic value of a share. We generally support reverse stock splits that are designed to avoid delisting or to facilitate trading in the stock, where the reverse split will not have
a negative impact on share value (e.g. one class is reduced while others remain at pre-split levels). In the event of a proposal for a reverse split that would not proportionately reduce the companys
authorized stock, we apply the same analysis we would use for a proposal to increase authorized stock.
Mergers,
acquisitions, asset sales, and other special transactions
In assessing mergers, acquisitions, asset sales, or other special transactions
including business combinations involving Special Purpose Acquisition Companies (SPACs) BIS primary consideration is the long-term economic interests of our clients as shareholders. We expect boards proposing a transaction
to clearly explain the economic and strategic rationale behind it. We will review a proposed transaction to determine the degree to which it enhances long-term shareholder value. While mergers, acquisitions, asset sales, business combinations, and
other special transaction proposals vary widely in scope and substance, we closely examine certain salient features in our analyses, such as:
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The degree to which the proposed transaction represents a premium to the companys trading price. We
consider the share price over multiple time periods prior to the date of the merger announcement. We may consider comparable transaction analyses provided by the parties financial advisors and our own valuation assessments. For companies
facing insolvency or bankruptcy, a premium may not apply |
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There should be clear strategic, operational, and/or financial rationale for the combination
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Unanimous board approval and arms-length negotiations are
preferred. We will consider whether the transaction involves a dissenting board or does not appear to be the result of an arms-length bidding process. We may also consider whether executive and/or board
members financial interests appear likely to affect their ability to place shareholders interests before their own |
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We prefer transaction proposals that include the fairness opinion of a reputable financial advisor assessing the
value of the transaction to shareholders in comparison to recent similar transactions |
Poison pill plans
Where a poison pill is put to a shareholder vote by management, our policy is to examine these plans individually. Although we have historically opposed most
plans, we may support plans that include a reasonable qualifying offer clause. Such clauses typically require shareholder ratification of the pill and stipulate a sunset provision whereby the pill expires unless it is renewed. These
clauses also tend to specify that an all-cash bid for all shares that includes a fairness opinion and evidence of financing does not trigger the
B-27
pill, but forces either a special meeting at which the offer is put to a shareholder vote, or requires the board to seek the written consent of shareholders, where shareholders could rescind the
pill at their discretion. We may also support a pill where it is the only effective method for protecting tax or other economic benefits that may be associated with limiting the ownership changes of individual shareholders.
We generally vote in favor of shareholder proposals to rescind poison pills.
Reimbursement of expense for successful shareholder campaigns
We generally do not support shareholder proposals seeking the reimbursement of proxy contest expenses, even in situations where we support the shareholder
campaign. We believe that introducing the possibility of such reimbursement may incentivize disruptive and unnecessary shareholder campaigns.
Executive compensation
BIS expects a companys board of directors to put in place a compensation structure that incentivizes and rewards
executives appropriately and is aligned with shareholder interests, particularly the generation of sustainable long-term value.
We expect the
compensation committee to carefully consider the specific circumstances of the company and the key individuals the board is focused on incentivizing. We encourage companies to ensure that their compensation plans incorporate appropriate and rigorous
performance metrics consistent with corporate strategy and market practice. Performance-based compensation should include metrics that are relevant to the business and stated strategy or risk mitigation efforts. Goals, and the processes used to set
these goals, should be clearly articulated and appropriately rigorous. We use third party research, in addition to our own analysis, to evaluate existing and proposed compensation structures. We hold members of the compensation committee, or
equivalent board members, accountable for poor compensation practices or structures.
BIS believes that there should be a clear link between variable pay
and company performance that drives value creation for our clients as shareholders. We are generally not supportive of one-off or special bonuses unrelated to company or individual performance. Where
discretion has been used by the compensation committee, we expect disclosure relating to how and why the discretion was used and further, how the adjusted outcome is aligned with the interests of shareholders.
We acknowledge that the use of peer group evaluation by compensation committees can help calibrate competitive pay; however, we are concerned when the
rationale for increases in total compensation is solely based on peer benchmarking, rather than absolute outperformance.
We support incentive plans that
foster the sustainable achievement of results both financial and non-financial, including ESG consistent with the companys strategic initiatives. The vesting and holding timeframes
associated with incentive plans should facilitate a focus on long-term value creation.
Compensation committees should guard against contractual
arrangements that would entitle executives to material compensation for early termination of their contract. Finally, pension contributions and other deferred compensation arrangements should be reasonable in light of market practices. Our publicly
available commentary provides more information on our approach to executive compensation.
Say on Pay advisory resolutions
In cases where there is a Say on Pay vote, BIS will respond to the proposal as informed by our evaluation of compensation practices at that
particular company and in a manner that appropriately addresses the specific question posed to shareholders. Where we conclude that a company has failed to align pay with performance, we will vote against the management compensation proposal and
relevant compensation committee members.
B-28
Frequency of Say on Pay advisory resolutions
BIS will generally support annual advisory votes on executive compensation. We believe shareholders should have the opportunity to express feedback on annual
incentive programs and changes to long-term compensation before multiple cycles are issued.
Clawback proposals
We generally favor recoupment from any senior executive whose compensation was based on faulty financial reporting or deceptive business practices. We also
favor recoupment from any senior executive whose behavior caused material financial harm to shareholders, material reputational risk to the company, or resulted in a criminal proceeding, even if such actions did not ultimately result in a material
restatement of past results. This includes, but is not limited to, settlement agreements arising from such behavior and paid for directly by the company. We typically support shareholder proposals on these matters unless the company already has a
robust clawback policy that sufficiently addresses our concerns.
Employee stock purchase plans
We believe employee stock purchase plans (ESPP) are an important part of a companys overall human capital management strategy and can
provide performance incentives to help align employees interests with those of shareholders. The most common form of ESPP qualifies for favorable tax treatment under Section 423 of the Internal Revenue Code. We will typically support
qualified ESPP proposals.
Equity compensation plans
BIS supports equity plans that align the economic interests of directors, managers, and other employees with those of shareholders. We believe that boards
should establish policies prohibiting the use of equity awards in a manner that could disrupt the intended alignment with shareholder interests (e.g. the use of stock as collateral for a loan; the use of stock in a margin account; the use of stock
in hedging or derivative transactions). We may support shareholder proposals requesting the establishment of such policies.
Our evaluation of equity
compensation plans is based on a companys executive pay and performance relative to peers and whether the plan plays a significant role in a pay-for-performance
disconnect. We generally oppose plans that contain evergreen provisions, which allow for the unlimited increase of shares reserved without requiring further shareholder approval after a reasonable time period. We also generally oppose
plans that allow for repricing without shareholder approval. We may also oppose plans that provide for the acceleration of vesting of equity awards even in situations where an actual change of control may not occur. We encourage companies to
structure their change of control provisions to require the termination of the covered employee before acceleration or special payments are triggered (commonly referred to as double trigger change of control provisions).
Golden parachutes
We generally view golden parachutes
as encouragement to management to consider transactions that might be beneficial to shareholders. However, a large potential pay-out under a golden parachute arrangement also presents the risk of motivating a
management team to support a sub-optimal sale price for a company.
When determining whether to support or oppose
an advisory vote on a golden parachute plan, BIS may consider several factors, including:
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Whether we believe that the triggering event is in the best interests of shareholders |
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Whether management attempted to maximize shareholder value in the triggering event |
B-29
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The percentage of total premium or transaction value that will be transferred to the management team, rather than
shareholders, as a result of the golden parachute payment |
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Whether excessively large excise tax gross-up payments are part of the pay-out |
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Whether the pay package that serves as the basis for calculating the golden parachute payment was reasonable in
light of performance and peers |
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Whether the golden parachute payment will have the effect of rewarding a management team that has failed to
effectively manage the company |
It may be difficult to anticipate the results of a plan until after it has been triggered; as a result,
BIS may vote against a golden parachute proposal even if the golden parachute plan under review was approved by shareholders when it was implemented.
We
may support shareholder proposals requesting that implementation of such arrangements require shareholder approval.
Option exchanges
We believe that there may be legitimate instances where underwater options create an overhang on a companys capital structure and a repricing or option
exchange may be warranted. We will evaluate these instances on a case-by-case basis. BIS may support a request to reprice or exchange underwater options under the
following circumstances:
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The company has experienced significant stock price decline as a result of macroeconomic trends, not individual
company performance |
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Directors and executive officers are excluded; the exchange is value neutral or value creative to shareholders;
tax, accounting, and other technical considerations have been fully contemplated |
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There is clear evidence that absent repricing, the company will suffer serious employee incentive or retention
and recruiting problems |
BIS may also support a request to exchange underwater options in other circumstances, if we determine that the
exchange is in the best interests of shareholders.
Supplemental executive retirement plans
BIS may support shareholder proposals requesting to put extraordinary benefits contained in supplemental executive retirement plans (SERP) to a
shareholder vote unless the companys executive pension plans do not contain excessive benefits beyond what is offered under employee-wide plans.
Environmental and social issues
We believe that well-managed companies deal effectively with material ESG factors relevant to their businesses. Governance is the core means by which boards
can oversee the creation of sustainable long-term value. Appropriate risk oversight of environmental and social (E&S) considerations stems from this construct.
Robust disclosure is essential for investors to effectively gauge the impact of companies business practices and strategic planning related to E&S
risks and opportunities. When a companys reporting is inadequate,
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investors, including BlackRock, will increasingly conclude that the company is not appropriately managing risk. Given the increased understanding of material sustainability risks and
opportunities, and the need for better information to assess them, BIS will advocate for continued improvement in companies reporting and will express concerns through our voting where disclosures or the business practices underlying them are
inadequate.
BIS encourages companies to disclose their approach to maintaining a sustainable business model. We believe that reporting aligned
with the framework developed by the Task Force on Climate-related Financial Disclosures (TCFD), supported by industry-specific metrics such as those identified by the Sustainability Accounting Standards Board (SASB), can
provide a comprehensive picture of a companys sustainability approach and performance. While the TCFD framework was developed to support climate-related risk disclosure, the four pillars of the TCFD Governance, Strategy, Risk
Management, and Metrics and Targets are a useful way for companies to disclose how they identify, assess, manage, and oversee a variety of sustainability-related risks and opportunities. SASBs industry-specific guidance (as identified
in its materiality map) is beneficial in helping companies identify key performance indicators (KPIs) across various dimensions of sustainability that are considered to be financially material and decision-useful within their industry.
We recognize that some companies may report using different standards, which may be required by regulation, or one of a number of private standards. In such cases, we ask that companies highlight the metrics that are industry- or company-specific.
Accordingly, we ask companies to:
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Disclose the identification, assessment, management, and oversight of sustainability-related risks in accordance
with the four pillars of TCFD |
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Publish investor-relevant, industry-specific, material metrics and rigorous targets, aligned with SASB or
comparable sustainability reporting standards |
Companies should also disclose any supranational standards adopted, the industry
initiatives in which they participate, any peer group benchmarking undertaken, and any assurance processes to help investors understand their approach to sustainable and responsible business conduct.
Climate risk
BlackRock believes that climate change has
become a defining factor in companies long-term prospects. We ask every company to help its investors understand how it may be impacted by climate-related risk and opportunities, and how these factors are considered within strategy in a manner
consistent with the companys business model and sector. Specifically, we ask companies to articulate how their business model is aligned to a scenario in which global warming is limited to well below 2°C, moving towards global net zero
emissions by 2050.
BIS understands that climate change can be very challenging for many companies, as they seek to drive long-term value by
mitigating risks and capturing opportunities. A growing number of companies, financial institutions, as well as governments, have committed to advancing net zero. There is growing consensus that companies can benefit from the more favorable
macro-economic environment under an orderly, timely, and just transition to net zero.14 Many companies are asking what
their role should be in contributing to a just
14 |
For example, BlackRocks Capital Markets Assumptions anticipate 25 points of cumulative economic
gains over a 20-year period in an orderly transition as compared to the alternative. This better macro environment will support better economic growth, financial stability, job growth, productivity, as well as
ecosystem stability and health outcomes. |
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transition in ensuring a reliable energy supply and protecting the most vulnerable from energy price shocks and economic dislocation. They are also seeking more clarity as to the public
policy path that will help align greenhouse gas reduction actions with commitments.
In this context, we ask companies to disclose a business plan for
how they intend to deliver long-term financial performance through the transition to global net zero, consistent with their business model and sector. We encourage companies to demonstrate that their plans are resilient under likely decarbonization
pathways, and the global aspiration to limit warming to 1.5°C.15 We also encourage companies to disclose how
considerations related to having a reliable energy supply and just transition affect their plans.
We look to companies to set short-, medium-, and
long-term science-based targets, where available for their sector, for greenhouse gas reductions and to demonstrate how their targets are consistent with the long-term economic interests of their shareholders. Companies have an opportunity to use
and contribute to the development of alternative energy sources and low-carbon transition technologies that will be essential to reaching net zero. We also recognize that some continued investment is required
to maintain a reliable, affordable supply of fossil fuels during the transition. We ask companies to disclose how their capital allocation across alternatives, transition technologies, and fossil fuel production is consistent with their strategy and
their emissions reduction targets.
In determining how to vote, we will continue to assess whether a companys disclosures are aligned with the TCFD
and provide short-, medium-, and long-term reduction targets for Scope 1 and 2 emissions. We may signal concerns about a companys plans or disclosures in our voting on director elections, particularly at companies facing material climate
risks. We may support shareholder proposals that ask companies to disclose climate plans aligned with our expectations. Our publicly available commentary provides more information on our approach to climate risk..
Key stakeholder interests
We believe that in order to
deliver long-term value for shareholders, companies should also consider the interests of their key stakeholders. While stakeholder groups may vary across industries, they are likely to include employees; business partners (such as suppliers and
distributors); clients and consumers; government and regulators; and the communities in which a company operates. Companies that build strong relationships with their key stakeholders are more likely to meet their own strategic objectives, while
poor relationships may create adverse impacts that expose a company to legal, regulatory, operational, and reputational risks and jeopardize their social license to operate. We expect companies to effectively oversee and mitigate these risks with
appropriate due diligence processes and board oversight. Our publicly available commentaries provide more information on our approach.
Human capital
management
A companys approach to human capital management (HCM) is a critical factor in fostering an inclusive, diverse, and
engaged workforce, which contributes to business continuity, innovation, and long-term value creation. Consequently, we expect companies to demonstrate a robust approach to HCM and provide shareholders with disclosures to understand how their
approach aligns with their stated strategy and business model.
We believe that clear and consistent disclosures on these matters are critical for
investors to make an informed assessment of a companys HCM practices. We expect companies to disclose the steps they are taking to
15 |
The global aspiration is reflective of aggregated efforts; companies in developed and emerging markets
are not equally equipped to transition their business and reduce emissions at the same ratethose in developed markets with the largest market capitalization are better positioned to adapt their business models at an accelerated pace.
Government policy and regional targets may be reflective of these realities. |
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advance diversity, equity, and inclusion; job categories and workforce demographics; and their responses to the U.S. Equal Employment Opportunity Commissions
EEO-1 Survey. Where we believe a companys disclosures or practices fall short relative to the market or peers, or we are unable to ascertain the board and managements effectiveness in overseeing
related risks and opportunities, we may vote against members of the appropriate committee or support relevant shareholder proposals. Our publicly available commentary provides more information on our approach to HCM.
Corporate political activities
Companies may engage in
certain political activities, within legal and regulatory limits, in order to support public policy matters material to the companies long-term strategies. These activities can also create risks, including: the potential for allegations of
corruption; certain reputational risks; and risks that arise from the complex legal, regulatory, and compliance considerations associated with corporate political spending and lobbying activity. Companies that engage in political activities should
develop and maintain robust processes to guide these activities and mitigate risks, including board oversight.
When presented with shareholder proposals
requesting increased disclosure on corporate political activities, BIS will evaluate publicly available information to consider how a companys lobbying and political activities may impact the company. We will also evaluate whether there is
general consistency between a companys stated positions on policy matters material to its strategy and the material positions taken by significant industry groups of which it is a member. We may decide to support a shareholder proposal
requesting additional disclosures if we identify a material inconsistency or feel that further transparency may clarify how the companys political activities support its long-term strategy. Our publicly available commentary provides more
information on our approach to corporate political activities.
General corporate governance matters
Adjourn meeting to solicit additional votes
We
generally support such proposals unless the agenda contains items that we judge to be detrimental to shareholders best long-term economic interests.
Bundled proposals
We believe that shareholders should
have the opportunity to review substantial governance changes individually without having to accept bundled proposals. Where several measures are grouped into one proposal, BIS may reject certain positive changes when linked with proposals that
generally contradict or impede the rights and economic interests of shareholders.
Exclusive forum provisions
BIS generally supports proposals to seek exclusive forum for certain shareholder litigation. In cases where a board unilaterally adopts exclusive forum
provisions that we consider unfavorable to the interests of shareholders, we will vote against the independent chair or lead independent director and members of the nominating/governance committee.
Multi-jurisdictional companies
Where a company is
listed on multiple exchanges or incorporated in a country different from its primary listing, we will seek to apply the most relevant market guideline(s) to our analysis of the companys governance structure and specific proposals on the
shareholder meeting agenda. In doing so, we typically consider the governance standards of the companys primary listing, the market standards by which the company governs itself, and the market context of each specific proposal on the agenda.
If the relevant
B-33
standards are silent on the issue under consideration, we will use our professional judgment as to what voting outcome would best protect the long-term economic interests of investors. We expect
companies to disclose the rationale for their selection of primary listing, country of incorporation, and choice of governance structures, particularly where there is conflict between relevant market governance practices.
Other business
We oppose voting on matters where we are
not given the opportunity to review and understand those measures and carry out an appropriate level of shareholder oversight.
Reincorporation
Proposals to reincorporate from one state or country to another are most frequently motivated by considerations of anti-takeover protections, legal
advantages, and/or cost savings. We will evaluate, on a case-by-case basis, the economic and strategic rationale behind the companys proposal to reincorporate. In
all instances, we will evaluate the changes to shareholder protections under the new charter/articles/bylaws to assess whether the move increases or decreases shareholder protections. Where we find that shareholder protections are diminished, we may
support reincorporation if we determine that the overall benefits outweigh the diminished rights.
IPO governance
We expect boards to consider and disclose how the corporate governance structures adopted upon initial public offering (IPO) are in
shareholders best long-term interests. We also expect boards to conduct a regular review of corporate governance and control structures, such that boards might evolve foundational corporate governance structures as company circumstances
change, without undue costs and disruption to shareholders. In our letter on unequal voting structures, we articulate our view that one vote for one share is the preferred structure for publicly-traded companies. We also recognize the
potential benefits of dual class shares to newly public companies as they establish themselves; however, we believe that these structures should have a specific and limited duration. We will generally engage new companies on topics such as
classified boards and supermajority vote provisions to amend bylaws, as we believe that such arrangements may not be in the best interest of shareholders in the long-term.
We will typically apply a one-year grace period for the application of certain director-related guidelines (including,
but not limited to, responsibilities on other public company boards and board composition concerns), during which we expect boards to take steps to bring corporate governance standards in line with our expectations.
Further, if a company qualifies as an emerging growth company (an EGC) under the Jumpstart Our Business Startups Act of 2012 (the JOBS
Act), we will give consideration to the NYSE and NASDAQ governance exemptions granted under the JOBS Act for the duration such a company is categorized as an EGC. We expect an EGC to have a totally independent audit committee by the first
anniversary of its IPO, with our standard approach to voting on auditors and audit-related issues applicable in full for an EGC on the first anniversary of its IPO.
Corporate form
Proposals to change a
corporations form, including those to convert to a public benefit corporation (PBC) structure, should clearly articulate how the interests of shareholders and different stakeholders would be augmented or adversely affected, as well
as the accountability and voting mechanisms that would be available to shareholders. We generally support management proposals if our analysis indicates that shareholders interests are adequately protected. Corporate form shareholder proposals
are evaluated on a case-by-case basis.
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Shareholder protections
Amendment to charter/articles/bylaws
We believe that
shareholders should have the right to vote on key corporate governance matters, including changes to governance mechanisms and amendments to the charter/articles/bylaws. We may vote against certain directors where changes to governing documents are
not put to a shareholder vote within a reasonable period of time, particularly if those changes have the potential to impact shareholder rights (see Director elections). In cases where a boards unilateral adoption of changes to the
charter/articles/bylaws promotes cost and operational efficiency benefits for the company and its shareholders, we may support such action if it does not have a negative effect on shareholder rights or the companys corporate governance
structure.
When voting on a management or shareholder proposal to make changes to the charter/articles/bylaws, we will consider in part the
companys and/or proponents publicly stated rationale for the changes; the companys governance profile and history; relevant jurisdictional laws; and situational or contextual circumstances which may have motivated the proposed
changes, among other factors. We will typically support amendments to the charter/articles/bylaws where the benefits to shareholders outweigh the costs of failing to make such changes.
Proxy access
We believe that long-term shareholders
should have the opportunity, when necessary and under reasonable conditions, to nominate directors on the companys proxy card.
In our view,
securing the right of shareholders to nominate directors without engaging in a control contest can enhance shareholders ability to meaningfully participate in the director election process, encourage board attention to shareholder interests,
and provide shareholders an effective means of directing that attention where it is lacking. Proxy access mechanisms should provide shareholders with a reasonable opportunity to use this right without stipulating overly restrictive or onerous
parameters for use, and also provide assurances that the mechanism will not be subject to abuse by short-term investors, investors without a substantial investment in the company, or investors seeking to take control of the board.
In general, we support market-standardized proxy access proposals, which allow a shareholder (or group of up to 20 shareholders) holding three percent of a
companys outstanding shares for at least three years the right to nominate the greater of up to two directors or 20% of the board. Where a standardized proxy access provision exists, we will generally oppose shareholder proposals requesting
outlier thresholds.
Right to act by written consent
In exceptional circumstances and with sufficiently broad support, shareholders should have the opportunity to raise issues of substantial importance without
having to wait for management to schedule a meeting. We therefore believe that shareholders should have the right to solicit votes by written consent provided that: 1) there are reasonable requirements to initiate the consent solicitation process
(in order to avoid the waste of corporate resources in addressing narrowly supported interests); and 2) shareholders receive a minimum of 50% of outstanding shares to effectuate the action by written consent. We may oppose shareholder proposals
requesting the right to act by written consent in cases where the proposal is structured for the benefit of a dominant shareholder to the exclusion of others, or if the proposal is written to discourage the board from incorporating appropriate
mechanisms to avoid the waste of corporate resources when establishing a right to act by written consent. Additionally, we may oppose shareholder proposals requesting the right to act by written consent if the company already provides a shareholder
right to call a special meeting that we believe offers shareholders a reasonable opportunity to raise issues of substantial importance without having to wait for management to schedule a meeting.
B-35
Right to call a special meeting
In exceptional circumstances and with sufficiently broad support, shareholders should have the opportunity to raise issues of substantial importance without
having to wait for management to schedule a meeting. Accordingly, shareholders should have the right to call a special meeting in cases where a reasonably high proportion of shareholders (typically a minimum of 15% but no higher than 25%) are
required to agree to such a meeting before it is called. However, we may oppose this right in cases where the proposal is structured for the benefit of a dominant shareholder, or where a lower threshold may lead to an ineffective use of corporate
resources. We generally believe that a right to act via written consent is not a sufficient alternative to the right to call a special meeting.
Simple
majority voting
We generally favor a simple majority voting requirement to pass proposals. Therefore, we will support the reduction or the
elimination of supermajority voting requirements to the extent that we determine shareholders ability to protect their economic interests is improved. Nonetheless, in situations where there is a substantial or dominant shareholder,
supermajority voting may be protective of minority shareholder interests and we may support supermajority voting requirements in those situations.
Virtual meetings
Shareholders should have the
opportunity to participate in the annual and special meetings for the companies in which they are invested, as these meetings facilitate an opportunity for shareholders to provide feedback and hear from the board and management. While these meetings
have traditionally been conducted in-person, virtual meetings are an increasingly viable way for companies to utilize technology to facilitate shareholder accessibility, inclusiveness, and cost efficiencies.
We expect shareholders to have a meaningful opportunity to participate in the meeting and interact with the board and management in these virtual settings; companies should facilitate open dialogue and allow shareholders to voice concerns and
provide feedback without undue censorship. Relevant shareholder proposals are assessed on a case-by-case basis.
B-36
PART C
Other Information
Item 25. |
Financial Statements And Exhibits |
The agreements included or incorporated by reference as exhibits to this Registration Statement contain representations and warranties by each of the parties
to the applicable agreement. These representations and warranties were made solely for the benefit of the other parties to the applicable agreement and (i) were not intended to be treated as categorical statements of fact, but rather as a way
of allocating the risk to one of the parties if those statements prove to be inaccurate; (ii) may have been qualified in such agreement by disclosures that were made to the other party in connection with the negotiation of the applicable
agreement; (iii) may apply contract standards of materiality that are different from materiality under the applicable securities laws; and (iv) were made only as of the date of the applicable agreement or such other
date or dates as may be specified in the agreement.
The Registrant acknowledges that, notwithstanding the inclusion of the foregoing cautionary
statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this Registration Statement not misleading.
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|
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(a)(1) |
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Amended and Restated Agreement and Declaration of Trust, dated of June 10, 2003, is incorporated by reference to Exhibit (a) to Pre-Effective Amendment No. 1 to the Registrants Registration Statement on Form N-2 filed on June 20, 2003. |
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(a)(2) |
|
Certification Evidencing Amendment to the Trusts Amended and Restated Agreement and Declaration of Trust, dated February
11, 2011, is incorporated by reference to Exhibit (a)(2) to Pre-Effective Amendment No.
1 to the Registrants Registration Statement on Form N-2 filed on April 30, 2014. |
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(b)(1) |
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Amended and Restated Bylaws, dated October 28, 2010, is incorporated by reference to Exhibit 3.1 to the Registrants Report on Form 8-K filed on October 29, 2010. |
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(b)(2) |
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Amendment No.
1 to Amended and Restated Bylaws is incorporated by reference to Exhibit (b)(2) to the Registrants Registration Statement on Form N-2 filed on January 27, 2022. |
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(c) |
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Inapplicable |
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(d) |
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Form of Specimen Stock Certificate is incorporated by reference to Exhibit (d)
to Pre-Effective Amendment No. 1 to the Registrants Registration Statement on Form N-2 filed on June 20, 2003. |
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(e) |
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Automatic Dividend Reinvestment Plan is incorporated by reference to Exhibit (e) to the Registrants Registration Statement on Form N-2 filed on March 14, 2014. |
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(f) |
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Inapplicable |
C-1
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(g)(1) |
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Investment Management Agreement between the Registrant and BlackRock Advisors, LLC is incorporated by reference to Exhibit (g)(1) to the Registrants
Registration Statement on Form N-2 filed on March 14, 2014. |
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(g)(2) |
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Sub-Investment Advisory Agreement between the Registrant and BlackRock International Limited
is incorporated by reference to Attachment G.1b.iii to the Registrants Annual Report for Registered Investment Companies on Form N-CEN filed on June 2, 2020. |
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(g)(3) |
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Sub-Investment Advisory Agreement between the Registrant and BlackRock (Singapore) Limited is
incorporated by reference to Attachment G.1b.iii to the Registrants Annual Report for Registered Investment Companies on Form N-CEN filed on June 2, 2020. |
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(g)(4) |
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Amended and Restated Master Advisory Fee Waiver Agreement
is incorporated by reference to Exhibit (g)(4) to the Registration Statement on Form N-2 of BlackRock Multi-Sector Income Trust, filed on January 12, 2022. |
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(g)(5) |
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Amendment No. 1 to Amended and Restated Master Advisory Fee Waiver Agreement
is incorporated by reference to Exhibit (g)(5) to the Registration Statement on Form N-2 of BlackRock Multi-Sector Income Trust, filed on January 12, 2022. |
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(g)(6) |
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Amendment No. 2 to Amended and Restated Master Advisory Fee
Waiver Agreement is incorporated by reference to Exhibit (g)(6) to the Registration Statement on Form N-2 of BlackRock Multi-Sector Income Trust, filed on January 12, 2022. |
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(g)(7) |
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Amendment No. 3 to Amended and Restated Master Advisory Fee
Waiver Agreement is incorporated by reference to Exhibit (g)(7) to the Registration Statement on Form N-2 of BlackRock Multi-Sector Income Trust, filed on January 12, 2022. |
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(g)(8) |
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Amendment No. 4 to Amended and Restated Master Advisory Fee
Waiver Agreement is incorporated by reference to Exhibit (g)(8) to the Registration Statement on Form N-2 of BlackRock Multi-Sector Income Trust, filed on January 12, 2022. |
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(g)(9) |
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Form of Amendment No. 5 to Amended and Restated Master Advisory Fee
Waiver Agreement is incorporated by reference to Exhibit (g)(9) to the Registration Statement on Form N-2 of BlackRock Multi-Sector Income Trust, filed on January 12, 2022. |
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(h) |
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To be filed by amendment. |
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(i) |
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Form of BlackRock Fixed-Income Complex Third Amended and Restated Deferred Compensation Plan is incorporated by reference to Exhibit (i) to
the Registration on Form N-2 of BlackRock Multi-Sector Income Trust, filed on January 12, 2022. |
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(j) |
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Form of Master Custodian Agreement is incorporated by reference to Exhibit (j) to the Registration on Form N-2 of BlackRock Multi-Sector Income Trust, filed on January 12, 2022. |
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(k)(1) |
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Form of Amended and Restated Transfer Agency and Service Agreement is incorporated by reference to Exhibit (k)(1) to the Registration on Form
N-2 of BlackRock Multi-Sector Income Trust, filed on January 12, 2022. |
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(k)(2) |
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Form of Administration and Accounting Services Agreement is incorporated by reference to Exhibit (k)(2) to the Registration on Form N-2 of BlackRock Multi-Sector Income Trust, filed on January 12, 2022. |
C-2
Item 26. |
Marketing Arrangements |
The information contained under the section entitled Plan of Distribution in the Prospectus is incorporated by reference, and any information
concerning any underwriters will be contained in the accompanying Prospectus Supplement, if any.
Item 27. |
Other Expenses Of Issuance And Distribution |
The following table sets forth the estimated expenses to be incurred in connection with the offering described in this Registration Statement:
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Registration fee |
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$ |
12,700 |
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NYSE listing fee |
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2,500 |
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Accounting fees and expenses |
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4,000 |
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Legal fees and expenses |
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70,000 |
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FINRA fee |
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21,050 |
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Total |
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$ |
110,250 |
(1) |
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(1) |
Estimate is based on the aggregate estimated expenses to be incurred during a three year shelf
offering period. |
Item 28. |
Persons Controlled By Or Under Common Control With The Registrant |
None.
C-3
Item 29. |
Number Of Holders Of Shares |
As of January 31, 2022:
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Title Of Class |
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Number Of Record Holders |
Common Shares of Beneficial Interest |
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30 |
Article V of the Registrants Agreement and Declaration of Trust provides as follows:
5.1 No Personal Liability of Shareholders, Trustees, etc. No Shareholder of the Trust shall be subject in such
capacity to any personal liability whatsoever to any Person in connection with Trust Property or the acts, obligations or affairs of the Trust. Shareholders shall have the same limitation of personal liability as is extended to stockholders of a
private corporation for profit incorporated under the Delaware General Corporation Law. No Trustee or officer of the Trust shall be subject in such capacity to any personal liability whatsoever to any Person, other than the Trust or its
Shareholders, in connection with Trust Property or the affairs of the Trust, save only liability to the Trust or its Shareholders arising from bad faith, willful misfeasance, gross negligence (negligence in the case of those Trustees or officers who
are directors, officers or employees of the Trusts investment advisor (Affiliated Indemnitees)) or reckless disregard for his duty to such Person; and, subject to the foregoing exception, all such Persons shall look solely to the
Trust Property for satisfaction of claims of any nature arising in connection with the affairs of the Trust. If any Shareholder, Trustee or officer, as such, of the Trust, is made a party to any suit or proceeding to enforce any such liability,
subject to the foregoing exception, he shall not, on account thereof, be held to any personal liability. Any repeal or modification of this Section 5.1 shall not adversely affect any right or protection of a Trustee or officer of the Trust
existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification.
5.2
Mandatory Indemnification. (a) The Trust hereby agrees to indemnify each person who at any time serves as a Trustee or officer of the Trust (each such person being an indemnitee) against any
liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and reasonable counsel fees reasonably incurred by such indemnitee in connection with the defense or disposition of any action,
suit or other proceeding, whether civil or criminal, before any court or administrative or investigative body in which he may be or may have been involved as a party or otherwise or with which he may be or may have been threatened, while acting in
any capacity set forth in this Article V by reason of his having acted in any such capacity, except with respect to any matter as to which he shall not have acted in good faith in the reasonable belief that his action was in the best interest of the
Trust or, in the case of any criminal proceeding, as to which he shall have had reasonable cause to believe that the conduct was unlawful, provided, however, that no indemnitee shall be indemnified hereunder against any liability to any person or
any expense of such indemnitee arising by reason of (i) willful misfeasance, (ii) bad faith, (iii) gross negligence (negligence in the case of Affiliated Indemnitees), or (iv) reckless disregard of the duties involved in the
conduct of his position (the conduct referred to in such clauses (i) through (iv) being sometimes referred to herein as disabling conduct). Notwithstanding the foregoing, with respect to any action, suit or other proceeding
voluntarily prosecuted by any indemnitee as plaintiff, indemnification shall be mandatory only if the prosecution of such action, suit or other proceeding by such indemnitee (1) was authorized by a majority of the Trustees or (2) was
instituted by the indemnitee to enforce his or her rights to indemnification hereunder in a case in which the indemnitee is found to be entitled to such indemnification. The rights to indemnification set forth in this Declaration shall continue as
to a person who has ceased to be a Trustee or officer of the Trust and shall inure to the benefit of his or her heirs, executors and personal and legal representatives. No amendment or restatement of this Declaration or repeal of any of its
provisions shall limit or eliminate any of the benefits provided to any person who at any time is or was a Trustee or officer of the Trust or otherwise entitled to indemnification hereunder in respect of any act or omission that occurred prior to
such amendment, restatement or repeal.
C-4
(b) Notwithstanding the foregoing, no indemnification shall be made
hereunder unless there has been a determination (i) by a final decision on the merits by a court or other body of competent jurisdiction before whom the issue of entitlement to indemnification hereunder was brought that such indemnitee is
entitled to indemnification hereunder or, (ii) in the absence of such a decision, by (1) a majority vote of a quorum of those Trustees who are neither interested persons of the Trust (as defined in Section 2(a)(19) of the
1940 Act) nor parties to the proceeding (Disinterested Non-Party Trustees), that the indemnitee is entitled to indemnification hereunder, or (2) if such quorum is not obtainable or even if
obtainable, if such majority so directs, independent legal counsel in a written opinion concludes that the indemnitee should be entitled to indemnification hereunder. All determinations to make advance payments in connection with the expense of
defending any proceeding shall be authorized and made in accordance with the immediately succeeding paragraph (c) below.
(c)
The Trust shall make advance payments in connection with the expenses of defending any action with respect to which indemnification might be sought hereunder if the Trust receives a written affirmation by the indemnitee of
the indemnitees good faith belief that the standards of conduct necessary for indemnification have been met and a written undertaking to reimburse the Trust unless it is subsequently determined that the indemnitee is entitled to such
indemnification and if a majority of the Trustees determine that the applicable standards of conduct necessary for indemnification appear to have been met. In addition, at least one of the following conditions must be met: (i) the indemnitee
shall provide adequate security for his undertaking, (ii) the Trust shall be insured against losses arising by reason of any lawful advances, or(iii) a majority of a quorum of the Disinterested Non-Party
Trustees, or if a majority vote of such quorum so direct, independent legal counsel in a written opinion, shall conclude, based on a review of readily available facts (as opposed to a full trial-type inquiry), that there is substantial reason to
believe that the indemnitee ultimately will be found entitled to indemnification.
(d) The rights accruing to any
indemnitee under these provisions shall not exclude any other right which any person may have or hereafter acquire under this Declaration, the By-Laws of the Trust, any statute, agreement, vote of stockholders
or Trustees who are disinterested persons (as defined in Section 2(a)(19) of the 1940 Act) or any other right to which he or she may be lawfully entitled.
(e) Subject to any limitations provided by the 1940 Act and this Declaration, the Trust shall have the power and
authority to indemnify and provide for the advance payment of expenses to employees, agents and other Persons providing services to the Trust or serving in any capacity at the request of the Trust to the full extent corporations organized under the
Delaware General Corporation Law may indemnify or provide for the advance payment of expenses for such Persons, provided that such indemnification has been approved by a majority of the Trustees.
5.3 No Bond Required of Trustees. No Trustee shall, as such, be obligated to give any bond or other security
for the performance of any of his duties hereunder.
5.4 No Duty of Investigation; Notice in Trust Instruments,
etc. No purchaser, lender, transfer agent or other person dealing with the Trustees or with any officer, employee or agent of the Trust shall be bound to make any inquiry concerning the validity of any transaction purporting to be made by the
Trustees or by said officer, employee or agent or be liable for the application of money or property paid, loaned, or delivered to or on the order of the Trustees or of said officer, employee or agent. Every obligation, contract, undertaking,
instrument, certificate, Share, other security of the Trust, and every other act or thing whatsoever executed in connection with the Trust shall be conclusively taken to have been executed or done by the executors thereof only in their capacity as
Trustees under this Declaration or in their capacity as officers, employees or agents of the Trust. Every written obligation, contract, undertaking, instrument, certificate, Share, other security of the Trust made or issued by the Trustees or by any
officers, employees or agents of the Trust in their capacity as such, shall contain an appropriate recital to the effect that the Shareholders, Trustees, officers, employees or agents of the Trust shall not personally be bound by or liable
thereunder, nor shall resort be had to their private property for the satisfaction of any obligation or claim thereunder, and appropriate references shall be made therein to this Declaration, and may contain any further recital which they may deem
appropriate, but the omission of such recital shall not operate to impose personal liability on any of the Trustees, Shareholders, officers, employees or agents of the Trust. The Trustees may maintain insurance for the protection of the Trust
Property, its Shareholders, Trustees, officers, employees and agents in such amount as the Trustees shall deem adequate to cover
C-5
possible tort liability, and such other insurance as the Trustees in their sole judgment shall deem advisable or is required by the 1940 Act.
5.5 Reliance on Experts, etc. Each Trustee and officer or employee of the Trust shall, in the performance of
its duties, be fully and completely justified and protected with regard to any act or any failure to act resulting from reliance in good faith upon the books of account or other records of the Trust, upon an opinion of counsel, or upon reports made
to the Trust by any of the Trusts officers or employees or by any advisor, administrator, manager, distributor, selected dealer, accountant, appraiser or other expert or consultant selected with reasonable care by the Trustees, officers or
employees of the Trust, regardless of whether such counsel or expert may also be a Trustee.
Registrant has also entered into an agreement
with Trustees and officers of the Registrant entitled to indemnification under the Agreement and Declaration of Trust pursuant to which the Registrant has agreed to advance expenses and costs incurred by the indemnitee in connection with any matter
in respect of which indemnification might be sought pursuant to the Agreement and Declaration of Trust to the maximum extent permitted by law.
Reference is also made to:
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Sections 10 and 11 of the Registrants Investment Management Agreement, a form of which is filed as
Exhibit (g)(1) of this Registration Statement. |
Additionally, the Registrant and the other funds in the BlackRock
Fixed-Income Complex jointly maintain, at their own expense, E&O/D&O insurance policies for the benefit of its Trustees, officers and certain affiliated persons. The Registrant pays a pro rata portion of the premium on such insurance
policies.
5.6 Indemnification of Shareholders. If any Shareholder or former Shareholder shall be held
personally liable solely by reason of its being or having been a Shareholder and not because of its acts or omissions or for some other reason, the Shareholder or former Shareholder (or its heirs, executors, administrators or other legal
representatives or in the case of any entity, its general successor) shall be entitled out of the assets belonging to the Trust to be held harmless from and indemnified to the maximum extent permitted by law against all loss and expense arising from
such liability. The Trust shall, upon request by such Shareholder, assume the defense of any claim made against such Shareholder for any act or obligation of the Trust and satisfy any judgment thereon from the assets of the Trust.
Item 31. |
Business And Other Connections Of Investment Advisor |
BlackRock Advisors, LLC, a limited liability company organized under the laws of Delaware (the Advisor), acts as investment
adviser to the Registrant. The Registrant is fulfilling the requirement of this Item 31 to provide a list of the officers and directors of the Advisor, together with information as to any other business, profession, vocation or employment of a
substantial nature engaged in by the Advisor or those officers and directors during the past two years, by incorporating by reference the information contained in the Form ADV of the Advisor filed with the commission pursuant to the Investment
Advisers Act of 1940 (Commission File No. 801-47710).
Item 32. |
Location Of Accounts And Records |
Omitted pursuant to the Instruction of Item 32 of Form N-2.
Item 33. |
Management Services |
Not Applicable
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(3) |
The securities being registered will be offered on a delayed or continuous basis in reliance on Rule 415 under
the Securities Act of 1933. Accordingly, the Registrant undertakes: |
|
(a) |
to file, during any period in which offers or sales are being made, a post-effective
amendment to this Registration Statement: |
(1) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(2) to reflect in the prospectus any facts or events after the effective date of the Registration Statement (or
the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the Calculation of Registration Fee table in the
effective registration statement.
(3) to include any material information with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material change to such information in the Registration Statement.
|
(b) |
that for the purpose of determining any liability under the Securities Act of 1933, each post-effective
amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; |
|
(c) |
to remove from registration by means of a post-effective amendment any of the securities being registered which
remain unsold at the termination of the offering; and |
|
(d) |
that, for the purpose of determining liability under the Securities Act of 1933 to any purchaser: (1) if the
Registrant is relying on Rule 430B [17 CFR 230.430B]: |
(A) Each prospectus filed by the Registrant pursuant to
Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and
(B) Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on
Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (x), or (xi) for the purpose of providing the information required by Section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the
registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for
liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus
relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective
date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date; or
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(2) if the Registrant is subject to Rule 430C [17 CFR 230.430C]: Each prospectus filed pursuant
to Rule 424(b) under the Securities Act of 1933 as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be
part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a
document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify
any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
(e) that for the purpose of determining liability of the Registrant under the Securities Act of 1933 to any purchaser in the initial
distribution of securities: The undersigned Registrant undertakes that in a primary offering of securities of the undersigned Registrant pursuant to this Registration Statement, regardless of the underwriting method used to sell the securities to
the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned Registrant will be a seller to the purchaser and will be considered to offer or sell such securities to the
purchaser: (1) any preliminary prospectus or prospectus of the undersigned Registrant relating to the offering required to be filed pursuant to Rule 424 under the Securities Act of 1933; (2) free writing prospectus relating to the offering
prepared by or on behalf of the undersigned Registrant or used or referred to by the undersigned Registrant; (3) the portion of any other free writing prospectus or advertisement pursuant to Rule 482 under the Securities Act of 1933 relating to
the offering containing material information about the undersigned Registrant or its securities provided by or on behalf of the undersigned Registrant; and (4) any other communication that is an offer in the offering made by the undersigned
Registrant to the purchaser.
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(a) |
For the purposes of determining any liability under the Securities Act of 1933, the information omitted from
the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant under Rule 424(b)(1) under the Securities Act of 1933 shall be deemed to be part of the
Registration Statement as of the time it was declared effective. |
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(b) |
For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment
that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering thereof.
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(5) |
The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrants annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference into the registration statement shall be deemed
to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
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(6) |
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will
be governed by the final adjudication of such issue. |
(7) |
The Registrant undertakes to send by first class mail or other means designed to ensure equally prompt delivery
within two business days of receipt of a written or oral request, any prospectus or Statement of Additional Information. |
C-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Trust has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, and the State of New York, on the 18th day of March, 2022.
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BLACKROCK LIMITED DURATION INCOME TRUST |
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By: |
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/s/ John M. Perlowski |
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John M. Perlowski |
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President and Chief Executive Officer |
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the
following persons in the capacities indicated and on the 18th day of March, 2022.
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/s/ John M. Perlowski |
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Trustee, President and Chief Executive Officer |
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March 18, 2022 |
(John M. Perlowski) |
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(Principal Executive Officer) |
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/s/ Trent Walker |
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Chief Financial Officer |
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March 18, 2022 |
(Trent Walker) |
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(Principal Financial and Accounting Officer) |
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CYNTHIA L. EGAN* |
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Trustee |
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(Cynthia L. Egan) |
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FRANK J. FABOZZI* |
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Trustee |
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(Frank J. Fabozzi) |
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LORENZO A. FLORES* |
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Trustee |
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(Lorenzo A. Flores) |
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STAYCE D. HARRIS* |
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Trustee |
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(Stayce D. Harris) |
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J. PHILLIP HOLLOMAN* |
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Trustee |
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(J. Phillip Holloman) |
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R. GLENN HUBBARD* |
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Trustee |
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(R. Glenn Hubbard) |
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W. CARL KESTER* |
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Trustee |
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(W. Carl Kester) |
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C-10
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CATHERINE A. LYNCH* |
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Trustee |
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(Catherine A. Lynch) |
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KAREN P. ROBARDS* |
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Trustee |
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(Karen P. Robards) |
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ROBERT FAIRBAIRN* |
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Trustee |
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(Robert Fairbairn) |
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*By: /s/ Janey Ahn |
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March 18, 2022 |
(Janey Ahn, Attorney-In-Fact) |
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C-11
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C-12
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