The following table describes
the performance for the fiscal periods indicated. Market price total return is calculated assuming an
initial investment made at the market price at the beginning of the period, reinvestment of all dividends
and distributions at market price during the period, and sale at the market price on the last day of
the period. These figures have been derived from the fund’s financial statements and, with respect
to common stock, market price data for the fund’s common shares.
NOTE 1—Significant Accounting Policies:
BNY
Mellon Strategic Municipals, Inc. (the “fund”), which is registered under the Investment Company
Act of 1940, as amended (the “Act”), is a diversified closed-end management investment company.
The fund’s investment objective is to maximize current income exempt from federal income tax to the
extent consistent with the preservation of capital. BNY Mellon Investment Adviser, Inc. (the “Adviser”),
a wholly-owned subsidiary of The Bank of New York Mellon Corporation (“BNY Mellon”), serves as the
fund’s investment adviser. The fund’s Common Stock trades on the New York Stock Exchange (the “NYSE”)
under the ticker symbol LEO.
On February 10, 2021, BNY Mellon Investment Management announced its intention to
realign several of its investment firms. As a result of this realignment, which is scheduled to occur,
subject to regulatory requirements, in the third quarter of 2021 (the “Effective Date”), portfolio
managers responsible for managing the fund’s investments who are employees of Mellon Investments Corporation
(“Mellon”) in a dual employment arrangement with the Adviser, will become employees of Insight North
America LLC (“INA”), which, like Mellon, will be an affiliate of the Adviser, and will no longer
be employees of Mellon. Consequently, effective as of the Effective Date and subject to the approval
of the fund’s Board of Directors (the “Board”), the Adviser will engage INA to serve as the fund’s
sub-adviser, pursuant to a sub-investment advisory agreement between the Adviser and INA. As the fund’s
sub-adviser, INA will provide the day-to-day management of the fund’s investments, subject to the Adviser’s
supervision and approval. It is currently anticipated that the fund’s portfolio managers who are responsible
for the day-to-day management of the fund’s investments will continue to manage the fund’s investments
as of the Effective Date. It is also currently anticipated that there will be no material changes to
the fund’s investment objective, strategies or policies, no reduction in the nature or level of services
provided to the fund, and no increase in the management fee payable by the fund as a result of the engagement
of INA as the fund’s sub-adviser. The Adviser (and not the fund) will pay INA for its sub-advisory
services.
The
fund has outstanding 763 Series M shares, 747 Series T shares, 660 Series W shares, 566 Series TH shares
and 420 series F shares for a total of 3,156 shares of Auction Preferred Stock (“APS”), with a liquidation
preference of $25,000 per share (plus an amount equal to accumulated but unpaid dividends upon liquidation).
APS dividend rates are determined pursuant to periodic auctions or by reference to a market rate. Deutsche
32
Bank
Trust Company America, as the Auction Agent, receives a fee from the fund for its services in connection
with such auctions. The fund also compensates broker-dealers generally at an annual rate of .15%-.25%
of the purchase price of shares of APS.
The fund is subject to certain restrictions relating to the
APS. Failure to comply with these restrictions could preclude the fund from declaring any distributions
to shareholders of Common Stock (“Common Shareholders”) or repurchasing shares of Common Stock and/or
could trigger the mandatory redemption of APS at liquidation value. Thus, redemptions of APS may be deemed
to be outside of the control of the fund.
The holders of APS, voting as a separate class, have the right
to elect at least two directors. The holders of APS will vote as a separate class on certain other matters,
as required by law. The Board has designated Robin A. Melvin and Benaree Pratt Wiley as directors to
be elected by the holders of APS.
The Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) is the exclusive reference of authoritative U.S. generally accepted
accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities.
Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority
of federal laws are also sources of authoritative GAAP for SEC registrants. The fund is an investment
company and applies the accounting and reporting guidance of the FASB ASC Topic 946 Financial Services-Investment
Companies. The fund’s financial statements are prepared in accordance with GAAP, which may require
the use of management estimates and assumptions. Actual results could differ from those estimates.
The
fund enters
into contracts that contain a variety of indemnifications. The fund’s maximum exposure under these
arrangements is unknown. The fund does not anticipate recognizing any loss related to these arrangements.
(a) Portfolio valuation: The fair
value of a financial instrument is the amount that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date (i.e., the
exit price). GAAP establishes a fair value hierarchy that prioritizes the inputs of valuation techniques
used to measure fair value. This hierarchy gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to
unobservable inputs (Level 3 measurements).
33
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
Additionally,
GAAP provides guidance on determining whether the volume and activity in a market has decreased significantly
and whether such a decrease in activity results in transactions that are not orderly. GAAP requires enhanced
disclosures around valuation inputs and techniques used during annual and interim periods.
Various inputs are used
in determining the value of the fund’s investments relating to fair value measurements. These inputs
are summarized in the three broad levels listed below:
Level 1—unadjusted quoted prices in active markets for
identical investments.
Level
2—other significant observable inputs (including quoted prices for similar investments, interest
rates, prepayment speeds, credit risk, etc.).
Level 3—significant unobservable inputs (including the fund’s own assumptions
in determining the fair value of investments).
The inputs or methodology used for valuing securities are not
necessarily an indication of the risk associated with investing in those securities.
Changes in valuation techniques
may result in transfers in or out of an assigned level within the disclosure hierarchy. Valuation techniques
used to value the fund’s investments are as follows:
Investments in securities, excluding short-term
investment (other than U.S. Treasury Bills) are valued each business day by an independent pricing service
(the “Service”) approved by the Board. Investments for which quoted bid prices are readily available
and are representative of the bid side of the market in the judgment of the Service are valued at the
mean between the quoted bid prices (as obtained by the Service from dealers in such securities) and asked
prices (as calculated by the Service based upon its evaluation of the market for such securities). Debt
investments (which constitute a majority of the portfolio securities) are carried at fair value as determined
by the Service, based on methods which include consideration of the following: yields or prices of municipal
securities of comparable quality, coupon, maturity and type; indications as to values from dealers; and
general market conditions. All of the preceding securities are generally categorized within Level 2 of
the fair value hierarchy.
The Service is engaged under the general oversight of the Board.
When market quotations
or official closing prices are not readily available, or are determined not to accurately reflect fair
value, such as when the value of a security has been significantly affected by events after the close
34
of
the exchange or market on which the security is principally traded, but before the fund calculates its
net asset value, the fund may value these investments at fair value as determined in accordance with
the procedures approved by the Board. Certain factors may be considered when fair valuing investments
such as: fundamental analytical data, the nature and duration of restrictions on disposition, an evaluation
of the forces that influence the market in which the securities are purchased and sold, and public trading
in similar securities of the issuer or comparable issuers. These securities are either categorized within
Level 2 or 3 of the fair value hierarchy depending on the relevant inputs used.
For securities where observable
inputs are limited, assumptions about market activity and risk are used and such securities are generally
categorized within Level 3 of the fair value hierarchy.
The following is a summary of the inputs
used as of March 31, 2021
in valuing the fund’s investments:
|
|
|
|
|
|
|
|
Level
1-Unadjusted Quoted Prices
|
Level 2- Other Significant Observable Inputs
|
|
Level
3-Significant Unobservable Inputs
|
Total
|
|
Assets
($)
|
|
|
Investments
In Securities:†
|
|
|
Collateralized Municipal-Backed
Securities
|
-
|
1,935,587
|
|
-
|
1,935,587
|
|
Municipal Securities
|
-
|
808,215,364
|
|
-
|
808,215,364
|
|
Liabilities
($)
|
|
|
Other
Financial Instruments:
|
|
|
Floating
Rate Notes††
|
-
|
(204,555,737)
|
|
-
|
(204,555,737)
|
|
† See Statement of Investments for additional detailed categorizations,
if any.
†† Certain of the fund’s liabilities are held at carrying amount,
which approximates fair value for financial reporting purposes.
(b) Securities transactions and investment income: Securities transactions
are recorded on a trade date basis. Realized gains and losses from securities transactions are recorded
on the identified cost basis. Interest income, adjusted for accretion of discount and amortization of
premium on investments, is earned from settlement date and recognized on the accrual basis. Securities
purchased or sold on a when issued or delayed delivery basis may be settled a month or more after the
trade date.
(c) Risk:
Certain events particular to the industries in which the fund’s investments conduct their operations,
as well as general economic, political
35
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
and
public health conditions, may have a significant negative impact on the investee’s operations and profitability.
In addition, turbulence in financial markets and reduced liquidity in equity, credit and/or fixed income
markets may negatively affect many issuers, which could adversely affect the fund. Global economies and
financial markets are becoming increasingly interconnected, and conditions and events in one country,
region or financial market may adversely impact issuers in a different country, region or financial market.
These risks may be magnified if certain events or developments adversely interrupt the global supply
chain; in these and other circumstances, such risks might affect companies world-wide. Recent examples
include pandemic risks related to COVID-19 and aggressive measures taken world-wide in response by governments,
including closing borders, restricting international and domestic travel, and the imposition of prolonged
quarantines of large populations, and by businesses, including changes to operations and reducing staff.
To the extent the fund may overweight its investments in certain countries, companies, industries or
market sectors, such positions will increase the fund’s exposure to risk of loss from adverse developments
affecting those countries, companies, industries or sectors.
(d) Dividends and distributions to Common Shareholders: Dividends and distributions
are recorded on the ex-dividend date. Dividends from investment income-net are normally declared and
paid monthly. Dividends from net realized capital gains, if any, are normally declared and paid annually,
but the fund may make distributions on a more frequent basis to comply with the distribution requirements
of the Internal Revenue Code of 1986, as amended (the “Code”). To the extent that net realized capital
gains can be offset by capital loss carryovers, it is the policy of the fund not to distribute such gains.
Income and capital gain distributions are determined in accordance with income tax regulations, which
may differ from GAAP.
Common Shareholders will have their distributions reinvested in additional shares
of the fund, unless such Common Shareholders elect to receive cash, at the lower of the market price
or net asset value per share (but not less than 95% of the market price). If market price is equal to
or exceeds net asset value, shares will be issued at net asset value. If net asset value exceeds market
price, Computershare Inc., the transfer agent for the fund’s Common Stock, will buy fund shares in
the open market and reinvest those shares accordingly.
On March 30, 2021, the Board declared a cash
dividend of $.035 per share from investment income-net, payable on April 30, 2021 to Common
36
Shareholders
of record as of the close of business on April 15, 2021. The ex-dividend date was April 14, 2021.
(e) Dividends and distributions to shareholders
of APS: Dividends, which are cumulative, are generally reset every 7 days for each Series of APS
pursuant to a process specified in related fund charter documents. Dividend rates as of March 31, 2021,
for each Series of APS were as follows: Series M-0.095%, Series T-0.095%, Series W-0.095%, Series TH-0.088%
and Series F-0.088%. These rates reflect the “maximum rates” under the governing instruments as a
result of “failed auctions” in which sufficient clearing bids are not received. The average dividend
rates for the period ended March 31, 2021 for each Series of APS were as follows: Series M-0.147%, Series
T-0.146%, Series W-0.142%, Series TH-0.146% and Series F-0.147%.
(f) Federal income taxes: It is the policy of the fund to continue to qualify
as a regulated investment company, which can distribute tax-exempt dividends, by complying with the applicable
provisions of the Code, and to make distributions of income and net realized capital gain sufficient
to relieve it from substantially all federal income and excise taxes.
As of and during the period
ended March 31, 2021, the fund did not have any liabilities for any uncertain tax positions. The fund
recognizes interest and penalties, if any, related to uncertain tax positions as income tax expense in
the Statement of Operations. During the period ended March 31, 2021, the fund did not incur any interest
or penalties.
Each tax year in the three-year period ended September 30, 2020 remains subject
to examination by the Internal Revenue Service and state taxing authorities.
The fund is permitted to
carry forward capital losses for an unlimited period. Furthermore, capital loss carryovers retain their
character as either short-term or long-term capital losses.
The fund has an unused capital loss carryover
of $28,135,416 available for federal income tax purposes to be applied against future net realized capital
gains, if any, realized subsequent to September 30, 2020. The fund has $16,093,978 of short-term capital
losses and $12,041,438 of long-term capital losses which can be carried forward for an unlimited period.
The
tax character of distributions paid to shareholders during the fiscal year ended September 30, 2020 was
as follows: tax-exempt income $27,323,378 and ordinary income $5,427. The tax character of current year
distributions will be determined at the end of the current fiscal year.
37
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
(g) New accounting pronouncements:
In March 2020, the FASB issued Accounting Standards Update 2020-04, Reference Rate Reform (Topic 848):
Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), and
in January 2021, the FASB issued Accounting Standards Update 2021-01, Reference Rate Reform (Topic 848):
Scope (“ASU 2021-01”), which provides optional, temporary relief with respect to the financial reporting
of contracts subject to certain types of modifications due to the planned discontinuation of the London
Interbank Offered Rate (“LIBOR”) and other interbank offered rates as of the end of 2021. The temporary
relief provided by ASU 2020-04 and ASU 2021-01 is effective for certain reference rate-related contract
modifications that occur during the period from March 12, 2020 through December 31, 2022. Management
is evaluating the impact of ASU 2020-04 and ASU 2021-01 on the fund’s investments, derivatives, debt and other
contracts that will undergo reference rate-related modifications as a result of the reference rate reform.
Management is also currently actively working with other financial institutions and counterparties to
modify contracts as required by applicable regulation and within the regulatory deadlines.
NOTE 2—Management Fee and
Other Transactions with Affiliates:
(a)
Pursuant to a management agreement (the “Agreement”) with the Adviser, the management fee
is computed at the annual rate of .75% of the value of the fund’s average weekly net assets, inclusive
of the outstanding APS, and is payable monthly. The Agreement provides for an expense reimbursement from
the Adviser should the fund’s aggregate expenses (excluding taxes, interest on borrowings, brokerage
fees and extraordinary expenses) in any full fiscal year exceed the lesser of (1) the expense limitation
of any state having jurisdiction over the fund or (2) 2% of the first $10 million, 1½% of the next $20 million and 1% of the excess
over $30 million of the average weekly value of the fund’s net assets. During the period ended March
31, 2021, there was no expense reimbursement pursuant to the Agreement.
The Adviser has currently
undertaken, from October 1, 2020 through November 30, 2021 to waive receipt of a portion of the fund’s
management fee, in the amount of .10% of the value of the fund’s average weekly net assets (including
net assets representing APS outstanding). The reduction in expenses, pursuant to the undertaking, amounted
to $305,522 during the period ended March 31, 2021.
(b)
The fund compensates The Bank of New York Mellon, a subsidiary of BNY Mellon and an affiliate
of the Adviser, under a custody agreement for providing custodial services for the fund. These fees
are determined
38
based
on net assets and transaction activity. During the period ended March 31, 2021, the fund was charged $5,497 pursuant to the custody agreement.
These fees were partially offset by earnings credits of $5,410
The fund has an arrangement with the custodian
whereby the fund may receive earnings credits when positive cash balances are maintained, which are used
to offset custody fees. For financial reporting purposes, the fund includes net earnings credits, if
any, as an expense offset in the Statement of Operations.
During the period ended March 31, 2021, the
fund was charged $4,585 for services performed by the Chief Compliance Officer and his staff. These fees
are included in Chief Compliance Officer fees in the Statement of Operations.
The components of “Due
to BNY Mellon Investment Adviser, Inc. and affiliates” in the Statement of Assets and Liabilities consist
of: management fees of $391,691, custodian fees of $3,545 and Chief Compliance Officer fees of $2,359,
which are offset against an expense reimbursement currently in effect in the amount of $55,537.
(c) Each Board member also serves
as a Board member of other funds in the BNY Mellon Family of Funds complex. Annual retainer fees and
attendance fees are allocated to each fund based on net assets.
NOTE 3—Securities Transactions:
The aggregate amount of
purchases and sales (including paydowns) of investment securities, excluding short-term securities during
the period ended March 31, 2021, amounted to $43,879,353 and $42,226,537, respectively.
Inverse Floater Securities: The fund participates in secondary
inverse floater structures in which fixed-rate, tax-exempt municipal bonds are transferred to a trust
(the “Inverse Floater Trust”). The Inverse Floater Trust typically issues two variable rate securities
that are collateralized by the cash flows of the fixed-rate, tax-exempt municipal bonds. One of these
variable rate securities pays interest based on a short-term floating rate set by a remarketing agent
at predetermined intervals (“Trust Certificates”). A residual interest tax-exempt security is also
created by the Inverse Floater Trust, which is transferred to the fund, and is paid interest based on
the remaining cash flows of the Inverse Floater Trust, after payment of interest on the other securities
and various expenses of the Inverse Floater Trust. An Inverse Floater Trust may be collapsed without
the consent of the fund due to certain termination events such as bankruptcy, default or other credit
event.
39
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
The
fund accounts for the transfer of bonds to the Inverse Floater Trust as secured borrowings, with the
securities transferred remaining in the fund’s investments, and the Trust Certificates reflected as
fund liabilities in the Statement of Assets and Liabilities.
The fund may invest in inverse floater securities
on either a non-recourse or recourse basis. These securities are typically supported by a liquidity facility
provided by a bank or other financial institution (the “Liquidity Provider”) that allows the holders
of the Trust Certificates to tender their certificates in exchange for payment from the Liquidity Provider
of par plus accrued interest on any business day prior to a termination event. When the fund invests
in inverse floater securities on a non-recourse basis, the Liquidity Provider is required to make a payment
under the liquidity facility due to a termination event to the holders of the Trust Certificates. When
this occurs, the Liquidity Provider typically liquidates all or a portion of the municipal securities
held in the Inverse Floater Trust. A liquidation shortfall occurs if the Trust Certificates exceed the
proceeds of the sale of the bonds in the Inverse Floater Trust (“Liquidation Shortfall”). When a
fund invests in inverse floater securities on a recourse basis, the fund typically enters into a reimbursement
agreement with the Liquidity Provider where the fund is required to repay the Liquidity Provider the
amount of any Liquidation Shortfall. As a result, a fund investing in a recourse inverse floater security
bears the risk of loss with respect to any Liquidation Shortfall.
The average amount of borrowings outstanding
under the inverse floater structure during the period ended March 31, 2021 was approximately $213,588,704
with a related weighted average annualized interest rate of .72%.
At March 31, 2021, accumulated net unrealized
appreciation on investments was $67,706,563, consisting of $69,370,784 gross unrealized appreciation
and $1,664,221 gross unrealized depreciation.
At March 31, 2021, the cost of investments for federal income
tax purposes was substantially the same as the cost for financial reporting purposes (see the Statement
of Investments).
40
INFORMATION
ABOUT THE RENEWAL OF THE FUND’S MANAGEMENT AGREEMENT (Unaudited)
At a meeting of the fund’s Board of Directors held on November
2-3, 2020, the Board considered the renewal of the fund’s Management Agreement pursuant to which the
Adviser provides the fund with investment advisory and administrative services (the “Agreement”).
The Board members, a majority of whom are not “interested persons” (as defined in the Investment
Company Act of 1940, as amended) of the fund, were assisted in their review by independent legal counsel
and met with counsel in executive session separate from representatives of the Adviser. In considering
the renewal of the Agreement, the Board considered several factors that it believed to be relevant, including
those discussed below. The Board did not identify any one factor as dispositive, and each Board member
may have attributed different weights to the factors considered.
Analysis of Nature, Extent, and Quality of Services Provided
to the Fund. The Board considered information provided to it at the meeting and in previous presentations
from representatives of the Adviser regarding the nature, extent, and quality of the services provided
to funds in the BNY Mellon fund complex, including the fund. Representatives of the Adviser noted that
the fund is a closed-end fund without daily inflows and outflows of capital and provided the fund’s
asset size.
The Board also considered research support available to, and portfolio management
capabilities of, the fund’s portfolio management personnel and that the Adviser also provides oversight
of day-to-day fund operations, including fund accounting and administration and assistance in meeting
legal and regulatory requirements. The Board also considered the Adviser’s extensive administrative,
accounting and compliance infrastructures.
Comparative Analysis of the Fund’s Performance and Management Fee and Expense
Ratio. The Board reviewed reports prepared by Broadridge Financial Solutions, Inc. (“Broadridge”),
an independent provider of investment company data based on classifications provided by Thomson Reuters
Lipper, which included information comparing (1) the fund’s performance with the performance of a group
of leveraged closed-end general and insured municipal debt funds selected by Broadridge as comparable
to the fund (the “Performance Group”) and with a broader group of funds consisting of all leveraged
closed-end general and insured municipal debt funds (the “Performance Universe”), all for various
periods ended September 30, 2020, and (2) the fund’s actual and contractual management fees and total
expenses with those of the same group of funds in the Performance Group (the “Expense Group”) and
with a broader group of all leveraged closed-end general and insured municipal debt funds, excluding
outliers (the “Expense Universe”), the information for which was derived in part from fund financial
statements available to Broadridge as of the date of its analysis. The Adviser previously had furnished
the Board with a description of the methodology Broadridge used to select the Performance Group and Performance
Universe and the Expense Group and Expense Universe.
41
INFORMATION ABOUT THE RENEWAL OF THE FUND’S MANAGEMENT AGREEMENT
(Unaudited) (continued)
Performance
Comparisons. Representatives of the Adviser stated that the usefulness of performance comparisons
may be affected by a number of factors, including different investment limitations and policies and the
extent and manner in which leverage is employed that may be applicable to the fund and comparison funds
and the end date selected. The Board discussed with representatives of the Adviser the results of the
comparisons and considered that the fund’s total return performance, on a net asset value basis, was
at or above the Performance Group median for all periods, except the one-, two- and three-year periods
when it was below the Performance Group median, and below the Performance Universe median for all periods
and the fund’s total return performance, on a market price basis, was at or above the Performance Group
median for all periods, except the three- and four-year periods when it was below the Performance Group
median, and above the Performance Universe median for all periods except the three-year period when it
was below the Performance Universe median. The Board also considered that the fund’s yield performance,
on a net asset value basis, was at or above the Performance Group medians for all ten one-year periods
ended September 30th and above the Performance Universe medians for all ten one-year periods and, on
a market price basis, the fund’s yield performance was at or above the Performance Group and Performance
Universe medians for all ten one-year periods ended September 30th except one period when yield performance
was within one basis point of the Performance Universe median. The Adviser also provided a comparison
of the fund’s calendar year total returns (on a net asset value basis) to the returns of the fund’s
benchmark index, and it was noted that the fund’s returns were above the returns of the index in seven
of the ten calendar years shown.
Management Fee and Expense Ratio Comparisons. The Board reviewed and
considered the contractual management fee rate payable by the fund to the Adviser in light of the nature,
extent and quality of the management services provided by the Adviser. In addition, the Board reviewed
and considered the actual management fee rate paid by the fund over the fund’s last fiscal year which
included reductions for a fee waiver arrangement in place that reduced the management fee paid to the
Adviser. The Board also reviewed the range of actual and contractual management fees and total expenses
as a percentage of average net assets of the Expense Group and Expense Universe funds and discussed the
results of the comparisons. The Board considered that, based on common assets alone, the fund’s contractual
management fee was higher than the Expense Group median, the fund’s actual management fee was lower
than the Expense Group median and Expense Universe median actual management fee and the fund’s total
expenses were lower than the Expense Group median and Expense Universe median total expenses. The Board
also considered that, based on common and leveraged assets together, the fund’s actual management fee
was higher than the Expense Group median and Expense Universe median actual management fee and the fund’s
total expenses were equal to the Expense Group median and lower than the Expense Universe median total
expenses.
Representatives
of the Adviser stated that the Adviser has contractually agreed, until November 30, 2021, to waive receipt
of a portion of the fund’s management fee, in the
42
amount
of .10% of the value of the fund’s average weekly net assets (including net assets representing auction
preferred stock outstanding).
Representatives of the Adviser reviewed with the Board the management or investment
advisory fees paid by funds advised or administered by the Adviser that are in the same Lipper category
as the fund (the “Similar Funds”), and explained the nature of the Similar Funds. They discussed
differences in fees paid and the relationship of the fees paid in light of any differences in the services
provided and other relevant factors. The Board considered the relevance of the fee information provided
for the Similar Funds to evaluate the appropriateness of the fund’s management fee. Representatives
of the Adviser noted that there were no separate accounts and/or other types of client portfolios advised
by the Adviser that are considered to have similar investment strategies and policies as the fund.
Analysis
of Profitability and Economies of Scale. Representatives of the Adviser reviewed the expenses
allocated and profit received by the Adviser and its affiliates and the resulting profitability percentage
for managing the fund and the aggregate profitability percentage to the Adviser and its affiliates for
managing the funds in the BNY Mellon fund complex, and the method used to determine the expenses and
profit. The Board concluded that the profitability results were not excessive, given the services rendered
and service levels provided by the Adviser and its affiliates. The Board also considered the fee waiver
arrangement and its effect on the profitability of the Adviser and its affiliates. The Board also had
been provided with information prepared by an independent consulting firm regarding the Adviser’s approach
to allocating costs to, and determining the profitability of, individual funds and the entire BNY Mellon
fund complex. The consulting firm also had analyzed where any economies of scale might emerge in connection
with the management of a fund.
The Board considered, on the advice of its counsel, the profitability
analysis (1) as part of its evaluation of whether the fees under the Agreement, considered in relation
to the mix of services provided by the Adviser, including the nature, extent and quality of such services,
supported the renewal of the Agreement and (2) in light of the relevant circumstances for the fund and
the extent to which economies of scale would be realized if the fund grows and whether fee levels reflect
these economies of scale for the benefit of fund shareholders. Representatives of the Adviser stated
that, because the fund is a closed-end fund without daily inflows and outflows of capital, there were
not significant economies of scale at this time to be realized by the Adviser in managing the fund’s
assets. Representatives of the Adviser also stated that, as a result of shared and allocated costs among
funds in the BNY Mellon fund complex, the extent of economies of scale could depend substantially on
the level of assets in the complex as a whole, so that increases and decreases in complex-wide assets
can affect potential economies of scale in a manner that is disproportionate to, or even in the opposite
direction from, changes in the fund’s asset level. The Board also considered potential benefits to
the Adviser from acting as investment adviser and took into consideration that there were no soft dollar
arrangements in effect for trading the fund’s investments.
43
INFORMATION ABOUT THE RENEWAL OF THE FUND’S MANAGEMENT AGREEMENT
(Unaudited) (continued)
At
the conclusion of these discussions, the Board agreed that it had been furnished with sufficient information
to make an informed business decision with respect to the renewal of the Agreement. Based on the discussions
and considerations as described above, the Board concluded and determined as follows.
· The Board concluded that the nature, extent and quality
of the services provided by the Adviser are adequate and appropriate.
· The Board generally was satisfied with the fund’s
overall performance.
· The
Board concluded that the fee paid to the Adviser continued to be appropriate under the circumstances
and in light of the factors and the totality of the services provided as discussed above.
· The Board determined that the economies of scale which
may accrue to the Adviser and its affiliates in connection with the management of the fund had been adequately
considered by the Adviser in connection with the fee rate charged to the fund pursuant to the Agreement
and that, to the extent in the future it were determined that material economies of scale had not been
shared with the fund, the Board would seek to have those economies of scale shared with the fund.
In
evaluating the Agreement, the Board considered these conclusions and determinations and also relied on
its previous knowledge, gained through meetings and other interactions with the Adviser and its affiliates,
of the Adviser and the services provided to the fund by the Adviser. The Board also relied on information
received on a routine and regular basis throughout the year relating to the operations of the fund and
the investment management and other services provided under the Agreement, including information on the
investment performance of the fund in comparison to similar funds and benchmark performance indices;
general market outlook as applicable to the fund; and compliance reports. In addition, the Board’s
consideration of the contractual fee arrangements for the fund had the benefit of a number of years of
reviews of the Agreement for the fund, or substantially similar agreements for other BNY Mellon funds
that the Board oversees, during which lengthy discussions took place between the Board and representatives
of the Adviser. Certain aspects of the arrangements may receive greater scrutiny in some years than in
others, and the Board’s conclusions may be based, in part, on their consideration of the fund’s arrangements,
or substantially similar arrangements for other BNY Mellon funds that the Board oversees, in prior years.
The Board determined to renew the Agreement.
44