Filed Pursuant to Rule 424(b)(2)
Securities Act File No. 333-263021
PROSPECTUS SUPPLEMENT
(To
Prospectus dated June 6, 2022)
BLACKROCK INVESTMENT QUALITY MUNICIPAL TRUST, INC.
Up to 5,000,000 Shares of Common Stock
BlackRock
Investment Quality Municipal Trust, Inc. (the Fund, we, us or our) is offering for sale up to 5,000,000 of our shares of common stock, par value $.01 per share (common shares). Our common
shares are listed on the New York Stock Exchange (NYSE) under the symbol BKN. As of the close of business on June 3, 2022, the last reported net asset value per share of our common shares was $14.05 and the last reported
sales price per share of our common shares on the NYSE was $15.43.
The Fund is a diversified,
closed-end management investment company registered under the Investment Company Act of 1940, as amended (the Investment Company Act). The Funds investment objective is to provide high
current income exempt from regular U.S. federal income tax consistent with the preservation of capital. As a matter of fundamental policy, under normal market conditions, the Fund will invest at least 80% of its Managed Assets (as defined in this
Prospectus Supplement) in investments the income from which is exempt from federal income tax (except that the interest may be subject to the federal alternative minimum tax). The Funds investment adviser is BlackRock Advisors, LLC (the
Advisor).
The Fund has entered into a distribution agreement dated June 6, 2022 (the Distribution Agreement)
with BlackRock Investments, LLC (the Distributor), an affiliate of the Advisor, to provide for distribution of the Funds common shares. The Distributor has entered into
a sub-placement agent agreement dated June 6, 2022 (the Sub-Placement Agent Agreement) with UBS Securities LLC (the Sub-Placement Agent) with respect to the Fund relating to the common shares offered by this Prospectus Supplement and the accompanying Prospectus. In accordance with the terms of the Sub-Placement Agent Agreement, the Fund may offer and sell its common shares from time to time through the Sub-Placement Agent as
sub-placement agent for the offer and sale of its common shares. Under the Investment Company Act, the Fund may not sell any common shares at a price below the current net asset value of such common
shares, exclusive of any distributing commission or discount.
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.
The Fund will compensate the Distributor
with respect to sales of common shares at a commission rate of 1.00% of the gross proceeds of the sale of the Funds common shares. Out of this commission, the Distributor will compensate
the Sub-Placement Agent at a rate of up to 0.80% of the gross sales proceeds of the sale of the Funds common shares sold by
the Sub-Placement Agent. In connection with the sale of the common shares on the Funds behalf, the Distributor may be deemed to be an underwriter within the meaning of the
Securities Act and the compensation of the Distributor may be deemed to be underwriting commissions or discounts.
Investing in the
Funds common shares involves certain risks, including risks of leverage, that are described in the Risks section beginning on page 29 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.
June 6, 2022
This Prospectus Supplement, together with the accompanying Prospectus, sets forth concisely the
information about the Fund that a prospective investor should know before investing. You should read this Prospectus Supplement and the accompanying Prospectus, which contain important information, before deciding whether to invest in the common
shares. You should retain the accompanying Prospectus and this Prospectus Supplement for future reference. A Statement of Additional Information (SAI), dated June 6, 2022, containing additional information about the Fund, has been
filed with the Securities and Exchange Commission (SEC) and, as amended from time to time, is incorporated by reference in its entirety into this Prospectus Supplement and the accompanying Prospectus. This Prospectus Supplement, the
accompanying Prospectus and the SAI are part of a shelf registration statement filed with the SEC. This Prospectus Supplement describes the specific details regarding this offering, including the method of distribution. If information in
this Prospectus Supplement is inconsistent with the accompanying Prospectus or the SAI, you should rely on this Prospectus Supplement. You may call (800) 882-0052, visit the Funds website
(http://www.blackrock.com) or write to the Fund to obtain, free of charge, copies of the SAI and the Funds semi-annual and annual reports, as well as to obtain other information about the Fund or to make shareholder inquiries. The SAI, as well
as the Funds semi-annual and annual reports, are also available for free on the SECs website (http://www.sec.gov). You may also e-mail requests for these documents to publicinfo@sec.gov.
Information contained in, or that can be accessed through, the Funds website is not part of this Prospectus Supplement or the accompanying Prospectus.
You should not construe the contents of this Prospectus Supplement and the accompanying Prospectus as legal, tax or financial advice. You
should consult with your own professional advisors as to the legal, tax, financial or other matters relevant to the suitability of an investment in the Fund.
The Funds common shares do not represent a deposit or an obligation of, and are not guaranteed or endorsed by, any bank or other
insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.
You should rely only on the information contained or incorporated by reference in this Prospectus Supplement
and the accompanying Prospectus. Neither the Fund nor the underwriters have authorized anyone to provide you with different information. The Fund is not making an offer to sell these securities in any jurisdiction where the offer or sale is not
permitted. You should not assume that the information contained in this Prospectus Supplement and the accompanying Prospectus is accurate as of any date other than the date of this Prospectus Supplement and the accompanying Prospectus, respectively.
Our business, financial condition, results of operations and prospects may have changed since those dates. In this Prospectus Supplement and in the accompanying Prospectus, unless otherwise indicated, Fund, us,
our and we refer to BlackRock Investment Quality Municipal Trust, Inc., a Maryland corporation.
TABLE OF CONTENTS
Prospectus Supplement
Prospectus
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus Supplement, the accompanying Prospectus and the Statement of Additional Information (the SAI) contain
forward-looking statements. Forward-looking statements can be identified by the words may, will, intend, expect, estimate, continue, plan,
anticipate, and similar terms and the negative of such terms. Such forward-looking statements may be contained in this Prospectus Supplement as well as in the accompanying Prospectus. By their nature, all forward-looking statements
involve risks and uncertainties, and actual results could differ materially from those contemplated by the forward-looking statements. Several factors that could materially affect our actual results are the performance of the portfolio of securities
we hold, the price at which our shares will trade in the public markets and other factors discussed in our periodic filings with the SEC.
Although we believe that the expectations expressed in our forward-looking statements are reasonable, actual results could differ materially
from those projected or assumed in our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and are subject to inherent risks and uncertainties, such
as those disclosed in the Risks section of the accompanying Prospectus. All forward-looking statements contained or incorporated by reference in this Prospectus Supplement or the accompanying Prospectus are made as of the date of this
Prospectus Supplement or the accompanying Prospectus, as the case may be. Except for our ongoing obligations under the federal securities laws, we do not intend, and we undertake no obligation, to update any forward-looking statement. The
forward-looking statements contained in this Prospectus Supplement, the accompanying Prospectus and the SAI are excluded from the safe harbor protection provided by Section 27A of the Securities Act.
Currently known risk factors that could cause actual results to differ materially from our expectations include, but are not limited to, the
factors described in the Risks section of the accompanying Prospectus. We urge you to review carefully those sections for a more detailed discussion of the risks of an investment in our common shares.
S-4
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.
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The Fund |
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The Fund is a diversified, closed-end management investment company. The
Funds investment objective is to provide high current income exempt from regular U.S. federal income tax consistent with the preservation of capital. As a matter of fundamental policy, under normal market conditions, the Fund will invest at
least 80% of its Managed Assets (as defined in this Prospectus Supplement) in investments the income from which is exempt from federal income tax (except that the interest may be subject to the federal alternative minimum tax). There can be no
assurance that the Funds investment objective will be achieved or that the Funds investment program will be successful. The Funds common shares are listed for trading on the NYSE under the symbol BKN. |
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Investment Advisor |
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BlackRock Advisors, LLC (previously defined as the Advisor) is the Funds investment adviser. The Advisor
receives an annual fee, payable monthly, in an amount equal to 0.35% of the average weekly value of the Funds Managed Assets. Managed Assets means the total assets of the Fund (including any assets attributable to money borrowed
for investment purposes) minus the sum of the Funds accrued liabilities (other than money borrowed for investment purposes). |
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The Offering |
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The Fund has entered into the Distribution Agreement with the Distributor to provide for distribution of the Funds
common shares. The Distributor has entered into the Sub-Placement Agent Agreement with the Sub-Placement Agent with respect to the Fund relating to the common shares
offered by this Prospectus Supplement and the accompanying Prospectus. In accordance with the terms of the Sub-Placement Agent Agreement, the Fund may offer and sell its common shares from time to time through
the Sub-Placement Agent as sub-placement agent for the offer and sale of its common shares. The Fund will compensate the Distributor with respect to sales of common
shares at a commission rate of 1.00% of the gross proceeds of the sale of the Funds common shares. Out of this commission, the Distributor will compensate the Sub-Placement Agent at a rate of up to 0.80%
of the gross sales proceeds of the sale of the Funds common shares sold by the Sub-Placement Agent. |
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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). |
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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. |
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Use of Proceeds |
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We currently anticipate that we will be able to invest all of the net proceeds of any sales of common shares pursuant to
this Prospectus Supplement in accordance with our investment objective and policies as described in the accompanying Prospectus under The Funds Investments within approximately three months of the receipt of such proceeds. Pending
such investment, it is anticipated that the proceeds will be invested in short-term investment grade securities or in high quality, short-term money market instruments. Depending on market conditions and operations, a portion of the cash held by the
Fund, including any proceeds raised from the offering, may be used to pay distributions in accordance with the Funds distribution policy and may be a return of capital. |
S-5
SUMMARY OF FUND 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) |
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1.00 |
% |
Offering expenses borne by the Fund (as a percentage of offering price)(2) |
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0.03 |
% |
Dividend reinvestment plan fees |
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$0.02 per share for open-market purchases of
common shares |
(3) |
Dividend reinvestment plan sale transaction fee |
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$2.50 |
(3) |
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Estimated Annual Expenses (as a percentage of net assets attributable to common
shares) |
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Management fees(4)(5) |
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0.57 |
% |
Other expenses(6) |
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0.95 |
% |
Miscellaneous other expenses |
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0.34% |
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Interest expense(7) |
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0.61% |
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Total annual expenses |
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1.52 |
% |
Fee waivers(5) |
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Total annual Fund operating expenses after fee waivers(5) |
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1.52 |
% |
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(1) |
Represents the estimated commission with respect to the Funds common shares being sold in this
offering. There is no guarantee that there will be any sales of the Funds common shares pursuant to this Prospectus Supplement and the accompanying Prospectus. Actual sales of the Funds common shares under this Prospectus Supplement and
the accompanying Prospectus, if any, may be less than as set forth under Capitalization below. In addition, the price per share of any such sale may be greater than or less than the price set forth under Capitalization below,
depending on market price of the Funds common shares at the time of any such sale. |
(2) |
Based on a sales price per share of $15.55, which represents the last reported sales price per share of the
Funds common shares on the NYSE on June 2, 2022. Assumes all of the common shares being offered by this Prospectus Supplement and the accompanying Prospectus are sold. Represents the initial offering costs incurred by the Fund in
connection with this offering, which are estimated to be $83,508. Offering costs generally include, but are not limited to, the preparation, review and filing with the SEC of the Funds registration statement, the preparation, review and filing
of any associated marketing or similar materials, costs associated with the printing, mailing or other distribution of the Prospectus Supplement and the accompanying Prospectus and/or marketing materials, associated filing fees, NYSE listing fees,
and legal and auditing fees associated with the offering. |
(3) |
Computershare Trust Company, N.A.s (the Reinvestment Plan Agent) fees for the handling of
the reinvestment of dividends will be paid by the Fund. However, you will pay a $0.02 per share fee incurred in connection with open-market purchases, which will be deducted from the value of the dividend. You will also be charged a $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.
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(4) |
The Fund currently pays the Advisor a monthly fee at an annual contractual investment management fee rate of
0.35% of its average weekly managed assets. For purposes of calculating these fees, managed assets means the total assets of the Fund (including any assets attributable to money borrowed for investment purposes) minus the sum of the
Funds accrued liabilities (other than money borrowed for investment purposes). |
(5) |
The Fund and the Advisor have entered into a fee waiver agreement (the Fee Waiver Agreement),
pursuant to which the Advisor has contractually agreed to waive the management fee with respect to any portion of the Funds assets attributable to investments in any equity and fixed-income mutual funds and ETFs managed by the Advisor or its
affiliates that have a contractual fee, through June 30, 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 Fund 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 Fund (upon
the vote of a majority of the members of the board of directors of the Fund who are not interested persons (as defined in the Investment Company Act), of the Fund or a majority of the outstanding voting securities of the Fund), upon 90
days written notice by the Fund to the Advisor. |
(6) |
Actual amount based on the fiscal year ended April 30, 2022. |
(7) |
The total expense table includes interest expense associated with the Funds investments in tender
option bonds (TOBs) (also known as inverse floaters). Although such interest expense is actually paid by special purpose vehicles in which the Fund invests, it is recorded
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S-6
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on the Funds financial statements for accounting purposes. The total expense table also includes, in interest expense, dividends associated with the Funds Variable Rate Muni Term
Preferred Shares (VMTP Shares), because the VMTP Shares are considered debt of the Fund for financial reporting purposes. |
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The Fund uses leverage to seek to enhance its returns to common shareholders. This leverage generally takes
two forms: the issuance of VMTP Shares and investment in TOBs. Both forms of leverage benefit common shareholders if the cost of the leverage is lower than the returns earned by the Fund when it invests the proceeds from the leverage. In order to
help you better understand the costs associated with the Funds leverage strategy, the Total annual Fund operating expenses after fee waivers (excluding interest expense) are 0.93%. |
Example
The following
example illustrates the expenses (including the sales load of $10.00 and offering costs of $0.31) that you would pay on a $1,000 investment in common shares, assuming (i) total net annual expenses of 1.52% of net assets attributable to common
shares, and (ii) a 5% annual return:
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One Year |
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Three Years |
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Five Years |
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Ten Years |
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Total expenses incurred |
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$ |
26 |
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$ |
58 |
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$ |
92 |
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$ |
190 |
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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 Funds actual rate of return may be greater or less than the hypothetical 5% return shown in the example.
S-7
USE OF PROCEEDS
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. There is no
guarantee that there will be any sales of our common shares pursuant to this Prospectus Supplement and the accompanying Prospectus. Actual sales, if any, of our common shares under this Prospectus Supplement and the accompanying Prospectus may be
less than as set forth below in this paragraph. In addition, the price per share of any such sale may be greater or less than the price set forth in this paragraph, depending on the market price of our common shares at the time of any such sale. As
a result, the actual net proceeds we receive may be more or less than the amount of net proceeds estimated in this Prospectus Supplement. Assuming the sale of all of the common shares offered under this Prospectus Supplement and the accompanying
Prospectus, at the last reported sale price of $15.55 per share for our common shares on the NYSE as of June 2, 2022, we estimate that the net proceeds of this offering will be approximately $76,888,992 after deducting the estimated sales load
and the estimated offering expenses payable by the Fund, if any.
The net proceeds from the issuance of common shares
hereunder will be invested in accordance with the Funds investment objective and policies as set forth in this Prospectus Supplement and the accompanying Prospectus. We currently anticipate that we will be able to invest all of the net
proceeds in accordance with our investment objective and policies within approximately three months of the receipt of such proceeds. Pending such investment, it is anticipated that the proceeds will be invested in short-term investment grade
securities or in high quality, short-term money market instruments. Depending on market conditions and operations, a portion of the cash held by the Fund, including any proceeds raised from the offering, may be used to pay distributions in
accordance with the Funds distribution policy and may be a return of capital. A return of capital is a return to investors of a portion of their original investment in the Fund. In general terms, a return of capital would involve a situation
in which a Fund distribution (or a portion thereof) represents a return of a portion of a shareholders investment in the Fund, rather than making a distribution that is funded from the Funds earned income or other profits. Although
return of capital distributions may not be currently taxable, such distributions would decrease the basis of a shareholders shares, and therefore, may increase a shareholders tax liability for capital gains upon a sale of shares, even if
sold at a loss to the shareholders original investments.
CAPITALIZATION
The Fund may offer and sell up to 5,000,000 common shares, $0.01 par value per share, from time to time through the Sub-Placement Agent as sub-placement agent under this Prospectus Supplement and the accompanying Prospectus. There is no guarantee that there will be any sales of the
Funds common shares pursuant to this Prospectus Supplement and the accompanying Prospectus. The table below assumes that the Fund will sell 5,000,000 common shares at a price of $15.55 per share (which represents the last reported sales price
per share of the Funds common shares on the NYSE on June 2, 2022). Actual sales, if any, of the Funds common shares under this Prospectus Supplement and the accompanying Prospectus may be greater or less than $15.55 per share,
depending on the market price of the Funds common shares at the time of any such sale. The Fund and the Distributor will determine whether any sales of the Funds common shares will be authorized on a particular day; the Fund and the
Distributor, however, will not authorize sales of the Funds common shares if the per share price of the shares is less than the current net asset value per share plus the per share amount of the commission to be paid to the Distributor (the
Minimum Price). The Fund and the Distributor may also not authorize sales of the Funds common shares on a particular day even if the per share price of the shares is equal to or greater than the Minimum Price or may only authorize
a fixed number of shares to be sold on any particular day. The Fund and the Distributor will have full discretion regarding whether sales of Fund common shares will be authorized on a particular day and, if so, in what amounts.
S-8
The following table sets forth the Funds capitalization (1) on a
historical basis as of April 30, 2022 (unaudited); and (2) on a pro forma basis as adjusted to reflect the assumed sale of 5,000,000 common shares at $15.55 per share (the last reported price per share of the Funds common shares on
the NYSE on June 2, 2022), in an offering under this Prospectus Supplement and the accompanying Prospectus, after deducting the assumed commission of $777,500 (representing an estimated commission to the Distributor of 1.00% of the gross
proceeds of the sale of Fund common shares, out of which the Distributor will compensate the Sub-Placement Agent at a rate of up to 0.80% of the gross sales proceeds of the sale of the Funds common
shares sold by the Sub-Placement Agent).
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As of April 30, 2022 (unaudited) |
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As adjusted for Offering (unaudited) |
Common shares |
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17,233,066 |
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22,233,066 |
Paid in Capital |
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$239,517,093 |
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$316,406,085 |
Undistributed NII |
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$381,640 |
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$381,640 |
Accumulated Loss |
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$(3,741,866) |
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$(3,741,866) |
Net appreciation/depreciation |
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$1,488,640 |
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$1,488,640 |
Net Assets |
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$237,645,507 |
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$314,534,499 |
Net asset value (NAV) |
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$13.79 |
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$14.15 |
PLAN OF DISTRIBUTION
Under the Sub-Placement Agent Agreement, upon instructions from the
Distributor, the Sub-Placement Agent will use its reasonable best efforts to sell, as sub-placement agent, common shares under the terms and subject to the conditions
set forth in the Sub-Placement Agent Agreement. The Distributor will instruct the Sub-Placement Agent as to the amount of Fund common shares authorized for
sale by the Sub-Placement Agent on any particular day that is a trading day for the exchange on which the Funds common shares are listed and primarily trade. The Distributor will also instruct the Sub-Placement Agent not to sell Fund common shares if the sales cannot be effected at or above a price designated by the Distributor, which price will at least be equal to the Minimum Price and which price, may, in
the discretion of the Distributor and the Fund, be above the Minimum Price. The Distributor and the Fund may, in their discretion, determine not to authorize sales of the Funds common shares on a particular day even if the per share price of
the shares is equal to or greater than the Minimum Price. The Fund and the Distributor will have full discretion regarding whether sales of Fund common shares will be authorized on a particular day and, if so, in what amounts. The Fund, the
Distributor or the Sub-Placement Agent may suspend a previously authorized offering of Fund common shares upon proper notice and subject to other conditions.
The Sub-Placement Agent will provide written confirmation to the Distributor
following the close of trading on a day on which Fund common shares are sold under the Sub-Placement Agent Agreement. Each confirmation will include the number of shares sold, the net proceeds to the
Fund and the compensation the Sub-Placement Agent is owed in connection with the sales.
The Fund will compensate the Distributor with respect to sales of common shares at a commission rate of 1.00% of the gross
proceeds of the sale of the Funds common shares. Out of this commission, the Distributor will compensate the Sub-Placement Agent at a rate of up to 0.80% of the gross sales proceeds of the sale
of the Funds common shares sold by the Sub-Placement Agent. There is no guarantee that there will be any sales of the Funds common shares pursuant to this Prospectus Supplement and the
accompanying Prospectus. Actual sales, if any, of the Funds common shares under this Prospectus Supplement and the accompanying Prospectus may be greater or less than the most recent market price set forth in this Prospectus Supplement,
depending on the market price of the Funds common shares at the time of any such sale; provided, however, that sales will not be made at less than the Minimum Price.
S-9
Settlements of sales of common shares will occur on the second business day
following the date on which any such sales are made, in return for payment of the net proceeds to the Fund.
In connection
with the sale of common shares on behalf of the Fund, the Distributor may be deemed to be an underwriter within the meaning of the Securities Act, and the compensation of the Distributor may be deemed to be underwriting commissions or discounts.
The offering of the Funds common shares pursuant to the Distribution Agreement will terminate upon the earlier of
(i) the sale of all common shares subject thereto or (ii) termination of the Distribution Agreement. The Fund and the Distributor each have the right to terminate the Distribution Agreement in its discretion upon advance notice to the
other party.
The Sub-Placement Agent, its affiliates and their respective
employees hold or may hold in the future, directly or indirectly, investment interests in BlackRock, Inc., the parent company of the Distributor, and funds advised by the Advisor and its affiliates. The interests held by employees of the Sub-Placement Agent or its affiliates are not attributable to, and no investment discretion is held by, the Sub-Placement Agent or its affiliates.
The Fund has agreed to indemnify the Distributor and hold the Distributor harmless against certain liabilities, including
certain liabilities under the Securities Act, except for any liability to the Fund or its investors to which the Distributor would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties
or by its reckless disregard of its obligations and duties under its agreement with the Fund.
LEGAL
MATTERS
Certain legal matters in connection with the common shares will be passed upon for the Fund by Willkie
Farr & Gallagher LLP, New York, New York, counsel to the Fund. Willkie Farr & Gallagher LLP may rely as to certain matters of Maryland law on the opinion of Miles & Stockbridge P.C., Baltimore, Maryland.
ADDITIONAL INFORMATION
This Prospectus Supplement and the accompanying Prospectus constitute part of a Registration Statement filed by the Fund with
the SEC under the Securities Act and the Investment Company Act. This Prospectus Supplement and the accompanying Prospectus omit certain of the information contained in the Registration Statement, and reference is hereby made to the Registration
Statement and related exhibits for further information with respect to the Fund and the common shares offered hereby. Any statements contained herein concerning the provisions of any document are not necessarily complete, and, in each instance,
reference is made to the copy of such document filed as an exhibit to the Registration Statement or otherwise filed with the SEC. Each such statement is qualified in its entirety by such reference. The complete Registration Statement may be obtained
from the SEC upon payment of the fee prescribed by its rules and regulations or free of charge through the SECs website (http://www.sec.gov).
S-10
Filed Pursuant to Rule 424(b)(2)
Registration Statement No. 333-263021
BASE PROSPECTUS
5,000,000 Shares
BlackRock Investment Quality Municipal Trust, Inc.
Shares of Common Stock
Rights to Purchase Shares of Beneficial Interest
BlackRock Investment Quality Municipal Trust, Inc. (the Fund, we, us or our)
is a diversified, closed-end management investment company. The Funds investment objective is to provide high current income exempt from regular U.S. federal income tax consistent with the preservation
of capital. As a matter of fundamental policy, under normal market conditions, the Fund will invest at least 80% of its Managed Assets (as defined in this Prospectus) in investments the income from which is exempt from federal income tax (except
that the interest may be subject to the federal alternative minimum tax).
We may offer, from time to time, in one or more
offerings, up to 5,000,000 of our shares of common stock, par value $.01 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 BKN. The last reported sale price of our common shares, as reported by the NYSE on June 1, 2022 was $15.24 per common share. The net asset value
of our common shares at the close of business on June 1, 2022 was $14.05 per common share. Rights issued by the Fund may also be listed on a securities exchange.
Investing in the Funds common shares involves certain risks, including risks of leverage, that are described in the
Risks section beginning on page 29 of this Prospectus.
Shares of closed-end management investment companies frequently trade at a discount to their net asset value. The Funds common shares have traded at a discount to net asset value, including during recent periods. If the
Funds common shares trade at a discount to their net asset value, the risk of loss may increase for purchasers in a public offering.
Neither the Securities and Exchange Commission (SEC) nor any state
securities commission has approved or disapproved these securities or passed upon the adequacy of this Prospectus. Any representation to the contrary is a criminal offense.
This Prospectus, together with any Prospectus Supplement, sets forth concisely the information about the Fund that a
prospective investor should know before investing. You should read this Prospectus and applicable Prospectus Supplement, which contain important information, before deciding whether to invest in the common shares. You should retain the Prospectus
and Prospectus Supplement for future reference. A Statement of Additional Information (SAI), dated June 6, 2022, containing additional information about the Fund, has been filed with the SEC and, as amended from time to time, is
incorporated by reference in its entirety into this Prospectus. You may call (800) 882-0052, visit the Funds website (http://www.blackrock.com) or write to the Fund to obtain, free of charge, copies of
the SAI and the Funds semi-annual and annual reports, as well as to obtain other information about the Fund or to make shareholder inquiries. The SAI, as well as the Funds semi-annual and annual reports, are also available for free on
the SECs website (http://www.sec.gov). You may also e-mail requests for these documents to publicinfo@sec.gov. Information contained in, or that can be accessed through, the Funds website is not
part of this Prospectus.
You should not construe the contents of this Prospectus as legal, tax or financial advice. You
should consult with your own professional advisors as to the legal, tax, financial or other matters relevant to the suitability of an investment in the Fund.
The Funds common shares do not represent a deposit or an obligation of, and are not guaranteed or endorsed by, any
bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.
Prospectus dated June 6, 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 Fund has not authorized any person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on
it. The Fund is not making an offer to sell the common shares in any jurisdiction where the offer or sale is not permitted. You should assume that the information in this Prospectus and any Prospectus Supplement is accurate only as of the dates on
their covers. The Funds business, financial condition and prospects may have changed since the date of its description in this Prospectus or the date of its description in any Prospectus Supplement.
PROSPECTUS SUMMARY
This is only a summary of certain information relating to BlackRock Investment Quality Municipal Trust, Inc. This summary
may not contain all of the information that you should consider before investing in our common shares. You should consider the more detailed information contained in the Prospectus and in any related Prospectus Supplement and in the Statement of
Additional Information (SAI) before purchasing common shares.
|
|
|
The Fund |
|
BlackRock Investment Quality Municipal Trust, Inc. is a diversified, closed-end
management investment company. Throughout this Prospectus, we refer to BlackRock Investment Quality Municipal Trust, Inc. simply as the Fund or as we, us or our. See The Fund. |
|
|
|
|
The Funds common shares are listed for trading on the New York Stock Exchange (NYSE) under the symbol
BKN. As of May 23, 2022, the net assets of the Fund were $227,405,369, the total assets of the Fund were $403,472,360 and the Fund had outstanding 17,236,321 common shares. The last reported sale price of the Funds common
shares, as reported by the NYSE on June 1, 2022 was $15.24 per common share. The net asset value (NAV) of the Funds common shares at the close of business on June 1, 2022 was $14.05 per common share. See Description of
Capital Stock. Rights issued by the Fund may also be listed on a securities exchange. |
|
|
The Offering |
|
We may offer, from time to time, in one or more offerings, up to 5,000,000 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. |
- 1 -
|
|
|
|
|
Use of Proceeds |
|
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 Fund; however, the
identification of appropriate investment opportunities pursuant to the Funds investment style or changes in market conditions could result in the Funds anticipated investment period extending to as long as six months. See
Use of Proceeds. |
|
|
Investment Objective and Policies |
|
Please refer to the section
of the Funds most recent annual report on Form N-CSR entitled Investment Objectives, Policies and Risks BlackRock Investment Quality Municipal Trust, Inc. (BKN), which is incorporated by reference herein, for a
discussion of the Funds investment objective and policies. |
|
|
Leverage |
|
The Fund uses leverage to seek to achieve its investment objective. The Funds use of leverage may increase or decrease
from time to time in its discretion and the Fund may, in the future, determine not to use leverage. The Fund currently leverages its assets through the use of shares of preferred stock (preferred shares) and tender option bonds
(TOBs). The Fund currently does not intend to borrow money or issue debt securities. Although it has no present intention to do so, the Fund reserves the right to borrow money from banks or other financial institutions, or issue debt
securities or preferred shares, in the future if it believes that market conditions would be conducive to the successful implementation of a leveraging strategy through borrowing money or issuing debt securities or preferred shares. See
Leverage. The Fund has leveraged its
portfolio by issuing Variable Rate Muni Term Preferred Shares, par value $0.001 per share and with a liquidation preference of $100,000 per share (VMTP Shares). Under the Investment Company Act of 1940 as amended (the Investment
Company Act), the Fund is not permitted to issue preferred shares if, immediately after such issuance, the liquidation value of Funds outstanding preferred shares exceeds 50% of its assets (including the proceeds from the issuance) less
liabilities other than borrowings (i.e., the value of the Funds assets must be at least 200% of the liquidation value of its outstanding preferred shares). In addition, the Fund would not be permitted to declare any cash dividend or
other distribution on its common shares unless, at the time of such declaration, the value of the Funds assets less liabilities other than borrowings is at least 200% of such liquidation value. See LeveragePreferred
Shares. |
|
|
|
|
The Fund currently leverages its assets through the use of residual interest municipal TOBs (TOB Residuals),
which are derivative interests in municipal bonds. The TOB Residuals in which Trust will invest pay interest or income that, in the opinion of counsel to the |
- 2 -
|
|
|
|
|
issuer of such TOB Residuals, is exempt from regular U.S. federal income tax. No independent investigation will be made to
confirm the tax-exempt status of the interest or income paid by TOB Residuals held by the Fund. Although volatile, TOB Residuals typically offer the potential for yields exceeding the yields
available on fixed rate municipal bonds with comparable credit quality. See LeverageTender Option Bond Transactions. |
|
|
|
|
For the fiscal year ended April 30, 2022 the average liquidation value of the VMTP Shares outstanding was $125,900,000
and the average annual dividend rate on the VMTP Shares was 1.07%.
The use of leverage is subject to numerous risks. When leverage is employed, the Funds NAV, the market price of the common shares and the
yield to holders of common shares will be more volatile than if leverage were not used. For example, a rise in short-term interest rates, which currently are near historically low levels, generally will cause the Funds NAV to decline more than
if the Fund had not used leverage. A reduction in the Funds NAV may cause a reduction in the market price of the Funds common shares. |
|
|
|
|
The Fund cannot assure you that the use of leverage will result in a higher yield on the Funds common shares. Any
leveraging strategy the Fund employs may not be successful. |
|
|
Investment Advisor |
|
BlackRock Advisors, LLC is the Funds investment adviser. The Advisor receives an annual fee, payable monthly, in an
amount equal to 0.35% of the Funds average weekly Managed Assets. Managed Assets means the total assets of the Fund (including any assets attributable to money borrowed for investment purposes) minus the sum of the Funds
accrued liabilities (other than money borrowed for investment purposes). See Management of the FundInvestment Advisor. |
|
|
Distributions |
|
The Fund intends to make regular monthly cash distributions of all or a portion of its net investment income, after payment
of dividends on the Funds VMTP Shares outstanding, to holders of the Funds common stock. Net capital gains, if any, will be distributed at least annually to holders of the Funds common stock. The Funds net investment income
consists of all interest income accrued on portfolio assets less all expenses of the Fund. The Fund is required to allocate net capital gains and other taxable income, if any, received by the Fund among its shareholders on a pro rata basis in the
year for which such capital gains and other income is realized. |
|
|
|
|
Various factors will affect the level of the Funds net investment income, such as its asset mix, portfolio turnover,
performance of its investments, level of retained earnings, the amount of leverage utilized by the Fund and the effects thereof, the costs of such leverage, the movement of interest rates for municipal bonds and general market conditions. To permit
the Fund to maintain more stable monthly distributions and to the extent consistent with the distribution requirements imposed on regulated investment |
- 3 -
|
|
|
|
|
companies by the Internal Revenue Code of 1986, as amended (the Code), the Fund may from time to time
distribute less than the entire amount earned in a particular period. The income would be available to supplement future distributions. As a result, the distributions paid by the Fund for any particular month may be more or less than the amount
actually earned by the Fund during that month. Undistributed earnings will increase the Funds NAV and, correspondingly, distributions from undistributed earnings and from capital, if any, will reduce the NAV. |
|
|
|
|
Shareholders will automatically have all dividends and distributions reinvested in common shares of the Fund in accordance
with the Funds dividend reinvestment plan, unless an election is made to receive cash by contacting the Reinvestment Plan Agent (as defined herein), at (800) 699-1236. See Dividend Reinvestment
Plan. |
|
|
Listing |
|
The Funds common shares are listed on the NYSE under the symbol BKN. See Description of Capital
StockCommon Shares. |
|
|
Custodian and Transfer Agent |
|
State Street Bank and Trust Company serves as the Funds custodian, and Computershare Trust Company, N.A. serves as
the Funds transfer agent. |
|
|
Administrator |
|
State Street Bank and Trust Company serves as the Funds administrator and fund accountant. |
|
|
Market Price of Shares |
|
Common shares of closed-end investment companies frequently trade at prices lower
than their NAV. The Fund cannot assure you that its common shares will trade at a price higher than or equal to NAV. See Use of Proceeds. The Funds 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 Capital Stock and Repurchase of Common Shares. The common shares are designed primarily for
long-term investors and you should not purchase common shares of the Fund if you intend to sell them shortly after purchase. |
|
|
Special Risk Considerations |
|
An investment in common shares of the Fund involves risk. Please refer to the section
of the Funds most recent annual report on Form N-CSR entitled Investment Objectives, Policies and RisksRisk Factors, which is incorporated by reference herein, for a
discussion of the risks of investing in the Fund. You should carefully consider those risks, which are described in more detail under Risks beginning on page 29 of this Prospectus, along with additional risks relating to investments in
the Fund. |
- 4 -
SUMMARY OF FUND EXPENSES
|
|
|
|
|
Shareholder Transaction Expenses |
|
|
|
|
Sales load paid by you (as a percentage of offering price)(1) |
|
|
1.00 |
% |
Offering expenses borne by the Fund (as a percentage of offering price)(1) |
|
|
0.04 |
% |
Dividend reinvestment plan fees |
|
$ |
0.02 per share for open-market purchases of common shares |
(2) |
Dividend reinvestment plan sale transaction fee |
|
$ |
2.50 |
(2) |
Estimated Annual Expenses (as a percentage of net assets attributable to common
shares) |
|
|
|
|
Management fees(3)(4) |
|
|
0.57 |
% |
Other expenses |
|
|
0.95 |
% |
Miscellaneous other expenses |
|
|
0.34% |
|
Interest expense(5) |
|
|
0.61% |
|
Total annual expenses |
|
|
1.52 |
% |
Fee waivers(4) |
|
|
|
|
|
|
|
|
|
Total annual Fund operating expenses after fee waivers(4) |
|
|
1.52 |
% |
|
|
|
|
|
(1) |
If the common shares are sold to or through underwriters, the Prospectus Supplement will set forth any
applicable sales load and the estimated offering expenses. Fund shareholders will pay all offering expenses involved with an offering. |
(2) |
The Reinvestment Plan Agents (as defined below under Dividend Reinvestment Plan) fees for
the handling of the reinvestment of dividends will be paid by the Fund. However, you will pay a $0.02 per share fee incurred in connection with open-market purchases, which will be deducted from the value of the dividend. You will also be charged a
$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 Fund currently pays the Advisor a monthly fee at an annual contractual investment management fee rate of
0.35% of its average weekly managed assets. For purposes of calculating these fees, managed assets means the total assets of the Fund (including any assets attributable to money borrowed for investment purposes) minus the sum of the
Funds accrued liabilities (other than money borrowed for investment purposes). |
(4) |
The Fund and the Advisor have entered into a fee waiver agreement (the Fee Waiver Agreement),
pursuant to which the Advisor has contractually agreed to waive the management fee with respect to any portion of the Funds assets attributable to investments in any equity and fixed-income mutual funds and ETFs managed by the Advisor or its
affiliates that have a contractual 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 Fund 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 Fund (upon
the vote of a majority of the directors of the Fund who are not interested persons (as defined in the Investment Company Act) of the Fund (the Independent Directors)) or a majority of the outstanding voting securities of
the Fund), upon 90 days written notice by the Fund to the Advisor. |
(5) |
The total expense table includes interest expense associated with the Funds investments in TOBs (also
known as inverse floaters). Although such interest expense is actually paid by special purpose vehicles in which the Fund invests, it is recorded on the Funds financial statements for accounting purposes. The total expense table
also includes, in interest expense, dividends associated with the VMTP Shares, because the VMTP Shares are considered debt of the Fund for financial reporting purposes. |
The Fund uses leverage to seek to enhance its returns to common shareholders. This leverage generally takes two forms: the
issuance of VMTP Shares and investment in TOBs. Both forms of leverage benefit common shareholders if the cost of the leverage is lower than the returns earned by the Fund when it invests the proceeds from the leverage. In order to help you better
understand the costs associated with the Funds leverage strategy, the Total annual Fund operating expenses after fee waivers (excluding interest expense) are 0.93%.
The following example illustrates the expenses (including the sales load of $10.00 and offering costs of $0.36) that you would
pay on a $1,000 investment in common shares, assuming (i) total net annual expenses of 1.52% of net assets attributable to common shares, and (ii) a 5% annual return:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year |
|
|
Three Years |
|
|
Five Years |
|
|
Ten Years |
|
Total expenses incurred |
|
$ |
26 |
|
|
$ |
58 |
|
|
$ |
92 |
|
|
$ |
190 |
|
- 5 -
The example should not be considered a representation of future expenses. The
example assumes that the estimated Other expenses set forth in the Estimated Annual Expenses table are accurate and that all dividends and distributions are reinvested at NAV. Actual expenses may be greater or less than those assumed.
Moreover, the Funds actual rate of return may be greater or less than the hypothetical 5% return shown in the example.
- 6 -
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Funds financial performance for the periods
presented. Certain information reflects financial results for a single common share of the Fund. The information for the fiscal years ended April 30, 2021, 2020, 2019, 2018 and 2017 has been audited by Deloitte & Touche LLP, independent
registered public accounting firm for the Fund. The report of Deloitte & Touche LLP is included in the Funds April 30, 2021 annual report and is incorporated by reference into the Prospectus and SAI. The unaudited financial
information for the period ended October 31, 2021 is included in the Funds October 31, 2021 semi-annual report and is incorporated by reference into the Prospectus and SAI.
On May 20, 2022, the Funds board of directors (the Board) approved a change in the Funds fiscal
year end from April 30 to July 31, effective as of July 31, 2022.
(For a Share outstanding throughout each period)
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BKN |
|
|
|
Six Months Ended 10/31/21 (unaudited) |
|
|
Year Ended April 30, |
|
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period |
|
$ |
16.71 |
|
|
$ |
14.89 |
|
|
$ |
15.75 |
|
|
$ |
15.26 |
|
|
$ |
15.39 |
|
|
$ |
16.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income(a) |
|
|
0.38 |
|
|
|
0.81 |
|
|
|
0.71 |
|
|
|
0.71 |
|
|
|
0.73 |
|
|
|
0.79 |
|
Net realized and unrealized gain (loss) |
|
|
(0.42 |
) |
|
|
1.80 |
|
|
|
(0.88 |
) |
|
|
0.46 |
|
|
|
0.02 |
|
|
|
(1.12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) from investment operations |
|
|
(0.04 |
) |
|
|
2.61 |
|
|
|
(0.17 |
) |
|
|
1.17 |
|
|
|
0.75 |
|
|
|
(0.33 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to Common Shareholders(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From net investment income |
|
|
(0.41 |
) |
|
|
(0.79 |
) |
|
|
(0.69 |
) |
|
|
(0.68 |
) |
|
|
(0.73 |
) |
|
|
(0.85 |
) |
From net realized gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.00 |
)(c) |
|
|
(0.15 |
) |
|
|
(0.26 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions to Common Shareholders |
|
|
(0.41 |
) |
|
|
(0.79 |
) |
|
|
(0.69 |
) |
|
|
(0.68 |
) |
|
|
(0.88 |
) |
|
|
(1.11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period |
|
$ |
16.26 |
|
|
$ |
16.71 |
|
|
$ |
14.89 |
|
|
$ |
15.75 |
|
|
$ |
15.26 |
|
|
$ |
15.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price, end of period |
|
$ |
17.13 |
|
|
$ |
19.20 |
|
|
$ |
14.75 |
|
|
$ |
14.31 |
|
|
$ |
13.57 |
|
|
$ |
14.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return Applicable to Common Shareholders(d) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net asset value |
|
|
(0.34 |
)%(e) |
|
|
17.68 |
% |
|
|
(1.16 |
)% |
|
|
8.45 |
% |
|
|
5.34 |
% |
|
|
(1.84 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on market price |
|
|
(8.63 |
)%(e) |
|
|
36.51 |
% |
|
|
7.77 |
% |
|
|
10.81 |
% |
|
|
(1.20 |
)% |
|
|
(7.55 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net Assets Applicable to Common Shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
1.47 |
%(f) |
|
|
1.53 |
% |
|
|
2.31 |
% |
|
|
2.53 |
% |
|
|
2.12 |
% |
|
|
1.84 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and/or reimbursed |
|
|
1.47 |
%(f) |
|
|
1.53 |
% |
|
|
2.31 |
% |
|
|
2.53 |
% |
|
|
2.11 |
% |
|
|
1.84 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and/or reimbursed and excluding interest expense, fees, and
amortization of offering costs(g) |
|
|
0.91 |
%(f) |
|
|
0.93 |
% |
|
|
0.93 |
% |
|
|
0.94 |
% |
|
|
0.90 |
% |
|
|
0.90 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income to Common Shareholders |
|
|
4.46 |
%(f) |
|
|
4.93 |
% |
|
|
4.39 |
% |
|
|
4.64 |
% |
|
|
4.64 |
% |
|
|
4.87 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets applicable to Common Shareholders, end of period (000) |
|
$ |
279,984 |
|
|
$ |
287,404 |
|
|
$ |
255,884 |
|
|
$ |
270,707 |
|
|
$ |
262,198 |
|
|
$ |
264,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VMTP Shares outstanding at $100,000 liquidation value, end of period (000) |
|
$ |
125,900 |
|
|
$ |
125,900 |
|
|
$ |
125,900 |
|
|
$ |
125,900 |
|
|
$ |
125,900 |
|
|
$ |
125,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset coverage per VMTP Shares at $100,000 liquidation value, end of period |
|
$ |
322,386 |
|
|
$ |
328,280 |
|
|
$ |
303,244 |
|
|
$ |
315,017 |
|
|
$ |
308,259 |
|
|
$ |
310,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings outstanding, end of period (000) |
|
$ |
51,038 |
|
|
$ |
54,214 |
|
|
$ |
56,112 |
|
|
$ |
51,999 |
|
|
$ |
41,043 |
|
|
$ |
30,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate |
|
|
6 |
% |
|
|
10 |
% |
|
|
16 |
% |
|
|
29 |
% |
|
|
31 |
% |
|
|
36 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 7 -
(a) |
Based on average Common Shares outstanding. |
(b) |
Distributions for annual periods determined in accordance with U.S. federal income tax regulations.
|
(c) |
Amount is greater than $(0.005) per share. |
(d) |
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. |
(e) |
Aggregate total return. |
(g) |
Interest expense, fees and amortization of offering costs related to TOB Trusts and/or VMTP Shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30, |
|
|
|
2016 |
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
Per Share Operating Performance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of year |
|
$ |
16.09 |
|
|
$ |
15.34 |
|
|
$ |
16.35 |
|
|
$ |
15.39 |
|
|
$ |
12.75 |
|
Net investment income1 |
|
|
0.88 |
|
|
|
0.90 |
|
|
|
0.94 |
|
|
|
0.94 |
|
|
|
0.98 |
|
Net realized and unrealized gain (loss) |
|
|
0.77 |
|
|
|
0.80 |
|
|
|
(0.99 |
) |
|
|
1.00 |
|
|
|
2.68 |
|
Distributions to AMPS Shareholders from net investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.01 |
) |
Net increase (decrease) from investment operations |
|
|
1.65 |
|
|
|
1.70 |
|
|
|
(0.05 |
) |
|
|
1.94 |
|
|
|
3.65 |
|
Distributions to Common Shareholders from net investment income2 |
|
|
(0.91 |
) |
|
|
(0.95 |
) |
|
|
(0.96 |
) |
|
|
(0.98 |
) |
|
|
(1.01 |
) |
Net asset value, end of year |
|
$ |
16.83 |
|
|
$ |
16.09 |
|
|
$ |
15.34 |
|
|
$ |
16.35 |
|
|
$ |
15.39 |
|
Market price, end of year |
|
$ |
16.94 |
|
|
$ |
15.60 |
|
|
$ |
14.86 |
|
|
$ |
16.11 |
|
|
$ |
15.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return Applicable to Common
Shareholders3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net asset value |
|
|
10.92 |
% |
|
|
11.43 |
% |
|
|
0.41 |
% |
|
|
12.89 |
% |
|
|
29.46 |
% |
Based on market price |
|
|
15.15 |
% |
|
|
11.52 |
% |
|
|
(1.28 |
)% |
|
|
8.69 |
% |
|
|
29.15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net Assets Applicable to Common Shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
1.46 |
% |
|
|
1.46 |
% |
|
|
1.55 |
% |
|
|
1.48 |
% |
|
|
1.26 |
%4 |
Total expenses after fees waived and paid indirectly |
|
|
1.46 |
% |
|
|
1.45 |
% |
|
|
1.55 |
% |
|
|
1.48 |
% |
|
|
1.26 |
%4 |
Total expenses after fees waived and paid indirectly and excluding interest expense and fees, and
amortization of offering costs5 |
|
|
0.89 |
% |
|
|
0.90 |
% |
|
|
0.92 |
% |
|
|
0.87 |
% |
|
|
0.99 |
%4,6 |
Net investment income |
|
|
5.48 |
% |
|
|
5.61 |
% |
|
|
6.45 |
% |
|
|
5.87 |
% |
|
|
6.94 |
%4 |
Distributions to AMPS Shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.09 |
% |
Net investment income to Common Shareholders |
|
|
5.48 |
% |
|
|
5.61 |
% |
|
|
6.45 |
% |
|
|
5.87 |
% |
|
|
6.85 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets applicable to Common Shareholders, end of year (000) |
|
$ |
289,003 |
|
|
$ |
276,308 |
|
|
$ |
263,298 |
|
|
$ |
280,514 |
|
|
$ |
263,375 |
|
VMTP Shares outstanding at $100,000 liquidation value, end of year (000) |
|
$ |
125,900 |
|
|
$ |
125,900 |
|
|
$ |
125,900 |
|
|
$ |
125,900 |
|
|
$ |
125,900 |
|
Asset coverage per VMTP Shares at $100,000 liquidation value, end of year |
|
$ |
329,549 |
|
|
$ |
319,467 |
|
|
$ |
309,133 |
|
|
$ |
322,807 |
|
|
$ |
309,194 |
|
Borrowings outstanding, end of year (000) |
|
$ |
31,286 |
|
|
$ |
28,685 |
|
|
$ |
23,585 |
|
|
$ |
27,198 |
|
|
$ |
14,883 |
|
Portfolio turnover rate |
|
|
28 |
% |
|
|
37 |
% |
|
|
29 |
% |
|
|
33 |
% |
|
|
47 |
% |
1 |
Based on average Common Shares outstanding. |
2 |
Distributions for annual periods determined in accordance with federal income tax regulations.
|
- 8 -
3 |
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. |
4 |
Does not reflect the effect of distributions to AMPS Shareholders. |
5 |
Interest expense, fees and amortization of offering costs related to TOB Trusts and/or VMTP Shares. See Note
4 and Note 10 of the Notes to Financial Statements for details. |
6 |
For the year ended April 30, 2012, the total expense ratio after fees waived and paid indirectly and
excluding interest expense, fees, amortization of offering costs, liquidity and remarketing fees was 0.94%. |
- 9 -
USE OF PROCEEDS
The net proceeds from the issuance of common shares hereunder will be invested in accordance with the Funds investment
objective and policies as stated below. We currently anticipate that we will be able to invest all of the net proceeds in accordance with our investment objectives and policies within approximately three months from the date on which the proceeds
from an offering are received by the Fund. Pending such investment, it is anticipated that the proceeds will be invested in short-term, tax-exempt or taxable investment grade securities or in high quality,
short-term money market instruments.
THE FUND
The Fund is a diversified, closed-end management investment company registered under
the Investment Company Act. The Fund was formed as a Maryland corporation on November 19, 1992, pursuant to the filing of Articles of Incorporation with the State Department of Assessments and Taxation for the State of Maryland (the
SDAT). The Funds principal place of business is located at 100 Bellevue Parkway, Wilmington, Delaware 19809 and its telephone number is (800) 882-0052.
The Fund commenced operations on February 26, 1993, upon the initiation of an initial public offering of 15,500,000
shares of its common shares. The net proceeds of such offering were approximately $218.6 million. The Funds common shares are traded on the NYSE under the symbol BKN.
DESCRIPTION OF CAPITAL STOCK
The following description of the Funds capital stock is based on relevant portions of the Maryland General Corporation
Law (the MGCL), the Funds Articles of Incorporation (as amended, supplemented, or amended and restated, from time to time, the Charter), and the Funds Amended and Restated Bylaws (the Bylaws). This
summary is not necessarily complete, and we refer you to the MGCL and the Funds Charter and Bylaws, forms of which are incorporated by reference as an exhibit to the registration statement of which this prospectus is a part, for a more
detailed description of the information summarized below.
Common Shares
The Fund is a corporation formed under the laws of the State of Maryland, by the filing of Articles of Incorporation with the
SDAT on November 19, 1992. The Fund is authorized to issue 200,000,000 shares of capital stock, par value $0.01 per share, all of which shares initially were classified as common stock and currently 199,992,879 shares are classified as
common stock (common shares). Each common share is entitled to one vote on any matter which holders of common shares are entitled to vote and, when issued and paid for in accordance with the terms of this offering, will be fully paid and
non-assessable. Pursuant to the Charter, when shares of preferred stock (preferred shares) are outstanding, the holders of common shares will not be entitled to receive any distributions from the Fund 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 Capital StockPreferred 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 Fund 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 Fund do not continuously offer shares and do not provide daily redemptions. Rather, if a shareholder determines to buy additional common shares or sell shares already held, the shareholder may do so by trading through a broker on the NYSE or
otherwise. Shares of closed-end
- 10 -
investment companies frequently trade on an exchange at prices lower than NAV. Shares of closed-end investment companies like the Fund have during some
periods traded at prices higher than NAV and during other periods have traded at prices lower than NAV. Because the market value of the common shares may be influenced by such factors as dividend levels (which are in turn affected by expenses), call
protection on its portfolio securities, dividend stability, portfolio credit quality, the Funds NAV, relative demand for and supply of such shares in the market, general market and economic conditions and other factors beyond the control of
the Fund, the Fund cannot assure you that 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 Funds outstanding common shares are, and when issued, the common shares offered by this Prospectus will be, publicly
held and listed and traded on the NYSE under the symbol BKN. The Fund determines its NAV on a daily basis. The following table sets forth, for the quarters indicated, the highest and lowest daily closing prices on the NYSE per common
share, and the NAV per common share and the premium to or discount from NAV, on the date of each of the high and low market prices. The table also sets forth the number of common shares traded on the NYSE during the respective quarters.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NYSE Market Price Per Common Share |
|
|
NAV per Common Share on Date of Market Price |
|
|
Premium/ (Discount) on Date of Market Price |
|
|
Trading |
|
During Quarter Ended |
|
High |
|
|
Low |
|
|
High |
|
|
Low |
|
|
High |
|
|
Low |
|
|
Volume |
|
April 30, 2022 |
|
$ |
16.76 |
|
|
$ |
13.64 |
|
|
$ |
15.46 |
|
|
$ |
14.20 |
|
|
|
8.41 |
% |
|
|
(3.94 |
)% |
|
|
4,299,926 |
|
January 31, 2022 |
|
$ |
18.20 |
|
|
$ |
15.86 |
|
|
$ |
16.25 |
|
|
$ |
16.05 |
|
|
|
11.97 |
% |
|
|
(1.18 |
)% |
|
|
3,241,020 |
|
October 31, 2021 |
|
$ |
18.78 |
|
|
$ |
14.87 |
|
|
$ |
16.82 |
|
|
$ |
16.61 |
|
|
|
11.65 |
% |
|
|
(10.50 |
)% |
|
|
1,670,594 |
|
July 31, 2021 |
|
$ |
19.90 |
|
|
$ |
17.81 |
|
|
$ |
16.68 |
|
|
$ |
16.87 |
|
|
|
19.30 |
% |
|
|
5.57 |
% |
|
|
2,474,393 |
|
April 30, 2021 |
|
$ |
19.20 |
|
|
$ |
16.88 |
|
|
$ |
16.71 |
|
|
$ |
16.58 |
|
|
|
14.90 |
% |
|
|
1.81 |
% |
|
|
2,609,523 |
|
January 31, 2021 |
|
$ |
17.33 |
|
|
$ |
15.79 |
|
|
$ |
16.72 |
|
|
$ |
16.12 |
|
|
|
3.65 |
% |
|
|
(2.05 |
)% |
|
|
1,898,586 |
|
October 31, 2020 |
|
$ |
16.89 |
|
|
$ |
15.63 |
|
|
$ |
16.59 |
|
|
$ |
16.27 |
|
|
|
1.81 |
% |
|
|
(3.93 |
)% |
|
|
2,279,726 |
|
July 31, 2020 |
|
$ |
16.83 |
|
|
$ |
14.57 |
|
|
$ |
16.52 |
|
|
$ |
15.34 |
|
|
|
1.88 |
% |
|
|
(5.02 |
)% |
|
|
2,504,760 |
|
As of June 1, 2022, the NAV per common share of the Fund was $14.05 and the market price per
common share was $15.24, representing a premium to NAV of 8.47%. Common shares of the Fund have historically traded at both a premium and discount to NAV.
As May 23, 2022, the Fund has outstanding 17,236,321 common shares.
Preferred Shares
The
Charter authorizes the issuance of 200,000,000 shares of capital stock, which may be classified or reclassified from time to time with rights as determined by the Board without the approval of holders of common shares. The Board has classified (i)
1,259 shares of the Funds authorized capital stock as Series W-7 VMTP Preferred Shares (VMTP Shares), of which the Fund has outstanding, 1,259, as of April 30, 2022, (ii) 3,262 shares of the Funds authorized capital
stock as Auction Rate Municipal Preferred Stock, Series T7, of which the Fund has none outstanding, as of April 30, 2022, and (iii) 2,600 shares of the Funds authorized capital stock as Auction Rate Municipal Preferred Stock, Series T8, of
which the Fund has none outstanding, as of April 30, 2022.
Distribution Preference and Liquidation Preference. The
VMTP Shares rank prior to the Funds common shares as to the payment of dividends by the Fund, and distribution of assets upon dissolution or liquidation of the Fund. The Investment Company Act prohibits the declaration of any dividend on the
Funds common shares or the repurchase of the Funds common shares if the Fund fails to maintain asset coverage of at least 200% of
- 11 -
the liquidation preference of the Funds outstanding VMTP Shares. In addition, pursuant to the Funds Charter, the Fund is restricted from declaring and paying dividends on classes of
shares ranking junior to or on parity with the VMTP Shares or repurchasing such shares if the Fund fails to declare and pay dividends on the VMTP Shares, redeem any VMTP Shares required to be redeemed under the Charter or comply with the basic
maintenance amount requirement of the ratings agencies rating the VMTP Shares.
Voting Rights. The holders of the
VMTP Shares have voting rights equal to the voting rights of the holders of the Funds common shares (one vote per share) and will vote together with holders of the common shares (one vote per share) as a single class on certain matters.
However, the holders of the VMTP Shares, voting as a separate class, are also entitled to elect two directors to the Board of the Fund. Holders of VMTP Shares are also entitled to elect the Funds full Board if dividends on the VMTP Shares are
not paid for a period of two years. Holders of VMTP Shares are also generally entitled to a separate class vote to amend the applicable Articles Supplementary and on matters adversely affecting VMTP Shares that do not adversely affect any of the
rights of holders of other securities of the Fund. In addition, pursuant to the Investment Company Act, the approval of the holders of a majority of any outstanding VMTP Shares, voting as a separate class, is required to (a) adopt any plan of
reorganization that would adversely affect the VMTP Shares, (b) change the Funds sub-classification as a closed-end investment company or change its
fundamental investment restrictions or (c) change its business so as to cease to be an investment company.
Redemption, Purchase and Sale of VMTP Shares. The VMTP Shares may be redeemed, in whole or in part, at any time at the
option of the Fund. The redemption price per VMTP Share is equal to the liquidation preference per share plus any outstanding unpaid dividends and, applicable redemption premiums. If the Fund redeems the VMTP Shares prior to the term redemption date
of the VMTP Shares and the VMTP Shares have long-term ratings above A1/A+ or its equivalent by the ratings agencies then rating the VMTP Shares, then such redemption may be subject to a prescribed redemption premium (up to 2% of the liquidation
preference) payable to the holder of the VMTP Shares based on the time remaining until the term redemption date of the VMTP Shares, subject to certain exceptions for redemptions that are required to comply with minimum asset coverage requirements.
The Fund is required to redeem its VMTP Shares on the term redemption date of the VMTP Shares, unless earlier redeemed or repurchased or unless extended. Such term redemption date is July 2, 2023, unless extended. Six months prior to the term
redemption date of the VMTP Shares, the Fund is required to begin to segregate liquid assets with its custodian to fund the redemption. In addition, the Fund is required to redeem certain of its outstanding VMTP Shares if it fails to comply with
certain asset coverage, basic maintenance amount or leverage requirements.
Please see Description of Capital
Stock in the SAI for more information.
Authorized and Outstanding Shares
The following table provides the Funds authorized capital stock and shares outstanding as of May 23, 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
Title of Class |
|
Amount Authorized |
|
|
Amount Held by Fund or for its Account |
|
|
Amount Outstanding Exclusive of Amount held by Fund |
|
Common Shares |
|
|
199,992,879 |
|
|
|
0 |
|
|
|
17,236,321 |
|
Series W-7 VMTP Preferred Shares |
|
|
1,259 |
|
|
|
0 |
|
|
|
1,259 |
|
Auction Rate Municipal Preferred Stock, Series T7 |
|
|
3,262 |
|
|
|
0 |
|
|
|
0 |
|
Auction Rate Municipal Preferred Stock, Series T8 |
|
|
2,600 |
|
|
|
0 |
|
|
|
0 |
|
- 12 -
THE FUNDS INVESTMENTS
Investment Objective and Policies
Please refer to the section
of the Funds most recent annual report on Form N-CSR entitled Investment Objectives, Policies and Risks BlackRock Investment Quality Municipal Trust, Inc. (BKN), which is incorporated by reference herein, for a
discussion of the Funds investment objective and policies.
Portfolio Contents and Techniques
Description of Municipal Securities
Set forth below is a detailed description of the municipal securities in which the Fund invests. Information with respect to
ratings assigned to tax-exempt obligations that the Fund may purchase is set forth in Appendix ARatings of Investments in the 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 Fund invests pay interest or
income that, in the opinion of bond counsel to the issuer, is exempt from regular Federal income tax. The Advisor does not conduct its own analysis of the tax status of the interest paid by municipal securities held by the Fund, but will rely on the
opinion of counsel to the issuer of each such instrument. The Fund may also invest in municipal 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 Fund may invest in other securities that pay interest or income that is, or make other distributions that are, exempt from regular Federal income tax and/or state and local personal taxes,
regardless of the technical structure of the issuer of the instrument. The Fund treats all of such tax-exempt securities as municipal 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
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offering, the 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 Fund has not established any
limit on the percentage of its portfolio that may be invested in PABs. The Fund may not be a suitable investment for investors who are already subject to the federal alternative minimum tax or who would become subject to the federal alternative
minimum tax as a result of an investment in the Funds common shares.
General Obligation Bonds. General
obligation bonds are typically secured by the issuers pledge of its faith, credit and taxing power for the repayment of principal and the payment of interest. The taxing power of any governmental entity may be limited, however, by provisions
of its state constitution or laws, and an entitys creditworthiness will depend on many factors, including potential erosion of its tax base due to population declines, natural disasters, declines in the states industrial base or
inability to attract new industries, economic limits on the ability to tax without eroding the tax base, state legislative proposals or voter initiatives to limit ad valorem real property taxes and the extent to which the entity relies on federal or
state aid, access to capital markets or other factors beyond the states or entitys control. Accordingly, the capacity of the issuer of a general obligation bond as to the timely payment of interest and the repayment of principal when due
is affected by the issuers maintenance of its tax base.
Revenue Bonds. Revenue or special obligation bonds
are typically payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise tax or other specific revenue sources such as payments from the user of the facility
being financed. Accordingly, the timely payment of interest and the repayment of principal in accordance with the terms of the revenue or special obligation bond is a function of the economic viability of such facility or such revenue source.
Revenue bonds issued by state or local agencies to finance the development of low-income, multi-family housing involve special risks in addition to those associated with municipal securities generally,
including that the underlying properties may not generate sufficient income to pay expenses and interest costs. Such bonds are generally non-recourse against the property owner, may be junior to the rights of
others with an interest in the properties, may pay interest that changes based in part on the financial performance of the property, may be prepayable without penalty and may be used to finance the construction of housing developments which, until
completed and rented, do not generate income to pay interest. Increases in interest rates payable on senior obligations may make it more difficult for issuers to meet payment obligations on subordinated bonds.
Municipal Notes. Municipal notes are shorter term municipal debt obligations. They may provide interim financing in
anticipation of tax collection, bond sales or revenue receipts. If there is a shortfall in the anticipated proceeds, repayment on the note may be delayed or the note may not be fully repaid, and the Fund may lose money.
Municipal Commercial Paper. Municipal commercial paper is generally unsecured and issued to meet short-term financing
needs. The lack of security presents some risk of loss to the Fund since, in the event of an issuers bankruptcy, unsecured creditors are repaid only after the secured creditors out of the assets, if any, that remain.
PABs. The Fund may purchase municipal 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 Fund. PABs, formerly referred to as industrial development bonds, are issued by, or on behalf
of, states, municipalities or public authorities to obtain funds to provide privately operated housing facilities, airport, mass transit or port facilities, sewage disposal, solid waste disposal or hazardous waste treatment or disposal facilities
and certain local facilities for water supply, gas or electricity. Other types of PABs, the proceeds of which are used for the construction, equipment, repair or improvement of privately operated industrial or commercial facilities, may constitute
municipal securities, although the federal tax laws may place substantial limitations on the size of such issues. Such bonds are secured primarily by
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revenues derived from loan repayments or lease payments due from the entity which may or may not be guaranteed by a parent company or otherwise secured. PABs generally are not secured by a pledge
of the taxing power of the issuer of such bonds. Therefore, an investor should be aware that repayment of such bonds generally depends on the revenues of a private entity and be aware of the risks that such an investment may entail. The continued
ability of an entity to generate sufficient revenues for the payment of principal and interest on such bonds will be affected by many factors including the size of the entity, capital structure, demand for its products or services, competition,
general economic conditions, government regulation and the entitys dependence on revenues for the operation of the particular facility being financed.
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 Fund, and
could result in a reduction in the value of the municipal lease experiencing non-payment and a potential decrease in the NAV of the Fund. Issuers of municipal lease obligations might seek protection under the
bankruptcy laws. In the event of bankruptcy of such an issuer, the Fund could experience delays and limitations with respect to the collection of principal and interest on such municipal leases and the Fund may not, in all circumstances, be able to
collect all principal and interest to which it is entitled. To enforce its rights in the event of a default in lease payments, the Fund might take possession of and manage the assets securing the issuers obligations on such securities, which
may increase the Funds operating expenses and adversely affect the NAV of the Fund. When the lease contains a non-appropriation clause, however, the failure to pay would not be a default and the Fund
would not have the right to take possession of the assets. Any income derived from the Funds ownership or operation of such assets may not be tax-exempt or may fail to generate qualifying income for
purposes of the income tests applicable to regulated investment companies. In addition, the Funds intention to qualify as a regulated investment company under the Code may limit the extent to which the Fund may exercise its rights by taking
possession of such assets, because as a regulated investment company the Fund is subject to certain limitations on its investments and on the nature of its income.
Zero-Coupon Bonds. Municipal 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.
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While interest payments are not made on such securities, holders of such
securities are deemed to have received income (phantom income) annually, notwithstanding that cash may not be received currently. The effect of owning instruments that do not make current interest payments is that a fixed yield is earned
not only on the original investment but also, in effect, on all discount accretion during the life of the obligations. This implicit reinvestment of earnings at a fixed rate eliminates the risk of being unable to invest distributions at a rate as
high as the implicit yield on the zero-coupon bond, but at the same time eliminates the holders ability to reinvest at higher rates in the future. For this reason, some of these securities may be subject
to substantially greater price fluctuations during periods of changing market interest rates than are comparable securities that pay interest currently. Longer term zero-coupon bonds are more exposed to
interest rate risk than shorter term zero-coupon bonds. These investments benefit the issuer by mitigating its need for cash to meet debt service, but also require a higher rate of return to attract investors
who are willing to defer receipt of cash.
The Fund accrues income with respect to these securities for U.S. federal
income tax and accounting purposes prior to the receipt of cash payments. Zero-coupon bonds may be subject to greater fluctuation in value and less liquidity in the event of adverse market conditions than comparably rated securities that pay cash
interest at regular intervals.
Further, to maintain its qualification for pass-through treatment under the federal tax
laws, the Fund is required to distribute income to its shareholders and, consequently, may have to dispose of other, more liquid portfolio securities under disadvantageous circumstances or may have to leverage itself by borrowing in order to
generate the cash to satisfy these distributions. The required distributions may result in an increase in the Funds exposure to zero-coupon bonds.
In addition to the above-described risks, there are certain other risks related to investing in
zero-coupon bonds. During a period of severe market conditions, the market for such securities may become even less liquid. In addition, as these securities do not pay cash interest, the Funds investment
exposure to these securities and their risks, including credit risk, will increase during the time these securities are held in the Funds portfolio.
Pre-Refunded Municipal Securities. The principal of, and interest on, pre-refunded municipal securities are no longer paid from the original revenue source for the securities. Instead, the source of such payments is typically an escrow fund consisting of U.S. Government securities.
The assets in the escrow fund are derived from the proceeds of refunding bonds issued by the same issuer as the pre-refunded municipal securities. Issuers of municipal securities use this advance refunding
technique to obtain more favorable terms with respect to securities that are not yet subject to call or redemption by the issuer. For example, advance refunding enables an issuer to refinance debt at lower market interest rates, restructure debt to
improve cash flow or eliminate restrictive covenants in the indenture or other governing instrument for the pre-refunded municipal securities.
However, except for a change in the revenue source from which principal and interest payments are made, the pre-refunded municipal securities remain outstanding on their original terms until they mature or are redeemed by the issuer.
Special Taxing Districts. Special taxing districts are organized to plan and finance infrastructure developments to
induce residential, commercial and industrial growth and redevelopment. The bond financing methods such as tax increment finance, tax assessment, special services district and Mello-Roos bonds (a type of municipal security established by the
Mello-Roos Community Facilities Act of 1982), are generally payable solely from taxes or other revenues attributable to the specific projects financed by the bonds without recourse to the credit or taxing power of related or overlapping
municipalities. They often are exposed to real estate development-related risks and can have more taxpayer concentration risk than general tax-supported bonds, such as general obligation bonds. Further, the
fees, special taxes, or tax allocations and other revenues that are established to secure such financings are generally limited as to the rate or amount that may be levied or assessed and are not subject to increase pursuant to rate covenants or
municipal or corporate guarantees. The bonds could default if development failed to progress as anticipated or if larger taxpayers failed to pay the assessments, fees and taxes as provided in the financing plans of the districts.
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Indexed and Inverse Floating Rate Securities. The Fund 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 Fund 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 Fund
invests in these types of municipal securities, the Funds 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 Fund may invest in so-called inverse floating rate bonds or residual interest bonds on which the interest rates vary
inversely with a short-term floating rate (which may be reset periodically by a Dutch auction, a remarketing agent, or by reference to a short-term tax-exempt interest rate index). The Fund may purchase
synthetically created inverse floating rate bonds evidenced by custodial or trust receipts. Generally, income on inverse floating rate bonds will decrease when short-term interest rates increase, and will increase when short-term interest rates
decrease. Such securities have the effect of providing a degree of investment leverage, since they may increase or decrease in value in response to changes, as an illustration, in market interest rates at a rate which is a multiple (typically two)
of the rate at which fixed rate long-term tax-exempt securities increase or decrease in response to such changes. As a result, the market values of such securities will generally be more volatile than the
market values of fixed rate tax-exempt securities. To seek to limit the volatility of these securities, the Fund may purchase inverse floating rate bonds with shorter-term maturities or limitations on the
extent to which the interest rate may vary. Certain investments in such obligations may be illiquid. See The Funds InvestmentsLeverageTender Option Bond Transactions.
When-Issued Securities, Delayed Delivery Securities and Forward Commitments. The Fund may purchase or sell securities
that it is entitled to receive on a when-issued basis. The Fund may also purchase or sell securities on a delayed delivery basis. The Fund may also purchase or sell securities through a forward commitment. These transactions involve the purchase or
sale of securities by the Fund at an established price with payment and delivery taking place in the future. The purchase will be recorded on the date the Fund enters into the commitment and the value of the securities will thereafter be reflected
in the Funds NAV. The Fund has not established any limit on the percentage of its assets that may be committed in connection with these transactions. At the time the Fund enters into a transaction on a when-issued basis, it will segregate or
designate on its books and records cash or liquid assets with a value not less than the value of the when-issued securities.
There can be no assurance that a security purchased on a when-issued basis will be issued or that a security purchased or sold
through a forward commitment will be delivered. A default by a counterparty may result in the Fund missing the opportunity of obtaining a price considered to be advantageous. The value of securities in these transactions on the delivery date may be
more or less than the Funds purchase price. The Fund may bear the risk of a decline in the value of the security in these transactions and may not benefit from an appreciation in the value of the security during the commitment period.
If deemed advisable as a matter of investment strategy, the Fund may dispose of or renegotiate a commitment after it has been
entered into, and may sell securities it has committed to purchase before those securities are delivered to the Fund on the settlement date. In these cases the Fund may realize a taxable capital gain or loss.
When the Fund engages in when-issued, delayed delivery or forward commitment transactions, it relies on the other party to
consummate the trade. Failure of such party to do so may result in the Funds incurring a loss or missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a commitment to purchase securities, and any subsequent fluctuations in their
market value, is taken into account when determining the market value of the Fund starting on the day the Fund agrees to purchase the securities. The Fund does not earn interest on the securities it has committed to purchase until they are paid for
and delivered on the settlement date.
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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 Fund to achieve its investment objective is also dependent on the continuing ability of the issuers of the securities in which the Fund invests to meet their obligations for the payment of interest and principal when due. There are variations in
the risks involved in holding municipal 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.
High Yield or Junk Bonds. The Fund may
invest up to 20% of its Managed Assets in securities rated below investment grade such as those rated Ba or below by Moodys Investor Service Inc. (Moodys) and BB or below by S&P Global Ratings (S&P), Fitch
Ratings, Inc. (Fitch) or in unrated securities determined by the Advisor to be of comparable quality. Information with respect to ratings assigned to tax-exempt obligations that the Fund may
purchase is set forth in Appendix ARatings of Investments in the SAI. Municipal securities of below investment grade quality (Ba/BB or below) are commonly known as junk bonds. Securities rated below
investment grade are judged to have speculative characteristics with respect to their interest and principal payments. Such securities may face major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
VRDOs Variable rate debt obligations
(VRDOs) are tax-exempt obligations that contain a floating or variable interest rate adjustment formula and right of demand on the part of the holder thereof to receive payment of the unpaid
principal balance plus accrued interest upon a short notice period not to exceed seven days. There is, however, the possibility that because of default or insolvency the demand feature of VRDOs may not be honored. The interest rates are adjustable
at intervals (ranging from daily to up to one year) to some prevailing market rate for similar investments, such adjustment formula being calculated to maintain the market value of the VRDOs, at approximately the par value of the VRDOs on the
adjustment date. The adjustments typically are based upon the Securities Industry and Financial Markets Association Municipal Swap Index or some other appropriate interest rate adjustment index. The Fund may invest in all types of tax exempt
instruments currently outstanding or to be issued in the future which satisfy its short term maturity and quality standards. VRDOs that contain an unconditional right of demand to receive payment of the unpaid principal balance plus accrued interest
on a notice period exceeding seven days may be deemed to be illiquid securities.
Strategic Transactions and Other
Management Techniques. In addition to the options strategy discussed above, the Fund may use a variety of other investment management techniques and instruments. The Fund may purchase and sell futures contracts, enter into various interest rate
transactions such as swaps, caps, floors or collars, currency transactions such as currency forward contracts, currency futures contracts, currency swaps or options on currency or currency futures and swap contracts (including, but not limited to,
credit default swaps) and may purchase and sell exchange-listed and OTC put and call options on securities and swap contracts, financial indices and futures contracts and use other derivative instruments or management techniques. These Strategic
Transactions may be used for duration management and other investment and risk management purposes, including to attempt to protect against possible changes in the market value of the Funds portfolio resulting from trends in the securities
markets and changes in interest rates or to protect the Funds unrealized gains in the value of its portfolio securities, to facilitate the sale of portfolio securities for investment purposes, to establish a position in the securities markets
as a temporary substitute for purchasing particular securities or to enhance income or gain. 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 use of Strategic Transactions to enhance current income may be speculative. The ability of the Fund to use Strategic Transactions successfully will depend on the Advisors
ability to predict pertinent market movements as well as sufficient correlation among the instruments, which cannot be assured. The use of Strategic Transactions may result in losses greater than if they had not been used, may require the Fund to
sell or
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purchase portfolio securities at inopportune times or for prices other than current market values, may limit the amount of appreciation the Fund can realize on an investment or may cause the Fund
to hold a security that it might otherwise sell. Inasmuch as any obligations of the Fund that arise from the use of Strategic Transactions will be covered by segregated or earmarked liquid assets or offsetting transactions, the Fund and the Advisor
believe such obligations do not constitute senior securities and, accordingly, will not treat such transactions as being subject to restrictions on senior securities under the Investment Company Act. Additionally, segregated or earmarked liquid
assets, amounts paid by the Fund as premiums and cash or other assets held in margin accounts with respect to Strategic Transactions are not otherwise available to the Fund for investment purposes. The SAI contains further information about the
characteristics, risks and possible benefits of Strategic Transactions and the Funds 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 Fund to engage in Strategic Transactions. In addition, the use of certain Strategic Transactions may give rise to taxable income and have certain other consequences.
Put and Call Options on Securities and Indices. The Fund may purchase and sell put and call options on securities and
indices. A put option gives the purchaser of the option the right to sell and the writer the obligation to buy the underlying security at the exercise price during the option period. The Fund may also purchase and sell options on bond indices
(index options). Index options are similar to options on securities except that, rather than taking or making delivery of securities underlying the option at a specified price upon exercise, an index option gives the holder the right to
receive cash upon exercise of the option if the level of the bond index upon which the option is based is greater, in the case of a call, or less, in the case of a put, than the exercise price of the option. The purchase of a put option on a debt
security could protect the Funds holdings in a security or a number of securities against a substantial decline in the market value. A call option gives the purchaser of the option the right to buy and the seller the obligation to sell the
underlying security or index at the exercise price during the option period or for a specified period prior to a fixed date. The purchase of a call option on a security could protect the Fund against an increase in the price of a security that it
intended to purchase in the future.
Writing Covered Call Options. The Fund is authorized to write (i.e., sell)
covered call options with respect to municipal securities it owns, thereby giving the holder of the option the right to buy the underlying security covered by the option from the Fund at the stated exercise price until the option expires. The Fund
writes only covered call options, which means that so long as the Fund is obligated as the writer of a call option, it will own the underlying securities subject to the option.
The Fund receives a premium from writing a call option, which increases the Funds return on the underlying security in
the event the option expires unexercised or is closed out at a profit. By writing a call, the Fund limits its opportunity to profit from an increase in the market value of the underlying security above the exercise price of the option for as long as
the Funds obligation as a writer continues. Covered call options serve as a partial hedge against a decline in the price of the underlying security. The Fund may engage in closing transactions in order to terminate outstanding options that it
has written.
Additional Information About Options. The Funds ability to close out its position as a
purchaser or seller of an exchange-listed put or call option is dependent upon the existence of a liquid secondary market on option exchanges. Among the possible reasons for the absence of a liquid secondary market on an exchange are:
(i) insufficient trading interest in certain options; (ii) restrictions on transactions imposed by an exchange; (iii) trading halts, suspensions or other restrictions imposed with respect to particular classes or series of options or
underlying securities; (iv) interruption of the normal operations on an exchange; (v) inadequacy of the facilities of an exchange or 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
- 19 -
counterparties which have entered into direct agreements with the Fund. With OTC options, such variables as expiration date, exercise price and premium will be agreed upon between the Fund and
the counterparty, without the intermediation of a third party such as the OCC. If the counterparty fails to make or take delivery of the securities underlying an option it has written, or otherwise settle the transaction in accordance with the terms
of that option as written, the Fund would lose the premium paid for the option as well as any anticipated benefit of the transaction. OTC options and assets used to cover OTC options written by the Fund are considered by the staff of the SEC to be
illiquid. The illiquidity of such options or assets may prevent a successful sale of such options or assets, result in a delay of sale, or reduce the amount of proceeds that might otherwise be realized.
The Fund may engage in options and futures transactions on exchanges and options in the over-the-counter markets. The Fund will only enter into OTC options with counterparties the Advisor believes to be creditworthy at the time they enter into such transactions.
The hours of trading for options on debt securities may not conform to the hours during which the underlying securities are
traded. To the extent that the option markets close before the markets for the underlying securities, significant price and rate movements can take place in the underlying markets that cannot be reflected in the option markets.
Financial Futures Transactions and Options. The Fund is authorized to purchase and sell certain exchange traded
financial futures contracts (financial futures contracts) in order to hedge its investments against declines in value, and to hedge against increases in the cost of securities it intends to purchase or to seek to enhance the Funds
return. However, any transactions involving financial futures or options (including puts and calls associated therewith) will be in accordance with the Funds investment policies and limitations. A financial futures contract obligates the
seller of a contract to deliver and the purchaser of a contract to take delivery of the type of financial instrument covered by the contract, or in the case of index-based futures contracts to make and accept a cash settlement, at a specific future
time for a specified price. To hedge its portfolio, the Fund may take an investment position in a futures contract which will move in the opposite direction from the portfolio position being hedged. A sale of financial futures contracts may provide
a hedge against a decline in the value of portfolio securities because such depreciation may be offset, in whole or in part, by an increase in the value of the position in the financial futures contracts. A purchase of financial futures contracts
may provide a hedge against an increase in the cost of securities intended to be purchased because such appreciation may be offset, in whole or in part, by an increase in the value of the position in the futures contracts.
Distributions, if any, of net long-term capital gains from certain transactions in futures or options are taxable at long-term
capital gains rates for U.S. federal income tax purposes.
Futures Contracts. A futures contract is an agreement
between two parties to buy and sell a security or, in the case of an index-based futures contract, to make and accept a cash settlement for a set price on a future date. A majority of transactions in futures contracts, however, do not result in the
actual delivery of the underlying instrument or cash settlement, but are settled through liquidation, i.e., by entering into an offsetting transaction. Futures contracts have been designed by boards of trade which have been designated
contracts markets by the CFTC.
The purchase or sale of a futures contract differs from the purchase or sale
of a security in that no price or premium is paid or received. Instead, an amount of cash or securities acceptable to the broker and the relevant contract market, which varies, but is generally about 5% of the contract amount, must be deposited with
the broker. This amount is known as initial margin and represents a good faith deposit assuring the performance of both the purchaser and seller under the futures contract. Subsequent payments to and from the broker, called
variation margin, are required to be made on a daily basis as the price of the futures contract fluctuates making the long and short positions in the futures contract more or less valuable, a process known as marking to the
market. At any time prior to the settlement date of the futures contract, the position may be closed out by taking an opposite position that will operate to terminate the position in the futures contract. A final determination of
- 20 -
variation margin is then made, additional cash is required to be paid to or released by the broker and the purchaser realizes a loss or gain. In addition, a nominal commission is paid on each
completed sale transaction.
The Fund may also purchase and sell financial futures contracts on U.S. Government securities
as a hedge against adverse changes in interest rates as described below. With respect to U.S. Government securities, currently there are financial futures contracts based on long-term U.S. Treasury bonds, U.S. Treasury notes, Government National
Mortgage Association Certificates and three-month U.S. Treasury bills. The Fund may purchase and write call and put options on futures contracts on U.S. Government securities and purchase and sell municipal security index futures contracts in
connection with its hedging strategies.
The Fund also may engage in other futures contracts transactions such as futures
contracts on other municipal bond indices that may become available if the Advisor should determine that there is normally a sufficient correlation between the prices of such futures contracts and the municipal securities in which the Fund invests
to make such hedging appropriate.
Futures Strategies. The Fund may sell a financial futures contract (i.e., assume
a short position) in anticipation of a decline in the value of its investments resulting from an increase in interest rates or otherwise. The risk of decline could be reduced without employing futures as a hedge by selling investments and either
reinvesting the proceeds in securities with shorter maturities or by holding assets in cash. This strategy, however, entails increased transaction costs in the form of dealer spreads and typically would reduce the average yield of the Funds
portfolio securities as a result of the shortening of maturities. The sale of futures contracts provides an alternative means of hedging against declines in the value of its investments. As such values decline, the value of the Funds positions
in the futures contracts will tend to increase, thus offsetting all or a portion of the depreciation in the market value of the Funds investments that are being hedged. While the Fund will incur commission expenses in selling and closing out
futures positions, commissions on futures transactions are typically lower than transaction costs incurred in the purchase and sale of the Funds investments being hedged. In addition, the ability of the Fund to trade in the standardized
contracts available in the futures markets may offer a more effective defensive position than a program to reduce the average maturity of the portfolio securities due to the unique and varied credit and technical characteristics of the instruments
available to the Fund. Employing futures as a hedge also may permit the Fund to assume a defensive posture without reducing the yield on its investments beyond any amounts required to engage in futures trading.
When the Fund intends to purchase a security, the Fund may purchase futures contracts as a hedge against any increase in the
cost of such security resulting from a decrease in interest rates or otherwise, that may occur before such purchase can be effected. Subject to the degree of correlation between such securities and the futures contracts, subsequent increases in the
cost of such securities should be reflected in the value of the futures held by the Fund. As such purchases are made, an equivalent amount of futures contracts will be closed out. Due to changing market conditions and interest rate forecasts,
however, a futures position may be terminated without a corresponding purchase of portfolio securities.
Call Options
on Futures Contracts. The Fund may also purchase and sell exchange traded call and put options on financial futures contracts. The purchase of a call option on a futures contract is analogous to the purchase of a call option on an individual
security. Depending on the pricing of the option compared to either the futures contract upon which it is based or the price of the underlying securities, it may or may not be less risky than ownership of the futures contract or underlying
securities. Like the purchase of a futures contract, the Fund may purchase a call option on a futures contract to hedge against a market advance when the Fund is not fully invested.
The writing of a call option on a futures contract constitutes a partial hedge against declining prices of the securities
which are deliverable upon exercise of the futures contract. If the futures price at expiration is below the exercise price, the Fund will retain the full amount of the option premium, which provides a partial hedge against any decline that may have
occurred in the Funds portfolio holdings.
- 21 -
Put Options on Futures Contracts. The purchase of a put option on a
futures contract is analogous to the purchase of a protective put option on portfolio securities. The Fund may purchase a put option on a futures contract to hedge the Funds portfolio against the risk of rising interest rates.
The writing of a put option on a futures contract constitutes a partial hedge against increasing prices of the securities
which are deliverable upon exercise of the futures contract. If the futures price at expiration is higher than the exercise price, the Fund will retain the full amount of the option premium, which provides a partial hedge against any increase in the
price of securities which the Fund intends to purchase.
The writer of an option on a futures contract is required to
deposit initial and variation margin pursuant to requirements similar to those applicable to futures contracts. Premiums received from the writing of an option will be included in initial margin. The writing of an option on a futures contract
involves risks similar to those relating to futures contracts.
The CFTC subjects advisers to registered investment
companies to regulation by the CFTC if a fund that is advised by the investment adviser either (i) invests, directly or indirectly, more than a prescribed level of its liquidation value in CFTC-regulated futures, options and swaps (CFTC
Derivatives), or (ii) markets itself as providing investment exposure to such instruments. To the extent the Fund uses CFTC Derivatives, it intends to do so below such prescribed levels and will not market itself as a commodity
pool or a vehicle for trading such instruments. Accordingly, the Advisor has claimed an exclusion from the definition of the term commodity pool operator under the Commodity Exchange Act (CEA) pursuant to Rule 4.5 under
the CEA. The Advisor is not, therefore, subject to registration or regulation as a commodity pool operator under the CEA in respect of the Fund.
Counterparty Credit Standards. To the extent that the Fund engages in principal transactions, including, but not
limited to, OTC options, forward currency transactions, swap transactions, repurchase and reverse repurchase agreements and the purchase and sale of bonds and other fixed-income securities, it must rely on the creditworthiness of its counterparties
under such transactions. In certain instances, the credit risk of a counterparty is increased by the lack of a central clearing house for certain transactions, including certain swap contracts. In the event of the insolvency of a counterparty, the
Fund may not be able to recover its assets, in full or at all, during the insolvency process. Counterparties to investments may have no obligation to make markets in such investments and may have the ability to apply essentially discretionary margin
and credit requirements. Similarly, the Fund will be subject to the risk of bankruptcy of, or the inability or refusal to perform with respect to such investments by, the counterparties with which it deals. The Advisor will seek to minimize the
Funds exposure to counterparty risk by entering into such transactions with counterparties the Advisor believes to be creditworthy at the time it enters into the transaction. Certain option transactions and Strategic Transactions may require
the Fund to provide collateral to secure its performance obligations under a contract, which would also entail counterparty credit risk.
- 22 -
LEVERAGE
The Fund currently leverages its assets through the use of VMTP Shares and TOB Residuals. For the fiscal year ended
April 30, 2022, the average liquidation value of the VMTP Shares outstanding was $125,900,000 and the average annual dividend rate on the VMTP Shares was 1.07%. The Fund currently does not intend to borrow money or issue debt securities.
Although it has no present intention to do so, the Fund reserves the right to borrow money from banks or other financial institutions, or issue debt securities, in the future if it believes that market conditions would be conducive to the successful
implementation of a leveraging strategy through borrowing money or issuing debt securities. Any such leveraging will not be fully achieved until the proceeds resulting from the use of leverage have been invested in accordance with the Funds
investment objective and policies.
The use of leverage can create risks. When leverage is employed, the NAV and market
price of the common shares and the yield to holders of common shares will be more volatile than if leverage were not used. Changes in the value of the Funds portfolio, including securities bought with the proceeds of leverage, will be borne
entirely by the holders of common shares. If there is a net decrease or increase in the value of the Funds investment portfolio, leverage will decrease or increase, as the case may be, the NAV per common share to a greater extent than if the
Fund did not utilize leverage. A reduction in the Funds NAV may cause a reduction in the market price of its shares. During periods in which the Fund is using leverage, the fee paid to the Advisor for advisory services will be higher than if
the Fund did not use leverage, because the fees paid will be calculated on the basis of the Funds Managed Assets, which includes the proceeds from leverage. The Funds leveraging strategy may not be successful.
Certain types of leverage the Fund may use may result in the Fund being subject to covenants relating to asset coverage and
portfolio composition requirements. The Fund may be subject to certain restrictions on investments imposed by one or more lenders or by guidelines of one or more rating agencies, which may issue ratings for any short-term debt securities or
preferred shares issued by the Fund. The terms of any borrowings or rating agency guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed by the Investment Company Act. The Advisor does
not believe that these covenants or guidelines will impede it from managing the Funds portfolio in accordance with its investment objective and policies if the Fund were to utilize leverage.
Under the Investment Company Act, the Fund is not permitted to issue senior securities if, immediately after the issuance of
such senior securities, the Fund would have an asset coverage ratio (as defined in the Investment Company Act) of less than 300% with respect to senior securities representing indebtedness (i.e., for every dollar of indebtedness outstanding, the
Fund is required to have at least three dollars of assets) or less than 200% with respect to senior securities representing preferred shares (i.e., for every dollar of preferred shares outstanding, the Fund is required to have at least two dollars
of assets). The Investment Company Act also provides that the Fund may not declare distributions or purchase its stock (including through tender offers) if, immediately after doing so, it will have an asset coverage ratio of less than 300% or 200%,
as applicable. Under the Investment Company Act, certain short-term borrowings (such as for cash management purposes) are not subject to these limitations if (i) repaid within 60 days, (ii) not extended or renewed, and (iii) not
in excess of 5% of the total assets of the Fund.
Effects of Leverage
Assuming that leverage will represent approximately 43.6% of the Funds Managed Assets and that the Fund will bear
expenses relating to that leverage at an average annual rate of 0.95%, the income generated by the Funds portfolio (net of estimated expenses) must exceed 0.42% in order to cover the expenses specifically related to the Funds use of
leverage. Of course, these numbers are merely estimates used for illustration. Actual leverage expenses will vary frequently and may be significantly higher or lower than the rate estimated above.
- 23 -
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 Funds portfolio) of (10)%, (5)%, 0%, 5% and 10%.
These assumed investment portfolio returns are hypothetical figures and are not necessarily indicative of the investment portfolio returns experienced or expected to be experienced by the Fund. The table further reflects the use of leverage
representing 43.6% of the Funds Managed Assets and an assumed annual cost of leverage of 0.95%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed Portfolio Total Return (Net of Expenses) |
|
|
(10.00) |
% |
|
|
(5.00) |
% |
|
|
0 |
% |
|
|
5.00 |
% |
|
|
10.00 |
% |
Common Share Total Return |
|
|
(18.48) |
% |
|
|
(9.61) |
% |
|
|
(0.74) |
% |
|
|
8.13 |
% |
|
|
17.00 |
% |
Common share total return is composed of two elements: the common share dividends paid by the
Fund (the amount of which is largely determined by the net investment income of the Fund after paying for any leverage used by the Fund) and gains or losses on the value of the securities the Fund owns. As required by SEC rules, the table assumes
that the Fund is more likely to suffer capital losses than to enjoy capital appreciation. For example, to assume a total return of 0% the Fund must assume that the interest it receives on its investments is entirely offset by losses in the value of
those securities.
Preferred Shares
The Fund has leveraged its portfolio by issuing VMTP Shares. Under the Investment Company Act, the Fund is not permitted to
issue preferred shares if, immediately after such issuance, the liquidation value of the Funds outstanding preferred shares exceeds 50% of its assets (including the proceeds from the issuance) less liabilities other than borrowings
(i.e., the value of the Funds assets must be at least 200% of the liquidation value of its outstanding preferred shares). In addition, the Fund would not be permitted to declare any cash dividend or other distribution on its common
shares unless, at the time of such declaration, the value of the Funds assets less liabilities other than borrowings is at least 200% of such liquidation value. Please see Description of Capital Stock Preferred Shares for a
description of the Funds VMTP Shares.
For tax purposes, the Fund is currently required to allocate tax-exempt interest income, net capital gain and other taxable income, if any, between its common shares and preferred shares outstanding in proportion to total dividends paid to each class for
the year in which or with respect to which tax-exempt income, the net capital gain or other taxable income is paid. If net capital gain or other taxable income is allocated to preferred shares,
instead of solely tax-exempt income, the Fund will likely have to pay higher total dividends to preferred shareholders or make special payments to preferred shareholders to compensate them for the
increased tax liability. This would reduce the total amount of dividends paid to the common shareholders, but would increase the portion of the dividend that is tax-exempt. If the increase in
dividend payments or the special payments to preferred shareholders are not entirely offset by a reduction in the tax liability of, and an increase in the tax-exempt dividends received by, the common
shareholders, the advantage of the Funds leveraged structure to common shareholders will be reduced.
Tender Option Bonds
The Fund currently leverages its assets through the use of TOB Residuals, which are derivative interests in municipal bonds.
The TOB Residuals in which the Fund will invest pay interest or income that, in the opinion of counsel to the issuer of such TOB Residuals, is exempt from regular U.S. federal income tax. No independent investigation will be made to confirm the tax-exempt status of the interest or income paid by TOB Residuals held by the Fund. Although volatile, TOB Residuals typically offer the potential for yields exceeding the yields available on fixed rate municipal
bonds with comparable credit quality.
TOB Residuals represent beneficial interests in a TOB Trust formed for the purpose
of holding municipal bonds contributed by one or more funds. A TOB Trust typically issues two classes of beneficial interests: short-term floating rate interests (TOB Floaters), which are sold to third party investors, and TOB Residuals,
which
- 24 -
are generally issued to the fund(s) that transferred municipal bonds to the TOB Trust. The Fund may invest in both TOB Floaters and TOB Residuals. TOB Floaters may have first priority on the cash
flow from the municipal bonds held by the TOB Trust and are enhanced with a liquidity support arrangement from a third party TOBs Liquidity Provider (defined below) which allows holders to tender their position at par (plus accrued interest). The
Fund, as a holder of TOB Residuals, is paid the residual cash flow from the TOB Trust. The Fund contributes municipal bonds to the TOB Trust and is paid the cash received by the TOB Trust from the sale of the TOB Floaters, less certain transaction
costs, and typically will invest the cash to purchase additional municipal bonds or other investments permitted by its investment policies. If the Fund ever purchases all or a portion of the TOB Floaters sold by the TOB Trust, it may surrender those
TOB Floaters together with a proportionate amount of TOB Residuals to the TOB Trust in exchange for a proportionate amount of the municipal bonds owned by the TOB Trust.
Other BlackRock-advised Funds (as defined below) may contribute municipal bonds to a TOB Trust into which the Fund has
contributed municipal bonds. If multiple BlackRock-advised Funds participate in the same TOB Trust, the economic rights and obligations under the TOB Residual will generally be shared among the funds ratably in proportion to their participation in
the TOB Trust.
The municipal bonds transferred to a TOB Trust typically are high grade municipal bonds. In certain cases,
when municipal bonds transferred are lower grade municipal bonds, the TOB Trust transaction includes a credit enhancement feature that provides for the timely payment of principal and interest on the bonds to the TOB Trust by a credit enhancement
provider. The TOB Trust would be responsible for the payment of the credit enhancement fee and the Fund, as a TOB Residual holder, would be responsible for reimbursement of any payments of principal and interest made by the credit enhancement
provider.
The TOB Residuals held by the Fund generally provide the Fund with the right to cause the holders of a
proportional share of the TOB Floaters to tender their notes to the TOB Trust at par plus accrued interest. Thereafter, the Fund may withdraw a corresponding share of the municipal bonds from the TOB Trust. As a result, a tender option bond
transaction, in effect, creates exposure for the Fund to the entire return of the municipal bonds in the TOB Trust, with a net cash investment by the Fund that is less than the value of the municipal bonds in the TOB Trust. This multiplies the
positive or negative impact of the municipal bonds return within the Fund (thereby creating leverage). The leverage within a TOB Trust depends on the value of the municipal bonds deposited in the TOB Trust relative to the value of the TOB
Floaters it issues.
The Fund may invest in highly leveraged TOB Residuals. A TOB Residual generally is considered highly
leveraged if the principal amount of the TOB Floaters issued by the related TOB Trust exceeds 75% of the principal amount of the municipal bonds owned by the TOB Trust.
The leverage attributable to the Funds use of TOB Residuals may be called away on relatively short notice
and therefore may be less permanent than more traditional forms of leverage. The TOB Trust may be collapsed without the consent of the Fund upon the occurrence of termination events, as defined in the TOB Trust agreements. Upon the occurrence of a
termination event, a TOB Trust would be liquidated with the proceeds applied first to any accrued fees owed to the trustee of the TOB Trust, the remarketing agent of the TOB Floaters and the TOBs Liquidity Provider. Upon certain termination events,
the holders of the TOB Floaters would be paid before the TOB Residual holders (i.e., the Fund) whereas in other termination events, the holders of TOB Floaters and the TOB Residual holders would be paid pro rata.
TOB Trusts are typically supported by a liquidity facility provided by a liquidity provider (the TOBs Liquidity
Provider) that allows the holders of the TOB Floaters to tender their TOB Floaters in exchange for payment of par plus accrued interest on any business day (subject to the non-occurrence of a termination
event). The tendered TOB Floaters are remarketed by a remarketing agent. In the event of a failed remarketing, the TOB Trust may draw upon a loan from the TOBs Liquidity Provider to purchase the tendered TOB Floaters. Any loans made by the TOBs
Liquidity Provider will be secured by the purchased TOB Floaters held by the TOB Trust and will be subject to an increased interest rate based on number of days the loan is outstanding.
- 25 -
The Fund may invest in a TOB Trust on either a
non-recourse or recourse basis. When the Fund invests in TOB Trusts on a non-recourse basis, and the TOBs Liquidity Provider is required to make a payment under the
liquidity facility, the TOBs Liquidity Provider will typically liquidate all or a portion of the municipal bonds held in the TOB Trust and then fund the balance, if any, of the Liquidation Shortfall. If the Fund invests in a TOB Trust on a recourse
basis, it will typically enter into a reimbursement agreement with the TOBs Liquidity Provider pursuant to which the Fund is required to reimburse the TOBs Liquidity Provider the amount of any Liquidation Shortfall. As a result, if the Fund invests
in a recourse TOB Trust, the Fund will bear the risk of loss with respect to any Liquidation Shortfall. If multiple BlackRock-advised Funds participate in any such TOB Trust, these losses will be shared ratably, in proportion to their participation
in the TOB Trust.
Under accounting rules, Municipal Bonds of the Fund that are deposited into a TOB Trust are investments
of the Fund and are presented on the Funds Schedule of Investments and outstanding TOB Floaters issued by a TOB Trust are presented as liabilities in the Funds Statement of Assets and Liabilities. Interest income from the underlying
Municipal Bonds is recorded by the Fund on an accrual basis. Interest expense incurred on the TOB Floaters and other expenses related to remarketing, administration, trustee and other services to a TOB Trust are reported as expenses of the Fund. In
addition, under accounting rules, loans made to a TOB Trust sponsored by the Fund may be presented as loans of the Fund in the Funds financial statements even if there is no recourse to the Funds assets.
For TOB Floaters, generally, the interest rate earned will be based upon the market rates for municipal bonds with maturities
or remarketing provisions that are comparable in duration to the periodic interval of the tender option. Since the tender option feature has a shorter term than the final maturity or first call date of the underlying municipal bonds deposited in the
TOB Trust, the holder of the TOB Floaters relies upon the terms of the agreement with the financial institution furnishing the liquidity facility as well as the credit strength of that institution. The perceived reliability and creditworthiness, of
many major financial institutions, some of which sponsor and/or provide liquidity support to TOB Trusts increases the risk associated with TOB Floaters. This in turn may reduce the desirability of TOB Floaters as investments, which could impair the
viability or availability of TOB Trusts.
The use of TOB Residuals will require the Fund to earmark or segregate liquid
assets in an amount equal to any TOB Floaters, plus any accrued but unpaid interest due on the TOB Floaters, issued by TOB Trusts sponsored by, or on behalf of, the Fund that are not owned by the Fund. The use of TOB Residuals may also require the
Fund to earmark or segregate liquid assets in an amount equal to loans provided by the TOBs Liquidity Provider to the TOB Trust to purchase tendered TOB Floaters. The Fund reserves the right to modify its asset segregation policies in the future to
the extent that such changes are in accordance with applicable regulations or interpretations. Future regulatory requirements or SEC guidance may necessitate more onerous contractual or regulatory requirements, which may increase the costs or reduce
the degree of potential economic benefits of TOB Trust transactions or limit the Funds ability to enter into or manage TOB Trust transactions.
Credit Facility
The Fund
is permitted to leverage its portfolio by entering into one or more credit facilities. If the Fund enters into a credit facility, the Fund may be required to prepay outstanding amounts or incur a penalty rate of interest upon the occurrence of
certain events of default. The Fund would also likely have to indemnify the lenders under the credit facility against liabilities they may incur in connection therewith. In addition, the Fund expects that any credit facility would contain covenants
that, among other things, likely would limit the Funds ability to pay distributions in certain circumstances, incur additional debt, change certain of its investment policies and engage in certain transactions, including mergers and
consolidations, and require asset coverage ratios in addition to those required by the Investment Company Act. The Fund may be required to pledge its assets and to maintain a portion of its assets in cash or high-grade securities as a reserve
against interest or principal payments and expenses. The Fund expects that any credit facility would have customary covenant, negative covenant and default provisions. There can be no assurance that the Fund will enter into an agreement
- 26 -
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.
Reverse
Repurchase Agreements
Borrowings may be made by the Fund through reverse repurchase agreements under which the Fund
sells portfolio securities to financial institutions, such as banks and broker-dealers, and agrees to repurchase them at an agreed upon date and price. Such agreements are considered to be borrowings under the Investment Company Act. The Fund may
utilize reverse repurchase agreements when it is anticipated that the interest income to be earned from the investment of the proceeds of the transaction is greater than the interest expense of the transaction.
Derivatives
The Fund may
enter into derivative transactions that have economic leverage embedded in them. Derivative transactions that the Fund may enter into and the risks associated with them are described elsewhere in this Prospectus and are also referred to as
Strategic Transactions. The Fund cannot assure you that investments in derivative transactions that have economic leverage embedded in them will result in a higher return on its common shares.
To the extent the terms of such transactions obligate the Fund to make payments, the Fund may earmark or segregate cash or
liquid assets in an amount at least equal to the current value of the amount then payable by the Fund under the terms of such transactions or otherwise cover such transactions in accordance with applicable interpretations of the staff of the SEC. If
the current value of the amount then payable by the Fund under the terms of such transactions is represented by the notional amounts of such investments, the Fund would segregate or earmark cash or liquid assets having a market value at least equal
to such notional amounts, and if the current value of the amount then payable by the Fund under the terms of such transactions is represented by the market value of the Funds current obligations, the Fund would segregate or earmark cash or
liquid assets having a market value at least equal to such current obligations. To the extent the terms of such transactions obligate the Fund to deliver particular securities to extinguish the Funds obligations under such transactions the
Fund may cover its obligations under such transactions by either (i) owning the securities or collateral underlying such transactions or (ii) having an absolute and immediate right to acquire such securities or collateral
without additional cash consideration (or, if additional cash consideration is required, having earmarked or segregated an appropriate amount of cash or liquid assets). Such earmarking, segregation or cover is intended to provide the Fund with
available assets to satisfy its obligations under such transactions. As a result of such earmarking, segregation or cover, the Funds obligations under such transactions will not be considered senior securities representing indebtedness for
purposes of the Investment Company Act, or considered borrowings subject to the Funds limitations on borrowings discussed above, but may create leverage for the Fund. To the extent that the Funds obligations under such transactions are
not so earmarked, segregated or covered, such obligations may be considered senior securities representing indebtedness under the Investment Company Act and therefore subject to the 300% asset coverage requirement.
These earmarking, segregation or cover requirements can result in the Fund maintaining securities positions it would otherwise
liquidate, segregating or earmarking assets at a time when it might be disadvantageous to do so or otherwise restrict portfolio management.
On October 28, 2020, the SEC adopted new regulations governing the use of derivatives by registered investment companies
(Rule 18f-4). The Fund 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
- 27 -
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
Fund may also borrow money as a temporary measure for extraordinary or emergency purposes, including the payment of dividends and the settlement of securities transactions which otherwise might require untimely dispositions of Fund securities.
- 28 -
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 more fully described below.
General Risks
Please refer to the section
of the Funds most recent annual report on Form N-CSR entitled Investment Objectives, Policies and RisksRisk Factors, which is incorporated by reference herein, for a discussion of
general risks of investing in the Fund.
Other Risks
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 Funds 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 Funds investments or
prevent the Fund from executing on advantageous 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 Fund invests in securities of issuers located in or with significant exposure to countries experiencing economic, political and/or financial difficulties,
the value and liquidity of the Funds investments may be negatively affected by such events.
- 29 -
An outbreak of respiratory disease caused by a novel coronavirus (COVID-19) that
was first detected in China in December 2019 developed into a global pandemic. Although vaccines have been developed and approved for use by various governments, the duration of the pandemic and its effects cannot be predicted with certainty. 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 Fund 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
Fund 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 fund invests will have an impact on the Fund and its
investments and will impact the Funds 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 Fund may
be exposed to financial instruments that are tied to LIBOR to determine payment obligations, financing terms, hedging strategies or investment value. The Funds investments may pay interest at floating rates based on LIBOR or may be subject to
interest caps or floors based on LIBOR. The Fund may also obtain financing at floating rates based on LIBOR. Derivative instruments utilized by the Fund 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 Fund 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 Fund 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 Funds performance or NAV.
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
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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 Funds performance. U.S. companies that source material and goods from China and those that make large amounts of sales in China would be particularly vulnerable to an escalation of trade tensions. Uncertainty regarding
the outcome of the trade tensions and the potential for a trade war could cause the U.S. dollar to decline against safe haven currencies, such as the Japanese yen and the euro. Events such as these and their consequences are difficult to predict and
it is unclear whether further tariffs may be imposed or other escalating actions may be taken in the future.
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 Fund 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 Fund and
its investments are adversely affected by market movements and may make it more difficult, or more expensive, if the Fund 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 Fund, its investments or its organization more generally.
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The occurrence of any of these above events could have a significant adverse
impact on the value and risk profile of the Funds portfolio. The Fund does not know how long the securities markets may be affected by similar events and cannot predict the effects of similar events in the future on the U.S. economy and
securities markets. There can be no assurance that similar events and other market disruptions will not have other material and adverse implications.
Regulation and Government Intervention Risk
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 Fund from executing on advantageous investment opportunities in
a timely manner and negatively impact the Funds 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 Fund may face a heightened level of interest rate risk as a result of
a rise or increased volatility in interest rates.
Federal, state, and other governments, their regulatory agencies or
self-regulatory organizations may take actions that affect the regulation of the issuers in which the Fund invests in ways that are unforeseeable. Legislation or regulation may also change the way in which the Fund is regulated. Such legislation or
regulation could limit or preclude the Funds ability to achieve its investment objective.
In the aftermath of the
global financial crisis, there appears to be a renewed popular, political and judicial focus on finance related consumer protection. Financial institution practices are also subject to greater scrutiny and criticism generally. In the case of
transactions between financial institutions and the general public, there may be a greater tendency toward strict interpretation of terms and legal rights in favor of the consuming public, particularly where there is a real or perceived disparity in
risk allocation and/or where consumers are perceived as not having had an opportunity to exercise informed consent to the transaction. In the event of conflicting interests between retail investors holding common shares of a closed-end investment company such as the Fund and a large financial institution, a court may similarly seek to strictly interpret terms and legal rights in favor of retail investors.
The Fund may be affected by governmental action in ways that are not foreseeable, and there is a possibility that such actions
could have a significant adverse effect on the Fund and its ability to achieve its investment objective.
Investment Company Act Regulations
The Fund is a registered closed-end management investment company and as such is
subject to regulations under the Investment Company Act. Generally speaking, any contract or provision thereof that is made, or where performance involves a violation of the Investment Company Act or any rule or regulation thereunder is
unenforceable by either party unless a court finds otherwise
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
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liquidation value in CFTC-regulated futures, options and swaps (CFTC Derivatives), or (ii) markets itself as providing investment exposure to such instruments. To the extent the
Fund uses CFTC Derivatives, it intends to do so below such prescribed levels and will not market itself as a commodity pool or a vehicle for trading such instruments. Accordingly, the Advisor has claimed an exclusion from the definition
of the term commodity pool operator under the CEA pursuant to Rule 4.5 under the CEA. The Advisor is not, therefore, subject to registration or regulation as a commodity pool operator under the CEA in respect of the Fund.
Failures of Futures Commission Merchants and Clearing Organizations Risk
The Fund is required to deposit funds to margin open positions in cleared derivative instruments (both futures and swaps)
with a clearing broker registered as a futures commission merchant (FCM). The CEA requires an FCM to segregate all funds received from customers with respect to any orders for the purchase or sale of U.S. domestic
futures contracts and cleared swaps from the FCMs proprietary assets. Similarly, the CEA requires each FCM to hold in a separate secure account all funds received from customers with respect to any orders for the purchase or sale of
foreign futures contracts and segregate any such funds from the funds received with respect to domestic futures contracts. However, all funds and other property received by an FCM from its customers are held by an FCM on a commingled basis in an
omnibus account and amounts in excess of assets posted to the clearing organization may be invested by an FCM in certain instruments permitted under the applicable regulation. There is a risk that assets deposited by the Fund with any FCM as margin
for futures contracts or commodity options may, in certain circumstances, be used to satisfy losses of other clients of the Funds FCM. In addition, the assets of the Fund posted as margin against both swaps and futures contracts may not be
fully protected in the event of the FCMs bankruptcy.
Legal, Tax and Regulatory Risks
Legal, tax and regulatory changes could occur that may have material adverse effects on the Fund. For example, the regulatory
and tax environment for derivative instruments in which the Fund may participate is evolving, and such changes in the regulation or taxation of derivative instruments may have material adverse effects on the value of derivative instruments held by
the Fund and the ability of the Fund to pursue its investment strategies.
To qualify for the favorable U.S. federal
income tax treatment generally accorded to RICs, the Fund must, among other things, derive in each taxable year at least 90% of its gross income from certain prescribed sources and distribute for each taxable year at least 90% of the sum of (i) its
net tax-exempt interest income, if any, and (ii) 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 Fund
does not qualify as a RIC, all of its taxable income for that year (including its net capital gain) would be subject to tax at regular corporate rates without any deduction for distributions to shareholders, and such distributions would be taxable
as ordinary dividends to the extent of the Funds current and accumulated earnings and profits.
The 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 Fund cannot predict the impact, if any, of these changes to the Funds business, they could adversely affect the Funds business, financial condition, operating results and cash flows. Until the Fund knows what policy changes
are made and how those changes impact the
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Funds business and the business of the Funds competitors over the long term, the Fund will not know if, overall, the Fund will benefit from them or be negatively affected by them.
The 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 Advisor and Others
The investment activities of BlackRock, Inc. (BlackRock), the ultimate parent company of the Advisor, and its
affiliates (including BlackRock and its subsidiaries (collectively, the Affiliates)) in the management of, or their interest in, their own accounts and other accounts they manage, may present conflicts of interest that could disadvantage
the Fund and its shareholders. BlackRock and its Affiliates provide investment management services to other funds and discretionary managed accounts that may follow investment programs similar to that of the Fund. Subject to the requirements of the
Investment Company Act, BlackRock and its Affiliates intend to engage in such activities and may receive compensation from third parties for their services. None of BlackRock or its Affiliates is under any obligation to share any investment
opportunity, idea or strategy with the Fund. As a result, an Affiliate may compete with the Fund for appropriate investment opportunities. The results of the Funds investment activities, therefore, may differ from those of an Affiliate and of
other accounts managed by BlackRock or an Affiliate, and it is possible that the Fund 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 FundPortfolio ManagementPotential Material Conflicts of Interest in the SAI.
Defensive
Investing Risk
For defensive purposes, the Fund may allocate assets into cash or short-term fixed-income securities
without limitation. In doing so, the Fund may succeed in avoiding losses but may otherwise fail to achieve its investment objective. Further, the value of short-term fixed-income securities may be affected by changing interest rates and by changes
in credit ratings of the investments. If the Fund holds cash uninvested it will be subject to the credit risk of the depository institution holding the cash.
Decision-Making Authority Risk
Investors have no authority to make decisions or to exercise business discretion on behalf of the Fund, except as set forth in
the Funds governing documents. The authority for all such decisions is generally delegated to the Board, which in turn, has delegated the day-to-day management of
the Funds investment activities to the Advisor, subject to oversight by the Board.
Management Risk
The Fund is subject to management risk because it is an actively managed investment portfolio. The Advisor and the individual
portfolio managers will apply investment techniques and risk analyses in making investment decisions for the Fund, but there can be no guarantee that these will produce the desired results. The Fund may be subject to a relatively high level of
management risk because the Fund may invest in derivative instruments, which may be highly specialized instruments that require investment techniques and risk analyses different from those associated with equities and bonds.
Valuation Risk
The Fund
is subject to valuation risk, which is the risk that one or more of the securities in which the Fund invests are valued at prices that the Fund is unable to obtain upon sale due to factors such as incomplete data,
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market instability or human error. The Advisor may use an independent pricing service or prices provided by dealers to value securities at their market value. Because the secondary markets for
certain investments may be limited, such investments may be difficult to value. See Net Asset Value. When market quotations are not available, the Advisor may price such investments pursuant to a number of methodologies, such as
computer-based analytical modeling or individual security evaluations. These methodologies generate approximations of market values, and there may be significant professional disagreement about the best methodology for a particular type of financial
instrument or different methodologies that might be used under different circumstances. In the absence of an actual market transaction, reliance on such methodologies is essential, but may introduce significant variances in the ultimate valuation of
the Funds investments. Technological issues and/or errors by pricing services or other third-party service providers may also impact the Funds ability to value it investments and the calculation of the Funds NAV.
When market quotations are not readily available or are deemed to be inaccurate or unreliable, the Fund values its investments
at fair value as determined in good faith pursuant to policies and procedures approved by the Board. Fair value is defined as the amount for which assets could be sold in an orderly disposition over a reasonable period of time, taking into account
the nature of the asset. Fair value pricing may require determinations that are inherently subjective and inexact about the value of a security or other asset. As a result, there can be no assurance that fair value priced assets will not result in
future adjustments to the prices of securities or other assets, or that fair value pricing will reflect a price that the Fund is able to obtain upon sale, and it is possible that the fair value determined for a security or other asset will be
materially different from quoted or published prices, from the prices used by others for the same security or other asset and/or from the value that actually could be or is realized upon the sale of that security or other asset. For example, the
Funds NAV could be adversely affected if the Funds determinations regarding the fair value of the Funds investments were materially higher than the values that the Fund ultimately realizes upon the disposal of such investments.
Where market quotations are not readily available, valuation may require more research than for more liquid investments. In addition, elements of judgment may play a greater role in valuation in such cases than for investments with a more active
secondary market because there is less reliable objective data available.
Because of overall size, duration and
maturities of positions held by the Fund, the value at which its investments can be liquidated may differ, sometimes significantly, from the interim valuations obtained by the Fund. In addition, the timing of liquidations may also affect the values
obtained on liquidation. Securities held by the Fund may routinely trade with bid-offer spreads that may be significant. There can be no guarantee that the Funds investments could ultimately be realized
at the Funds valuation of such investments. In addition, the Funds compliance with the asset diversification tests applicable to regulated investment companies depends on the fair market values of the Funds assets, and,
accordingly, a challenge to the valuations ascribed by the Fund could affect its ability to comply with those tests or require it to pay penalty taxes in order to cure a violation thereof.
The Funds NAV per share is a critical component in several operational matters including computation of advisory and
services fees and determination of the price at which a tender offer will be made. Consequently, variance in the valuation of the Funds investments will impact, positively or negatively, the fees and expenses shareholders will pay.
Reliance on the Advisor Risk
The Fund is dependent upon services and resources provided by the Advisor, and therefore the Advisors parent, BlackRock.
The Advisor is not required to devote its full time to the business of the Fund and there is no guarantee or requirement that any investment professional or other employee of the Advisor will allocate a substantial portion of his or her time to the
Fund. The loss of one or more individuals involved with the Advisor could have a material adverse effect on the performance or the continued operation of the Fund. For additional information on the Advisor and BlackRock, see Management of the
FundInvestment Advisor.
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Reliance on Service Providers Risk
The Fund must rely upon the performance of service providers to perform certain functions, which may include functions that are
integral to the Funds operations and financial performance. Failure by any service provider to carry out its obligations to the Fund in accordance with the terms of its appointment, to exercise due care and skill or to perform its obligations
to the Fund at all as a result of insolvency, bankruptcy or other causes could have a material adverse effect on the Funds performance and returns to shareholders. The termination of the Funds relationship with any service provider,
or any delay in appointing a replacement for such service provider, could materially disrupt the business of the Fund and could have a material adverse effect on the Funds performance and returns to shareholders.
Information Technology Systems Risk
The Fund is dependent on the Advisor for certain management services as well as back-office functions. The Advisor depends
on information technology systems in order to assess investment opportunities, strategies and markets and to monitor and control risks for the Fund. It is possible that a failure of some kind which causes disruptions to these information
technology systems could materially limit the Advisors ability to adequately assess and adjust investments, formulate strategies and provide adequate risk control. Any such information technology-related difficulty could harm the
performance of the Fund. Further, failure of the back-office functions of the Advisor to process trades in a timely fashion could prejudice the investment performance of the Fund.
Cyber Security Risk
With
the increased use of technologies such as the Internet to conduct business, the Fund is susceptible to operational, information security and related risks. In general, cyber incidents can result from deliberate attacks or unintentional events.
Cyber-attacks include, but are not limited to, gaining unauthorized access to digital systems (e.g., through hacking or malicious software coding) for purposes of misappropriating assets or sensitive information, corrupting data, or
causing operational disruption. Cyber-attacks may also be carried out in a manner that does not require gaining unauthorized access, such as causing denial-of-service
attacks on websites (i.e., efforts to make network services unavailable to intended users). Cyber security failures by or breaches of the Advisor and other service providers (including, but not limited to, fund accountants, custodians,
transfer agents and administrators), and the issuers of securities in which the Fund invests, have the ability to cause disruptions and impact business operations, potentially resulting in financial losses, interference with the Funds ability
to calculate its NAV, impediments to trading, the inability of shareholders to transact business, violations of applicable privacy and other laws, regulatory fines, penalties, reputational damage, reimbursement or other compensation costs, or
additional compliance costs. In addition, substantial costs may be incurred in order to prevent any cyber incidents in the future. While the Fund has established business continuity plans in the event of, and risk management systems to prevent, such
cyber-attacks, there are inherent limitations in such plans and systems including the possibility that certain risks have not been identified. Furthermore, the Fund cannot control the cyber security plans and systems put in place by service
providers to the Fund and issuers in which the Fund invests. As a result, the Fund or its shareholders could be negatively impacted.
Misconduct of
Employees and of Service Providers Risk
Misconduct or misrepresentations by employees of the Advisor or the
Funds service providers could cause significant losses to the Fund. Employee misconduct may include binding the Fund to transactions that exceed authorized limits or present unacceptable risks and unauthorized trading activities,
concealing unsuccessful trading activities (which, in any case, may result in unknown and unmanaged risks or losses) or making misrepresentations regarding any of the foregoing. Losses could also result from actions by the Funds service
providers, including, without limitation, failing to recognize trades and misappropriating assets. In addition, employees and service providers may improperly use or disclose confidential information, which could result in
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litigation or serious financial harm, including limiting the Funds business prospects or future marketing activities. Despite the Advisors due diligence efforts, misconduct and
intentional misrepresentations may be undetected or not fully comprehended, thereby potentially undermining the Advisors due diligence efforts. As a result, no assurances can be given that the due diligence performed by the Advisor will
identify or prevent any such misconduct.
Special Risks for Holders of Rights
There is a risk that performance of the Fund may result in the common shares purchasable upon exercise of the rights being less
attractive to investors at the conclusion of the subscription period. This may reduce or eliminate the value of the rights. Investors who receive rights may find that there is no market to sell rights they do not wish to exercise. If investors
exercise only a portion of the rights, common shares may trade at less favorable prices than larger offerings for similar securities.
Portfolio
Turnover Risk
The Funds annual portfolio turnover rate may vary greatly from year to year, as well as within a
given year. Portfolio turnover rate is not considered a limiting factor in the execution of investment decisions for the Fund. A higher portfolio turnover rate results in correspondingly greater brokerage commissions and other transactional expenses
that are borne by the Fund. High portfolio turnover may result in an increased realization of net short-term capital gains by the Fund which, when distributed to common shareholders, will be taxable as ordinary income. Additionally, in a declining
market, portfolio turnover may create realized capital losses.
Anti-Takeover Provisions Risk
The MGCL and the Funds Charter and Bylaws include provisions that could limit the ability of other entities or persons to
acquire control of the Fund or convert the Fund to open-end status or to change the composition of the Board. Such provisions could limit the ability of shareholders to sell their shares at a premium over
prevailing market prices by discouraging a third party from seeking to obtain control of the Fund. See Certain Provisions in the Charter and Bylaws.
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HOW THE FUND MANAGES RISK
Investment Limitations
The Fund has adopted certain investment limitations designed to limit investment risk. Some of these limitations are
fundamental and thus may not be changed without the approval of the holders of a majority of the outstanding common shares. See Investment Objective and PoliciesInvestment Restrictions in the SAI.
The restrictions and other limitations set forth throughout this Prospectus and in the SAI apply only at the time of purchase
of securities and will not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of the acquisition of securities.
Management of Investment Portfolio and Capital Structure to Limit Leverage Risk
The Fund may take certain actions if short-term interest rates increase or market conditions otherwise change (or the Fund
anticipates such an increase or change) and any leverage the Fund may have outstanding begins (or is expected) to adversely affect common shareholders. In order to attempt to offset such a negative impact of any outstanding leverage on common
shareholders, the Fund may shorten the average maturity of its investment portfolio (by investing in short-term securities) or may reduce any indebtedness that it may have incurred. The success of any such attempt to limit leverage risk depends on
the Advisors ability to accurately predict interest rate or other market changes. Because of the difficulty of making such predictions, the Fund may never attempt to manage its capital structure in the manner described in this paragraph.
If market conditions suggest that employing additional leverage would be beneficial, the Fund 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 Fund may use certain Strategic Transactions designed to limit the risk of price fluctuations of securities and to preserve
capital. These Strategic Transactions include using swaps, financial futures contracts, options on financial futures or options based on either an index of long-term securities, or on securities whose prices, in the opinion of the Advisor, correlate
with the prices of the Funds investments. There can be no assurance that Strategic Transactions will be used or used effectively to limit risk, and Strategic Transactions may be subject to their own risks.
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MANAGEMENT OF THE FUND
Directors and Officers
The Board is responsible for the overall management of the Fund, including supervision of the duties performed by the Advisor.
There are twelve members of the Board (the Directors). A majority of the Directors are Independent Directors of the Fund. The name and business address of the Directors and officers of the Fund and their principal occupations and other
affiliations during the past five years are set forth under Management of the Fund in the SAI.
Investment Advisor
The Advisor is responsible for the management of the Funds portfolio and provides the necessary personnel, facilities,
equipment and certain other services necessary to the operation of the Fund. The Advisor, located at 100 Bellevue Parkway, Wilmington, Delaware 19809, is a wholly-owned subsidiary of BlackRock.
BlackRock is one of the worlds largest publicly-traded investment management firms. As of 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 Funds investment objective. This strategy is combined with disciplined risk control techniques and
applied in sector, sub-sector and individual security selection decisions. BlackRocks extensive personnel and technology resources are the key drivers of the investment philosophy.
Portfolio Managers
The
members of the portfolio management team who are primarily responsible for the day-to-day management of the Funds portfolio are as follows:
Michael A. Kalinoski, CFA, Director of BlackRock, Inc., is a portfolio manager on the Municipal Mutual Fund Desk within
BlackRocks Municipal Fixed Income business within BlackRocks Portfolio Management Group. Mr. Kalinoskis service with BlackRock, Inc. dates back to 1999, including his years with MLIM. At MLIM, he was a member of the tax-exempt fixed income team responsible for managing a number of national and state funds. Prior to joining MLIM in 1999, Mr. Kalinoski was a municipal trader with Strong Capital Management. Mr. Kalinoski
earned a BS degree in accounting from Marquette University in 1992.
Walter OConnor. Managing Director of
BlackRock, Inc., is Co-Head of the Municipal Funds team within the Municipal Fixed Income business within BlackRocks Portfolio Management Group. He is also a member of BlackRocks
Municipal Bond Operating Committee, which oversees all municipal bond portfolio management, research and trading activities. Mr. OConnors service with the BlackRock, Inc. dates back to 1991, including his years with MLIM. At MLIM,
he was a portfolio manager for the municipal bond retail mutual funds. Prior to joining MLIM, Mr. OConnor was a municipal bond trader with Prudential Securities. Mr. OConnor earned a BA degree in finance and philosophy from
University of Notre Dame in 1984.
- 39 -
Christian Romaglino, CFA, Director of BlackRock, Inc., is a portfolio
manager for the Municipal Fixed Income business within BlackRocks Portfolio Management Group. Prior to joining BlackRock, Inc. in 2017, Mr. Romaglino was a portfolio manager at Brown Brothers Harriman focusing on a diverse set of
institutional mandates and high net worth separately managed accounts. Mr. Romaglino also held various trading and portfolio construction positions at Brown Brothers Harriman across several taxable fixed income sectors prior to 2010 when he
transitioned to Municipals. Mr. Romaglino earned a BS degree in Industrial Engineering from Lehigh University.
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 Funds securities by each portfolio manager.
Investment Management Agreement
Pursuant to an investment management agreement between the Advisor and the Fund (the Investment Management
Agreement), the Fund has agreed to pay the Advisor a monthly management fee at an annual rate equal to 0.35% of the average weekly value of the Funds Managed Assets. Managed Assets means the total assets of the Fund
(including any assets attributable to money borrowed for investment purposes) minus the sum of the Funds accrued liabilities (other than money borrowed for investment purposes).
A discussion regarding the basis for the approval of the Investment Management Agreement by the Board is available in the
Funds Semi-Annual Report to shareholders for the period ended October 31, 2021.
Except as otherwise described
in this Prospectus, the Fund pays, in addition to the fees paid to the Advisor, all other costs and expenses of its operations, including compensation of its Directors (other than those affiliated with the Advisor), custodian, leveraging expenses,
transfer and dividend disbursing agent expenses, legal fees, rating agency fees, listing fees and expenses, expenses of independent auditors, expenses of repurchasing shares, expenses of preparing, printing and distributing shareholder reports,
notices, proxy statements and reports to governmental agencies and taxes, if any.
The Fund and the Advisor have entered
into the Fee Waiver Agreement, pursuant to which the Advisor has contractually agreed to waive the management fee with respect to any portion of the Funds assets attributable to investments in any equity and fixed-income mutual funds and ETFs
managed by the Advisor or its affiliates that have a contractual fee, through June 30, 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 Fund 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 Fund (including by a majority of the Funds Independent Directors). Neither the Advisor nor the Fund is obligated to extend the Fee Waiver
Agreement. The Fee Waiver Agreement may be terminated at any time, without the payment of any penalty, only by the Fund (upon the vote of a majority of the Independent Directors or a majority of the outstanding voting securities of the Fund), upon
90 days written notice by the Fund to the Advisor.
Administration Agreement
The Advisor serves as the Funds administrator pursuant to an administration agreement (the Administration
Agreement). Pursuant to the Administration Agreement, BlackRock provides certain administrative services to the Fund including, without limitation, oversight of the determination and publication of the Funds NAV, oversight of the
maintenance of certain books and records of the Fund, oversight of the preparation and filing of the Funds federal, state and local income tax returns and any other required tax returns, and preparation, or oversight of the preparation of,
financial information for the Funds semi-annual and annual reports, proxy statements and other communications with shareholders and certain other oversight and reporting
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activities. The administration fee paid monthly to the Advisor pursuant to the Administration Agreement is computed at an annual rate of 0.15% of the average weekly value of the Funds
managed assets.
Administration and Accounting Services
State Street Bank and Trust Company provides certain administration and accounting services to the Fund pursuant to an
Administration and Trust Accounting Services Agreement (the Administration and Fund Accounting Services Agreement). Pursuant to the Administration and Fund Accounting Services Agreement, State Street Bank and Trust Company provides the
Fund with, among other things, customary fund accounting services, including computing the Funds NAV and maintaining books, records and other documents relating to the Funds financial and portfolio transactions, and customary fund
administration services, including assisting the Fund with regulatory filings, tax compliance and other oversight activities. For these and other services it provides to the Fund, State Street Bank and Trust Company is paid a monthly fee from the
Fund at an annual rate ranging from 0.0075% to 0.015% of the Funds Managed Assets, along with an annual fixed fee ranging from $0 to $10,000 for the services it provides to the Fund.
Custodian and Transfer Agent
The custodian of the assets of the Fund is State Street Bank and 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 Funds accounts, establishment of segregated accounts as necessary, and transfer, exchange and delivery of
Fund portfolio securities.
Computershare Trust Company, N.A., whose principal business address is 150 Royall Street,
Canton, Massachusetts 02021, serves as the Funds transfer agent with respect to the common shares.
Independent Registered Public Accounting Firm
Deloitte & Touche LLP, whose principal business address is 200 Berkeley Street, Boston, MA 02116, is the
independent registered public accounting firm of the Fund and is expected to render an opinion annually on the financial statements of the Fund.
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NET ASSET VALUE
The NAV of the Funds common shares will be computed based upon the value of the Funds portfolio securities and
other assets. NAV per common share will be determined as of the close of the regular trading session on the NYSE on each business day on which the NYSE is open for trading. The Fund calculates NAV per common share by subtracting the Funds
liabilities (including accrued expenses, dividends payable and any borrowings of the Fund), and the liquidation value of any outstanding Fund preferred shares from the Funds total assets (the value of the securities the Fund holds plus cash or
other assets, including interest accrued but not yet received) and dividing the result by the total number of common shares of the Fund outstanding.
Valuation of securities held by the Fund is as follows:
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 Fund on a day on which the Fund values such security, the last bid (long positions) or ask (short positions) price, if available, will be used as the value of such security. If the Fund holds both long and short positions in the
same security, the last bid price will be applied to securities held long and the last ask price will be applied to securities sold short. If no bid or ask price is available on a day on which the Fund values such security, the prior days
price will be used, unless the Advisors determine that such prior days price no longer reflects the fair value of the security, in which case such asset would be treated as a Fair Value Asset (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 Fund 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 Funds approved independent third-party pricing services, each in accordance with the policies and procedures approved by the Funds 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 Fund may hold or transact in such securities in smaller, odd lot sizes. Odd lots often trade at lower prices than
institutional round lots. The amortized cost method of valuation may be used with respect to debt obligations with 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 Fund on a day on which the Fund values such option, the last bid (long positions) or ask (short positions) price, if available, will be used as the value of such option. If no bid
or ask price is available on a day on which the Fund values such option, the prior days price will be used, unless the Advisors determine that such prior days price no longer reflects the fair value of the option in which case such
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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 Fund may employ
independent third party pricing services, which may use, without limitation, a matrix or formula method that takes into consideration market indexes, matrices, yield curves and other specific adjustments. This may result in the assets being valued
at a price different from the price that would have been determined had the matrix or formula method not been used. All cash, receivables and current payables are carried on the Funds books at their face value. The price the Fund could receive
upon the sale of any particular portfolio investment may differ from the Funds valuation of the investment, particularly for 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 Fund, and the Fund could realize a greater than expected loss or lesser than expected gain upon the
sale of the investment. The Funds ability to value its investment may also be impacted by technological issues and/or errors by pricing services or other third party service providers.
All cash, receivables and current payables are carried on the Funds books at their fair value.
Prices obtained from independent third party pricing services, broker-dealers or market makers to value the Funds
securities and other assets and liabilities are based on information available at the time the Fund values its assets and liabilities. In the event that a pricing service quotation is revised or updated subsequent to the day on which the Fund valued
such security, the revised pricing service quotation generally will be applied prospectively. Such determination will be made considering pertinent facts and circumstances surrounding the revision.
In the event that application of the methods of valuation discussed above result in a price for a security which is deemed not
to be representative of the fair market value of such security, the security will be valued by, under the direction of or in accordance with a method specified by the Board as reflecting fair value. All other assets and liabilities (including
securities for which market quotations are not readily available) held by the Fund (including restricted securities) are valued at fair value as determined in good faith by the Board or 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 Fund may be traded on foreign exchanges or OTC markets on days on which the
Funds NAV is not calculated and common shares is not traded. In such cases, the NAV of the Funds common shares may be significantly affected on days when investors can neither purchase nor sell shares of the Fund.
Fair Value. When market quotations are not readily available or are believed by the Advisors to be unreliable,
the Funds 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 believes a market quotation from a broker-dealer or other source is
unreliable (e.g., where it varies significantly from a recent trade, or no longer reflects the fair value of the security or other asset or liability subsequent to the most recent market quotation),
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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 Funds
assets or liabilities, that it is likely that the event will cause a material change to the last exchange closing price or closing market price of one or more assets or liabilities held by the Fund. On any 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 Funds 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 Funds accounting agent periodically endeavors to confirm the prices it receives from all third party pricing services, index providers and broker-dealers, and, with the assistance of the Advisors, to regularly evaluate the values assigned
to the securities and other assets and liabilities of the Fund. The pricing of all Fair Value Assets is subsequently reported to the Board or a Committee thereof.
When determining the price for a Fair Value Asset, the Valuation Committee shall seek to determine the price that the Fund
might reasonably expect to receive from the current sale of that asset or liability in an arms-length transaction on the date on which the asset or liability is being valued, and does not seek to
determine the price the Fund might reasonably expect to receive for selling an asset or liability at a later time or if it holds the asset or liability to maturity. Fair value determinations 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.
The fair value of one or more assets or liabilities may not, in retrospect, be the price at which those assets or liabilities
could have been sold during the period in which the particular fair values were used in determining the Funds NAV. As a result, the Funds sale or repurchase of its shares at NAV, at a time when a holding or holdings are valued at fair
value, may have the effect of diluting or increasing the economic interest of existing shareholders.
The Funds
annual audited financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP), follow the requirements for valuation set forth in Financial Accounting
Standards Board Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (ASC 820), which defines and establishes a framework for measuring fair value under US GAAP and expands financial
statement disclosure requirements relating to fair value measurements.
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Generally, ASC 820 and other accounting rules applicable to investment companies
and various assets in which they invest are evolving. Such changes may adversely affect the Fund. For example, the evolution of rules governing the determination of the fair market value of assets or liabilities to the extent such rules become more
stringent would tend to increase the cost and/or reduce the availability of third-party determinations of fair market value. This may in turn increase the costs associated with selling assets or affect their liquidity due to the Funds
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 Funds valuation policies. The Fund will not be required to comply with the new rule until September 8, 2022.
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DISTRIBUTIONS
The Fund intends to make regular monthly cash distributions of all or a portion of its net investment income, after payment of
dividends on the Funds VMTP Shares outstanding, to holders of the Funds common shares. Net capital gains, if any, will be distributed at least annually to holders of the Funds common shares. The Funds net investment income
consists of all interest income accrued on portfolio assets less all expenses of the Fund. The Fund is required to allocate net capital gains and other taxable income, if any, received by the Fund among its shareholders on a pro rata basis in the
year for which such capital gains and other income is realized.
The tax treatment and characterization of the Funds
distributions may vary significantly from time to time because of the varied nature of the Funds investments. The ultimate tax characterization of the Funds distributions made in a fiscal year cannot finally be determined until after the
end of that fiscal year. As a result, there is a possibility that the Fund may make total distributions during a fiscal year in an amount that exceeds the Funds earnings and profits for U.S. federal income tax purposes. In such situations, the
amount by which the Funds total distributions exceed earnings and profits would generally be treated as a return of capital reducing the amount of a shareholders tax basis in such shareholders shares, with any amounts exceeding
such basis treated as gain from the sale of shares.
Various factors will affect the level of the Funds net
investment income, such as its asset mix, portfolio turnover, performance of its investments, level of retained earnings, the amount of leverage utilized by the Fund and the effects thereof, the costs of such leverage, the movement of interest rates
for municipal bonds and general market conditions. To permit the Fund to maintain more stable monthly distributions and to the extent consistent with the distribution requirements imposed on regulated investment companies by the Code, the Fund may
from time to time distribute less than the entire amount 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 Fund for any particular
monthly period may be more or less than the amount of income actually earned by the Fund during that month. Undistributed earnings will increase the Funds NAV and, correspondingly, distributions from undistributed earnings and from capital, if
any, will reduce the Funds NAV.
Shareholders will automatically have all dividends and distributions reinvested the
common shares of the Fund in accordance with the Funds dividend reinvestment plan, unless an election is made to receive cash by contacting the Reinvestment Plan Agent (as defined herein), at (800)
699-1236. See Dividend Reinvestment Plan.
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DIVIDEND REINVESTMENT PLAN
Please refer to the section
of the Funds most recent annual report on Form N-CSR entitled Automatic Dividend Reinvestment Plan, which is incorporated by reference herein, for a discussion of the dividend
reinvestment plan.
RIGHTS OFFERINGS
The Fund may in the future, and at its discretion, choose to make offerings of rights to its shareholders to purchase common
shares. Rights may be issued independently or together with any other offered security and may or may not be transferable by the person purchasing or receiving the rights. In connection with a rights offering to shareholders, we would distribute
certificates or other documentation (i.e., rights cards distributed in lieu of certificates) evidencing the rights and a Prospectus Supplement to our shareholders as of the record date that we set for determining the shareholders eligible to
receive rights in such rights offering. Any such future rights offering will be made in accordance with the Investment Company Act. Under the Funds Charter, and subject to the Investment Company Act, the Board is permitted to authorize the
issuance of shares of capital stock in the Fund, pursuant to a rights offerings or otherwise, 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. |
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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.
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TAX MATTERS
The following discussion is a brief summary of certain U.S. federal income tax considerations affecting the Fund and the
purchase, ownership and disposition of the Funds common shares. A more detailed discussion of the tax rules applicable to the Fund and its common shareholders can be found in the SAI that is incorporated by reference into this Prospectus.
Except as otherwise noted, this discussion assumes you are a taxable U.S. holder (as defined below) and that you hold your common shares as capital assets for U.S. federal income tax purposes (generally, assets held for investment). This discussion
is based upon current provisions of the Code, the regulations promulgated thereunder and judicial and administrative authorities, all of which are subject to change or differing interpretations by the courts or the Internal Revenue Service, possibly
with retroactive effect. No attempt is made to present a detailed explanation of all U.S. federal tax concerns affecting the Fund and its common shareholders. The Fund has not sought and will not seek any ruling from the Internal Revenue
Service regarding any matters discussed herein. No assurance can be given that the Internal Revenue Service would not assert, or that a court would not sustain, a position contrary to those set forth below. This summary does not discuss any aspects
of non-U.S., state or local tax. The discussion set forth herein does not constitute tax advice and potential investors are urged to consult their own tax advisers to determine the specific U.S. federal,
state, local and foreign tax consequences to them of investing in the Fund.
In addition, no attempt is made to
address tax considerations applicable to an investor with a special tax status, such as 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 Fund as part of a hedging, integrated, conversion or straddle transaction, trader in securities that has elected the mark-to-market method of accounting for its securities, U.S. holder (as defined below) whose functional currency is not the U.S. dollar, investor with applicable
financial statements within the meaning of Section 451(b) of the Code, or non-U.S. investor. Furthermore, this discussion does not reflect possible application of the alternative minimum tax.
A U.S. holder is a beneficial owner that is for U.S. federal income tax purposes:
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a citizen or individual resident of the United States (including certain former citizens and
former long-term residents); |
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a corporation or other entity treated as a corporation for U.S. federal income tax purposes, created or
organized in or under the laws of the United States or any state thereof or the District of Columbia; |
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an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
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a trust with respect to which a court within the United States is able to exercise primary supervision over
its administration and one or more U.S. persons have the authority to control all of its substantial decisions or the trust has made a valid election in effect under applicable Treasury regulations to be treated as a U.S. person 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 Fund
The Fund has elected to be treated and intends to qualify to be taxed each year as a RIC under Subchapter M of the Code. In
order to qualify as a RIC, the Fund must, among other things, satisfy certain requirements relating to the sources of its income, diversification of its assets, and distribution of its income to its shareholders. First, the Fund must derive at least
90% of its annual gross income from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of shares 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 shares, securities or currencies, or net income derived from interests in qualified publicly traded partnerships (as defined in the Code)
(the 90% gross income test). Second, the Fund must diversify its holdings so that, at the close of each quarter of its taxable year, (i) at least 50% of the value of its
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total assets consists of cash, cash items, U.S. Government securities, securities of other RICs and other securities, with such other securities limited in respect of any one issuer to an amount
not greater in value than 5% of the value of the Funds total assets and to not more than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the 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 Fund and engaged in the same, similar or related trades or businesses, or any one or more qualified
publicly traded partnerships.
As long as the Fund qualifies as a RIC, the Fund will generally not be subject to
corporate-level U.S. federal income tax on income and gains that it distributes each taxable year to its shareholders, provided that in such taxable year it distributes at least 90% of the sum of (i) its net
tax-exempt interest income, if any, and (ii) its investment company taxable income (which includes, among other items, dividends, taxable interest, taxable original issue discount and market
discount income, income from securities lending, net short-term capital gain in excess of net long-term capital loss, and any other taxable income other than net capital gain (as defined below) and is reduced by deductible expenses)
determined without regard to the deduction for dividends paid. The Fund may retain for investment its net capital gain (which consists of the excess of its net long-term capital gain over its net short-term capital loss). However, if the Fund
retains any net capital gain or any investment company taxable income, it will be subject to tax at regular corporate rates on the amount retained.
The Code imposes a 4% nondeductible excise tax on the Fund to the extent the Fund does not distribute by the end of any
calendar year at least the sum of (i) 98% of its ordinary income (not taking into account any capital gain or loss) for the calendar year and (ii) 98.2% of its capital gain in excess of its capital loss (adjusted for certain ordinary
losses) for a one-year period generally ending on October 31 of the calendar year (unless an election is made to use the Funds fiscal year). In addition, the minimum amounts that must be distributed
in any year to avoid the excise tax will be increased or decreased to reflect any under-distribution or over-distribution, as the case may be, from the previous year. For purposes of the excise tax, the Fund will be deemed to have distributed any
income on which it paid U.S. federal income tax. While the Fund intends to distribute any income and capital gain in the manner necessary to minimize imposition of the 4% nondeductible excise tax, there can be no assurance that sufficient
amounts of the Funds taxable income and capital gain will be distributed to entirely avoid the imposition of the excise tax. In that event, the Fund will be liable for the excise tax only on the amount by which it does not meet the foregoing
distribution requirement.
If in any taxable year the Fund should fail to qualify under Subchapter M of the Code for tax
treatment as a RIC, the Fund would incur a regular corporate U.S. federal income tax upon all of its taxable income for that year, and all distributions to its shareholders (including distributions of net capital gain) would be taxable to
shareholders as ordinary dividend income for U.S. federal income tax purposes to the extent of the Funds earnings and profits. Provided that certain holding period and other requirements were met, such dividends would be eligible (i) to
be treated as qualified dividend income in the case of shareholders taxed as individuals and (ii) for the dividends received deduction in the case of corporate shareholders. In addition, to qualify again to be taxed as a RIC in a
subsequent year, the Fund would be required to distribute to shareholders its earnings and profits attributable to non-RIC years. In addition, if the Fund failed to qualify as a RIC for a period greater than
two taxable years, then, in order to qualify as a RIC in a subsequent year, the Fund would be required to elect to recognize and pay tax on any net built-in gain (the excess of aggregate gain, including items
of income, over aggregate loss that would have been realized if the Fund had been liquidated) or, alternatively, be subject to taxation on such built-in gain recognized for a period of five years.
The remainder of this discussion assumes that the Fund qualifies for taxation as a RIC.
The Funds Investments. Certain of the Funds investment practices are subject to special and complex U.S.
federal income tax provisions (including mark-to-market, constructive sale, straddle, wash sale, short sale and other rules) that may, among other things,
(i) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (ii) convert lower taxed long-term capital gains or qualified dividend income into higher taxed
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short-term capital gains or ordinary income, (iii) convert ordinary loss or a deduction into capital loss (the deductibility of which is more limited), (iv) cause the Fund to recognize
income or gain without a corresponding receipt of cash, (v) adversely affect the time as to when a purchase or sale of shares or securities is deemed to occur, (vi) adversely alter the characterization of certain complex financial
transactions and (vii) produce income that will not be qualified income for purposes of the 90% annual gross income requirement described above. These U.S. federal income tax provisions could therefore affect the amount, timing and
character of distributions to common shareholders. The Fund intends to monitor its transactions and may make certain tax elections and may be required to dispose of securities to mitigate the effect of these provisions and prevent disqualification
of the Fund as a RIC. Additionally, the Fund may be required to limit its activities in derivative instruments in order to enable it to maintain its RIC status.
The Fund may invest a portion of its net assets in below investment grade securities. Investments in these types of securities
may present special tax issues for the Fund. U.S. federal income tax rules are not entirely clear about issues such as when the Fund may cease to accrue interest, original issue discount or market discount, when and to what extent deductions may be
taken for bad debts or worthless securities, how payments received on obligations in default should be allocated between principal and income and whether modifications or exchanges of debt obligations in a bankruptcy or workout context are taxable.
These and other issues could affect the Funds ability to distribute sufficient income to preserve its status as a RIC or to avoid the imposition of U.S. federal income or excise tax.
Certain debt securities acquired by the Fund may be treated as debt securities that were originally issued at a discount.
Generally, the amount of the original issue discount is treated as interest income and is included in taxable income (and required to be distributed by the Fund in order to qualify as a RIC and avoid U.S. federal income tax or the 4% excise tax on
undistributed income) over the term of the security, even though payment of that amount is not received until a later time, usually when the debt security matures.
If the Fund purchases a debt security on a secondary market at a price lower than its adjusted issue price, the excess of the
adjusted issue price over the purchase price is market discount. Unless the Fund makes an election to accrue market discount on a current basis, generally, any gain realized on the disposition of, and any partial payment of principal on,
a debt security having market discount is treated as ordinary income to the extent the gain, or principal payment, does not exceed the accrued market discount on the debt security. Market discount generally accrues in equal daily
installments. If the Fund ultimately collects less on the debt instrument than its purchase price plus the market discount previously included in income, the Fund may not be able to benefit from any offsetting loss deductions.
The Fund may invest in preferred securities or other securities the U.S. federal income tax treatment of which may not be
clear or may be subject to recharacterization by the Internal Revenue Service. To the extent the tax treatment of such securities or the income from such securities differs from the tax treatment expected by the Fund, it could affect the timing or
character of income recognized by the Fund, potentially requiring the Fund to purchase or sell securities, or otherwise change its portfolio, in order to comply with the tax rules applicable to RICs under the Code.
Gain or loss on the sale of securities by the Fund will generally be long-term capital gain or loss if the securities have
been held by the Fund for more than one year. Gain or loss on the sale of securities held for one year or less will be short-term capital gain or loss.
Because the Fund may invest in foreign securities, its income from such securities may be subject to non-U.S. taxes.
Foreign currency gain or loss on foreign currency exchange contracts, non-U.S. dollar-denominated securities contracts, and non-U.S. dollar-denominated futures contracts, options and forward contracts that are not section 1256 contracts (as
defined below) generally will be treated as ordinary income and loss.
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Income from options on individual securities written by the Fund will generally
not be recognized by the Fund for tax purposes until an option is exercised, lapses or is subject to a closing transaction (as defined by applicable regulations) pursuant to which the Funds obligations with respect to the option
are otherwise terminated. If the option lapses without exercise, the premiums received by the Fund from the writing of such options will generally be characterized as short-term capital gain. If the Fund enters into a closing transaction, the
difference between the premiums received and the amount paid by the Fund to close out its position will generally be treated as short-term capital gain or loss. If an option written by the Fund is exercised, thereby requiring the Fund to sell the
underlying security, the premium will increase the amount realized upon the sale of the security, and the character of any gain on such sale of the underlying security as short-term or long-term capital gain will depend on the holding period of the
Fund in the underlying security. Because the Fund will not have control over the exercise of the options it writes, such exercises or other required sales of the underlying securities may cause the Fund to realize gains or losses at inopportune
times.
Index options that qualify as section 1256 contracts will generally be
marked-to-market for U.S. federal income tax purposes. As a result, the Fund will generally recognize gain or loss on the last day of each taxable year equal
to the difference between the value of the option on that date and the adjusted basis of the option. The adjusted basis of the option will consequently be increased by such gain or decreased by such loss. Any gain or loss with respect to options on
indices and sectors that qualify as section 1256 contracts will be treated as short-term capital gain or loss to the extent of 40% of such gain or loss and long-term capital gain or loss to the extent of 60% of such gain or loss. Because
the mark-to-market rules may cause the Fund to recognize gain in advance of the receipt of cash, the Fund may be required to dispose of investments in order to meet its
distribution requirements. Mark-to-market losses may be suspended or otherwise limited if such losses are part of a straddle or similar transaction.
Taxation of Common Shareholders
Fund distributions of its tax-exempt interest on municipal securities, if properly
reported by the Fund to its shareholders (exempt-interest dividends), will generally be exempt from regular federal income tax. In order for the Fund to pay exempt-interest dividends, at least 50% of the value of the Funds total
assets must consist of tax-exempt obligations on a quarterly basis. If the Fund does not meet this requirement, it would not be able to pay tax-exempt dividends, and
your distributions attributable to interest received by the Fund from any source (including distributions of tax-exempt interest income) would be taxable as ordinary income to the extent of the Funds
earnings and profits.
The Fund will either distribute or retain for reinvestment all or part of its net capital gain. If
any such gain is retained, the Fund will be subject to a corporate income tax on such retained amount. In that event, the Fund expects to report the retained amount as undistributed capital gain in a notice to its common shareholders, each of whom,
if subject to U.S. federal income tax on long-term capital gains, (i) will be required to include in income for U.S. federal income tax purposes as long-term capital gain its share of such undistributed amounts, (ii) will be entitled to
credit its proportionate share of the tax paid by the Fund against its U.S. federal income tax liability and to claim refunds to the extent that the credit exceeds such liability and (iii) will increase its basis in its common shares by the
amount of undistributed capital gains included in the shareholders income less the tax deemed paid by the shareholder under clause (ii).
Distributions paid to you by the Fund from its net capital gain, if any, that the Fund properly reports as capital gain
dividends (capital gain dividends) are taxable as long-term capital gains, regardless of how long you have held your common shares. All other dividends paid to you by the Fund (including dividends from net short-term capital gains) from
its current or accumulated earnings and profits, other than exempt-interest dividends (ordinary income dividends) are generally subject to tax as ordinary income. Provided that certain holding period and other requirements are met,
ordinary income dividends (if properly reported by the Fund) may qualify (i) for the dividends received deduction in the case of corporate shareholders to the extent that the Funds income consists of dividend income from U.S.
corporations, and (ii) in the case of individual
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shareholders, as qualified dividend income eligible to be taxed at long-term capital gains rates to the extent that the Fund receives qualified dividend income. Qualified dividend
income is, in general, dividend income from taxable domestic corporations and certain qualified foreign corporations (e.g., generally, foreign corporations incorporated in a possession of the United States or in certain countries with a qualifying
comprehensive tax treaty with the United States, or whose shares with respect to which such dividend is paid is readily tradable on an established securities market in the United States). There can be no assurance as to what portion, if
any, of the Funds distributions will constitute qualified dividend income or be eligible for the dividends received deduction.
Any distributions you receive that are in excess of the Funds current and accumulated earnings and profits will be
treated as a return of capital to the extent of your adjusted tax basis in your common shares, and thereafter as capital gain from the sale of common shares. The amount of any Fund distribution that is treated as a return of capital will reduce your
adjusted tax basis in your common shares, thereby increasing your potential gain or reducing your potential loss on any subsequent sale or other disposition of your common shares.
Common shareholders may be entitled to offset their capital gain dividends with capital losses. The Code contains a number of
statutory provisions affecting when capital losses may be offset against capital gain, and limiting the use of losses from certain investments and activities. Accordingly, common shareholders that have capital losses are urged to consult their tax
advisers.
Dividends and other taxable distributions are taxable to you even though they are reinvested in additional
common shares of the Fund. Dividends and other distributions paid by the Fund are generally treated under the Code as received by you at the time the dividend or distribution is made. If, however, the Fund pays you a dividend in January that was
declared in the previous October, November or December to common shareholders of record on a specified date in one of such months, then such dividend will be treated for U.S. federal income tax purposes as being paid by the Fund and received by you
on December 31 of the year in which the dividend was declared. In addition, certain other distributions made after the close of the Funds taxable year may be spilled back and treated as paid by the Fund (except for purposes of
the 4% nondeductible excise tax) during such taxable year. In such case, you will be treated as having received such dividends in the taxable year in which the distributions were actually made.
Interest on certain private activity bonds is an item of tax preference subject to the alternative minimum tax on
individuals. The Fund may invest a portion of its assets in municipal bonds subject to this provision so that a portion of its exempt-interest dividends is an item of tax preference to the extent such dividends represent interest received from these
private activity bonds. Accordingly, investment in the Fund could cause a holder of common shares to be subject to, or result in an increased liability under, the alternative minimum tax.
Exempt-interest dividends are included in determining what portion, if any, of a persons Social Security and railroad
retirement benefits will be includable in gross income subject to federal income tax.
The price of common shares
purchased at any time may reflect the amount of a forthcoming distribution. Those purchasing common shares just prior to the record date of a distribution will receive a distribution which will be taxable to them even though it represents,
economically, a return of invested capital.
The Fund will send you information after the end of each year setting forth
the amount and tax status of any distributions paid to you by the Fund.
The sale or other disposition of common shares
will generally result in capital gain or loss to you and will be long-term capital gain or loss if you have held such common shares for more than one year at the time of sale. Any loss upon the sale or other disposition of common shares held for six
months or less will be treated as long-term capital loss to the extent of any capital gain dividends received (including amounts credited as an undistributed capital gain dividend) by you with respect to such common shares. Any loss you recognize on
a sale or other disposition of common shares will be disallowed if you acquire other common shares (whether
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through the automatic reinvestment of dividends or otherwise) within a 61-day period beginning 30 days before and ending 30 days after your sale or
exchange of the common shares. In such case, your tax basis in the common shares acquired will be adjusted to reflect the disallowed loss.
If the Fund liquidates, shareholders generally will realize capital gain or loss upon such liquidation in an amount equal to
the difference between the amount of cash or other property received by the shareholder (including any property deemed received by reason of its being placed in a liquidating trust) and the shareholders adjusted tax basis in its common shares.
Any such gain or loss will be long-term if the shareholder is treated as having a holding period in the Fund shares of greater than one year, and otherwise will be short-term.
Current U.S. federal income tax law taxes both long-term and short-term capital gain of corporations at the rates applicable
to ordinary income. For non-corporate taxpayers, short-term capital gain is currently taxed at rates applicable to ordinary income while long-term capital gain generally is taxed at a reduced maximum rate. The
deductibility of capital losses is subject to limitations under the Code.
Certain U.S. holders who are individuals,
estates or trusts and whose income exceeds certain thresholds will be required to pay a 3.8% Medicare tax on all or a portion of their net investment income, which includes dividends received from the Fund and capital gains from the sale
or other disposition of the Funds common shares.
A common shareholder that is a nonresident alien individual or a
foreign corporation (a foreign investor) generally will be subject to U.S. federal withholding tax at the rate of 30% (or possibly a lower rate provided by an applicable tax treaty) on ordinary income dividends (except as discussed
below). In general, U.S. federal withholding tax and U.S. federal income tax will not apply to any gain or income realized by a foreign investor in respect of any distribution of exempt-interest dividends or net capital gain (including amounts
credited as an undistributed capital gain dividend) or upon the sale or other disposition of common shares of the Fund. Different tax consequences may result if the foreign investor is engaged in a trade or business in the United States or, in the
case of an individual, is present in the United States for 183 days or more during a taxable year and certain other conditions are met. Foreign investors should consult their tax advisers regarding the tax consequences of investing in the
Funds common shares.
Ordinary income dividends properly reported by a RIC are generally exempt from U.S. federal
withholding tax where they (i) are paid in respect of the RICs qualified net interest income (generally, its U.S.-source interest income, other than certain contingent interest and interest from obligations of a corporation or
partnership in which the RIC is at least a 10% shareholder, reduced by expenses that are allocable to such income) or (ii) are paid in respect of the RICs qualified short-term capital gains (generally, the excess of the
RICs net short-term capital gain over its long-term capital loss for such taxable year). Depending on its circumstances, the Fund may report all, some or none of its potentially eligible dividends as such qualified net interest income or as
qualified short-term capital gains, and/or treat such dividends, in whole or in part, as ineligible for this exemption from withholding. In order to qualify for this exemption from withholding, a foreign investor needs to comply with applicable
certification requirements relating to its non-U.S. status (including, in general, furnishing an IRS Form W-8BEN, W-8BEN-E or substitute Form). In the case of common shares held through an intermediary, the intermediary may have withheld tax even if the Fund reported the payment as qualified net interest income or
qualified short-term capital gain. Foreign investors should contact their intermediaries with respect to the application of these rules to their accounts. There can be no assurance as to what portion of the Funds distributions would
qualify for favorable treatment as qualified net interest income or qualified short-term capital gains.
In
addition, withholding at a rate of 30% will apply to dividends paid in respect of common shares of the Fund held by or through certain foreign financial institutions (including investment funds), unless such institution enters into an agreement
with the Treasury to report, on an annual basis, information with respect to shares in,
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and accounts maintained by, the institution to the extent such shares or accounts are held by certain U.S. persons and by certain non-U.S. entities that
are wholly or partially owned by U.S. persons and to withhold on certain payments. Accordingly, the entity through which common shares of the Fund are held will affect the determination of whether such withholding is required. Similarly, dividends
paid in respect of common shares of the Fund held by an investor that is a non-financial foreign entity that does not qualify under certain exemptions will be subject to withholding at a rate of 30%, unless
such entity either (i) certifies that such entity does not have any substantial United States owners or (ii) provides certain information regarding the entitys substantial United States owners, which the Fund
or applicable withholding agent will in turn provide to the Secretary of the Treasury. An intergovernmental agreement between the United States and an applicable foreign country, or future Treasury regulations or other guidance, may modify these
requirements. The Fund will not pay any additional amounts to common shareholders in respect of any amounts withheld. Foreign investors are encouraged to consult with their tax advisers regarding the possible implications of these rules on their
investment in the Funds common shares.
U.S. federal backup withholding tax may be required on dividends,
distributions and sale proceeds payable to certain non-exempt common shareholders who fail to supply their correct taxpayer identification number (in the case of individuals, generally, their social security
number) or to make required certifications, or who are otherwise subject to backup withholding. Backup withholding is not an additional tax and any amount withheld may be refunded or credited against your U.S. federal income tax liability, if any,
provided that you timely furnish the required information to the Internal Revenue Service.
Ordinary income dividends,
capital gain dividends, and gain from the sale or other disposition of common shares of the Fund also may be subject to state, local, and/or foreign taxes. Common shareholders are urged to consult their own tax advisers regarding specific questions
about U.S. federal, state, local or foreign tax consequences to them of investing in the Fund.
The foregoing is a
general and abbreviated summary of certain provisions of the Code and the Treasury regulations currently in effect as they directly govern the taxation of the Fund and its common shareholders. These provisions are subject to change by legislative or
administrative action, and any such change may be retroactive. A more detailed discussion of the tax rules applicable to the Fund and its common shareholders can be found in the SAI that is incorporated by reference into this Prospectus. Common
shareholders are urged to consult their tax advisers regarding specific questions as to U.S. federal, state, local and foreign income or other taxes.
Please refer to the SAI for more detailed information. You are urged to consult your tax adviser.
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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 CHARTER AND BYLAWS
The Funds Charter and Bylaws include provisions that could have the effect of limiting the ability of other
entities or persons to acquire control of the Fund or to change the composition of the Board. In addition to the matters described below, the Fund has adopted other measures pursuant to the MGCL that may make it difficult for a third party to obtain
control of the Fund, including provisions in the Charter authorizing the Board to classify or reclassify shares of the Funds capital stock in one or more classes or series, to cause the issuance of additional shares of capital stock, and to
amend certain provisions of the Funds Charter, without shareholder approval, including to increase or decrease the number of shares of capital stock authorized to be issued by the Fund. These provisions, 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 Fund. Such attempts could have the effect of increasing the expenses of the Fund and
disrupting the normal operation of the Fund. Pursuant to the Funds Charter, 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 Directors expires and
only the Directors in that one class stand for re-election. Directors standing for election at an annual meeting of shareholders or special meeting in lieu thereof are elected to a three-year term. These
provisions of the Funds Charter could delay for up to two years the replacement of a majority of the Board. Pursuant to the Funds Charter, a Director may be removed from office with cause but only by a vote of the holders of at least 75%
of the shares of capital stock of the Fund then entitled to vote for the election of the respective Director.
The
Funds Charter also provides that the outstanding preferred shares of the Fund, including VMTP Shares, voting together as a class, to the exclusion of the holders of all other securities and classes of shares of the Fund, are entitled to elect
two Directors at any annual meeting in which Directors are elected.
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In addition, conversion of the Fund to an
open-end investment company would require an amendment to the Funds Charter. The amendment would have to be declared advisable by the Board prior to its submission to shareholders. Pursuant to the
Funds Charter, such an amendment would require the favorable vote of a majority of the total number of Directors fixed in accordance with the Bylaws and the favorable vote of the holders of at least 75% of the Funds outstanding shares of
capital stock (including preferred stock) entitled to be voted on the matter, voting as a single class. Such a vote also would satisfy a separate requirement in the Investment Company Act that the change be approved by the shareholders. Shareholders
of an open-end investment company may require the company to redeem their common shares at any time (except in certain circumstances as authorized by or under the Investment Company Act) at their net asset
value, less such redemption charge, if any, as might be in effect at the time of a redemption. If the Fund is converted to an open-end investment company, it could be required to liquidate portfolio securities
to meet requests for redemption, and the common shares would no longer be listed on a stock exchange. Conversion to an open-end investment company would also require redemption of all outstanding preferred
shares and would require changes in certain of the Funds investment policies and restrictions, such as those relating to the issuance of senior securities, the borrowing of money and the purchase of illiquid securities. Reference should be
made to the Charter on file with the SEC for the full text of such provision.
The Charter and Bylaws provide that the
Board has the power, to the exclusion of shareholders, to make, alter or repeal any provision of the Bylaws (except for any provision thereof specified not to be amended or repealed by the Board), subject to the requirements of the Investment
Company Act. Neither this provision of the Charter, nor the foregoing provision of the Charter requiring the affirmative vote of 75% of shares of capital stock of the Fund, can be amended or repealed except by the vote of such required number of
shares.
Under the MGCL, shareholder action can be taken only at an annual or special meeting of shareholders or (unless
the corporations charter provides for shareholder action by less than unanimous written consent, which the Funds Charter does not) by unanimous written consent in lieu of a meeting. These provisions, combined with the requirements of the
Bylaws regarding the calling of a shareholder-requested special meeting of shareholders (discussed below), may have the effect of delaying consideration of a shareholder proposal until the next annual meeting.
The Fund has elected to be subject to the Maryland Control Share Acquisition Act (the MCSAA). In general, the
MCSAA limits the ability of holders of control shares to vote those shares above various threshold levels that start at 10% unless approved by a vote of two-thirds of the other votes entitled to be cast on the matter at a special meeting
of the shareholders, as provided in the MCSAA. Control shares are generally defined in the MCSAA as shares of stock that, if aggregated with all other shares of stock that are either (i) owned by a person or (ii) as to which
that person is entitled to exercise or direct the exercise of voting power, except solely by virtue of a revocable proxy, would entitle that person to exercise voting power in electing directors above various thresholds of voting power starting at
10%. The Bylaws also provide that the Funds election to be subject to the provisions of the MCSAA shall not apply to the voting rights of the holders of any preferred shares of the Fund (but only with respect to such preferred shares) or to
the extent that any provision of the MCSAA is or is determined to be inconsistent with the Investment Company Act.
The
Funds Bylaws generally require that advance notice be given to the Fund 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 Fund not less than 120 calendar days nor more than 150 calendar days prior to the anniversary date of the prior years annual meeting
(subject to certain exceptions). Any notice by a shareholder must be accompanied by certain information as provided in the Bylaws .
The MGCL provides that a Maryland corporation that has a class of securities registered under the Securities Exchange Act of
1934 (the Exchange Act) and has at least three outside directors can elect to be subject to certain corporate governance provisions that may be inconsistent with the corporations charter or
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bylaws. Under the applicable statute, a board of directors may classify itself without the vote of shareholders. Further, the board of directors may, by electing into applicable statutory
provisions and notwithstanding the charter or bylaws, (i) reserve for itself the right to fix the number of directors; (ii) retain for itself sole authority to fill vacancies created by the death, removal or resignation of a director; and
(iii) provide that all vacancies on the board of directors may be filled only by the affirmative vote of a majority of the remaining directors, in office, even if the remaining directors do not constitute a quorum. Any director elected to fill
such vacancy shall hold office for the remainder of the unexpired term and until his or her successor is elected and qualified. A board of directors may implement all or any of these provisions without amending the charter or bylaws and without
shareholder approval. A corporation may be prohibited by its charter or by resolution of its board of directors from electing any of the provisions of the statute. The Fund is not prohibited from implementing any or all of the statute.
The Fund has elected to be subject Section 3-804(c) of the MGCL such that, at all times that the Fund is eligible to make that
election, all vacancies on the Board resulting from an increase in the size of the Board or the death, resignation or removal of a Director, may be filled only by the affirmative vote of a majority of the remaining Directors, even if the remaining
Directors do not constitute a quorum, subject to applicable requirements imposed on the election of Directors by the Investment Company Act.
Under Subtitle 6 of Title 3 of the MGCL (the Business Combination Act), once a corporation has at least 100
beneficial owners of its capital stock and subject to certain limited exceptions, business combinations between a Maryland corporation and an interested shareholder or an affiliate of an interested shareholder are prohibited for five
years after the most recent date on which the interested shareholder becomes an interested shareholder. The Funds Charter expressly elects that the Fund is subject to the restrictions under the Business Combination Act, notwithstanding a
provision of the Business Combination Act that would otherwise exempt corporations registered under the Investment Company Act as a closed end investment company. These business combinations include a merger, consolidation, share exchange or, in
circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested shareholder is defined as (i) any person who beneficially owns 10% or more of the voting power of the corporations
outstanding voting stock; or (ii) an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then-outstanding voting
stock of the corporation. After the five-year prohibition, any business combination between the corporation and an interested shareholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote
of at least (i) 80% of the votes entitled to be case by holders of the outstanding shares of voting stock of the corporation; and (ii) two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held
by the interested shareholder. These super-majority vote requirements do not apply if the corporations common shareholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in
the same form as previously paid by the interested shareholder for its shares. The Business Combination Act permits various exemptions from its provisions, including business combinations that are exempted by the Board before the time that the
interested shareholder becomes an interested shareholder.
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CLOSED-END FUND STRUCTURE
The Fund is a diversified, closed-end management investment company (commonly
referred to as a closed-end fund). Closed-end funds differ from open-end funds (which are generally referred to as mutual funds)
in that closed-end funds generally list their shares for trading on a stock exchange and do not redeem their shares at the request of the shareholder. This means that if you wish to sell your shares of a closed-end fund you must trade them on the stock exchange like any other stock at the prevailing market price at that time. In a mutual fund, if the shareholder wishes to sell shares of the fund, the mutual fund
will redeem or buy back the shares at NAV. Also, mutual funds generally offer new shares on a continuous basis to new investors and closed-end funds generally do not. The continuous inflows and outflows of
assets in a mutual fund can make it difficult to manage the funds investments. By comparison, closed-end funds are generally able to stay more fully invested in securities that are consistent with their
investment objectives and also have greater flexibility to make certain types of investments and to use certain investment strategies, such as financial leverage and investments in illiquid securities.
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 Fund to an open-end mutual fund, which
would also require a vote of the shareholders of the Fund.
REPURCHASE OF COMMON SHARES
Shares of closed-end investment companies often trade at a discount to their NAVs and
the Funds common shares may also trade at a discount to their NAV, although it is possible that they may trade at a premium above NAV. The market price of the Funds common shares will be determined by such factors as relative demand for
and supply of such common shares in the market, the Funds NAV, general market and economic conditions and other factors beyond the control of the Fund. See Net Asset Value and Description of Capital SharesCommon
Shares. Although the Funds common shareholders will not have the right to redeem their common shares, the Fund may take action to repurchase common shares in the open market or make tender offers for its common shares. This may have the
effect of reducing any market discount from NAV.
There is no assurance that, if action is undertaken to repurchase or
tender for common shares, such action will result in the common shares trading at a price which approximates their NAV. Although share repurchases and tender offers could have a favorable effect on the market price of the Funds common
shares, you should be aware that the acquisition of common shares by the Fund will decrease the capital of the Fund and, therefore, may have the effect of increasing the Funds expense ratio and decreasing the asset coverage with respect to any
borrowings or preferred shares outstanding. Any share repurchases or tender offers will be made in accordance with the requirements of the Exchange Act, the Investment Company Act and the principal stock exchange on which the common shares are
traded. For additional information, see Repurchase of Common Shares in the SAI.
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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 shares 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.
If a Prospectus Supplement so indicates, we may grant the underwriters an option to purchase additional common shares at the
public offering price, less the underwriting discounts and commissions, within 45 days from the date of the Prospectus Supplement, to cover any over-allotments.
Under agreements into which we may enter, underwriters, dealers and agents who participate in the distribution of our common
shares may be entitled to indemnification by us against certain liabilities, including liabilities under the Securities Act. Underwriters, dealers and agents may engage in transactions with us, or perform services for us, in the ordinary course of
business.
If so indicated in the applicable Prospectus Supplement, we will ourselves, or will authorize underwriters or
other persons acting as our agents to solicit offers by certain institutions to purchase our common shares from us pursuant to contracts providing for payment and delivery on a future date. Institutions with which such contacts may be made include
commercial and savings banks, insurance companies, pension funds, investment companies, educational and charitable institutions and others, but in all cases such institutions must be approved by us. The obligation of any purchaser under any such
contract will be subject to the condition that the purchase of the common shares shall not at the time of delivery be prohibited under the laws of the jurisdiction to which
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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.
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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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The Funds SAI, dated June 6, 2022, filed with this Prospectus; |
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our annual
report on Form N-CSR for the fiscal year ended April 30, 2021 filed with the SEC on July 6, 2021; and |
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our semi-annual
report on Form N-CSR for the fiscal period ended October 31, 2021 filed with the SEC on January 4, 2022. |
The Fund 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 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 Fund makes available this Prospectus, SAI and the Funds 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 Fund 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 Funds 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.
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PRIVACY PRINCIPLES OF THE FUND
The Fund is committed to maintaining the privacy of shareholders and to safeguarding their
non-public personal information. The following information is provided to help you understand what personal information the Fund collects, how we protect that information, and why in certain cases we may share
such information with select other parties.
The Fund does not receive any
non-public personal information relating to its shareholders who purchase shares through their broker-dealers. In the case of shareholders who are record holders of the Fund, the Fund receives personal non-public information on account applications or other forms. With respect to these shareholders, the Fund also has access to specific information regarding their transactions in the Fund.
The Fund does not disclose any non-public personal information about its shareholders
or former shareholders to anyone, except as permitted by law or as is necessary in order to service our shareholders accounts (for example, to a transfer agent).
The Fund restricts access to non-public personal information about its shareholders to
BlackRock employees with a legitimate business need for the information. The Fund maintains physical, electronic and procedural safeguards designed to protect the non-public personal information of our
shareholders.
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5,000,000 Shares
BLACKROCK INVESTMENT QUALITY MUNICIPAL TRUST, INC.
Shares of Common Stock
Rights to Purchase Common Stock
PROSPECTUS
June 6, 2022
BLACKROCK INVESTMENT QUALITY MUNICIPAL TRUST, INC.
5,000,000 Shares of Common Stock
PROSPECTUS
SUPPLEMENT
June 6, 2022
Until July 1, 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.
BlackRock Investment Quality Municipal Trust, Inc.
STATEMENT OF ADDITIONAL INFORMATION
BlackRock Investment Quality Municipal Trust, Inc. (the Fund) is a diversified, closed-end
management investment company. This Statement of Additional Information (SAI) relating to the Funds shares of common stock (common shares) does not constitute a prospectus, but should be read in conjunction with the
prospectus relating thereto dated June 6, 2022 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.
On May 20, 2022, the Funds board of directors (the Board) approved a
change in the Funds fiscal year end from April 30 to July 31, effective as of July 31, 2022.
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 June 6, 2022.
S-1
THE FUND
The Fund is a diversified, closed-end management investment company registered under the Investment
Company Act. The Fund was formed as a Maryland corporation on November 19, 1992, pursuant to the filing of Articles of Incorporation with the SDAT. The Funds investment adviser is BlackRock Advisors, LLC (the Advisor).
The common shares of the Fund are listed on the New York Stock Exchange (NYSE) under the symbol BKN. As April 30,
2022, the Fund has outstanding 17,233,066 common shares and 1,259 Series W-7 Variable Rate Muni Term Preferred Shares (VMTP Shares).
INVESTMENT OBJECTIVE AND POLICIES
Investment Restrictions
The Funds
investment objective and the following investment restrictions are fundamental and cannot be changed without the approval of the holders of a majority of the Funds outstanding voting securities (defined in the Investment Company Act as the
lesser of (a) more than 50% of the outstanding shares (including common shares and any outstanding shares of preferred stock (preferred shares)) or (b) 67% or more of the shares (including common shares and any outstanding preferred
shares) represented at a meeting at which more than 50% of the outstanding shares (including common shares and any outstanding preferred shares) are represented) and the approval of the holders of a majority of any outstanding preferred shares
voting separately as a class. All other investment policies or practices are considered by the Fund not to be fundamental and accordingly may be changed without shareholder approval. If a percentage restriction on investment or use of assets set
forth below is adhered to at a time a transaction is effected, later changes in the percentage resulting from changing market values will not be considered a deviation from policy. The Fund may not:
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with respect to 75% of its total assets, invest more than 5% of the value of its total assets (taken at market
value at time of purchase) in the outstanding securities of any other issuer or own more than 10% of the outstanding voting securities of any one issuer, in each case other than securities issued or guaranteed by the U.S. government or any agency or
instrumentality thereof or other investment companies; |
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invest 25% of more of the value of its total assets in any one industry provided that such limitation shall not
be applicable to municipal obligations other than those municipal obligations backed only by assets and revenues of non-governmental users; |
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issue senior securities other than (a) preferred shares not in excess of the excess of 50% of its total
assets over any senior securities described in clause (b) below that are outstanding, (b) senior securities other than preferred shares (including borrowing money, including on margin if margin securities are owned and through entering
into reverse repurchase agreements) not in excess of 33 1/3% of its total assets, and (c) borrowings up to 5% of its total assets for temporary purposes without regard to the amount of senior securities outstanding under clauses (a) and
(b) above; provided, however, that the Funds obligations under interest rate swaps, when issued and forward commitment transactions and similar transactions are not treated as senior securities if covering assets are appropriately segregated;
or pledge its assets other than to secure such issuances or in connection with Hedging Transactions, short sales, when-issued and forward commitment transactions and similar investment strategies. For purposes of clauses (a), (b) and (c) above,
total assets shall be calculated after giving effect to the net proceeds of any such issuance and net of any liabilities and indebtedness that do not constitute senior securities except for such liabilities and indebtedness as are
excluded from treatment as senior securities by the proviso to this item (3); |
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make loans of money or property to any person, except through loans of portfolio securities, the purchase of
fixed income securities consistent with the Funds investment objective and policies or the acquisition of securities subject to repurchase agreements; |
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underwrite the securities of other issuers, except to the extent that in connection with the disposition of
portfolio securities or the sale of its own shares the Fund may be deemed to be an underwriter; |
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invest for the purpose of exercising control over any issuer, except that the Fund may control a portfolio
subsidiary; |
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purchase or sell real estate or interests therein other than municipal obligations secured by real estate or
interests therein; |
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purchase or sell commodities or commodity contracts except for purposes, and only to the extent, permitted by
applicable law without the Fund becoming subject to registration with the Commodity Futures Trading Commission as a commodity pool; or |
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make any short sale of securities except in conformity with applicable laws, rules and regulations and unless,
giving effect to such sale, the market value of all securities sold short does not exceed 25% of the value of the Funds total assets and the Funds aggregate short sales of a particular class of securities does not exceed 25% of the then
outstanding securities of that class. |
As a matter of fundamental policy, under normal market conditions, the Fund will
invest at least 80% of its Managed Assets in investments the income from which is exempt from federal income tax.
As a matter of non-fundamental policy, under normal market conditions, the Fund will invest at least 80% of its Managed Assets in investment quality securities. For the purposes of the foregoing policy, an investment quality
security is a security that is rated BBB or Baa or higher by Moodys Investor Service Inc. (Moodys), S&P Global Ratings (S&P), Fitch Ratings, Inc. (Fitch) or another nationally recognized rating
agency or, if unrated, deemed to be of comparable quality by the Investment Advisor. The Fund has adopted a policy to provide shareholders of the Fund at least 60 days prior notice of any change in this non fundamental investment policy, if
the change is not first approved by shareholders, which notice will comply with the Investment Company Act, as amended, and the rules and regulations thereunder.
The Funds VMTP Shares are assigned long-term ratings by Moodys and Fitch. In order to maintain the required ratings, the Fund is
required to comply with certain investment quality, diversification and other guidelines established by Moodys and Fitch. Such guidelines may be more restrictive than the restrictions set forth above. The Fund does not anticipate that such
guidelines would have a material adverse effect on its ability to achieve its investment objective. Moodys and Fitch receive fees in connection with their ratings issuances. The Fund is also subject to certain covenants and requirements under
the terms of the VMTP Shares and related documents. Such requirements may be more restrictive than the restrictions set forth above. The Fund does not anticipate that such requirements would have a material adverse effect on its ability to achieve
its investment objective.
S-2
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Funds investment objective, policies and techniques that are described in
the Prospectus.
Portfolio Investments
Municipal Securities
Municipal
security bonds are either general obligation or revenue bonds and typically are issued to finance public projects, such as roads or public buildings, to pay general operating expenses or to refinance outstanding debt. Municipal security bonds may
also be issued for private activities, such as housing, medical and educational facility construction or for privately owned industrial development and pollution control projects. General obligation bonds are backed by the full faith and credit, or
taxing authority, of the issuer and may be repaid from any revenue source. Revenue bonds may be repaid only from the revenues of a specific facility or source.
Issuers of securities rated Ba/BB or below are regarded as having current capacity to make principal and interest payments but are subject to
business, financial or economic conditions which could adversely affect such payment capacity. Municipal securities rated Baa/BBB or better are considered investment grade securities; municipal securities rated Baa are considered medium
grade obligations which lack outstanding investment characteristics and have speculative characteristics, while municipal securities rated BBB are regarded as having adequate capacity to pay principal and interest. Municipal securities rated AAA in
which the Fund may invest may have been so rated on the basis of the existence of insurance guaranteeing the timely payment, when due, of all principal and interest. Municipal securities rated below investment grade quality (Ba/BB or lower) are
obligations of issuers that are considered predominantly speculative with respect to the issuers capacity to pay interest and repay principal according to the terms of the obligation and, therefore, carry greater investment risk, including the
possibility of issuer default and bankruptcy and increased market price volatility. Municipal securities rated below investment grade tend to be less marketable than higher-quality securities because the market for them is less broad. The market for
unrated municipal securities is even narrower. During periods of thin trading in these markets, the spread between bid and ask prices is likely to increase significantly and the Fund may have greater difficulty selling its portfolio securities. The
Fund will be more dependent on the research and analysis of the Advisor.
A general description of Moodys, S&Ps and
Fitchs ratings of municipal securities is set forth in Appendix A hereto. The ratings of Moodys, S&P and Fitch represent their opinions as to the quality of the municipal securities they rate. It should be emphasized, however,
that ratings are general and are not absolute standards of quality. Consequently, municipal securities with the same maturity, coupon and rating may have different yields while obligations of the same maturity and coupon with different ratings may
have the same yield.
The Fund will opportunistically manage the maturity and/or duration of its securities and the average weighted
maturity and/or duration may be shortened or lengthened from time to time depending on market conditions. As a result, the Funds portfolio at any given time may include both long-term and intermediate-term municipal securities. Moreover,
during temporary defensive periods (e.g., times when, in the Advisors opinion, temporary imbalances of supply and demand or other temporary dislocations in the municipal securities market adversely affect the price at which long-term or
intermediate-term municipal securities are available), and in order to keep cash on hand fully invested, including the period during which the net proceeds of the offering of common shares or securities in connection with leverage, if any, are being
invested, the Fund may invest any percentage of its assets in short-term investments including high quality, short-term securities which may be either tax-exempt or taxable and securities of other open- or closed-end investment companies that invest primarily in municipal securities of the type in which the Fund may invest directly.
S-3
Obligations of issuers of municipal securities are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such as the Bankruptcy Reform Act of 2005. In addition, the obligations of such issuers may become subject to the laws enacted in the future by Congress, state legislatures or
referenda extending the time for payment of principal or interest, or both, or imposing other constraints upon enforcement of such obligations or upon municipalities to levy taxes. There is also the possibility that, as a result of legislation or
other conditions, the power or ability of any issuer to pay, when due, the principal of and interest on its municipal securities may be materially affected.
Short-Term Taxable Fixed Income Securities
For temporary defensive purposes or to keep cash on hand fully invested, the Fund may invest up to 100% of its Managed Assets in cash
equivalents and short-term taxable fixed income securities. The Fund may also invest in these instruments to achieve its investment objective. Short-term taxable fixed income investments are defined to include, without limitation, the following:
(1) U.S. Government securities, including bills, notes and bonds differing as to maturity and rates of interest that are either
issued or guaranteed by the U.S. Treasury or by U.S. Government agencies or instrumentalities. U.S. Government securities include securities issued by (a) the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration, and Government National Mortgage Association, whose securities are supported by the full faith and credit of the United States; (b) the Federal Home Loan Banks,
Federal Intermediate Credit Banks, and Tennessee Valley Authority, whose securities are supported by the right of the agency to borrow from the U.S. Treasury; (c) the Federal National Mortgage Association, whose securities are supported by
the discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and (d) the Student Loan Marketing Association, whose securities are supported only by its credit. While the
U.S. Government provides financial support to such U.S. Government-sponsored agencies or instrumentalities, no assurance can be given that it always will do so since it is not so obligated by law. The U.S. Government, its agencies and
instrumentalities do not guarantee the market value of their securities. Consequently, the value of such securities may fluctuate.
(2) Certificates of deposit issued against funds deposited in a bank or a savings and loan association. Such certificates are for a
definite period of time, earn a specified rate of return, and are normally negotiable. The issuer of a certificate of deposit agrees to pay the amount deposited plus interest to the bearer of the certificate on the date specified thereon.
Certificates of deposit purchased by the Fund may not be fully insured by the Federal Deposit Insurance Corporation.
(3) Repurchase
agreements, which involve purchases of debt securities. At the time the Fund purchases securities pursuant to a repurchase agreement, it simultaneously agrees to resell and redeliver such securities to the seller, who also simultaneously agrees to
buy back the securities at a fixed price and time. This assures a predetermined yield for the Fund during its holding period, since the resale price is always greater than the purchase price and reflects an agreed-upon market rate. Such actions
afford an opportunity for the Fund to invest temporarily available cash. The Fund may enter into repurchase agreements only with respect to obligations of the U.S. Government, its agencies or instrumentalities; certificates of deposit; or
bankers acceptances in which the Fund may invest. Repurchase agreements may be considered loans to the seller, collateralized by the underlying securities. The risk to the Fund is limited to the ability of the seller to pay the agreed-upon sum
on the repurchase date; in the event of default, the repurchase agreement provides that the Fund is entitled to sell the underlying collateral. If the value of the collateral declines after the agreement is entered into, and if the seller defaults
under a repurchase agreement when the value of the underlying collateral is less than the repurchase price, the Fund could incur a loss of both principal and interest. The Advisor monitors the value of the collateral at the time the action is
entered into and at all times during the term of the repurchase agreement. The Advisor does so in an effort to determine that the value of the collateral always equals or exceeds the agreed-upon repurchase price to be paid to the Fund. If the seller
were to be subject to a Federal bankruptcy proceeding, the ability of the Fund to liquidate the collateral could be delayed or impaired because of certain provisions of the bankruptcy laws.
S-4
(4) Commercial paper, which consists of short-term unsecured promissory notes, including
variable rate master demand notes issued by corporations to finance their current operations. Master demand notes are direct lending arrangements between the Fund and a corporation. There is no secondary market for such notes. However, they are
redeemable by the Fund at any time. The Advisor will consider the financial condition of the corporation (e.g., earning power, cash flow and other liquidity ratios) and will continuously monitor the corporations ability to meet all of its
financial obligations, because the Funds liquidity might be impaired if the corporation were unable to pay principal and interest on demand. Investments in commercial paper will be limited to commercial paper rated in the highest categories by
a major rating agency and which mature within one year of the date of purchase or carry a variable or floating rate of interest.
Short-Term Tax-Exempt Fixed Income Securities
For temporary defensive purposes or to keep cash on hand fully
invested, the Fund may invest up to 100% of its Managed Assets in cash equivalents and short-term tax-exempt fixed income securities. The Fund may also invest in these instruments to achieve its investment
objective. Short-term tax-exempt fixed income securities are securities that are exempt from regular Federal income tax and mature within three years or less from the date of issuance. Short-term tax-exempt fixed income securities are defined to include, without limitation, the following:
Bond
Anticipation Notes (BANs) are usually general obligations of state and local governmental issuers which are sold to obtain interim financing for projects that will eventually be funded through the sale of long-term debt obligations or
bonds. The ability of an issuer to meet its obligations on its BANs is primarily dependent on the issuers access to the long-term municipal bond market and the likelihood that the proceeds of such bond sales will be used to pay the principal
and interest on the BANs.
Tax Anticipation Notes (TANs) are issued by state and local governments to finance the current
operations of such governments. Repayment is generally to be derived from specific future tax revenues. TANs are usually general obligations of the issuer. A weakness in an issuers capacity to raise taxes due to, among other things, a decline
in its tax base or a rise in delinquencies could adversely affect the issuers ability to meet its obligations on outstanding TANs.
Revenue Anticipation Notes (RANs) are issued by governments or governmental bodies with the expectation that future revenues from
a designated source will be used to repay the notes. In general, they also constitute general obligations of the issuer. A decline in the receipt of projected revenues, such as anticipated revenues from another level of government, could adversely
affect an issuers ability to meet its obligations on outstanding RANs. In addition, the possibility that the revenues would, when received, be used to meet other obligations could affect the ability of the issuer to pay the principal and
interest on RANs.
Construction Loan Notes are issued to provide construction financing for specific projects. Frequently, these notes are
redeemed with funds obtained from the Federal Housing Administration.
Bank Notes are notes issued by local government bodies and agencies
such as those described above to commercial banks as evidence of borrowings. The purposes for which the notes are issued are varied but they are frequently issued to meet short-term working capital or capital-project needs. These notes may have
risks similar to the risks associated with TANs and RANs.
Tax-Exempt Commercial Paper
(municipal paper) represents very short-term unsecured, negotiable promissory notes, issued by states, municipalities and their agencies. Payment of principal and interest on issues of municipal paper may be made from various sources, to
the extent the funds are available therefrom. Maturities on municipal paper generally will be shorter than the maturities of TANs, BANs or RANs. There is a limited secondary market for issues of municipal paper.
Certain municipal securities may carry variable or floating rates of interest whereby the rate of interest is not fixed but varies with
changes in specified market rates or indices, such as a bank prime rate or tax-exempt money market indices.
S-5
While the various types of notes described above as a group represent the major portion of the tax-exempt note market, other types of notes are available in the marketplace and the Fund may invest in such other types of notes to the extent permitted under its investment objective, policies and limitations.
Such notes may be issued for different purposes and may be secured differently from those mentioned above.
Strategic Transactions and Other Management
Techniques
Consistent with its investment objective and policies set forth herein, the Fund may also enter into certain hedging and
risk management transactions or transactions to enhance total return. In particular, the Fund may purchase and sell futures contracts, exchange-listed and
over-the-counter put and call options on securities, financial indices and futures contracts, forward foreign currency contracts, and may enter into various interest
rate transactions (collectively, Strategic Transactions). Strategic Transactions may be used to attempt to protect against possible changes in the market value of the Funds portfolio resulting from fluctuations in the debt
securities markets and changes in interest rates, to protect the Funds unrealized gains in the value of its portfolio securities, to facilitate the sale of such securities for investment purposes and to establish a position in the securities
markets as a temporary substitute for purchasing particular securities. Any or all of these Strategic Transactions may be used at any time whether for hedging and risk management or to enhance total return. There is no particular strategy that
requires use of one technique rather than another. Use of any Strategic Transaction is a function of market conditions. The Strategic Transactions that the Fund may use are described below. The ability of the Fund to hedge them successfully will
depend on the Advisors ability to predict pertinent market movements as well as sufficient correlation among the instruments, which cannot be assured.
Interest Rate Transactions. The Fund 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 Fund anticipates purchasing at a later date.
The Fund intends to use these transactions for duration and risk management purposes and not as a speculative investment. The Fund will not sell interest rate caps or floors that it does not own. Interest rate swaps involve the exchange by the Fund
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 predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate floor.
The Fund 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 Fund 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 Advisor and the Fund believe such obligations do not constitute senior securities and, accordingly,
will not treat them as being subject to its borrowing restrictions. The Fund will accrue the net amount of the excess, if any, of the Funds 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 Fund 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 Fund 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.
S-6
Futures Contracts and Options on Futures Contracts. In connection with its
hedging and other risk management strategies, the Fund may also enter into contracts for the purchase or sale for future delivery (futures contracts) of debt securities, aggregates of debt securities or indices or prices thereof, other
financial indices and U.S. Government debt securities or options on the above. The Fund primarily intends to engage in such transactions for bona fide hedging or risk management and other portfolio management purposes.
Calls on Securities, Indices and Futures Contracts. In order to enhance income or reduce fluctuations on net asset value,
the Fund may sell or purchase call options (calls) on municipal securities and indices based upon the prices of futures contracts and debt securities that are traded on U.S. and foreign securities exchanges and in the over-the-counter markets. A call option gives the purchaser of the option the right to buy, and obligates the seller to sell, the underlying security, futures contract or
index at the exercise price at any time or at a specified time during the option period. All such calls sold by the Fund must be covered as long as the call is outstanding (i.e., the Fund must own the instrument subject to the call or
other securities or assets acceptable for applicable segregation and coverage requirements). A call sold by the Fund exposes the Fund during the term of the option to possible loss of opportunity to realize appreciation in the market price of the
underlying security, index or futures contract and may require the Fund to hold an instrument which it might otherwise have sold. The purchase of a call gives the Fund the right to buy a security, futures contract or index at a fixed price. Calls on
futures on municipal securities must also be covered by assets or instruments acceptable under applicable segregation and coverage requirements.
Puts on Securities, Indices and Futures Contracts. As with calls, the Fund may purchase put options (puts) that
relate to municipal securities (whether or not it holds such securities in its portfolio), indices or futures contracts. For the same purposes, the Fund may also sell puts on municipal securities, indices or futures contracts on such securities if
the Funds contingent obligations on such puts are secured by segregated assets consisting of cash or liquid high grade debt securities having a value not less than the exercise price. The Fund will not sell puts if, as a result, more than 50%
of the Funds total assets would be required to cover its potential obligations under its hedging and other investment transactions. In selling puts, there is a risk that the Fund may be required to buy the underlying security at a price higher
than the current market price.
Credit Derivatives. The Fund may engage in credit derivative transactions. There are
two broad categories of credit derivatives: default price risk derivatives and market spread derivatives. Default price risk derivatives are linked to the price of reference securities or loans after a default by the issuer or borrower,
respectively. Market spread derivatives are based on the risk that changes in market factors, such as credit spreads, can cause a decline in the value of a security, loan or index. There are three basic transactional forms for credit derivatives:
swaps, options and structured instruments. The use of credit derivatives is a highly specialized activity which involves strategies and risks different from those associated with ordinary portfolio security transactions. If the Advisor is incorrect
in its forecasts of default risks, market spreads or other applicable factors, the investment performance of the Fund would diminish compared with what it would have been if these techniques were not used. Moreover, even if the Advisor is correct in
its forecasts, there is a risk that a credit derivative position may correlate imperfectly with the price of the asset or liability being hedged. There is no limit on the amount of credit derivative transactions that may be entered into by the Fund.
The Funds risk of loss in a credit derivative transaction varies with the form of the transaction. For example, if the Fund purchases a default option on a security, and if no default occurs with respect to the security, the Funds loss
is limited to the premium it paid for the default option. In contrast, if there is a default by the grantor of a default option, the Funds loss will include both the premium that it paid for the option and the decline in value of the
underlying security that the default option hedged.
Municipal Market Data Rate Locks. The Fund may purchase and sell
Municipal Market Data Rate Locks (MMD Rate Locks). An MMD Rate Lock permits the Fund to lock in a specified municipal interest rate for a portion of its portfolio to preserve a return on a particular investment or a portion of its
portfolio as a duration management technique or to protect against any increase in the price of securities to be purchased at a later date. The Fund will ordinarily use these transactions as a hedge or for duration or risk management although it is
S-7
permitted to enter into them to enhance income or gain. An MMD Rate Lock is a contract between the Fund and an MMD Rate Lock provider pursuant to which the parties agree to make payments to each
other on a notional amount, contingent upon whether the Municipal Market Data AAA General Obligation Scale is above or below a specified level on the expiration date of the contract. For example, if the Fund buys an MMD Rate Lock and the Municipal
Market Data AAA General Obligation Scale is below the specified level on the expiration date, the counterparty to the contract will make a payment to the Fund equal to the specified level minus the actual level, multiplied by the notional amount of
the contract. If the Municipal Market Data AAA General Obligation Scale is above the specified level on the expiration date, the Fund will make a payment to the counterparty equal to the actual level minus the specified level, multiplied by the
notional amount of the contract. In entering into MMD Rate Locks, there is a risk that municipal yields will move in the direction opposite of the direction anticipated by the Fund. The Fund will not enter into MMD Rate Locks if, as a result, more
than 50% of its total assets would be required to cover its potential obligations under its hedging and other investment transactions.
New Products. The financial markets continue to evolve and financial products continue to be developed. The Fund reserves
the right to invest in new financial products as they are developed or become more widely accepted. As with any new financial product, these products will entail risks, including risks to which the Fund currently is not subject.
The principal risks relating to the use of futures contracts and other Strategic Transactions are: (a) less than perfect correlation
between the prices of the instrument and the market value of the securities in the Funds portfolio; (b) possible lack of a liquid secondary market for closing out a position in such instruments; (c) losses resulting from interest
rate or other market movements not anticipated by the Advisor; and (d) the obligation to meet additional variation margin or other payment requirements, all of which could result in the Fund being in a worse position than if such techniques had
not been used.
Certain provisions of the Code may restrict or affect the ability of the Fund to engage in Strategic Transactions. See
Tax Matters.
Short Sales
The Fund may make short sales of municipal securities and other securities. A short sale is a transaction in which the Fund sells a security it
does not own in anticipation that the market price of that security will decline. The Fund may make short sales to hedge positions, for duration and risk management, in order to maintain portfolio flexibility or to enhance income or gain.
When the Fund 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 Fund may have to pay a fee to borrow particular securities and is often obligated to pay over any payments received on such borrowed securities.
The Funds obligation to replace the borrowed security will be secured by collateral deposited with the broker-dealer, usually cash,
U.S. Government securities or other liquid securities. The Fund will also be required to designate on its books and records 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 broker-dealer from which it borrowed the security regarding payment over of any payments received by the Fund on such security, the
Fund may not receive any payments (including interest) on its collateral deposited with such broker-dealer.
If the price of the security
sold short increases between the time of the short sale and the time the Fund replaces the borrowed security, the Fund will incur a loss; conversely, if the price declines, the Fund will realize a gain. Any gain will be decreased, and any loss
increased, by the transaction costs described above. Although the Funds gain is limited to the price at which it sold the security short, its potential loss is theoretically unlimited.
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The Fund will not make a short sale if, after giving effect to such sale, the market value of all
securities sold short exceeds 25% of the value of its total assets or the Funds aggregate short sales of a particular class of securities exceeds 25% of the outstanding securities of that class. The Fund 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 Fund owns or has the immediate and unconditional right to acquire at no additional cost the identical security.
Environmental, Social and Governance (ESG) Integration
Although the Fund does not seek to implement a specific ESG, impact or sustainability strategy, Fund management will consider ESG
characteristics as part of the investment process for actively managed funds such as the Fund. 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 Advisor across the ESG risks and opportunities regarding an issuer. Fund management will consider those ESG characteristics it deems relevant or additive when making investment decisions for the Fund.
The ESG characteristics utilized in the Funds 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 Fund. Further, investors can differ in their
views of what constitutes positive or negative ESG characteristics. As a result, the Fund 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 Funds
exposure to certain companies or industries and the Fund may forego certain investment opportunities. While Fund management views ESG considerations as having the potential to contribute to the Funds long-term performance, there is no
guarantee that such results will be achieved.
OTHER INVESTMENT POLICIES AND TECHNIQUES
Restricted and Illiquid Investments
The
Fund may invest in investments that lack an established secondary trading market or otherwise are considered illiquid. Liquidity of an investment relates to the ability to dispose easily of the investment and the price to be obtained upon
disposition of the investment, which may be less than would be obtained for a comparable more liquid investment. Illiquid investments may trade at a discount from comparable, more liquid investments. Investment of the Funds assets in illiquid
investments may restrict the ability of the Fund to dispose of its investments in a timely fashion and for a fair price as well as its ability to take advantage of market opportunities. The risks associated with illiquidity will be particularly
acute where the Funds operations require cash, such as when the Fund pays dividends, and could result in the Fund borrowing to meet short-term cash requirements or incurring capital losses on the sale of illiquid investments.
The Fund may invest in securities that are not registered under the Securities Act (restricted securities). Restricted securities
may be sold in private placement transactions between issuers and their purchasers and may be neither listed on an exchange nor traded in other established markets. In many cases, privately placed securities may not be freely transferable under the
laws of the applicable jurisdiction or due to contractual restrictions on resale. As a result of the absence of a public trading market, privately placed securities may be less liquid and more difficult to value than publicly traded securities. To
the extent that privately placed securities may be resold in privately negotiated transactions, the prices realized from the sales, due to illiquidity, could be less than those originally paid by the Fund or less than their fair market value. In
addition, issuers whose securities are not publicly traded may not be subject to the disclosure and other investor protection requirements that may be applicable if their securities were publicly traded. If any privately placed securities held by
the Fund are required to be registered under the securities laws of one or more jurisdictions before being resold, the Fund may be required to bear the expenses of registration. Where registration is required for restricted securities, a
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considerable time period may elapse between the time the Fund decides to sell the security and the time it is actually permitted to sell the security under an effective registration statement. If
during such period, adverse market conditions were to develop, the Fund might obtain less favorable pricing terms than when it decided to sell the security. Transactions in restricted securities may entail other transaction costs that are higher
than those for transactions in unrestricted securities. Certain of the Funds investments in private placements may consist of direct investments and may include investments in smaller, less seasoned issuers, which may involve greater risks.
These issuers may have limited product lines, markets or financial resources, or they may be dependent on a limited management group. In making investments in such securities, the Fund may obtain access to material nonpublic information, which may
restrict the Funds ability to conduct portfolio transactions in such securities.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements with respect to its portfolio investments subject to the investment restrictions set
forth herein and in the Prospectus. Reverse repurchase agreements involve the sale of securities held by the Fund with an agreement by the Fund to repurchase the securities at an agreed upon price, date and interest payment. At the time the Fund
enters into a reverse repurchase agreement, it may designate on its books and records liquid instruments having a value not less than the repurchase price (including accrued interest). If the Fund establishes and maintains such a segregated account,
a reverse repurchase agreement will not be considered a borrowing by the Fund; however, under certain circumstances in which the Fund does not establish and maintain such a segregated account, such reverse repurchase agreement will be considered a
borrowing for the purpose of the Funds limitation on borrowings. The use by the Fund of reverse repurchase agreements involves many of the same risks of leverage since the proceeds derived from such reverse repurchase agreements may be
invested in additional securities. 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 Fund 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 Fund in connection with the reverse repurchase agreement may decline in price.
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 Funds obligation to repurchase the securities, and the Funds use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such
decision. Also, the Fund 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.
Repurchase Agreements
As temporary
investments, the Fund 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 Funds holding period. Repurchase agreements are considered to be loans collateralized by the underlying security that is the subject of the repurchase contract. The Fund will
only enter into repurchase agreements with registered securities dealers or domestic banks that, in the opinion of the Advisor, present minimal credit risk. The risk to the Fund is limited to the ability of the issuer to pay the agreed-upon
repurchase price on the delivery date; however, although the value of the underlying collateral at the time the transaction is entered into always equals or exceeds the agreed-upon repurchase price, if the value of the collateral declines there is a
risk of loss of both principal and interest. In the event of default, the collateral may be sold but the Fund might incur a loss if the value of the collateral declines, and might incur disposition costs or experience delays in connection with
liquidating the collateral. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, realization upon the collateral by the Fund may be delayed or limited. The Advisor will monitor the value of the collateral
at the time the transaction is entered into and 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
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repurchase price. In the event the value of the collateral declines below the repurchase price, the Advisor will demand additional collateral from the issuer to increase the value of the
collateral to at least that of the repurchase price, including interest.
Lending of Securities
The Fund 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 shall be made on behalf of the Fund if, as a result, the aggregate value of
all securities loans of the Fund exceeds one-third of the value of the Funds total assets (including the value of the collateral received). The Fund may terminate a loan at any time and obtain
the return of the securities loaned. The Fund 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 Fund 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 Fund 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 Fund 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 Fund
conducts its securities lending pursuant to an exemptive order from the SEC permitting it to lend portfolio securities to borrowers affiliated with the Fund and to retain an affiliate of the Fund as lending agent. To the extent that the Fund engages
in securities lending, BlackRock Investment Management, LLC (BIM), an affiliate of the Advisors, acts as securities lending agent for the Fund, subject to the overall supervision of the Advisors. BIM 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 Fund engages in securities lending, the Fund 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 Fund 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 Fund 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 Fund. 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 Fund 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 Fund, 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 lending income (which excludes collateral investment expenses).
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High Yield Securities
The Fund may invest up to 20% of its Managed Assets in securities rated below investment grade, such as those rated Ba or below by Moodys
or BB or below by S&P or Fitch or securities comparably rated by other rating agencies or in unrated securities determined by the Advisor to be of comparable quality. Securities rated Ba and below by Moodys and Fitch are judged to have
speculative elements, their future cannot be considered as well assured and often the protection of interest and principal payments may be very moderate. Securities rated BB by S&P are regarded as having predominantly speculative characteristics
and, while such obligations have less near-term vulnerability to default than other speculative grade debt, they 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 retail 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 Fund to sell certain securities or could result in lower prices than those used in calculating the Funds net asset value.
The prices of debt 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. This higher coupon is what the investor receives 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 Advisor also will independently evaluate these securities and the ability for the issuers of such securities to pay interest and principal. To the extent that the Fund invests in lower
grade securities that have not been rated by a rating agency, the Funds ability to achieve its investment objectives will be more dependent on the Advisors credit analysis than would be the case when the Fund invests in rated securities.
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ADDITIONAL RISK FACTORS
Risk Factors in Strategic Transactions and Derivatives
The Funds use of derivative instruments involves risks different from, and possibly greater than, the risks associated with investing
directly in securities and other traditional investments. Derivatives are subject to a number of risks such as credit risk, leverage risk, illiquidity risk, correlation risk and index risk as described below:
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Credit Riskthe risk that the counterparty in a derivative transaction will be unable to honor its
financial obligation to the Fund, or the risk that the reference entity in a derivative will not be able to honor its financial obligations. In particular, derivatives traded in OTC markets often are not guaranteed by an exchange or clearing
corporation and often do not require payment of margin, and to the extent that the Fund has unrealized gains in such instruments or has deposited collateral with its counterparties the Fund is at risk that its counterparties will become bankrupt or
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Currency Riskthe risk that changes in the exchange rate between two currencies will adversely affect
the value (in U.S. dollar terms) of an investment. |
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Leverage Riskthe risk associated with certain types of investments or trading strategies (such as,
for example, borrowing money to increase the amount of investments) that relatively small market movements may result in large changes in the value of an investment. Certain transactions in derivatives (such as futures transactions or sales of put
options) involve substantial leverage risk and may expose the Fund to potential losses that exceed the amount originally invested by the Fund. When the Fund engages in such a transaction, the Fund will deposit in a segregated account, or earmark on
its books and records, liquid assets with a value at least equal to the Funds exposure, on a mark-to-market basis, to the transaction (as calculated pursuant to
requirements of the SEC). Such segregation or earmarking will ensure that the Fund has assets available to satisfy its obligations with respect to the transaction, but will not limit the Funds exposure to loss. |
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Illiquidity Riskthe risk that certain securities may be difficult or impossible to sell at the time
that the Fund would like or at the price that the Fund as seller believes the security is currently worth. There can be no assurance that, at any specific time, either a liquid secondary market will exist for a derivative or the Fund will otherwise
be able to sell such instrument at an acceptable price. It may, therefore, not be possible to close a position in a derivative without incurring substantial losses, if at all. The absence of liquidity may also make it more difficult for the Fund to
ascertain a market value for such instruments. Although both OTC and exchange-traded derivatives markets may experience a lack of liquidity, certain derivatives traded in OTC markets, including swaps and OTC options, involve substantial illiquidity
risk. The illiquidity of the derivatives markets may be due to various factors, including congestion, disorderly markets, limitations on deliverable supplies, the participation of speculators, government regulation and intervention, and technical
and operational or system failures. In addition, the liquidity of a secondary market in an exchange-traded derivative contract may be adversely affected by daily price fluctuation limits established by the exchanges which limit the
amount of fluctuation in an exchange-traded contract price during a single trading day. Once the daily limit has been reached in the contract, no trades may be entered into at a price beyond the limit, thus preventing the liquidation of open
positions. Prices have in the past moved beyond the daily limit on a number of consecutive trading days. If it is not possible to close an open derivative position entered into by the Fund, the Fund would continue to be required to make daily cash
payments of variation margin in the event of adverse price movements. In such a situation, if the Fund has insufficient cash, it may have to sell portfolio securities to meet daily variation margin requirements at a time when it may be
disadvantageous to do so. |
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Correlation Riskthe risk that changes in the value of a derivative will not match the changes in the
value of the portfolio holdings that are being hedged or of the particular market or security to which the |
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Fund seeks exposure through the use of the derivative. There are a number of factors which may prevent a derivative instrument from achieving the desired correlation (or inverse correlation) with
an underlying asset, rate or index, such as the impact of fees, expenses and transaction costs, the timing of pricing, and disruptions or illiquidity in the markets for such derivative instrument. |
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Index RiskIf the derivative is linked to the performance of an index, it will be subject to the
risks associated with changes in that index. If the index changes, the Fund could receive lower interest payments or experience a reduction in the value of the derivative to below the price that the Fund paid for such derivative.
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Volatility Riskthe risk that the Funds use of derivatives may reduce income or gain and/or
increase volatility. Volatility is defined as the characteristic of a security, an index or a market to fluctuate significantly in price over a defined time period. The Fund could suffer losses related to its derivative positions as a result of
unanticipated market movements, which losses are potentially unlimited. |
When a derivative is used as a hedge against a
position that the Fund holds, any loss generated by the derivative generally should be substantially offset by gains on the hedged investment, and vice versa. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains.
Hedges are sometimes subject to imperfect matching between the derivative and the underlying security, and there can be no assurance that the Funds hedging transactions will be effective. The Fund could also suffer losses related to its
derivative positions as a result of unanticipated market movements, which losses are potentially unlimited. The Advisor may not be able to predict correctly the direction of securities prices, interest rates and other economic factors, which could
cause the Funds derivatives positions to lose value. In addition, some derivatives are more sensitive to interest rate changes and market price fluctuations than other securities. The possible lack of a liquid secondary market for derivatives
and the resulting inability of the Fund to sell or otherwise close a derivatives position could expose the Fund to losses and could make derivatives more difficult for the Fund to value accurately.
When engaging in a hedging transaction, the Fund may determine not to seek to establish a perfect correlation between the hedging instruments
utilized and the portfolio holdings being hedged. Such an imperfect correlation may prevent the Fund from achieving the intended hedge or expose the Fund to a risk of loss. The Fund may also determine not to hedge against a particular risk because
it does not regard the probability of the risk occurring to be sufficiently high as to justify the cost of the hedge or because it does do not foresee the occurrence of the risk. It may not be possible for the Fund to hedge against a change or event
at attractive prices or at a price sufficient to protect the assets of the Fund from the decline in value of the portfolio positions anticipated as a result of such change. The Fund may also be restricted in its ability to effectively manage the
portion of its assets that are segregated or earmarked to cover its obligations. In addition, it may not be possible to hedge at all against certain risks.
If the Fund invests in a derivative instrument it could lose more than the principal amount invested. Moreover, derivatives raise certain tax,
legal, regulatory and accounting issues that may not be presented by investments in securities, and there is some risk that certain issues could be resolved in a manner that could adversely impact the performance of the Fund.
The Fund is not required to use derivatives or other portfolio strategies to seek to increase return or to seek to hedge its portfolio and may
choose not to do so. Also, suitable derivative transactions may not be available in all circumstances and there can be no assurance that the Fund will engage in these transactions to reduce exposure to other risks when that would be beneficial.
Although the Advisor seeks to use derivatives to further the Funds investment objective, there is no assurance that the use of derivatives will achieve this result.
Options Risk. There are several risks associated with transactions in options on securities and indexes. For example, there are
significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objective. In addition, a liquid secondary market for particular
options, whether traded OTC or on a recognized securities exchange
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(e.g., NYSE), separate trading boards of a securities exchange or through a market system that provides contemporaneous transaction pricing information (an Exchange) may be absent for
reasons which include the following: there may be insufficient trading interest in certain options; restrictions may be imposed by an Exchange on opening transactions or closing transactions or both; trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options or underlying securities; unusual or unforeseen circumstances may interrupt normal operations on an Exchange; the facilities of an Exchange or the OCC may not at all times be
adequate to handle current trading volume; or one or more Exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event
the secondary market on that Exchange (or in that class or series of options) would cease to exist, although outstanding options that had been issued by the OCC as a result of trades on that Exchange would continue to be exercisable in accordance
with their terms.
Futures Transactions and Options Risk. The primary risks associated with the use of futures contracts and
options are (a) the imperfect correlation between the change in market value of the instruments held by the Fund and the price of the futures contract or option; (b) possible lack of a liquid secondary market for a futures contract and the
resulting inability to close a futures contract when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; (d) the Advisors inability to predict correctly the direction of securities prices,
interest rates, currency exchange rates and other economic factors; and (e) the possibility that the counterparty will default in the performance of its obligations.
Investment in futures contracts involves the risk of imperfect correlation between movements in the price of the futures contract and the
price of the security being hedged. The hedge will not be fully effective when there is imperfect correlation between the movements in the prices of two financial instruments. For example, if the price of the futures contract moves more or less than
the price of the hedged security, the Fund will experience either a loss or gain on the futures contract which is not completely offset by movements in the price of the hedged securities. To compensate for imperfect correlations, the Fund may
purchase or sell futures contracts in a greater dollar amount than the hedged securities if the volatility of the hedged securities is historically greater than the volatility of the futures contracts. Conversely, the Fund may purchase or sell fewer
futures contracts if the volatility of the price of the hedged securities is historically lower than that of the futures contracts.
The
particular securities comprising the index underlying a securities index financial futures contract may vary from the securities held by the Fund. As a result, the Funds ability to hedge effectively all or a portion of the value of its
securities through the use of such financial futures contracts will depend in part on the degree to which price movements in the index underlying the financial futures contract correlate with the price movements of the securities held by the Fund.
The correlation may be affected by disparities in the average maturity, ratings, geographical mix or structure of the Funds investments as compared to those comprising the securities index and general economic or political factors. In
addition, the correlation between movements in the value of the securities index may be subject to change over time as additions to and deletions from the securities index alter its structure. The correlation between futures contracts on U.S.
Government securities and the securities held by the Fund may be adversely affected by similar factors and the risk of imperfect correlation between movements in the prices of such futures contracts and the prices of securities held by the Fund may
be greater. The trading of futures contracts also is subject to certain market risks, such as inadequate trading activity, which could at times make it difficult or impossible to liquidate existing positions.
The Fund may liquidate futures contracts it enters into through offsetting transactions on the applicable contract market. There can be no
assurance, however, that a liquid secondary market will exist for any particular futures contract at any specific time. Thus, it may not be possible to close out a futures position. In the event of adverse price movements, the Fund would continue to
be required to make daily cash payments of variation margin. In such situations, if the Fund has insufficient cash, it may be required to sell portfolio securities to meet daily variation margin requirements at a time when it may be disadvantageous
to do so. The inability to close out futures positions also could have an adverse impact on the Funds ability to hedge effectively its investments in securities. The liquidity of a secondary market in a futures contract may be adversely
affected by daily price
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fluctuation limits established by commodity exchanges which limit the amount of fluctuation in a futures contract price during a single trading day. Once the daily limit has been reached in
the contract, no trades may be entered into at a price beyond the limit, thus preventing the liquidation of open futures positions. Prices have in the past moved beyond the daily limit on a number of consecutive trading days.
The successful use of transactions in futures and related options also depends on the ability of the Advisor to forecast correctly the
direction and extent of interest rate movements within a given time frame. To the extent interest rates remain stable during the period in which a futures contract or option is held by the Fund or such rates move in a direction opposite to that
anticipated, the Fund may realize a loss on the Strategic Transaction which is not fully or partially offset by an increase in the value of portfolio securities. As a result, the Funds total return for such period may be less than if it had
not engaged in the Strategic Transaction.
Because of low initial margin deposits made upon the opening of a futures position, futures
transactions involve substantial leverage. As a result, relatively small movements in the price of the futures contracts can result in substantial unrealized gains or losses. There is also the risk of loss by the Fund of margin deposits in the event
of bankruptcy of a broker with which the Fund has an open position in a financial futures contract. Because the Fund will engage in the purchase and sale of futures contracts for hedging purposes or to seek to enhance the Funds return, any
losses incurred in connection therewith may, if the strategy is successful, be offset in whole or in part by increases in the value of securities held by the Fund or decreases in the price of securities the Fund intends to acquire.
The amount of risk the Fund assumes when it purchases an option on a futures contract is the premium paid for the option plus related
transaction costs. In addition to the correlation risks discussed above, the purchase of an option on a futures contract also entails the risk that changes in the value of the underlying futures contract will not be fully reflected in the value of
the option purchased.
General Risk Factors in Hedging Foreign Currency. Hedging transactions involving Currency Instruments
involve substantial risks, including correlation risk. While the Funds use of Currency Instruments to effect hedging strategies is intended to reduce the volatility of the NAV of the Funds common shares, the NAV of the Funds common
shares will fluctuate. Moreover, although Currency Instruments may be used with the intention of hedging against adverse currency movements, transactions in Currency Instruments involve the risk that anticipated currency movements will not be
accurately predicted and that the Funds hedging strategies will be ineffective. To the extent that the Fund hedges against anticipated currency movements that do not occur, the Fund may realize losses and decrease its total return as the
result of its hedging transactions. Furthermore, the Fund will only engage in hedging activities from time to time and may not be engaging in hedging activities when movements in currency exchange rates occur.
It may not be possible for the Fund to hedge against currency exchange rate movements, even if correctly anticipated, in the event that
(i) the currency exchange rate movement is so generally anticipated that the Fund is not able to enter into a hedging transaction at an effective price, or (ii) the currency exchange rate movement relates to a market with respect to which
Currency Instruments are not available and it is not possible to engage in effective foreign currency hedging. The cost to the Fund of engaging in foreign currency transactions varies with such factors as the currencies involved, the length of the
contract period and the market conditions then prevailing. Since transactions in foreign currency exchange usually are conducted on a principal basis, no fees or commissions are involved.
Foreign Currency Forwards Risk. Forward foreign currency exchange contracts do not eliminate fluctuations in the value of Non-U.S. Securities (as defined in the Prospectus) but rather allow the Fund to establish a fixed rate of exchange for a future point in time. This strategy can have the effect of reducing returns and minimizing
opportunities for gain.
In connection with its trading in forward foreign currency contracts, the Fund will contract with a foreign or
domestic bank, or foreign or domestic securities dealer, to make or take future delivery of a specified amount of a
S-16
particular currency. There are no limitations on daily price moves in such forward contracts, and banks and dealers are not required to continue to make markets in such contracts. There have been
periods during which certain banks or dealers have refused to quote prices for such forward contracts or have quoted prices with an unusually wide spread between the price at which the bank or dealer is prepared to buy and that at which it is
prepared to sell. Governmental imposition of credit controls might limit any such forward contract trading. With respect to its trading of forward contracts, if any, the Fund will be subject to the risk of bank or dealer failure and the inability
of, or refusal by, a bank or dealer to perform with respect to such contracts. Any such default would deprive the Fund of any profit potential or force the Fund to cover its commitments for resale, if any, at the then market price and could result
in a loss to the Fund.
The Fund may also engage in proxy hedging transactions to reduce the effect of currency fluctuations on the value
of existing or anticipated holdings of portfolio securities. Proxy hedging is often used when the currency to which the Fund is exposed is difficult to hedge or to hedge against the dollar. Proxy hedging entails entering into a forward contract to
sell a currency whose changes in value are generally considered to be linked to a currency or currencies in which some or all of the Funds securities are, or are expected to be, denominated, and to buy U.S. dollars. Proxy hedging involves some
of the same risks and considerations as other transactions with similar instruments. Currency transactions can result in losses to the Fund if the currency being hedged fluctuates in value to a degree or in a direction that is not anticipated. In
addition, there is the risk that the perceived linkage between various currencies may not be present or may not be present during the particular time that the Fund is engaging in proxy hedging. The Fund may also cross-hedge currencies by entering
into forward contracts to sell one or more currencies that are expected to decline in value relative to other currencies to which the Fund has or in which the Fund expects to have portfolio exposure. For example, the Fund may hold both Canadian
government bonds and Japanese government bonds, and the Advisor may believe that Canadian dollars will deteriorate against Japanese yen. The Fund would sell Canadian dollars to reduce its exposure to that currency and buy Japanese yen. This strategy
would be a hedge against a decline in the value of Canadian dollars, although it would expose the Fund to declines in the value of the Japanese yen relative to the U.S. dollar.
Some of the forward non-U.S. currency contracts entered into by the Fund may be classified as non-deliverable forwards (NDFs). NDFs are cash-settled, short-term forward contracts that may be thinly traded or are denominated in non-convertible foreign
currency, where the profit or loss at the time at the settlement date is calculated by taking the difference between the agreed upon exchange rate and the spot rate at the time of settlement, for an agreed upon notional amount of funds. All NDFs
have a fixing date and a settlement date. The fixing date is the date at which the difference between the prevailing market exchange rate and the agreed upon exchange rate is calculated. The settlement date is the date by which the payment of the
difference is due to the party receiving payment. NDFs are commonly quoted for time periods of one month up to two years, and are normally quoted and settled in U.S. dollars. They are often used to gain exposure to and/or hedge exposure to foreign
currencies that are not internationally traded.
Currency Futures Risk. The Fund may also seek to hedge against the decline in the
value of a currency or to enhance returns through use of currency futures or options thereon. Currency futures are similar to forward foreign exchange transactions except that futures are standardized, exchange-traded contracts while forward foreign
exchange transactions are traded in the OTC market. Currency futures involve substantial currency risk, and also involve leverage risk.
Currency Options Risk. The Fund may also seek to hedge against the decline in the value of a currency or to enhance returns through the
use of currency options. Currency options are similar to options on securities. For example, in consideration for an option premium the writer of a currency option is obligated to sell (in the case of a call option) or purchase (in the case of a put
option) a specified amount of a specified currency on or before the expiration date for a specified amount of another currency. The Fund may engage in transactions in options on currencies either on exchanges or OTC markets. Currency options involve
substantial currency risk, and may also involve credit, leverage or illiquidity risk.
S-17
Currency Swaps Risk. The Fund may enter into currency swaps, which are transactions in
which one currency is simultaneously bought for a second currency on a spot basis and sold for the second currency on a forward basis. Currency swaps involve the exchange of the rights of the Fund and another party to make or receive payments in
specified currencies. Currency swaps usually involve the delivery of the entire principal value of one designated currency in exchange for the other designated currency. Because currency swaps usually involve the delivery of the entire principal
value of one designated currency in exchange for the other designated currency, the entire principal value of a currency swap is subject to the risk that the other party to the swap will default on its contractual delivery obligations.
Over-the-Counter Trading Risk. The derivative
instruments that may be purchased or sold by the Fund may include instruments not traded on an exchange. The risk of nonperformance by the counterparty to an instrument may be greater than, and the ease with which the Fund can dispose of or enter
into closing transactions with respect to an instrument may be less than, the risk associated with an exchange traded instrument. In addition, significant disparities may exist between bid and asked prices for derivative
instruments that are not traded on an exchange. The absence of liquidity may make it difficult or impossible for the Fund to sell such instruments promptly at an acceptable price. Derivative instruments not traded on exchanges also are not subject
to the same type of government regulation as exchange traded instruments, and many of the protections afforded to participants in a regulated environment may not be available in connection with the transactions. Because derivatives traded in OTC
markets generally are not guaranteed by an exchange or clearing corporation and generally do not require payment of margin, to the extent that the Fund has unrealized gains in such instruments or has deposited collateral with its counterparties the
Fund is at risk that its counterparties will become bankrupt or otherwise fail to honor its obligations.
Dodd-Frank Act Risk.
Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) (the Derivatives Title) imposed a substantially new regulatory structure on derivatives markets, with particular emphasis
on swaps (which were subject to oversight by the CFTC) and security-based swaps (which were subject to oversight by the SEC). The regulatory framework covers a broad range of swap market participants, including banks,
non-banks, credit unions, insurance companies, broker-dealers and investment advisers. Prudential regulators were granted authority to regulate margining of swaps and security-based swaps of banks and
bank-related entities.
Current regulations for swaps require the mandatory central clearing and mandatory exchange trading of particular
types of interest rate swaps and index credit default swaps (together, Covered Swaps). The Fund is required to clear its Covered Swaps through a clearing broker, which requires, among other things, posting initial margin and variation
margin to the Funds clearing broker in order to enter into and maintain positions in Covered Swaps.
Covered Swaps generally are
required to be executed through a swap execution facility (SEF), which can involve additional transaction fees.
Additionally,
with respect to uncleared swaps, swap dealers are required to collect variation margin from the Fund and may be required by applicable regulations to collect initial margin from the Fund. 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
S-18
or restrict the rights of counterparties to terminate such contracts, foreclose upon collateral, exercise other default rights or restrict transfers of affiliate credit enhancements (such as
guarantees) in the event that the bank-regulated counterparty and/or its affiliates are subject to certain types of resolution or insolvency proceedings.
Legal and Regulatory Risk. At any time after the date hereof, legislation or additional regulations may be enacted that could
negatively affect the assets of the Fund. Changing approaches to regulation may have a negative impact on the securities in which the Fund invests. Legislation or regulation may also change the way in which the Fund itself is regulated. There can be
no assurance that future legislation, regulation or deregulation will not have a material adverse effect on the Fund or will not impair the ability of the Fund to achieve its investment objective. In addition, as new rules and regulations resulting
from the passage of the Dodd-Frank Act are implemented and new international capital and liquidity requirements are introduced under the Basel III Accords, the market may not react the way the Advisor expects. Whether the Fund achieves its
investment objective may depend on, among other things, whether the Advisor correctly forecasts market reactions to this and other legislation. In the event the Advisor incorrectly forecasts market reaction, the Fund may not achieve its investment
objective.
S-19
MANAGEMENT OF THE FUND
Investment Management Agreement
Although
the Advisor intends to devote such time and effort to the business of the Fund as is reasonably necessary to perform its duties to the Fund, the services of the Advisor are not exclusive and the Advisor provides similar services to other investment
companies and other clients and may engage in other activities.
The investment management agreement between the Advisor and the Fund (the
Investment Management Agreement) also provides that except for a loss resulting from a breach of fiduciary duty with respect to the receipt of compensation or a loss resulting from willful misfeasance, bad faith or gross negligence on
the Advisors part in the performance of its duties or from reckless disregard by the Advisor of its duties under the Investment Management Agreement, the Advisor is not liable for any error of judgment or mistake of law or for any loss
suffered by the Advisor or the Fund in connection with the performance of the Investment Management Agreement. The Investment Management Agreement also provides for indemnification by the Fund of the Advisor and each of the Advisors directors,
officers, employees, agents, associates and controlling persons, and the directors, partners, members, officers, employees and agents thereof (including any individual who serves at the Advisors request as director, officer, partner, member,
trustee or the like of another entity) for liabilities and expenses incurred by them in connection with their services to the Fund, subject to certain limitations and conditions.
The Investment Management Agreement provides for the Fund to pay a monthly management fee at an annual rate equal to 0.35% of the average
weekly Managed Assets. Managed Assets means the total assets of the Fund (including any assets attributable to money borrowed for investment purposes) minus the sum of the Funds accrued liabilities (other than money borrowed for
investment purposes).
The Fund and the Advisor have entered into a fee waiver agreement (the Fee Waiver Agreement), pursuant
to which the Advisor has contractually agreed to waive the management fee with respect to any portion of the Funds assets attributable to investments in any equity and fixed-income mutual funds and exchange-traded funds (ETFs)
managed by the Advisor or its affiliates that have a contractual 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 Fund 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 Fund (including by a majority of the Directors who are not interested persons (as defined in the Investment Company Act) (the
Independent Directors)). Neither the Advisor nor the Fund is obligated to extend the Fee Waiver Agreement. The Fee Waiver Agreement may be terminated at any time, without the payment of any penalty, only by the Fund (upon the vote of a
majority of the Independent Directors or a majority of the outstanding voting securities of the Fund), upon 90 days written notice by the Fund to the Advisor. Prior to December 1, 2019, the agreement to waive a portion of the Funds
management fee in connection with the Funds investment in affiliated money market funds was voluntary.
The Investment Management
Agreement will continue in effect from year to year provided that each continuance is specifically approved at least annually by both (1) the vote of a majority of the Board or the vote of a majority of the outstanding voting securities of the
Fund (as such term is defined in the Investment Company Act) and (2) by the vote of a majority of the Directors who are not parties to the Investment Management Agreement or interested persons (as such term is defined in the
Investment Company Act) of any such party, cast in person at a meeting called for the purpose of voting on such approval. The Investment Management Agreement may be terminated as a whole at any time by the Fund, without the payment of any penalty,
upon the vote of a majority of the Directors or a majority of the outstanding voting securities of the Fund or by the Advisor, on 60 days written notice by either party to the other which can be waived by the
non-terminating party. The Investment Management Agreement will terminate automatically in the event of its assignment (as such term is defined in the Investment Company Act and the rules
thereunder).
S-20
The table below sets forth information about the total management fees paid by the Fund to the
Advisor, and the amounts waived by the Advisor, for the periods indicated:
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30, |
|
Paid to the Advisor |
|
|
Waived by the Advisor |
|
2022 |
|
$ |
1,595,006 |
|
|
$ |
1,108 |
|
2021 |
|
$ |
1,622,884 |
|
|
$ |
1,295 |
|
2020 |
|
$ |
1,609,254 |
|
|
$ |
1,062 |
|
Administration Agreement
The Advisor serves as the Funds administrator pursuant to an administration agreement (the Administration Agreement).
Pursuant to the Administration Agreement, BlackRock provides certain administrative services to the Fund including, without limitation, oversight of the determination and publication of the Funds NAV, oversight of the maintenance of certain
books and records of the Fund, oversight of the preparation and filing of the Funds federal, state and local income tax returns and any other required tax returns, and preparation, or oversight of the preparation of, financial information for
the Funds semi-annual and annual reports, proxy statements and other communications with shareholders and certain other oversight and reporting activities. The administration fee paid monthly to the Advisor pursuant to the Administration
Agreement is computed at an annual rate of 0.15% of the average weekly value of the Funds managed assets.
The table below sets
forth information about the total administration fees paid by the Fund to the Advisor for the periods indicated:
|
|
|
|
|
Fiscal Year Ended April 30, |
|
Paid to the Advisor |
|
2022 |
|
$ |
683,574 |
|
2021 |
|
$ |
695,522 |
|
2020 |
|
$ |
689,680 |
|
Biographical Information Pertaining to the Directors
The Board consists of ten individuals (each, a Director), eight of whom are Independent Directors. The registered investment
companies advised by the Advisor or its affiliates (the BlackRock-advised Funds) are organized into one complex of closed-end funds and open-end non-index fixed-income funds (the BlackRock Fixed-Income Complex), one complex of open-end equity, multi-asset, index and money market funds (the BlackRock
Multi-Asset Complex) and one complex of exchange-traded funds (each, a BlackRock Fund Complex). The Fund is included in the BlackRock Fund Complex referred to as the BlackRock Fixed-Income Complex. The Directors also
oversee as board members the operations of the other open-end and closed-end registered investment companies included in the BlackRock Fixed-Income Complex.
S-21
Certain biographical and other information relating to the Directors of the Fund is set forth
below, including their year of birth, their principal occupation for at least the last five years, the length of time served, the total number of BlackRock-advised Funds overseen and any public directorships or trusteeships.
|
|
|
|
|
|
|
|
|
|
|
Name and Year of Birth1,2 |
|
Position(s) Held (Length of Service)3 |
|
Principal Occupation(s) During Past Five Years |
|
Number of BlackRock- Advised Registered Investment Companies (RICs) Consisting
of Investment Portfolios (Portfolios) Overseen |
|
|
Public Company and Other Investment Company Directorships Held During Past Five Years |
|
|
|
Independent Directors |
|
|
|
|
|
|
|
|
|
|
|
R. Glenn Hubbard
1958 |
|
Chair of the Board (Sine 2022) and Director (Since 2007) |
|
Dean, Columbia Business School from 2004 to 2019; Faculty member, Columbia Business School since 1988. |
|
|
69 RICs consisting of 99 Portfolios |
|
|
ADP (data and information services) from 2004 to 2020; Metropolitan Life Insurance Company (insurance) |
|
|
|
|
|
W. Carl Kester4
1951 |
|
Vice Chair of the Board (Since 2022) and Director (Since 2007) |
|
George Fisher Baker Jr. Professor of Business Administration, Harvard Business School since 2008; Deputy Dean for Academic Affairs from 2006 to 2010; Chairman of the Finance Unit, from 2005 to 2006; Senior Associate Dean and
Chairman of the MBA Program from 1999 to 2005; Member of the faculty of Harvard Business School since 1981. |
|
|
71 RICs consisting of 101 Portfolios |
|
|
None |
|
|
|
|
|
Cynthia L. Egan
1955 |
|
Director (Since 2016) |
|
Advisor, U.S. Department of the Treasury from 2014 to 2015; President, Retirement Plan Services, for T. Rowe Price Group, Inc. from 2007 to 2012; executive positions within Fidelity Investments from 1989 to 2007. |
|
|
69 RICs consisting of 99 Portfolios |
|
|
Unum (insurance); The Hanover Insurance Group (Board Chair) (insurance); Huntsman Corporation (chemical products) |
S-22
|
|
|
|
|
|
|
|
|
Name and Year of Birth1,2 |
|
Position(s) Held (Length of Service)3 |
|
Principal Occupation(s) During Past Five Years |
|
Number of BlackRock- Advised Registered Investment Companies (RICs) Consisting
of Investment Portfolios (Portfolios) Overseen |
|
Public Company and Other Investment Company Directorships Held During Past Five Years |
|
|
|
|
|
Frank J. Fabozzi4
1948 |
|
Director (Since 2007) |
|
Editor of The Journal of Portfolio Management since 1986; Professor of Finance, EDHEC Business School (France) since 2011; Visiting Professor, Princeton University for the 2013 to 2014 academic year and Spring 2017 semester;
Professor in the Practice of Finance, Yale University School of Management from 1994 to 2011 and currently a Teaching Fellow in Yales Executive Programs; Board Member, BlackRock Equity-Liquidity Funds from 2014 to 2016; affiliated professor
Karlsruhe Institute of Technology from 2008 to 2011; Visiting Professor, Rutgers University for the Spring 2019 semester; Visiting Professor, New York University for the 2019 academic year; Adjunct Professor of Finance, Carnegie Mellon University
for the Fall 2020 semester |
|
71 RICs consisting of 101 Portfolios |
|
None |
|
|
|
|
|
Lorenzo A. Flores
1964 |
|
Director (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. |
|
69 RICs consisting of 99 Portfolios |
|
None |
|
|
|
|
|
Stayce D. Harris
1959 |
|
Director (Since 2021) |
|
Lieutenant General, Inspector General, Office of the Secretary of the United States Air Force from 2017 to 2019; Lieutenant General, Assistant Vice Chief of Staff and Director, Air Staff, United States Air Force from 2016 to 2017;
Major General, Commander, 22nd Air Force, AFRC, Dobbins Air Reserve Base, Georgia from 2014 to 2016; Pilot, United Airlines from 1990 to 2020. |
|
69 RICs consisting of 99 Portfolios |
|
The Boeing Company |
S-23
|
|
|
|
|
|
|
|
|
Name and Year of Birth1,2 |
|
Position(s) Held (Length of Service)3 |
|
Principal Occupation(s) During Past Five Years |
|
Number of BlackRock- Advised Registered Investment Companies (RICs) Consisting
of Investment Portfolios (Portfolios) Overseen |
|
Public Company and Other Investment Company Directorships Held During Past Five Years |
|
|
|
|
|
J. Phillip Holloman
1955 |
|
Director (Since 2021) |
|
President and Chief Operating Officer, Cintas Corporation from 2008 to 2018. |
|
69 RICs consisting of 99 Portfolios |
|
PulteGroup, Inc. (home construction); Rockwell Automation Inc. (industrial automation). |
|
|
|
|
|
Catherine A. Lynch4
1961 |
|
Director (Since 2016) |
|
Chief Executive Officer, Chief Investment Officer and various other positions, National Railroad Retirement Investment Trust from 2003 to 2016; Associate Vice President for Treasury Management, The George Washington University from
1999 to 2003; Assistant Treasurer, Episcopal Church of America from 1995 to 1999. |
|
71 RICs consisting of 101 Portfolios |
|
PennyMac Mortgage Investment Trust |
|
|
|
Interested
Directors5 |
|
|
|
|
|
|
|
|
|
Robert Fairbairn
1965 |
|
Director (Since 2018) |
|
Vice Chairman of BlackRock, Inc. since 2019; Member of BlackRocks Global Executive and Global Operating Committees; Co-Chair of BlackRocks Human Capital Committee; Senior Managing
Director of BlackRock, Inc. from 2010 to 2019; oversaw BlackRocks Strategic Partner Program and Strategic Product Management Group from 2012 to 2019; Member of the Board of Managers of BlackRock Investments, LLC from 2011 to 2018; Global Head
of BlackRocks Retail and iShares® businesses from 2012 to 2016. |
|
98 RICs consisting of 262 Portfolios |
|
None |
S-24
|
|
|
|
|
|
|
|
|
Name and Year of Birth1,2 |
|
Position(s) Held (Length of Service)3 |
|
Principal Occupation(s) During Past Five Years |
|
Number of BlackRock- Advised Registered Investment Companies (RICs) Consisting
of Investment Portfolios (Portfolios) Overseen |
|
Public Company and Other Investment Company Directorships Held During Past Five Years |
|
|
|
|
|
John M. Perlowski4
1964 |
|
Director (Since 2014) and President and Chief Executive Officer (Since 2011) |
|
Managing Director of BlackRock, Inc. since 2009; Head of BlackRock Global Accounting and Product Services since 2009; Advisory Director of Family Resource Network (charitable foundation) since 2009. |
|
100 RICs consisting of 264 Portfolios |
|
None |
1 |
The address of each Director is c/o BlackRock, Inc., 55 East 52nd Street, New York, New York 10055.
|
2 |
Each Independent Director holds office until his or her successor is duly elected and qualifies or until his or
her earlier death, resignation, retirement or removal as provided by the Funds bylaws or charter or statute, or until December 31 of the year in which he or she turns 75. Directors who are interested persons, as defined in the
Investment Company Act, serve until their successor is duly elected and qualifies or until their earlier death, resignation, retirement or removal as provided by the Funds bylaws or statute, or until December 31 of the year in which they
turn 72. The Board may determine to extend the terms of Independent Directors on a case-by-case basis, as appropriate. |
3 |
Following the combination of Merrill Lynch Investment Managers, L.P. (MLIM) and BlackRock in
September 2006, the various legacy MLIM and legacy BlackRock fund boards were realigned and consolidated into three new fund boards in 2007. Certain Independent Directors first became members of the boards of other legacy MLIM or legacy BlackRock
funds as follows: Frank J. Fabozzi, 1988; R. Glenn Hubbard, 2004; and W. Carl Kester, 1995. Certain other Independent Directors became members of the boards of the closed-end funds in the BlackRock
Fixed-Income Complex as follows: Cynthia L. Egan, 2016; and Catherine A. Lynch, 2016. |
4 |
Dr. Fabozzi, Dr. Kester, Ms. Lynch and Mr. Perlowski are also trustees of the BlackRock
Credit Strategies Fund and BlackRock Private Investments Fund. |
5 |
Mr. Fairbairn and Mr. Perlowski are both interested persons, as defined in the Investment
Company Act, of the Fund based on their positions with BlackRock, Inc. and its affiliates. Mr. Fairbairn and Mr. Perlowski are also board members of the BlackRock Multi-Asset Complex. |
The Independent Directors have adopted a statement of policy that describes the experiences, qualifications, skills and attributes that are
necessary and desirable for potential Independent Director candidates (the Statement of Policy). The Board believes that each Independent Director satisfied, at the time he or she was initially elected or appointed as a Director, and
continues to satisfy, the standards contemplated by the Statement of Policy as well as the standards set forth in the Funds Bylaws. Furthermore, in determining that a particular Director was and continues to be qualified to serve as a
Director, the Board has considered a variety of criteria, none of which, in isolation, was controlling. The Board believes that, collectively, the Directors have balanced and diverse experiences, skills, attributes and qualifications, which allow
the Board to operate effectively in governing the Fund and protecting the interests of shareholders. Among the attributes common to all Directors is their ability to review critically, evaluate, question and discuss information provided to them, to
interact effectively with the Advisor, other service providers, counsel and independent auditors, and to exercise effective business judgment in the performance of their duties as Directors. Each Directors ability to perform his or her duties
effectively is evidenced by his or her educational background or professional training; business, consulting, public service or academic positions; experience from service as a board member of the Fund or the
S-25
other funds in the BlackRock Fund Complexes (and any predecessor funds), other investment funds, public companies, or
not-for-profit entities or other organizations; ongoing commitment and participation in Board and committee meetings, as well as their leadership of standing and other
committees throughout the years; or other relevant life experiences.
The table below discusses some of the experiences, qualifications
and skills of the Directors that support the conclusion that they should serve on the Board.
|
|
|
Director |
|
Experience, Qualifications and Skills |
|
Independent Directors |
|
|
R. Glenn Hubbard |
|
R. Glenn Hubbard has served in numerous roles in the field of economics, including as the Chairman of the U.S. Council of Economic Advisers of the President of the United States. Dr. Hubbard has served as the Dean of
Columbia Business School, as a member of the Columbia Faculty and as a Visiting Professor at the John F. Kennedy School of Government at Harvard University, the Harvard Business School and the University of Chicago. Dr. Hubbards
experience as an adviser to the President of the United States adds a dimension of balance to the Funds governance and provides perspective on economic issues. Dr. Hubbards service on the boards of ADP and Metropolitan Life
Insurance Company provides the Board with the benefit of his experience with the management practices of other financial companies. Dr. Hubbards long-standing service on the boards of directors/trustees of the closed-end funds in the BlackRock Fixed-Income Complex also provides him with a specific understanding of the Fund, its operations, and the business and regulatory issues facing the Fund. Dr. Hubbards
independence from the Fund and the Advisor enhances his service as Chair of the Board, Chair of the Executive Committee and a member of the Governance and Nominating Committee, the Compliance Committee and the Performance Oversight
Committee. |
|
|
W. Carl Kester |
|
The Board benefits from W. Carl Kesters experiences as a professor and author in finance, and his experience as the George Fisher Baker Jr. Professor of Business Administration at Harvard Business School and as Deputy Dean
of Academic Affairs at Harvard Business School from 2006 through 2010 adds to the Board a wealth of expertise in corporate finance and corporate governance. Dr. Kester has authored and edited numerous books and research papers on both subject
matters, including co-editing a leading volume of finance case studies used worldwide. Dr. Kesters long-standing service on the boards of directors/trustees of the
closed-end funds in the BlackRock Fixed-Income Complex also provides him with a specific understanding of the Fund, its operations, and the business and regulatory issues facing the Fund.
Dr. Kesters independence from the Fund and the Advisor enhances his service as a Vice Chair of the Board, Chair of the Governance and Nominating Committee and a member of the Executive Committee, the Compliance Committee and the
Performance Oversight Committee. |
S-26
|
|
|
Director |
|
Experience, Qualifications and Skills |
|
|
Cynthia L. Egan |
|
Cynthia L. Egan brings to the Board a broad and diverse knowledge of investment companies and the retirement industry as a result of her many years of experience as President, Retirement Plan Services, for T. Rowe Price Group,
Inc. and her various senior operating officer positions at Fidelity Investments, including her service as Executive Vice President of FMR Co., President of Fidelity Institutional Services Company and President of the Fidelity Charitable Gift Fund.
Ms. Egan has also served as an advisor to the U.S. Department of Treasury as an expert in domestic retirement security. Ms. Egan began her professional career at the Board of Governors of the Federal Reserve and the Federal Reserve Bank of
New York. Ms. Egan is also a director of UNUM Corporation, a publicly traded insurance company providing personal risk reinsurance, and of The Hanover Group, a public property casualty insurance company. Ms. Egans independence from
the Fund and the Advisor enhances her service as Chair of the Compliance Committee, and a member of the Governance and Nominating Committee and the Performance Oversight Committee. |
|
|
Frank J. Fabozzi |
|
Frank J. Fabozzi has served for over 25 years on the boards of registered investment companies. Dr. Fabozzi holds the designations of Chartered Financial Analyst and Certified Public Accountant. Dr. Fabozzi was inducted
into the Fixed Income Analysts Societys Hall of Fame and is the 2007 recipient of the C. Stewart Sheppard Award and the 2015 recipient of the James R. Vertin Award, both given by the CFA Institute. The Board benefits from
Dr. Fabozzis experiences as a professor and author in the field of finance. Dr. Fabozzis experience as a professor at various institutions, including EDHEC Business School, Yale, MIT, and Princeton, as well as
Dr. Fabozzis experience as a Professor in the Practice of Finance and Becton Fellow at the Yale University School of Management and as editor of the Journal of Portfolio Management demonstrates his wealth of expertise in the investment
management and structured finance areas. Dr. Fabozzi has authored and edited numerous books and research papers on topics in investment management and financial econometrics, and his writings have focused on fixed income securities and
portfolio management, many of which are considered standard references in the investment management industry. Dr. Fabozzis long-standing service on the boards of directors/trustees of the closed-end
funds in the BlackRock Fixed-Income Complex also provides him with a specific understanding of the Fund, its operations and the business and regulatory issues facing the Fund. Moreover, Dr. Fabozzis knowledge of financial and accounting
matters qualifies him to serve as a member of the Audit Committee. Dr. Fabozzis independence from the Fund and the Advisor enhances his service as Chair of the Performance Oversight Committee. |
|
|
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 Fund and the Advisor enhances his service as a member of the Performance Oversight
Committee. |
S-27
|
|
|
Director |
|
Experience, Qualifications and Skills |
|
|
Stayce D. Harris |
|
The Board benefits from Stayce D. Harriss leadership and governance experience gained during her extensive military career, including as a three-star Lieutenant General of the United States Air Force. In her most recent
role, Ms. Harris reported to the Secretary and Chief of Staff of the Air Force on matters concerning Air Force effectiveness, efficiency and the military discipline of active duty, Air Force Reserve and Air National Guard forces.
Ms. Harriss experience on governance matters includes oversight of inspection policy and the inspection and evaluation system for all Air Force nuclear and conventional forces; oversight of Air Force counterintelligence operations and
service on the Air Force Intelligence Oversight Panel; investigation of fraud, waste and abuse; and oversight of criminal investigations and complaints resolution programs. Ms. Harriss independence from the Fund and the Advisor enhances
her service as a member of the Compliance Committee and the Performance Oversight Committee. |
|
|
J. Phillip Holloman |
|
The Board benefits from J. Phillip Hollomans many years of business and leadership experience as an executive, director and advisory board member of various public and private companies. In particular,
Mr. Hollomans service as President and Chief Operating Officer of Cintas Corporation and director of PulteGroup, Inc. and Rockwell Automation Inc. allows him to provide insight into business trends and conditions. Mr. Hollomans
knowledge of financial and accounting matters qualifies him to serve as a member of the Audit Committee. Mr. Hollomans independence from the Fund and the Advisor enhances his service as a member of the Governance and Nominating Committee
and the Performance Oversight Committee. |
|
|
Catherine A. Lynch |
|
Catherine A. Lynch, who served as the Chief Executive Officer and Chief Investment Officer of the National Railroad Retirement Investment Trust, benefits the Board by providing business leadership and experience and a diverse
knowledge of pensions and endowments. Ms. Lynch also holds the designation of Chartered Financial Analyst. Ms. Lynchs knowledge of financial and accounting matters qualifies her to serve as Chair of the Audit Committee.
Ms. Lynchs independence from the Fund and the Advisor enhances her service as a member of the Governance and Nominating Committee and the Performance Oversight Committee. |
|
Interested Directors |
|
|
Robert Fairbairn |
|
Robert Fairbairn has more than 25 years of experience with BlackRock, Inc. and over 30 years of experience in finance and asset management. In particular, Mr. Fairbairns positions as Vice Chairman of BlackRock, Inc.,
Member of BlackRocks Global Executive and Global Operating Committees and Co-Chair of BlackRocks Human Capital Committee provide the Board with a wealth of practical business knowledge and
leadership. In addition, Mr. Fairbairn has global investment management and oversight experience through his former positions as Global Head of BlackRocks Retail and iShares®
businesses, Head of BlackRocks Global Client Group, Chairman of BlackRocks international businesses and his previous oversight over BlackRocks Strategic Partner Program and Strategic Product Management Group. Mr. Fairbairn
also serves as a board member for the funds in the BlackRock Multi-Asset Complex. |
S-28
|
|
|
Director |
|
Experience, Qualifications and Skills |
|
|
John M. Perlowski |
|
John M. Perlowskis experience as Managing Director of BlackRock, Inc. since 2009, as the Head of BlackRock Global Accounting and Product Services since 2009, and as President and Chief Executive Officer of the Fund provides
him with a strong understanding of the Fund, its operations, and the business and regulatory issues facing the Fund. Mr. Perlowskis prior position as Managing Director and Chief Operating Officer of the Global Product Group at Goldman
Sachs Asset Management, and his former service as Treasurer and Senior Vice President of the Goldman Sachs Mutual Funds and as Director of the Goldman Sachs Offshore Funds provides the Board with the benefit of his experience with the management
practices of other financial companies. Mr. Perlowski also serves as a board member for the funds in the BlackRock Multi-Asset Complex. Mr. Perlowskis experience with BlackRock enhances his service as a member of the Executive
Committee. |
Board Leadership Structure and Oversight
The Board has overall responsibility for the oversight of the Fund. The Chair of the Board and the Chief Executive Officer are different
people. Not only is the Chair an Independent Director, but also the Chair of each Board committee (each, a Committee) is an Independent Director. The Board has five standing Committees: an Audit Committee, a Governance and Nominating
Committee, a Compliance Committee, a Performance Oversight Committee and an Executive Committee.
The Board currently oversees the
Funds usage of leverage, including the Funds incurrence, refinancing and maintenance of leverage and, to the extent necessary or appropriate, authorize or approve the execution of documentation in respect thereto. The Executive Committee
of the Fund has authority to make any such authorizations or approvals that are required between regular meetings of the Board.
The Fund
does not have a compensation committee because their executive officers, other than the Funds Chief Compliance Officer (CCO), do not receive any direct compensation from the Fund and the CCOs compensation is comprehensively
reviewed by the Board.
The role of the Chair of the Board is to preside over all meetings of the Board and to act as a liaison with
service providers, officers, attorneys, and other Directors between meetings. The Chair of each Committee performs a similar role with respect to such Committee. The Chair of the Board or Chair of a Committee may also perform such other functions as
may be delegated by the Board or the Committees from time to time. The Independent Directors meet regularly outside the presence of the Funds management, in executive sessions or with other service providers to the Fund. The Board has regular
meetings five times a year, including a meeting to consider the approval of the Funds investment management agreement and, if necessary, may hold special meetings before its next regular meeting. Each Committee meets regularly to conduct the
oversight functions delegated to that Committee by the Board and reports its findings to the Board. The Board and each standing Committee conduct annual assessments of their oversight function and structure. The Board has determined that the
Boards leadership structure is appropriate because it allows the Board to exercise independent judgment over management and to allocate areas of responsibility among Committees and the Board to enhance oversight.
The Board decided to separate the roles of Chief Executive Officer from the Chair because it believes that having an independent Chair:
|
|
|
increases the independent oversight of the Fund and enhances the Boards objective evaluation of the Chief
Executive Officer; |
|
|
|
allows the Chief Executive Officer to focus on the Funds operations instead of Board administration;
|
S-29
|
|
|
provides greater opportunities for direct and independent communication between shareholders and the Board; and
|
|
|
|
provides independent spokespersons for the Fund. |
The Board has engaged the Advisor to manage the Fund on a
day-to-day basis. The Board is responsible for overseeing the Advisor, other service providers, the operations of the Fund and associated risks in accordance with the
provisions of the Investment Company Act, state law, other applicable laws, the Funds charter, and the Funds investment objective(s) and strategies. The Board reviews, on an ongoing basis, the Funds performance, operations, and
investment strategies and techniques. The Board also conducts reviews of the Advisor and its role in running the operations of the Fund.
Day-to-day risk management with respect to the Fund is the responsibility of the Advisor or other service providers (depending on the nature of the risk), subject to the
supervision of the Advisor. The Fund is subject to a number of risks, including investment, compliance, operational and valuation risks, among others. While there are a number of risk management functions performed by the Advisor or other service
providers, as applicable, it is not possible to eliminate all of the risks applicable to the Fund. Risk oversight is part of the Boards general oversight of the Fund and is addressed as part of various Board and Committee activities. The
Board, directly or through Committees, also reviews reports from, among others, management, the independent registered public accounting firm for the Fund, the Advisor, and internal auditors for the Advisor or its affiliates, as appropriate,
regarding risks faced by the Fund and managements or the service providers risk functions. The Committee system facilitates the timely and efficient consideration of matters by the Directors and facilitates effective oversight of
compliance with legal and regulatory requirements and of the Funds activities and associated risks. The Board has approved the appointment of a CCO, who oversees the implementation and testing of the Funds compliance program and reports
regularly to the Board regarding compliance matters for the Fund and its service providers. The Independent Directors have engaged independent legal counsel to assist them in performing their oversight responsibilities.
Audit Committee. The Board has a standing Audit Committee composed of Catherine A. Lynch (Chair), Frank J. Fabozzi, Lorenzo A.
Flores and J. Phillip Holloman, all of whom are Independent Directors. The principal responsibilities of the Audit Committee are to assist the Board in fulfilling its oversight responsibilities relating to the accounting and financial reporting
policies and practices of the Fund. The Audit Committees responsibilities include, without limitation: (i) approving and recommending to the full Board for approval the selection, retention, termination and compensation of the Funds
independent registered public accounting firm (the Independent Registered Public Accounting Firm) and evaluating the independence and objectivity of the Independent Registered Public Accounting Firm; (ii) approving all audit
engagement terms and fees for the Fund; (iii) reviewing the conduct and results of each audit; (iv) reviewing any issues raised by the Funds Independent Registered Public Accounting Firm or management regarding the accounting or
financial reporting policies and practices of the Fund, its internal controls, and, as appropriate, the internal controls of certain service providers and managements response to any such issues; (v) reviewing and discussing the
Funds audited and unaudited financial statements and disclosure in the Funds shareholder reports relating to the Funds performance; (vi) assisting the Boards responsibilities with respect to the internal controls of the
Fund and its service providers with respect to accounting and financial matters; and (vii) resolving any disagreements between the Funds management and the Funds Independent Registered Public Accounting Firm regarding financial
reporting. The Board has adopted a written charter for the Boards Audit Committee. A copy of the Audit Committee Charter for the Fund can be found in the Corporate Governance section of the BlackRock
Closed-End Fund website at www.blackrock.com. During the fiscal year ended April 30, 2022, the Audit Committee met 12 times.
Governance and Nominating Committee. The Board has a standing Governance and Nominating Committee composed of Carl Kester (Chair),
Cynthia L. Egan, J. Phillip Holloman, R. Glenn Hubbard and Catherine A. Lynch, all of whom are Independent Directors. The principal responsibilities of the Governance and Nominating
S-30
Committee are: (i) identifying individuals qualified to serve as Independent Directors and recommending Board nominees that are not interested persons of the Fund (as defined in
the Investment Company Act) for election by shareholders or appointment by the Board; (ii) advising the Board with respect to Board composition, procedures and Committees of the Board (other than the Audit Committee); (iii) overseeing
periodic self-assessments of the Board and Committees of the Board (other than the Audit Committee); (iv) reviewing and making recommendations with respect to Independent Director compensation; (v) monitoring corporate governance matters
and making recommendations in respect thereof to the Board; (vi) acting as the administrative committee with respect to Board policies and procedures, committee policies and procedures (other than the Audit Committee) and codes of ethics as
they relate to the Independent Directors; and (vii) reviewing and making recommendations to the Board in respect of Fund share ownership by the Independent Directors. The Board has adopted a written charter for the Boards Governance and
Nominating Committee. During the fiscal year ended April 30, 2022, the Governance and Nominating Committee met 7 times.
The
Governance and Nominating Committee of the Board seeks to identify individuals to serve on the Board who have a diverse range of viewpoints, qualifications, experiences, backgrounds and skill sets so that the Board will be better suited to fulfill
its responsibility of overseeing the Funds activities. In so doing, the Governance and Nominating Committee reviews the size of the Board, the ages of the current Directors and their tenure on the Board, and the skills, background and
experiences of the Directors in light of the issues facing the Fund in determining whether one or more new trustees should be added to the Board. The Board as a group strives to achieve diversity in terms of gender, race and geographic location. The
Governance and Nominating Committee believes that the Directors as a group possess the array of skills, experiences and backgrounds necessary to guide the Fund. The Directors biographies included herein highlight the diversity and breadth of
skills, qualifications and expertise that the Directors bring to the Fund.
The Governance and Nominating Committee may consider
nominations for Directors made by the Funds shareholders as it deems appropriate. Under the Funds Bylaws, shareholders must follow certain procedures to nominate a person for election as a Director at an annual or special meeting, or to
introduce an item of business at an annual meeting. Under these advance notice procedures, shareholders must submit the proposed nominee or item of business by delivering a notice to the Secretary of the Fund at its principal executive offices. The
Fund must receive notice of a shareholders intention to introduce a nomination or proposed item of business for an annual shareholder meeting not less than 120 days nor more than 150 days before the anniversary date of the prior years
annual shareholder meeting. However, if the Fund holds its annual shareholder meeting on a date that is not within 25 days before or after the anniversary date of the prior years annual shareholder meeting, the Fund must receive the notice of
a shareholders intention to introduce a nomination or proposed item of business not later than the close of business on the tenth day following the day on which the notice of the date of the shareholder meeting was mailed or the public
disclosure of the date of the shareholder meeting was made, whichever comes first.
The Funds Bylaws provide that notice of a
proposed nomination must include certain information about the shareholder and the nominee, as well as a written consent of the proposed nominee to serve if elected. A notice of a proposed item of business must include a description of and the
reasons for bringing the proposed business to the meeting, any material interest of the shareholder in the business, and certain other information about the shareholder.
Further, the Fund has adopted Director qualification requirements which can be found in the Funds Bylaws and are applicable to all
Directors that may be nominated, elected, appointed, qualified or seated to serve as Directors. The qualification requirements include: (i) age limits; (ii) limits on service on other boards; (iii) restrictions on relationships with
investment advisers other than BlackRock; and (iv) character and fitness requirements. In addition to not being an interested person of the Fund as defined under Section 2(a)(19) of the Investment Company Act, each Independent
Director may not be or have certain relationships with a shareholder owning five percent or more of the Funds voting securities or owning other percentage ownership interests in investment companies registered under the Investment Company Act.
Reference is made to the Funds Bylaws for more details.
S-31
A copy of the Governance and Nominating Committee Charter for the Fund can be found in the
Corporate Governance section of the BlackRock Closed-End Fund website at www.blackrock.com.
Compliance Committee. The Board has a Compliance Committee composed of Cynthia L. Egan (Chair), Stayce D. Harris, R. Glenn Hubbard and
W. Carl Kester, all of whom are Independent Directors. The Compliance Committees purpose is to assist the Board in fulfilling its responsibility with respect to the oversight of regulatory and fiduciary compliance matters involving the Fund,
the fund-related activities of BlackRock, and any subadviser and the Funds other third party service providers. The Compliance Committees responsibilities include, without limitation: (i) overseeing the compliance policies and
procedures of the Fund and its service providers and recommending changes or additions to such policies and procedures; (ii) reviewing information on and, where appropriate, recommending policies concerning the Funds compliance with
applicable law; (iii) reviewing information on any significant correspondence with or other actions by regulators or governmental agencies with respect to the Fund and any employee complaints or published reports that raise concerns regarding
compliance matters; and (iv) reviewing reports from, overseeing the annual performance review of, and making certain recommendations in respect of, the CCO, including, without limitation, determining the amount and structure of the CCOs
compensation. The Board has adopted a written charter for the Boards Compliance Committee. During the fiscal year ended April 30, 2022, the Compliance Committee met 4 times.
Performance Oversight Committee. The Board has a Performance Oversight Committee composed of Frank J. Fabozzi (Chair), Cynthia L. Egan,
Lorenzo A. Flores, Stayce D. Harris, J. Phillip Holloman, R. Glenn Hubbard, W. Carl Kester and Catherine A. Lynch, all of whom are Independent Directors. The Performance Oversight Committees purpose is to assist the Board in fulfilling its
responsibility to oversee the Funds investment performance relative to the Funds investment objective, policies and practices. The Performance Oversight Committees responsibilities include, without limitation: (i) reviewing
the Funds investment objective, policies and practices; (ii) recommending to the Board any required action in respect of changes in fundamental and non-fundamental investment restrictions;
(iii) reviewing information on appropriate benchmarks and competitive universes; (iv) reviewing the Funds investment performance relative to such benchmarks; (v) reviewing information on unusual or exceptional investment
matters; (vi) reviewing whether the Fund has complied with its investment policies and restrictions; and (vii) overseeing policies, procedures and controls regarding valuation of the Funds investments. The Board has adopted a written
charter for the Boards Performance Oversight Committee. During the fiscal year ended April 30, 2022, the Performance Oversight Committee met 4 times.
Executive Committee. The Board has an Executive Committee composed of R. Glenn Hubbard (Chair), and W. Carl Kester, both of whom are
Independent Directors, and John M. Perlowski, who serves as an interested Director. The principal responsibilities of the Executive Committee include, without limitation: (i) acting on routine matters between meetings of the Board;
(ii) acting on such matters as may require urgent action between meetings of the Board; and (iii) exercising such other authority as may from time to time be delegated to the Executive Committee by the Board. The Board has adopted a
written charter for the Boards Executive Committee. The Board currently oversees the Funds usage of leverage, including the Funds incurrence, refinancing and maintenance of leverage and, to the extent necessary or appropriate,
authorize or approve the execution of documentation in respect thereto. The Executive Committee has authority to make any such authorizations or approvals that are required between regular meetings of the Board. During the fiscal year ended
April 30, 2022, the Executive Committee did not meet.
Information about the specific experience, skills, attributes and
qualifications of each Director, which in each case led to the Boards conclusion that the Director should serve (or continue to serve) as a Director of the Fund, is provided in Biographical Information of the Directors.
S-32
Director Share Ownership
Information relating to each Directors share ownership in the Fund and in all BlackRock-advised Funds that are currently overseen by the
respective Director (Supervised Funds) as of December 31, 2021 is set forth in the chart below:
|
|
|
|
|
|
|
|
|
Name of Trustee |
|
Dollar Range of Equity Securities in the Fund* |
|
|
Aggregate Dollar Range of Equity Securities in Supervised Funds* |
|
Independent Director |
|
|
|
|
|
|
|
|
Cynthia L. Egan |
|
|
None |
|
|
|
Over $100,000 |
|
Frank J. Fabozzi |
|
$ |
1-$10,000 |
|
|
|
Over $100,000 |
|
Lorenzo A. Flores |
|
|
None |
|
|
|
Over $100,000 |
|
Stayce D. Harris |
|
|
None |
|
|
|
Over $100,000 |
|
J. Phillip Holloman |
|
|
None |
|
|
|
Over $100,000 |
|
R. Glenn Hubbard |
|
$ |
1-$10,000 |
|
|
|
Over $100,000 |
|
W. Carl Kester |
|
|
None |
|
|
|
Over $100,000 |
|
Catherine A. Lynch |
|
$ |
10,001-$50,000 |
|
|
|
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 Directors who have participated in the deferred compensation plan of the Supervised Funds. |
Compensation of Directors
Each Directors who is an Independent Director 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 Fund, and each Independent Director may also receive a $10,000 Board meeting fee for special unscheduled meetings or meetings in excess of six Board meetings held in a calendar year, together with
out-of-pocket expenses in accordance with a Board policy on travel and other business expenses relating to attendance at meetings. In addition, 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, and each of the members of the Governance and Nominating Committee is paid an additional annual retainer of $25,000 for his or her service on such committee. The Fund will pay
a pro rata portion quarterly (based on relative net assets) of the foregoing Director fees paid by the funds in the BlackRock Fixed-Income Complex.
The Independent Directors have agreed that a maximum of 50% of each Independent Directors total compensation paid by funds in the
BlackRock Fixed-Income Complex may be deferred pursuant to the BlackRock Fixed-Income Complexs deferred compensation plan. Under the deferred compensation plan, deferred amounts earn a return for the Independent Directors as though equivalent
dollar amounts had been invested in shares of certain funds in the BlackRock Fixed-Income Complex selected by the Independent Directors. This has approximately the same economic effect for the Independent Directors as if they had invested the
deferred amounts in such funds in the BlackRock Fixed-Income Complex. The deferred compensation plan is not funded and obligations thereunder represent general unsecured claims against the general assets of a fund and are recorded as a liability for
accounting purposes.
The following table sets forth the compensation paid to the Directors by the Fund for the fiscal year ended
April 30, 2022, and the aggregate compensation, including deferred compensation amounts, paid to them by all
S-33
BlackRock-advised Funds for the calendar year ended December 31, 2021. Messrs. Fairbairn and Perlowski serve without compensation from the Fund because of their affiliation with BlackRock,
Inc. (BlackRock) and the Advisor.
|
|
|
|
|
|
|
|
|
|
|
|
|
Name(1) |
|
Compensation from the Fund |
|
|
Estimated Annual Benefits upon Retirement |
|
|
Aggregate Compensation from the BlackRock-Advised Funds(2)(3) |
|
Independent Directors |
|
|
|
|
|
|
|
|
|
|
|
|
Michael J. Castellano(4) |
|
$ |
1,201 |
|
|
|
None |
|
|
$ |
445,000 |
|
Richard E. Cavanagh(5) |
|
$ |
1,325 |
|
|
|
None |
|
|
$ |
495,000 |
|
Cynthia L. Egan |
|
$ |
1,743 |
|
|
|
None |
|
|
$ |
440,000 |
|
Frank J. Fabozzi |
|
$ |
1,725 |
|
|
|
None |
|
|
$ |
478,750 |
|
Lorenzo A. Flores(6) |
|
$ |
1,122 |
|
|
|
None |
|
|
$ |
167,988 |
|
Stayce D. Harris(7) |
|
$ |
1,302 |
|
|
|
None |
|
|
$ |
216,875 |
|
J. Phillip Holloman(8) |
|
$ |
1,315 |
|
|
|
None |
|
|
$ |
218,981 |
|
R. Glenn Hubbard |
|
$ |
1,800 |
|
|
|
None |
|
|
$ |
432,500 |
|
W. Carl Kester |
|
$ |
1,657 |
|
|
|
None |
|
|
$ |
443,750 |
|
Catherine A. Lynch(9) |
|
$ |
1,634 |
|
|
|
None |
|
|
$ |
441,250 |
|
Karen P. Robards(10) |
|
$ |
1,846 |
|
|
|
None |
|
|
$ |
500,000 |
|
Interested Directors |
|
|
|
|
|
|
|
|
|
|
|
|
Robert Fairbairn |
|
|
None |
|
|
|
None |
|
|
|
None |
|
John M. Perlowski |
|
|
None |
|
|
|
None |
|
|
|
None |
|
(1) |
For the number of BlackRock-advised Funds from which each Director receives compensation, see the Biographical
Information chart beginning on page S-22. |
(2) |
For the Independent Directors, this amount represents the aggregate compensation earned from the funds in the
BlackRock Fixed-Income Complex during the calendar year ended December 31, 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 Director of the Fund and Chair of the Audit Committee effective
December 31, 2021. |
(5) |
Mr. Cavanagh retired as a Director of the Fund and Co-Chair of the
Board effective December 31, 2021. |
(6) |
Mr. Flores was appointed as a Director of the Fund 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 Director of the Fund 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 Director of the Fund effective June 10, 2021, a member of the Audit
Committee effective July 30, 2021, a member of the Performance Oversight Committee effective November 18, 2021 and a member of the Governance and Nominating Committee effective May 20, 2022. |
(9) |
Ms. Lynch was appointed as a member of the Governance and Nominating Committee effective May 20,
2022. |
(10) |
Ms. Robards retired and resigned as a Director of the Fund effective May 31, 2022.
|
S-34
Independent Director Ownership of Securities
As of December 31, 2021, none of the Independent Directors of the Fund or their immediate family members owned beneficially or of record
any securities of BlackRock or any affiliate of any BlackRock person controlling, controlled by or under common control with BlackRock nor did any Independent Directors of the Fund or their immediate family member have any material interest in any
transaction, or series of similar transactions, during the most recently completed two calendar years involving the Fund, BlackRock or any affiliate of any BlackRock person controlling, controlled by or under common control with the Fund or
BlackRock.
As of the date of this SAI, the officers and Directors of the Fund, as a group, beneficially owned less than 1% of the
outstanding common shares of the Fund.
Information Pertaining to the Officers
Certain biographical and other information relating to the officers of the Fund who are not Directors is set forth below, including their
address and year of birth, principal occupations for at least the last five years and length of time served. With the exception of the CCO, executive officers receive no compensation from the Fund. The Fund compensates the CCO for his services as
its CCO.
Each executive officer is an interested person of the Fund (as defined in the Investment Company Act) by virtue of
that individuals position with BlackRock or its affiliates described in the table below.
|
|
|
|
|
Name and Year of Birth1,2 |
|
Position(s) Held (Length of Service) |
|
Principal Occupations(s) During Past Five
Years |
|
Officers Who Are Not Directors
|
Jonathan Diorio
1980 |
|
Vice President (Since 2015) |
|
Managing Director of BlackRock, Inc. since 2015; Director of BlackRock, Inc. from 2011 to 2015. |
|
|
|
Trent Walker
1974 |
|
Chief Financial Officer (Since 2021) |
|
Managing Director of BlackRock, Inc. since September 2019; Executive Vice President of PIMCO from 2016 to 2019; Senior Vice President of PIMCO from 2008 to 2015; Treasurer from 2013 to 2019 and Assistant Treasurer from 2007 to 2017
of PIMCO Funds, PIMCO Variable Insurance Trust, PIMCO ETF Trust, PIMCO Equity Series, PIMCO Equity Series VIT, PIMCO Managed Accounts Trust, 2 PIMCO-sponsored interval funds and 21 PIMCO-sponsored closed-end
funds. |
|
|
|
Jay M. Fife
1970 |
|
Treasurer (Since 2007) |
|
Managing Director of BlackRock, Inc. since 2007. |
S-35
|
|
|
|
|
Name and Year of Birth1,2 |
|
Position(s) Held (Length of Service) |
|
Principal Occupations(s) During Past Five
Years |
|
|
|
Charles Park
1967 |
|
Chief Compliance Officer (Since 2014) |
|
Anti-Money Laundering Compliance Officer for certain BlackRock-advised funds from 2014 to 2015; Chief Compliance Officer of BlackRock Advisors, LLC and the BlackRock-advised funds in the BlackRock Multi-Asset Complex and the
BlackRock Fixed-Income Complex since 2014; Principal of and Chief Compliance Officer for iShares® Delaware Trust Sponsor LLC since 2012 and BlackRock Fund Advisors (BFA) since
2006; Chief Compliance Officer for the BFA-advised iShares® exchange traded funds since 2006; Chief Compliance Officer for BlackRock Asset Management
International Inc. since 2012. |
|
|
|
Janey Ahn
1975 |
|
Secretary (Since 2012) |
|
Managing Director of BlackRock, Inc. since 2018; Director of BlackRock, Inc. from 2009 to 2017. |
1 |
The address of each Officer is c/o BlackRock, Inc., 55 East 52nd Street, New York, NY 10055.
|
2 |
Officers of the Fund serve at the pleasure of the Board. |
Indemnification of Directors and Officers
The governing documents of the Fund generally provide that, the Fund will indemnify its Directors and officers, including the advancing of
expenses, to the extent permitted by applicable law, so long as a there has been a determination that such person is entitled to such indemnification (as such determination is provided for in the Bylaws) and unless, as to liability to the Fund or
its investors, it is finally adjudicated that such person engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in their offices. In addition, the Fund will not indemnify Directors with respect to
any matter as to which Directors did not act in good faith in the reasonable belief that his or her action was in the best interest of the Fund or, in the case of any criminal proceeding, as to which Directors had reasonable cause to believe that
the conduct was unlawful. Indemnification provisions contained in the Funds governing documents are subject to any limitations imposed by applicable law.
Closed-end funds in the BlackRock Fixed-Income Complex, including the Fund, have also entered into a
separate indemnification agreement with the board members of each board of such funds (the Indemnification Agreement). The Indemnification Agreement (i) extends the indemnification provisions contained in a funds governing
documents to board members who leave that funds board and serve on an advisory board of a different fund in the BlackRock Fixed-Income Complex; (ii) sets in place the terms of the indemnification provisions of a funds governing
documents once a board member retires from a board; and (iii) in the case of board members who left the board of a fund in connection with or prior to the board consolidation that occurred in 2007 as a result of the merger of BlackRock and
Merrill Lynch & Co., Inc.s investment management business, clarifies that such fund continues to indemnify the trustee for claims arising out of his or her past service to that fund.
S-36
Portfolio Management
Portfolio Manager Assets Under Management
The following table sets forth information about funds and accounts other than the Fund for which the portfolio managers are primarily
responsible for the day-to-day portfolio management as of April 30, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(ii) Number of Other Accounts Managed and Assets by Account Type |
|
(iii) Number of Other Accounts and Assets for Which Advisory Fee is Performance-Based |
(i) Name of Portfolio Manager |
|
Other Registered Investment Companies |
|
Other Pooled Investment Vehicles |
|
Other Accounts |
|
Other Registered Investment Companies |
|
Other Pooled Investment Vehicles |
|
Other Accounts |
Michael A. Kalinoski, CFA |
|
14 |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
|
$32.79 Billion |
|
$0 |
|
$0 |
|
$0 |
|
$0 |
|
$0 |
Walter OConnor |
|
19 |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
|
$28.68 Billion |
|
$0 |
|
$0 |
|
$0 |
|
$0 |
|
$0 |
Christian Romaglino |
|
10 |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
|
$5.33 Billion |
|
$0 |
|
$0 |
|
$0 |
|
$0 |
|
$0 |
Portfolio Manager Compensation Overview
The discussion below describes the portfolio managers compensation as of April 30, 2022.
The Advisors financial arrangements with its portfolio managers, its competitive compensation and its career path emphasis at all levels
reflect the value senior management places on key resources. Compensation may include a variety of components and may vary from year to year based on a number of factors. The principal components of compensation include a base salary, a
performance-based discretionary bonus, participation in various benefits programs and one or more of the incentive compensation programs established by the Advisor.
Base Compensation. Generally, portfolio managers receive base compensation based on their position with the firm.
Discretionary Incentive Compensation. Discretionary incentive compensation is a function of several components: the performance of
BlackRock, Inc., the performance of the portfolio managers group within BlackRock, the investment performance, including risk-adjusted returns, of the firms assets under management or supervision by that portfolio manager relative
to predetermined benchmarks, and the individuals performance and contribution to the overall performance of these portfolios and BlackRock. In most cases, these benchmarks are the same as the benchmark or benchmarks against which the
performance of the Fund or other accounts managed by the portfolio managers are measured. Among other things, BlackRocks Chief Investment Officers make a subjective determination with respect to each portfolio managers compensation
based on the performance of the Fund and other accounts managed by each portfolio manager relative to the various benchmarks. Performance of fixed income funds is measured on
a pre-tax and/or after-tax basis over various time periods including 1-, 3- and 5- year periods, as applicable. With respect to these portfolio managers, such benchmarks for the Fund and other accounts are: a combination of
market-based indices (e.g., Bloomberg Municipal Bond Index), certain customized indices and certain fund industry peer groups.
Distribution of Discretionary Incentive Compensation. Discretionary incentive compensation is distributed to portfolio
managers in a combination of cash, deferred BlackRock, Inc. stock awards, and/or deferred cash awards that notionally track the return of certain BlackRock investment products.
Portfolio managers receive their annual discretionary incentive compensation in the form of cash. Portfolio managers whose total compensation
is above a specified threshold also receive deferred BlackRock, Inc. stock
S-37
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 BlackRocks ability to sustain and improve its performance over future periods. In some cases, additional deferred BlackRock, Inc. stock may be granted to certain key
employees as part of a long-term incentive award to aid in retention, align interests with long-term shareholders and motivate performance. Deferred BlackRock, Inc. stock awards are generally granted in the form of BlackRock, Inc. restricted stock
units that vest pursuant to the terms of the applicable plan and, once vested, settle in BlackRock, Inc. common stock. The portfolio managers of this Fund have deferred BlackRock, Inc. stock awards.
For certain portfolio managers, a portion of the discretionary incentive compensation is also distributed in the form of deferred cash awards
that notionally track the returns of select BlackRock investment products they manage, which provides direct alignment of portfolio manager discretionary incentive compensation with investment product results. Deferred cash awards vest ratably over
a number of years and, once vested, settle in the form of cash. Only portfolio managers who manage specified products and whose total compensation is above a specified threshold are eligible to participate in the deferred cash award program.
Other Compensation Benefits. In addition to base salary and discretionary incentive compensation, portfolio managers may be
eligible to receive or participate in one or more of the following:
Incentive Savings PlansBlackRock, Inc. has created
a variety of incentive savings plans in which BlackRock, Inc. employees are eligible to participate, including a 401(k) plan, the BlackRock Retirement Savings Plan (RSP), and the BlackRock Employee Stock Purchase Plan (ESPP). The employer
contribution components of the RSP include a company match equal to 50% of the first 8% of eligible pay contributed to the plan capped at $5,000 per year, and a company retirement contribution equal
to 3-5% of eligible compensation up to the Internal Revenue Service limit ($305,000 for 2022). The RSP offers a range of investment options, including registered investment companies and
collective investment funds managed by the firm. BlackRock, Inc. contributions follow the investment direction set by participants for their own contributions or, absent participant investment direction, are invested into a target date fund that
corresponds to, or is closest to, the year in which the participant attains age 65. The ESPP allows for investment in BlackRock, Inc. common stock at a 5% discount on the fair market value of the stock on the purchase date. Annual
participation in the ESPP is limited to the purchase of 1,000 shares of common stock or a dollar value of $25,000 based on its fair market value on the purchase date. All of the eligible portfolio managers are eligible to participate in these
plans.
Securities Ownership of Portfolio Managers
As of April 30, 2022, the end of the Funds most recently completed fiscal year end, the dollar range of securities beneficially
owned by each portfolio manager in the Fund is shown below:
|
|
|
Portfolio Manager |
|
Dollar Range of Equity Securities of the Fund Beneficially Owned |
Michael A. Kalinoski, CFA |
|
None |
Walter OConnor |
|
None |
Christian Romaglino |
|
$1 - $10,000 |
Potential Material Conflicts of Interest
The Advisor has built a professional working environment, firm-wide compliance culture and compliance procedures and systems designed to
protect against potential incentives that may favor one account over another. The Advisor has adopted policies and procedures that address the allocation of investment opportunities, execution of portfolio transactions, personal trading by employees
and other potential conflicts of interest that are designed to ensure that all client accounts are treated equitably over time. Nevertheless, the Advisor furnishes investment management and advisory services to numerous clients in addition to the
Fund, and the Advisor may,
S-38
consistent with applicable law, make investment recommendations to other clients or accounts (including accounts which are hedge funds or have performance or higher fees paid to the Advisor, or
in which portfolio managers have a personal interest in the receipt of such fees), which may be the same as or different from those made to the Fund. In addition, BlackRock, Inc., its affiliates and significant shareholders and any officer,
director, shareholder or employee may or may not have an interest in the securities whose purchase and sale the Advisor recommends to the Fund. BlackRock, Inc. or any of its affiliates or significant shareholders, or any officer, director,
shareholder, employee or any member of their families may take different actions than those recommended to the Fund by the Advisor with respect to the same securities. Moreover, the Advisor may refrain from rendering any advice or services
concerning securities of companies of which any of BlackRock, Inc.s (or its affiliates or significant shareholders) officers, directors or employees are directors or officers, or companies as to which BlackRock, Inc. or any of its
affiliates or significant shareholders or the officers, directors and employees of any of them has any substantial economic interest or possesses material non-public information. Certain portfolio managers
also may manage accounts whose investment strategies may at times be opposed to the strategy utilized for a fund. It should also be noted that a portfolio manager may be managing certain hedge fund and/or long only accounts, or may be part of a team
managing certain hedge fund and/or long only accounts, subject to incentive fees. Such portfolio managers may therefore be entitled to receive a portion of any incentive fees earned on such accounts. Currently, the portfolio managers of this fund
are not entitled to receive a portion of incentive fees of other accounts.
As a fiduciary, the Advisor owes a duty of loyalty to its
clients and must treat each client fairly. When the Advisor purchases or sells securities for more than one account, the trades must be allocated in a manner consistent with its fiduciary duties. The Advisor attempts to allocate investments in a
fair and equitable manner among client accounts, with no account receiving preferential treatment. To this end, BlackRock, Inc. has adopted policies that are intended to ensure reasonable efficiency in client transactions and provide the Advisor
with sufficient flexibility to allocate investments in a manner that is consistent with the particular investment discipline and client base, as appropriate.
Proxy Voting Policies
The Board has
delegated the voting of proxies for the Funds securities to the Advisor pursuant to the Advisors proxy voting guidelines. Under these guidelines, the Advisor will vote proxies related to Fund securities in the best interests of the Fund
and its shareholders. From time to time, a vote may present a conflict between the interests of the Funds shareholders, on the one hand, and those of the Advisor, or any affiliated person of the Fund or the Advisor, on the other. In such
event, provided that the Advisors Equity Investment Policy Oversight Committee, or a sub-committee thereof (the Oversight Committee), is aware of the real or potential conflict, if the matter
to be voted on represents a material, non-routine matter and if the Oversight Committee does not reasonably believe it is able to follow its general voting guidelines (or if the particular proxy matter is not
addressed in the guidelines) and vote impartially, the Oversight Committee may retain an independent fiduciary to advise the Oversight Committee on how to vote or to cast votes on behalf of the Advisors clients. If the Advisor determines not
to retain an independent fiduciary, or does not desire to follow the advice of such independent fiduciary, the Oversight Committee shall determine how to vote the proxy after consulting with the Advisors Portfolio Management Group and/or the
Advisors Legal and Compliance Department and concluding that the vote cast is in its clients best interest notwithstanding the conflict. A copy of the Closed-End Fund Proxy Voting Policy is
included as Appendix B to this SAI. Information on how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 will be available (i) at
www.blackrock.com and (ii) on the SECs website at http://www.sec.gov.
Codes of Ethics
The Fund and the Advisor have adopted codes of ethics pursuant to Rule 17j-1 under the Investment
Company Act. These codes permit personnel subject to the codes to invest in securities, including securities that may be purchased or held by the Fund. These codes may be obtained by calling the SEC at (202)
551-8090.
S-39
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 shareholder and a majority of independent directors.
S-40
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board, the Advisor is primarily responsible for the execution of the Funds portfolio transactions
and the allocation of brokerage. The Advisor does not execute transactions through any particular broker or dealer, but seeks to obtain the best net results for the Fund, taking into account such factors as price (including the applicable brokerage
commission or dealer spread), size of order, difficulty of execution, operational facilities of the firm and the firms risk and skill in positioning blocks of securities. While the Advisor generally seeks reasonable trade execution costs, the
Fund does not necessarily pay the lowest spread or commission available, and payment of the lowest commission or spread is not necessarily consistent with obtaining the best price and execution in particular transactions. Subject to applicable legal
requirements, the Advisor may select a broker based partly upon brokerage or research services provided to the Advisor and its clients, including the Fund. In return for such services, the Advisor may cause the Fund to pay a higher commission than
other brokers would charge if the Advisor determines in good faith that the commission is reasonable in relation to the services provided.
In selecting brokers or dealers to execute portfolio transactions, the Advisor seeks to obtain the best price and most favorable execution for
the Fund, taking into account a variety of factors including: (i) the size, nature and character of the security or instrument being traded and the markets in which it is purchased or sold; (ii) the desired timing of the transaction;
(iii) the Advisors knowledge of the expected commission rates and spreads currently available; (iv) the activity existing and expected in the market for the particular security or instrument, including any anticipated execution
difficulties; (v) the full range of brokerage services provided; (vi) the brokers or dealers capital; (vii) the quality of research and research services provided; (viii) the reasonableness of the commission, dealer
spread or its equivalent for the specific transaction; and (ix) the Advisors knowledge of any actual or apparent operational problems of a broker or dealer.
Section 28(e) of the Exchange Act (Section 28(e)) permits an investment adviser, under certain circumstances, to cause
an account to pay a broker or dealer a commission for effecting a transaction that exceeds the amount another broker or dealer would have charged for effecting the same transaction in recognition of the value of brokerage and research services
provided by that broker or dealer. This includes commissions paid on riskless principal transactions under certain conditions. Brokerage and research services include: (1) furnishing advice as to the value of securities, including pricing and
appraisal advice, credit analysis, risk measurement analysis, performance and other analysis, as well as the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities;
(2) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and (3) effecting securities transactions and performing functions incidental
to securities transactions (such as clearance, settlement, and custody). The Advisor believes that access to independent investment research is beneficial to its investment decision-making processes and, therefore, to the Fund.
The Advisor may participate in client commission arrangements under which the Advisor may execute transactions through a broker-dealer and
request that the broker-dealer allocate a portion of the commissions or commission credits to another firm that provides research to the Advisor. The Advisor believes that research services obtained through soft dollar or commission sharing
arrangements enhance its investment decision-making capabilities, thereby increasing the prospects for higher investment returns. The Advisor will engage only in soft dollar or commission sharing transactions that comply with the requirements of
Section 28(e). The Advisor regularly evaluates the soft dollar products and services utilized, as well as the overall soft dollar and commission sharing arrangements to ensure that trades are executed by firms that are regarded as best able to
execute trades for client accounts, while at the same time providing access to the research and other services the Advisor views as impactful to its trading results.
The Advisor may utilize soft dollars and related services, including research (whether prepared by the broker-dealer or prepared by a
third-party and provided to the Advisor by the broker-dealer) and execution or
S-41
brokerage services within applicable rules and the Advisors policies to the extent that such permitted services do not compromise the Advisors ability to seek to obtain best
execution. In this regard, the portfolio management investment and/or trading teams may consider a variety of factors, including the degree to which the broker-dealer: (a) provides access to company management; (b) provides access to their
analysts; (c) provides meaningful/insightful research notes on companies or other potential investments; (d) facilitates calls on which meaningful or insightful ideas about companies or potential investments are discussed;
(e) facilitates conferences at which meaningful or insightful ideas about companies or potential investments are discussed; or (f) provides research tools such as market data, financial analysis, and other third party related research and
brokerage tools that aid in the investment process.
Research-oriented services for which the Advisor might pay with Fund commissions may
be in written form or through direct contact with individuals and may include information as to particular companies or industries and securities or groups of securities, as well as market, economic, or institutional advice and statistical
information, political developments and technical market information that assists in the valuation of investments. Except as noted immediately below, research services furnished by brokers may be used in servicing some or all client accounts and not
all services may be used in connection with the Fund or account that paid commissions to the broker providing such services. In some cases, research information received from brokers by investment company management personnel, or personnel
principally responsible for the Advisors individually managed portfolios, is not necessarily shared by and between such personnel. Any investment advisory or other fees paid by the Fund to the Advisor are not reduced as a result of the
Advisors receipt of research services. In some cases, the Advisor may receive a service from a broker that has both a research and a non-research use. When this occurs the Advisor
makes a good faith allocation, under all the circumstances, between the research and non-research uses of the service. The percentage of the service that is used for research purposes may be paid for with
client commissions, while the Advisor will use its own funds to pay for the percentage of the service that is used for non-research purposes. In making this good faith allocation, the Advisor faces a potential
conflict of interest, but the Advisor believes that its allocation procedures are reasonably designed to ensure that it appropriately allocates the anticipated use of such services to their research and
non-research uses.
Payments of commissions to brokers who are affiliated persons of the Fund will
be made in accordance with Rule 17e-1 under the Investment Company Act.
From time to time, the
Fund may purchase new issues of securities in a fixed price offering. In these situations, the broker may be a member of the selling group that will, in addition to selling securities, provide the Advisor with research services. The Financial
Industry Regulatory Authority, Inc. has adopted rules expressly permitting these types of arrangements under certain circumstances. Generally, the broker will provide research credits in these situations at a rate that is higher than
that available for typical secondary market transactions. These arrangements may not fall within the safe harbor of Section 28(e).
The Advisor does not consider sales of shares of the investment companies it advises as a factor in the selection of brokers or dealers to
execute portfolio transactions for the Fund; however, whether or not a particular broker or dealer sells shares of the investment companies advised by the Advisor neither qualifies nor disqualifies such broker or dealer to execute transactions for
those investment companies.
The Fund anticipates that its brokerage transactions involving foreign securities generally will be conducted
primarily on the principal stock exchanges of the applicable country. Foreign equity securities may be held by the Fund in the form of depositary receipts, or other securities convertible into foreign equity securities. Depositary receipts may be
listed on stock exchanges, or traded in OTC markets in the United States or Europe, as the case may be. American Depositary Receipts, like other securities traded in the United States, will be subject to negotiated commission rates.
The Fund may invest in certain securities traded in the OTC market and intends to deal directly with the dealers who make a market in the
particular securities, except in those circumstances in which better prices and
S-42
execution are available elsewhere. Under the Investment Company Act, persons affiliated with the Fund and persons who are affiliated with such affiliated persons are prohibited from dealing with
the Fund as principal in the purchase and sale of securities unless a permissive order allowing such transactions is obtained from the SEC. Since transactions in the OTC market usually involve transactions with the dealers acting as principal for
their own accounts, the Fund will not deal with affiliated persons in connection with such transactions. However, an affiliated person of the Fund may serve as its broker in OTC transactions conducted on an agency basis provided that, among other
things, the fee or commission received by such affiliated broker is reasonable and fair compared to the fee or commission received by non-affiliated brokers in connection with comparable transactions.
OTC issues, including most fixed-income securities such as corporate debt and U.S. Government securities, are normally traded on a
net basis without a stated commission, through dealers acting for their own account and not as brokers. The Fund will primarily engage in transactions with these dealers or deal directly with the issuer unless a better price or execution
could be obtained by using a broker. Prices paid to a dealer with respect to both foreign and domestic securities will generally include a spread, which is the difference between the prices at which the dealer is willing to purchase and
sell the specific security at the time, and includes the dealers normal profit.
Purchases of money market instruments by the Fund
are made from dealers, underwriters and issuers. The Fund does not currently expect to incur any brokerage commission expense on such transactions because money market instruments are generally traded on a net basis with dealers acting
as principal for their own accounts without a stated commission. The price of the security, however, usually includes a profit to the dealer.
Securities purchased in underwritten offerings include a fixed amount of compensation to the underwriter, generally referred to as the
underwriters concession or discount. When securities are purchased or sold directly from or to an issuer, no commissions or discounts are paid.
The Advisor may seek to obtain an undertaking from issuers of commercial paper or dealers selling commercial paper to consider the repurchase
of such securities from the Fund prior to maturity at their original cost plus interest (sometimes adjusted to reflect the actual maturity of the securities), if it believes that the Funds anticipated need for liquidity makes such action
desirable. Any such repurchase prior to maturity reduces the possibility that the Fund would incur a capital loss in liquidating commercial paper, especially if interest rates have risen since acquisition of such commercial paper.
Investment decisions for the Fund and for other investment accounts managed by the Advisor are made independently of each other in light of
differing conditions. The Advisor allocates investments among client accounts in a fair and equitable manner. A variety of factors will be considered in making such allocations. These factors include: (i) investment objectives or strategies for
particular accounts, including sector, industry, country or region and capitalization weightings, (ii) tax considerations of an account, (iii) risk or investment concentration parameters for an account, (iv) supply or demand for a
security at a given price level, (v) size of available investment, (vi) cash availability and liquidity requirements for accounts, (vii) regulatory restrictions, (viii) minimum investment size of an account, (ix) relative
size of account, and (x) such other factors as may be approved by the Advisors general counsel. Moreover, investments may not be allocated to one client account over another based on any of the following considerations: (i) to favor
one client account at the expense of another, (ii) to generate higher fees paid by one client account over another or to produce greater performance compensation to the Advisor, (iii) to develop or enhance a relationship with a client or
prospective client, (iv) to compensate a client for past services or benefits rendered to the Advisor or to induce future services or benefits to be rendered to the Advisor, or (v) to manage or equalize investment performance among
different client accounts.
Equity securities will generally be allocated among client accounts within the same investment mandate on a
pro rata basis. This pro-rata allocation may result in the Fund receiving less of a particular security than if
S-43
pro-ration had not occurred. All allocations of equity securities will be subject, where relevant, to share minimums established for accounts and
compliance constraints.
Initial public offerings of securities may be over-subscribed and subsequently trade at a premium in the
secondary market. When the Advisor is given an opportunity to invest in such an initial offering or new or hot issue, the supply of securities available for client accounts is often less than the amount of securities the
accounts would otherwise take. In order to allocate these investments fairly and equitably among client accounts over time, each portfolio manager or a member of his or her respective investment team will indicate to the Advisors trading desk
their level of interest in a particular offering with respect to eligible clients accounts for which that team is responsible. Initial public offerings of U.S. equity securities will be identified as eligible for particular client accounts
that are managed by portfolio teams who have indicated interest in the offering based on market capitalization of the issuer of the security and the investment mandate of the client account and in the case of international equity securities, the
country where the offering is taking place and the investment mandate of the client account. Generally, shares received during the initial public offering will be allocated among participating client accounts within each investment mandate on a pro
rata basis. In situations where supply is too limited to be allocated among all accounts for which the investment is eligible, portfolio managers may rotate such investment opportunities among one or more accounts so long as the rotation system
provides for fair access for all client accounts over time. Other allocation methodologies that are considered by the Advisor to be fair and equitable to clients may be used as well.
Because different accounts may have differing investment objectives and policies, the Advisor may buy and sell the same securities at the same
time for different clients based on the particular investment objective, guidelines and strategies of those accounts. For example, the Advisor may decide that it may be entirely appropriate for a growth fund to sell a security at the same time a
value fund is buying that security. To the extent that transactions on behalf of more than one client of the Advisor or its affiliates during the same period may increase the demand for securities being purchased or the supply of securities being
sold, there may be an adverse effect on price. For example, sales of a security by the Advisor on behalf of one or more of its clients may decrease the market price of such security, adversely impacting other of the Advisors clients that still
hold the security. If purchases or sales of securities arise for consideration at or about the same time that would involve the Fund or other clients or funds for which the Advisor or an affiliate act as investment manager, transactions in such
securities will be made, insofar as feasible, for the respective funds and clients in a manner deemed equitable to all.
In certain
instances, the Advisor may find it efficient for purposes of seeking to obtain best execution, to aggregate or bunch certain contemporaneous purchases or sale orders of its advisory accounts. In general, all contemporaneous trades for
client accounts under management by the same portfolio manager or investment team will be bunched in a single order if the trader believes the bunched trade would provide each client with an opportunity to achieve a more favorable execution at a
potentially lower execution cost. The costs associated with a bunched order will be shared pro rata among the clients in the bunched order. Generally, if an order for a particular portfolio manager or management team is filled at several different
prices through multiple trades, all accounts participating in the order will receive the average price except in the case of certain international markets where average pricing is not permitted. While in some cases this practice could have a
detrimental effect upon the price or value of the security as far as the Fund is concerned, in other cases it could be beneficial to the Fund. Transactions effected by the Advisor on behalf of more than one of its clients during the same period may
increase the demand for securities being purchased or the supply of securities being sold, causing an adverse effect on price. The trader will give the bunched order to the broker dealer that the trader has identified as being able to provide the
best execution of the order. Orders for purchase or sale of securities will be placed within a reasonable amount of time of the order receipt and bunched orders will be kept bunched only long enough to execute the order.
The Fund will not purchase securities during the existence of any underwriting or selling group relating to such securities of which the
Advisor or any affiliated person (as defined in the Investment Company Act) thereof
S-44
is a member except pursuant to procedures adopted by the Board in accordance with Rule 10f-3 under the Investment Company Act. In no instance will
portfolio securities be purchased from or sold to the Advisor or any affiliated person of the foregoing entities except as permitted by SEC exemptive order or by applicable law.
While the Fund generally does not expect to engage in trading for short-term gains, it will effect portfolio transactions without regard to
any holding period if, in the Advisors judgment, such transactions are advisable in light of a change in circumstances of a particular company or within a particular industry or in general market, economic or financial conditions. The
portfolio turnover rate is calculated by dividing the lesser of the Funds annual sales or purchases of portfolio securities (exclusive of purchases or sales of U.S. Government Securities and all other securities whose maturities at the time of
acquisition were one year or less) by the monthly average value of the securities in the portfolio during the year. A high rate of portfolio turnover results in certain tax consequences, such as increased capital gain dividends and/or ordinary
income dividends, and in correspondingly greater transaction costs in the form of dealer spreads and brokerage commissions, which are borne directly by the Fund.
Information about the brokerage commissions paid by the Fund, including commissions paid to affiliates, for the last three fiscal years, is
set forth in the following table:
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30, |
|
Aggregate Brokerage Commissions Paid |
|
|
Commissions Paid to Affiliates |
|
2022 |
|
$ |
4,741 |
|
|
$ |
0 |
|
2021 |
|
$ |
855 |
|
|
$ |
0 |
|
2020 |
|
$ |
4,929 |
|
|
$ |
0 |
|
For the fiscal year ended April 30, 2022, the brokerage commissions paid to affiliates by the Fund
represented 0% of the aggregate brokerage commissions paid and involved 0% of the dollar amount of transactions involving payment of commissions during the year.
The following table shows the dollar amount of brokerage commissions paid to brokers for providing third-party research services and the
approximate dollar amount of the transactions involved for the fiscal year ended April 30, 2022. The provision of third-party research services was not necessarily a factor in the placement of all brokerage business with such brokers.
|
|
|
Amount of Commissions Paid to Brokers for
Providing Research Services |
|
Amount of Brokerage Transactions Involved |
$0 |
|
$0 |
As of April 30, 2022, the Fund held no securities of its regular brokers or dealers (as
defined in Rule 10b-1 under the Investment Company Act) whose shares were purchased during the fiscal year April 30, 2022.
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CONFLICTS OF INTEREST
Certain activities of BlackRock, Inc., the Advisor 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 Fund 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 and 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 Fund, 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 Fund. These are considerations of which investors in the Fund should be aware, and which may cause conflicts of interest that could
disadvantage the Fund and its shareholders. These businesses and interests include potential multiple advisory, transactional financial and other relationships with, or interests in companies and interests in securities or other instruments that may
be purchased or sold by the Fund.
BlackRock 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 Fund and/or that engage in transactions in the same types of securities, currencies and instruments as the Fund.
BlackRock is also a major participant in the global currency, equities, swap and fixed-income markets, in each case, for the accounts of clients and, in some cases, on a proprietary basis. As such, BlackRock is or may be actively engaged in
transactions in the same securities, currencies, and instruments in which the Fund invests. Such activities could affect the prices and availability of the securities, currencies, and instruments in which the Fund invests, which could have an
adverse impact on the Funds performance. Such transactions, particularly in respect of most proprietary accounts or client accounts, will be executed independently of the Funds transactions and thus at prices or rates that may be more or
less favorable than those obtained by the Fund.
When BlackRock seeks to purchase or sell the same assets for client accounts, including
the Fund, the assets actually purchased or sold may be allocated among the accounts on a basis determined in its good faith discretion to be equitable. In some cases, this system may adversely affect the size or price of the assets purchased or sold
for the Fund. In addition, transactions in investments by one or more other accounts managed by BlackRock may have the effect of diluting or otherwise disadvantaging the values, prices or investment strategies of the Fund, particularly, but not
limited to, with respect to small capitalization, emerging market or less liquid strategies. This may occur with respect to BlackRock-advised accounts when investment decisions regarding the Fund are based on research or other information that is
also used to support decisions for other accounts. When BlackRock implements a portfolio decision or strategy on behalf of another account ahead of, or contemporaneously with, similar decisions or strategies for the Fund, market impact, liquidity
constraints, or other factors could result in the Fund receiving less favorable trading results and the costs of implementing such decisions or strategies could be increased or the Fund could otherwise be disadvantaged. BlackRock may, in certain
cases, elect to implement internal policies and procedures designed to limit such consequences, which may cause the Fund to be unable to engage in certain activities, including purchasing or disposing of securities, when it might otherwise be
desirable for it to do so. Conflicts may also arise because portfolio decisions regarding the Fund may benefit other accounts managed by BlackRock. For example, the sale of a long position or establishment of a short position by the Fund may impair
the price of the same security sold short by (and therefore benefit) BlackRock or its other accounts or funds, and the purchase of a security or covering of a short position in a security by the Fund may increase the price of the same security held
by (and therefore benefit) BlackRock or its other accounts or funds.
BlackRock, on behalf of other client accounts, on the one hand, and
the Fund, 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
S-46
other activities, on behalf of other clients with respect to an issuer in which the Fund has invested, and such actions (or refraining from action) may have a material adverse effect on the Fund.
In situations in which clients of BlackRock (including the Fund) 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 Fund, 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 Fund.
In addition, to the extent permitted by applicable law, the Fund may invest its assets in other funds advised by BlackRock, including
funds that are managed by one or more of the same portfolio managers, which could result in conflicts of interest relating to asset allocation, timing of Fund purchases and redemptions, and increased remuneration and profitability for BlackRock
and/or its personnel, including portfolio managers.
In certain circumstances, BlackRock, on behalf of the Fund, may seek to buy from or
sell securities to another fund or account advised by BlackRock. BlackRock may (but is not required to) effect purchases and sales between BlackRock clients (cross trades), including the Fund, if BlackRock believes such transactions are
appropriate based on each partys investment objectives and guidelines, subject to applicable law and regulation. There may be potential conflicts of interest or regulatory issues relating to these transactions which could limit
BlackRocks decision to engage in these transactions for the Fund. BlackRock may have a potentially conflicting division of loyalties and responsibilities to the parties in such transactions.
BlackRock and its clients may pursue or enforce rights with respect to an issuer in which the Fund has invested, and those activities may have
an adverse effect on the Fund. As a result, prices, availability, liquidity and terms of the Funds investments may be negatively impacted by the activities of BlackRock or its clients, and transactions for the Fund may be impaired or effected
at prices or terms that may be less favorable than would otherwise have been the case.
The results of the Funds investment
activities may differ significantly from the results achieved by BlackRock for its proprietary accounts or other accounts (including investment companies or collective investment vehicles) 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 Fund. Moreover, it is possible that the Fund will sustain losses during
periods in which one or more proprietary or other accounts managed or advised by BlackRock achieve significant profits. The opposite result is also possible.
From time to time, the Fund may be restricted from purchasing or selling securities, or from engaging in other investment activities because
of regulatory, legal or contractual requirements applicable to BlackRock or 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 Fund in certain emerging and other markets in which limitations are imposed upon the amount of investment, in the
aggregate or in individual issuers, by affiliated foreign investors.
In connection with its management of the Fund, BlackRock may have
access to certain fundamental analysis and proprietary technical models developed by BlackRock. BlackRock will not be under any obligation, however, to effect transactions on behalf of the Fund in accordance with such analysis and models. In
addition, BlackRock will not have any obligation to make available any information regarding its proprietary activities or strategies, or the activities or strategies used for other accounts managed by them, for the benefit of the
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management of the Fund and it is not anticipated that BlackRock will have access to such information for the purpose of managing the Fund. The proprietary activities or portfolio strategies of
BlackRock, or the activities or strategies used for accounts managed by BlackRock or other client accounts could conflict with the transactions and strategies employed by BlackRock in managing the Fund.
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 Fund should be aware.
BlackRock may enter into transactions and invest in securities, instruments and currencies on
behalf of the Fund in which clients of BlackRock, or, 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 Fund, and such party may have no incentive to assure that the Fund obtains the best possible prices or terms in connection with the transactions. In addition, the purchase, holding and sale of such investments by the Fund may
enhance the profitability of BlackRock.
BlackRock may also create, write or issue derivatives for clients, the underlying securities,
currencies or instruments of which may be those in which the Fund invests or which may be based on the performance of the Fund. BlackRock has entered into an arrangement with Markit Indices Limited, the index provider for underlying fixed-income
indexes used by certain iShares ETFs, related to derivative fixed-income products that are based on such iShares ETFs. 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 Fund and other accounts managed by BlackRock may from time to time transact in
such derivative products where permitted by the Funds 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.
The Fund 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 Fund. 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 Fund. To the extent such transactions are permitted, the Fund 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 Fund. It is anticipated that the commissions, mark-ups, mark-downs, financial advisory fees, underwriting and placement fees, sales fees, financing and commitment fees, brokerage fees, other fees,
compensation or profits, rates, terms and conditions charged by BlackRock 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 Fund.
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 Fund as broker, dealer, agent, lender, adviser or in other commercial capacities. No accounting to the Fund or its
shareholders will be required, and no fees or other compensation payable by the Fund or its shareholders will be reduced by reason of receipt by BlackRock of any such fees or other amounts.
S-48
When BlackRock acts as broker, dealer, agent, adviser or in other commercial capacities in
relation to the Fund or BlackRock may take commercial steps in its own interests, which may have an adverse effect on the Fund.
The Fund
will be required to establish business relationships with its counterparties based on the Funds own credit standing. BlackRock will not have any obligation to allow credit to be used in connection with the Funds establishment of its
business relationships, nor is it expected that the Funds counterparties will rely on the credit of BlackRock in evaluating the Funds creditworthiness.
BlackRock Investment Management, LLC (BIM), an affiliate of BlackRock, pursuant to SEC exemptive relief, acts as securities
lending agent to, and receives a share of securities lending revenues from, the Fund. 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 BIM 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 loan request. In doing so, BlackRock seeks to
provide equal lending opportunities for all portfolios, independent of whether BlackRock indemnifies the portfolio. Equal opportunities for lending portfolios does not guarantee equal outcomes. Specifically, short and long-term outcomes for
individual clients may vary due to asset mix, asset/liability spreads on different securities, and the overall limits imposed by the firm.
Purchases and sales of securities and other assets for the Fund may be bunched or aggregated with orders for other BlackRock client accounts,
including with accounts that pay different transaction costs solely due to the fact that they have different research payment arrangements. BlackRock, however, is not required to bunch or aggregate orders if portfolio management decisions for
different accounts are made separately, or if they determine that bunching or aggregating is not practicable or required, or in cases involving client direction.
Prevailing trading activity frequently may make impossible the receipt of the same price or execution on the entire volume of securities
purchased or sold. When this occurs, the various prices may be averaged, and the
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Fund will be charged or credited with the average price. Thus, the effect of the aggregation may operate on some occasions to the disadvantage of the Fund. In addition, under certain
circumstances, the Fund will not be charged the same commission or commission equivalent rates in connection with a bunched or aggregated order.
As discussed in the section entitled Portfolio Transactions and Brokerage in this SAI, BlackRock, unless prohibited by applicable
law, may cause the Fund or account to pay a broker or dealer a commission for effecting a transaction that exceeds the amount another broker or dealer would have charged for effecting the same transaction in recognition of the value of brokerage and
research services provided by that broker or dealer.
Subject to applicable law, BlackRock may select brokers that furnish BlackRock, the
Fund, other BlackRock client accounts or personnel, directly or through correspondent relationships, with research or other appropriate services which provide, in BlackRocks view, appropriate assistance to BlackRock in the investment
decision-making process (including with respect to futures, fixed-price offerings and OTC transactions). Such research or other services may include, to the extent permitted by law, research reports on companies, industries and securities; economic
and financial data; financial publications; proxy analysis; trade industry seminars; computer data bases; research-oriented software and other services and products.
Research or other services obtained in this manner may be used in servicing any or all of the Fund and other BlackRock client accounts,
including in connection with BlackRock client accounts other than those that pay commissions to the broker relating to the research or other service arrangements. Such products and services may disproportionately benefit other BlackRock client
accounts relative to the Fund based on the amount of brokerage commissions paid by the Fund and such other BlackRock client accounts. For example, research or other services that are paid for through one clients commissions may not be used in
managing that clients account. In addition, other BlackRock client accounts may receive the benefit, including disproportionate benefits, of economies of scale or price discounts in connection with products and services that may be provided to
the Fund and to such other BlackRock client accounts. To the extent that BlackRock uses soft dollars, it will not have to pay for those products and services itself.
BlackRock, unless prohibited by applicable law, may endeavor to execute trades through brokers who, pursuant to such arrangements, provide
research or other services in order to ensure the continued receipt of research or other services BlackRock believes are useful in its investment decision-making process. BlackRock may from time to time choose not to engage in the above described
arrangements to varying degrees. BlackRock, unless prohibited by applicable law, may also enter into commission sharing arrangements under which BlackRock may execute transactions through a broker-dealer 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, will generally be charged to clients and, like commissions and markups/markdowns, would generally be included in the cost of the securities purchased. Access fees may be paid
by BlackRock even though incurred in connection with executing transactions on behalf of clients, including the Fund. In certain circumstances, ECNs may offer volume discounts that will reduce the access fees typically paid by BlackRock. BlackRock
will only utilize ECNs consistent with its obligation to seek to obtain best execution in client transactions.
BlackRock owns a minority
interest in, and is a member of, Members Exchange (MEMX), a newly created U.S. stock exchange. Transactions for the Fund 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.
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BlackRock has adopted policies and procedures designed to prevent conflicts of interest from
influencing proxy voting decisions that it makes on behalf of advisory clients, including the Fund, and to help ensure that such decisions are made in accordance with BlackRocks fiduciary obligations to its clients. Nevertheless,
notwithstanding such proxy voting policies and procedures, actual proxy voting decisions of BlackRock may have the effect of favoring the interests of other clients or businesses of other divisions or units of BlackRock, provided that BlackRock
believes such voting decisions to be in accordance with its fiduciary obligations. For a more detailed discussion of these policies and procedures, see Appendix B.
It is possible that the Fund may invest in securities of, or engage in transactions with, companies in which BlackRock has significant debt or
equity investments or other interests. The Fund may also invest in issuances (such as structured notes) by entities for which BlackRock provides and is compensated for cash management services relating to the proceeds from the sale of such
issuances. In making investment decisions for the Fund, BlackRock is not permitted to obtain or use material non-public information acquired by any unit of BlackRock, in the course of these activities. In
addition, from time to time, the activities of BlackRock may limit the Funds 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 Funds pricing vendors, especially if such valuations are based on
broker-dealer quotes or other data sources unavailable to the Funds pricing vendors. While BlackRock will generally communicate its valuation information or determinations to the Funds pricing vendors and/or fund accountants, there may
be instances where the Funds pricing vendors or fund accountants assign a different valuation to a security or other investment than the valuation for such security or investment determined or recommended by BlackRock.
As disclosed in more detail in Net Asset Value in the Prospectus, when market quotations are not readily available or are believed
by BlackRock to be unreliable, the Funds investments are valued at fair value by BlackRocks Valuation Committee (the Valuation Committee), in accordance with policies and procedures approved by the Funds Board of
Directors (the Valuation Procedures). When determining a fair value price, the Valuation Committee seeks to determine the price that the Fund might reasonably expect to receive from the current sale of that asset or liability
in an arms-length transaction. The price generally may not be determined based on what the Fund might reasonably expect to receive for selling an asset or liability at a later time or if it holds the
asset or liability to maturity. While fair value determinations will be based upon all available factors that BlackRock deems relevant at the time of the determination, and may be based on analytical values determined by BlackRock using proprietary
or third party valuation models, fair value represents only a good faith approximation of the value of an asset or liability. The fair value of one or more assets or liabilities may not, in retrospect, be the price at which those assets or
liabilities could have been sold during the period in which the particular fair values were used in determining the Funds NAV. As a result, the Funds sale or repurchase of its shares at NAV, at a time when a holding or holdings are
valued by 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 Fund may invest all or some of its short-term cash investments in any
money market fund or similarly-managed private fund advised or managed by BlackRock. In connection with any such investments, the Fund, to the extent permitted by the Investment Company Act, may pay its share of expenses of a money market fund or
other similarly-managed private fund in which it invests, which may result in the Fund bearing some additional expenses.
BlackRock and
its directors, officers and employees, may buy and sell securities or other investments for their own accounts and may have conflicts of interest with respect to investments made on behalf of the Fund. As a result of differing trading and investment
strategies or constraints, positions may be taken by directors, officers
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and employees of BlackRock that are the same, different from or made at different times than positions taken for the Fund. To lessen the possibility that the Fund will be adversely affected by
this personal trading, the Fund and the Advisor each have adopted a Code of Ethics in compliance with Section 17(j) of the Investment Company Act that restricts securities trading in the personal accounts of investment professionals and others
who normally come into possession of information regarding the Funds portfolio transactions. Each Code of Ethics is also available on the EDGAR Database on the SECs Internet site at http://www.sec.gov, and copies may be obtained, after
paying a duplicating fee, by e-mail at publicinfo@sec.gov.
BlackRock will not purchase securities
or other property from, or sell securities or other property to, the Fund, except that the Fund may in accordance with rules or guidance adopted under the Investment Company Act engage in transactions with another fund or accounts that are
affiliated with the Fund as a result of common officers, directors, or investment advisers or pursuant to exemptive orders granted to the Fund and/or BlackRock by the SEC. These transactions would be effected in circumstances in which BlackRock
determined that it would be appropriate for the Fund to purchase and another client of BlackRock to sell, or the Fund to sell and another client of BlackRock to purchase, the same security or instrument on the same day. From time to time, the
activities of the Fund may be restricted because of regulatory requirements applicable to BlackRock and/or BlackRocks internal policies designed to comply with, limit the applicability of, or otherwise relate to such requirements. A client not
advised by BlackRock would not be subject to some of those considerations. There may be periods when BlackRock may not initiate or recommend certain types of transactions, or may otherwise restrict or limit 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 Fund, particularly where such services result in BlackRock obtaining material non-public information about
the company (e.g., in connection with participation in a creditors committee). Similar situations could arise if personnel of BlackRock serve as directors of companies the securities of which the Fund wishes to purchase or sell. However, if
permitted by applicable law, and where consistent with BlackRocks policies and procedures (including the necessary implementation of appropriate information barriers), the Fund may purchase securities or instruments that are issued by such
companies, are the subject of an 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 Fund. For example, in certain circumstances where the Fund invests in securities issued by companies that operate in certain regulated industries, in certain emerging or international markets, or are subject to corporate or regulatory
ownership restrictions, or invest in certain futures and derivative transactions, there may be limits on the aggregate amount invested by BlackRock for its proprietary accounts and for client accounts (including the Fund) that may not be exceeded
without the grant of a license or other regulatory or corporate consent, or, if exceeded, may cause BlackRock, the Fund or other client accounts to suffer disadvantages or business restrictions. If certain aggregate ownership thresholds are reached
or certain transactions undertaken, the ability of BlackRock on behalf of clients (including the Fund) to purchase or dispose of investments, or exercise rights or undertake business transactions, may be restricted by regulation or otherwise
impaired. As a result, BlackRock on behalf of its clients (including the Fund) may limit purchases, sell existing investments, or otherwise restrict, forgo or limit the exercise of rights (including transferring, outsourcing or limiting voting
rights or forgoing the right to receive dividends) when BlackRock, in its sole discretion, deems it appropriate in light of potential regulatory or other restrictions on ownership or other consequences resulting from reaching investment thresholds.
In those circumstances where ownership thresholds or limitations must be observed, BlackRock seeks to allocate limited investment
opportunities equitably among clients (including the Fund), taking into consideration benchmark weight and investment strategy. When ownership in certain securities nears an applicable threshold, BlackRock may limit purchases in such securities to
the issuers weighting in the applicable benchmark used by BlackRock to manage the Fund. If client (including Fund) holdings of an issuer exceed an applicable threshold
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and BlackRock is unable to obtain relief to enable the continued holding of such investments, it may be necessary to sell down these positions to meet the applicable limitations. In these cases,
benchmark overweight positions will be sold prior to benchmark positions being reduced to meet applicable limitations.
In addition to the
foregoing, other ownership thresholds may trigger reporting requirements to governmental and regulatory authorities, and such reports may entail the disclosure of the identity of a client or BlackRocks intended strategy with respect to such
security or asset.
BlackRock may maintain securities indices. To the extent permitted by applicable laws, the Fund may seek to license
and use such indices as part of their investment strategy. Index based funds that seek to track the performance of securities indices also may use the name of the index or index provider in the fund name. Index providers, including BlackRock (to the
extent permitted by applicable law), may be paid licensing fees for use of their index or index name. BlackRock is not obligated to license its indices to the Fund and the Fund is under no obligation to use BlackRock indices. The Fund cannot be
assured that the terms of any index licensing agreement with BlackRock will be as favorable as those terms offered to other licensees.
BlackRock may enter into contractual arrangements with third-party service providers to the Fund (e.g., custodians, administrators and index
providers) pursuant to which BlackRock receives fee discounts or concessions in recognition of BlackRocks overall relationship with such service providers. To the extent that BlackRock is responsible for paying these service providers out of
its management fee, the benefits of any such fee discounts or concessions may accrue, in whole or in part, to BlackRock.
BlackRock owns
or has an ownership interest in certain trading, portfolio management, operations and/or information systems used by Fund service providers. These systems are, or will be, used by a Fund service provider in connection with the provision of services
to accounts managed by BlackRock and funds managed and sponsored by BlackRock, including the Fund, that engage the service provider (typically the custodian). The Funds service provider remunerates BlackRock for the use of the systems. A Fund
service providers payments to BlackRock for the use of these systems may enhance the profitability of BlackRock.
BlackRocks
receipt of fees from a service provider in connection with the use of systems provided by BlackRock may create an incentive for BlackRock to recommend that the Fund enter into or renew an arrangement with the service provider.
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 Fund fees and expenses applicable to such clients investment in the Fund.
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.
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DESCRIPTION OF CAPITAL STOCK
Common Shares
The Fund intends to hold
annual meetings of shareholders so long as the common shares are listed on a national securities exchange and such meetings are required as a condition to such listing.
Preferred Shares
The Charter authorizes
the issuance of 200,000,000 shares of capital stock, which may be classified or reclassified from time to time with rights as determined by the Board without the approval of holders of common shares. The Board has classified (i) 1,259 shares of the
Funds authorized capital stock as Series W-7 VMTP Preferred Shares (VMTP Shares), of which the Fund has outstanding, 1,259, as of April 30, 2022, (ii) 3,262 shares of the Funds authorized capital stock as Auction Rate
Municipal Preferred Stock, Series T7, of which the Fund has none outstanding, as of April 30, 2022, and (iii) 2,600 shares of the Funds authorized capital stock as Auction Rate Municipal Preferred Stock, Series T8, of which the Fund has none
outstanding, as of April 30, 2022. The remainder of the shares of capital stock are classified as shares of common stock (common shares).
Distribution Preference and Liquidation Preference. The VMTP Shares rank prior to the Funds common shares as to the payment of
dividends by the Fund, and distribution of assets upon dissolution or liquidation of the Fund. The Investment Company Act prohibits the declaration of any dividend on the Funds common shares or the repurchase of the Funds common shares
if the Fund fails to maintain asset coverage of at least 200% of the liquidation preference of the Funds outstanding VMTP Shares. In addition, pursuant to the Funds Charter, the Fund is restricted from declaring and paying dividends on
classes of shares ranking junior to or on parity with the VMTP Shares or repurchasing such shares if the Fund fails to declare and pay dividends on the VMTP Shares, redeem any VMTP Shares required to be redeemed under the Charter or comply with the
basic maintenance amount requirement of the ratings agencies rating the VMTP Shares.
Voting Rights. The holders of the VMTP Shares
have voting rights equal to the voting rights of the holders of the Funds common shares (one vote per share) and will vote together with holders of the common shares (one vote per share) as a single class on certain matters. However, the
holders of the VMTP Shares, voting as a separate class, are also entitled to elect two directors to the Board of the Fund. Holders of VMTP Shares are also entitled to elect the Funds full Board if dividends on the VMTP Shares are not paid for
a period of two years. Holders of VMTP Shares are also generally entitled to a separate class vote to amend the applicable Articles Supplementary and on matters adversely affecting VMTP Shares that do not adversely affect any of the rights of
holders of other securities of the Fund. In addition, pursuant to the Investment Company Act, the approval of the holders of a majority of any outstanding VMTP Shares, voting as a separate class, is required to (a) adopt any plan of
reorganization that would adversely affect the VMTP Shares, (b) change the Funds sub-classification as a closed-end investment company or change its
fundamental investment restrictions or (c) change its business so as to cease to be an investment company.
Redemption, Purchase
and Sale of VMTP Shares. The VMTP Shares may be redeemed, in whole or in part, at any time at the option of the Fund. The redemption price per VMTP Share is equal to the liquidation preference per share plus any outstanding unpaid dividends and,
applicable redemption premiums. If the Fund redeems the VMTP Shares prior to the term redemption date of the VMTP Shares and the VMTP Shares have long-term ratings above A1/A+ or its equivalent by the ratings agencies then rating the VMTP Shares,
then such redemption may be subject to a prescribed redemption premium (up to 2% of the liquidation preference) payable to the holder of the VMTP Shares based on the time remaining until the term redemption date of the VMTP Shares, subject to
certain exceptions for redemptions that are required to comply with minimum asset coverage requirements. The Fund is required to redeem its VMTP Shares on the term redemption date of the VMTP Shares, unless earlier redeemed or repurchased or unless
extended. Such term redemption date is July 2, 2023, unless extended. Six months prior to the term redemption date of the VMTP Shares, the Fund is required to begin
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to segregate liquid assets with its custodian to fund the redemption. In addition, the Fund is required to redeem certain of its outstanding VMTP Shares if it fails to comply with certain asset
coverage, basic maintenance amount or leverage requirements.
Other Shares
The Board (subject to applicable law and the Charter) may authorize an offering, without the approval of the holders of common shares and,
depending on their terms, any preferred shares outstanding at that time, of other classes of shares, or other classes or series of shares, as they determine to be necessary, desirable or appropriate, having such terms, rights, preferences,
privileges, limitations and restrictions as the Board sees fit. The Fund currently does not expect to issue any other classes of shares, or series of shares, except for the common shares and VMTP Shares.
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REPURCHASE OF COMMON SHARES
The Fund is a closed-end management investment company and as such its shareholders will not have the
right to cause the Fund to redeem their shares. Instead, the Funds common shares will trade in the open market at a price that will be a function of several factors, including dividend levels (which are in turn affected by expenses), NAV, call
protection for portfolio securities, dividend stability, liquidity, relative demand for and supply of the common shares in the market, general market and economic conditions and other factors. Because shares of a
closed-end investment company may frequently trade at prices lower than NAV, the Board may consider action that might be taken to reduce or eliminate any material discount from NAV in respect of common shares,
which may include the repurchase of such shares in the open market or in private transactions, the making of a tender offer for such shares, or the conversion of the Fund to an open-end investment company. The
Board may decide not to take any of these actions. In addition, there can be no assurance that share repurchases or tender offers, if undertaken, will reduce market discount.
Notwithstanding the foregoing, at any time when the Fund has preferred shares outstanding, the Fund may not purchase, redeem or otherwise
acquire any of its common shares unless (1) all accrued preferred share dividends have been paid and (2) at the time of such purchase, redemption or acquisition, the NAV of the Funds portfolio (determined after deducting the
acquisition price of the common shares) is at least 200% of the liquidation value of any outstanding preferred shares (expected to equal the original purchase price per share plus any accrued and unpaid dividends thereon). Any service fees incurred
in connection with any tender offer made by the Fund will be borne by the Fund and will not reduce the stated consideration to be paid to tendering shareholders.
Subject to its investment restrictions, the Fund may borrow to finance the repurchase of shares or to make a tender offer. Interest on any
borrowings to finance share repurchase transactions or the accumulation of cash by the Fund in anticipation of share repurchases or tender offers will reduce the Funds net income. Any share repurchase, tender offer or borrowing that might be
approved by the Board would have to comply with the Exchange Act, the Investment Company Act and the rules and regulations thereunder.
Although the decision to take action in response to a discount from NAV will be made by the Board at the time it considers such issue, it is
the Boards present policy, which may be changed by the Board, not to authorize repurchases of common shares or a tender offer for such shares if: (i) such transactions, if consummated, would (a) result in the delisting of the common
shares from the NYSE, or (b) impair the Funds status as a RIC under the Code, (which would make the Fund a taxable entity, causing the Funds income to be taxed at the corporate level in addition to the taxation of shareholders who
receive dividends from the Fund) or as a registered closed-end investment company under the Investment Company Act; (ii) the Fund would not be able to liquidate portfolio securities in an orderly manner
and consistent with the Funds investment objectives and policies in order to repurchase shares; or (iii) there is, in the Boards judgment, any (a) material legal action or proceeding instituted or threatened challenging such
transactions or otherwise materially adversely affecting the Fund, (b) general suspension of or limitation on prices for trading securities on the NYSE, (c) declaration of a banking moratorium by federal or state authorities or any
suspension of payment by United States or New York banks, (d) material limitation affecting the Fund or the issuers of its portfolio securities by federal or state authorities on the extension of credit by lending institutions or on the
exchange of foreign currency, (e) commencement of war, armed hostilities or other international or national calamity directly or indirectly involving the United States, or (f) other event or condition which would have a material adverse
effect (including any adverse tax effect) on the Fund or its shareholders if shares were repurchased. The Board may in the future modify these conditions in light of experience.
The repurchase by the Fund of its shares at prices below NAV will result in an increase in the NAV of those shares that remain outstanding.
However, there can be no assurance that share repurchases or tender offers at or below NAV will result in the Funds common shares trading at a price equal to their NAV. Nevertheless, the fact that the Funds common shares may be the
subject of repurchases or tender offers from time to time, or that the Fund may be converted to an open-end investment company, may reduce any spread between market price and NAV that might otherwise exist.
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In addition, a purchase by the Fund of its common shares will decrease the Funds net assets
which would likely have the effect of increasing the Funds expense ratio. Any purchase by the Fund of its common shares at a time when preferred shares are outstanding will increase the leverage applicable to the outstanding common shares then
remaining.
Before deciding whether to take any action if the common shares trade below NAV, the Board would likely consider all relevant
factors, including the extent and duration of the discount, the liquidity of the Funds portfolio, the impact of any action that might be taken on the Fund or its shareholders and market considerations. Based on these considerations, even if
the Funds common shares should trade at a discount, the Board may determine that, in the interest of the Fund and its shareholders, no action should be taken.
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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 Fund. Except as otherwise noted, this discussion assumes you are a taxable U.S. holder (as defined below). This discussion is based upon current provisions of the Internal Revenue Code of 1986, as amended (the Code), the
regulations promulgated thereunder and judicial and administrative authorities, all of which are subject to change or differing interpretations by the courts or the Internal Revenue Service, possibly with retroactive effect. No attempt is made to
present a detailed explanation of all U.S. federal income tax concerns affecting the Fund and its shareholders, and the discussions set forth here do not constitute tax advice. This discussion assumes that investors hold common shares of the Fund as
capital assets for U.S. federal income tax purposes(generally, assets held for investment). The Fund has not sought and will not seek any ruling from the Internal Revenue Service regarding any matters discussed herein. No assurance can be given that
the Internal Revenue Service would not assert, or that a court would not sustain, a position contrary to those set forth below. This summary does not discuss any aspects of 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 Funds common shares, as well as the
effects of state, local and non-U.S. tax laws.
In addition, no attempt is made to address tax
considerations applicable to an investor with a special tax status, such as a financial institution, REIT, insurance company, regulated investment company, individual retirement account, other tax-exempt
organization, dealer in securities or currencies, person holding shares of the Fund as part of a hedging, integrated, conversion or straddle transaction, trader in securities that has elected the mark-to-market method of accounting for its securities, U.S. holder (as defined below) whose functional currency is not the U.S. dollar, investor with applicable financial statements within the
meaning of Section 451(b) of the Code, or non-U.S. investor. Furthermore, this discussion does not reflect possible application of the alternative minimum tax.
A U.S. holder is a beneficial owner that is for U.S. federal income tax purposes:
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a citizen or individual resident of the United States (including certain former citizens and former long-term
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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 Fund
The Fund has elected to be treated and intends to qualify to be taxed each year as a RIC under Subchapter M of the Code. In order to qualify as
a RIC, the Fund must, among other things, satisfy certain requirements relating to the sources of its income, diversification of its assets, and distribution of its income to its shareholders. First, the Fund must derive at least 90% of its annual
gross income from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock or securities or foreign currencies, or other income (including but not limited to gains from options, futures and
forward contracts) derived with respect to its business of investing in such stock, securities or currencies, or net income derived from interests in qualified publicly traded partnerships (as defined in the Code) (the 90% gross
income test). Second, the Fund must diversify its holdings so that, at the close of each quarter of its taxable year, (i) at least 50% of the value of its
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total assets consists of cash, cash items, U.S. Government securities, securities of other RICs and other securities, with such other securities limited in respect of any one issuer to an amount
not greater in value than 5% of the value of the Funds total assets and to not more than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the 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 Fund and engaged in the same, similar or related trades or businesses, or any one or more qualified
publicly traded partnerships.
As long as the Fund qualifies as a RIC, the Fund will generally not be subject to corporate-level
U.S. federal income tax on income and gains that it distributes each taxable year to its shareholders, provided that in such taxable year it distributes at least 90% of the sum of (i) its net tax-exempt
interest income, if any, and (ii) its investment company taxable income (which includes, among other items, dividends, taxable interest, taxable original issue discount and market discount income, income from securities lending, net
short-term capital gain in excess of net long-term capital loss, and any other taxable income other than net capital gain (as defined below) and is reduced by deductible expenses) determined without regard to the deduction for dividends
paid. The Fund may retain for investment its net capital gain (which consists of the excess of its net long-term capital gain over its net short-term capital loss). However, if the Fund retains any net capital gain or any investment company taxable
income, it will be subject to tax at regular corporate rates on the amount retained.
The Code imposes a 4% nondeductible excise tax on
the Fund to the extent the Fund does not distribute by the end of any calendar year at least the sum of (i) 98% of its ordinary income (not taking into account any capital gain or loss) for the calendar year and (ii) 98.2% of its capital
gain in excess of its capital loss (adjusted for certain ordinary losses) for a one-year period generally ending on October 31 of the calendar year (unless an election is made to use the Funds
fiscal year). In addition, the minimum amounts that must be distributed in any year to avoid the excise tax will be increased or decreased to reflect any under-distribution or over-distribution, as the case may be, from the previous year. For
purposes of the excise tax, the Fund will be deemed to have distributed any income on which it paid U.S. federal income tax. While the Fund intends to distribute any income and capital gain in the manner necessary to minimize imposition of the 4%
nondeductible excise tax, there can be no assurance that sufficient amounts of the Funds taxable income and capital gain will be distributed to entirely avoid the imposition of the excise tax. In that event, the Fund will be liable for the
excise tax only on the amount by which it does not meet the foregoing distribution requirement.
If in any taxable year the Fund should
fail to qualify under Subchapter M of the Code for tax treatment as a RIC, the Fund would incur a regular corporate U.S. federal income tax upon all of its taxable income for that year, and all distributions to its shareholders (including
distributions of net capital gain) would be taxable to shareholders as ordinary dividend income for U.S. federal income tax purposes to the extent of the Funds earnings and profits. Provided that certain holding period and other requirements
were met, such dividends would be eligible (i) to be treated as qualified dividend income in the case of shareholders taxed as individuals and (ii) for the dividends received deduction in the case of corporate shareholders. In
addition, to qualify again to be taxed as a RIC in a subsequent year, the Fund would be required to distribute to shareholders its earnings and profits attributable to non-RIC years. In addition, if the Fund
failed to qualify as a RIC for a period greater than two taxable years, then, in order to qualify as a RIC in a subsequent year, the Fund would be required to elect to recognize and pay tax on any net built-in
gain (the excess of aggregate gain, including items of income, over aggregate loss that would have been realized if the Fund had been liquidated) or, alternatively, be subject to taxation on such built-in gain
recognized for a period of five years.
The remainder of this discussion assumes that the Fund qualifies for taxation as a RIC.
The Funds Investments
Certain of
the Funds investment practices are subject to special and complex U.S. federal income tax provisions (including mark-to-market, constructive sale, straddle, wash
sale, short sale and other rules) that may, among other
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things, (i) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (ii) convert lower taxed long-term capital gains or qualified dividend income into higher
taxed short-term capital gains or ordinary income, (iii) convert ordinary loss or a deduction into capital loss (the deductibility of which is more limited), (iv) cause the Fund to recognize income or gain without a corresponding receipt
of cash, (v) adversely affect the time as to when a purchase or sale of stock or securities is deemed to occur, (vi) adversely alter the characterization of certain complex financial transactions and (vii) produce income that will not
be qualified income for purposes of the 90% annual gross income requirement described above. These U.S. federal income tax provisions could therefore affect the amount, timing and character of distributions to common shareholders. The
Fund intends to monitor its transactions and may make certain tax elections and may be required to dispose of securities to mitigate the effect of these provisions and prevent disqualification of the Fund as a RIC. Additionally, the Fund may be
required to limit its activities in derivative instruments in order to enable it to maintain its RIC status.
The Fund may invest a
portion of its net assets in below investment grade securities, commonly known as junk securities. Investments in these types of securities may present special tax issues for the Fund. U.S. federal income tax rules are not entirely clear
about issues such as when the Fund may cease to accrue interest, original issue discount or market discount, when and to what extent deductions may be taken for bad debts or worthless securities, how payments received on obligations in default
should be allocated between principal and income and whether modifications or exchanges of debt obligations in a bankruptcy or workout context are taxable. These and other issues could affect the Funds ability to distribute sufficient income
to preserve its status as a RIC or to avoid the imposition of U.S. federal income or excise tax.
Certain debt securities acquired by the
Fund may be treated as debt securities that were originally issued at a discount. Generally, the amount of the original issue discount is treated as interest income and is included in taxable income (and required to be distributed by the Fund in
order to qualify as a RIC and avoid U.S. federal income tax or the 4% excise tax on undistributed income) over the term of the security, even though payment of that amount is not received until a later time, usually when the debt security matures.
If the Fund purchases a debt security on a secondary market at a price lower than its adjusted issue price, the excess of the adjusted
issue price over the purchase price is market discount. Unless the Fund makes an election to accrue market discount on a current basis, generally, any gain realized on the disposition of, and any partial payment of principal on, a debt
security having market discount is treated as ordinary income to the extent the gain, or principal payment, does not exceed the accrued market discount on the debt security. Market discount generally accrues in equal daily installments.
If the Fund ultimately collects less on the debt instrument than its purchase price plus the market discount previously included in income, the Fund may not be able to benefit from any offsetting loss deductions.
The Fund may invest in preferred securities or other securities the U.S. federal income tax treatment of which may not be clear or may be
subject to recharacterization by the Internal Revenue Service. To the extent the tax treatment of such securities or the income from such securities differs from the tax treatment expected by the Fund, it could affect the timing or character of
income recognized by the Fund, potentially requiring the Fund to purchase or sell securities, or otherwise change its portfolio, in order to comply with the tax rules applicable to RICs under the Code.
Gain or loss on the sale of securities by the Fund will generally be long-term capital gain or loss if the securities have been held by the
Fund for more than one year. Gain or loss on the sale of securities held for one year or less will be short-term capital gain or loss.
Because the Fund may invest in foreign securities, its income from such securities may be subject to
non-U.S. taxes.
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.
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Income from options on individual securities written by the Fund will generally not be recognized
by the Fund for tax purposes until an option is exercised, lapses or is subject to a closing transaction (as defined by applicable regulations) pursuant to which the Funds obligations with respect to the option are otherwise
terminated. If the option lapses without exercise, the premiums received by the Fund from the writing of such options will generally be characterized as short-term capital gain. If the Fund enters into a closing transaction, the difference between
the premiums received and the amount paid by the Fund to close out its position will generally be treated as short-term capital gain or loss. If an option written by the Fund is exercised, thereby requiring the Fund to sell the underlying security,
the premium will increase the amount realized upon the sale of the security, and the character of any gain on such sale of the underlying security as short-term or long-term capital gain will depend on the holding period of the Fund in the
underlying security. Because the Fund will not have control over the exercise of the options it writes, such exercises or other required sales of the underlying securities may cause the Fund to realize gains or losses at inopportune times.
Options on indices of securities and sectors of securities that qualify as section 1256 contracts will generally be marked-to-market for U.S. federal income tax purposes. As a result, the Fund will generally recognize gain or loss on the last day of each taxable year equal to
the difference between the value of the option on that date and the adjusted basis of the option. The adjusted basis of the option will consequently be increased by such gain or decreased by such loss. Any gain or loss with respect to options on
indices and sectors that qualify as section 1256 contracts will be treated as short-term capital gain or loss to the extent of 40% of such gain or loss and long-term capital gain or loss to the extent of 60% of such gain or loss.
Because the mark-to-market rules may cause the Fund to recognize gain in advance of the receipt of cash, the Fund may be required to dispose of investments in order to
meet its distribution requirements. Mark-to-market losses may be suspended or otherwise limited if such losses are part of a straddle or similar transaction.
Taxation of Common Shareholders
Fund distributions of its tax-exempt interest on municipal securities, if properly reported by the Fund
to its shareholders (exempt-interest dividends), will generally be exempt from regular federal income tax. In order for the Fund to pay exempt-interest dividends, at least 50% of the value of the Funds total assets must consist of tax-exempt obligations on a quarterly basis. Although the Fund intends to meet this requirement, no assurance can be given in this regard. If the Fund failed to do so, it would not be able to pay tax-exempt dividends, and your distributions attributable to interest received by the Fund from any source (including distributions of tax-exempt interest income) would be
taxable as ordinary income to the extent of the Funds earnings and profits.
The Fund will either distribute or retain for
reinvestment all or part of its net capital gain. If any such gain is retained, the Fund will be subject to a corporate income tax on such retained amount. In that event, the Fund expects to report the retained amount as undistributed capital gain
in a notice to its common shareholders, each of whom, if subject to U.S. federal income tax on long-term capital gains, (i) will be required to include in income for U.S. federal income tax purposes as long-term capital gain its share of such
undistributed amounts, (ii) will be entitled to credit its proportionate share of the tax paid by the Fund against its U.S. federal income tax liability and to claim refunds to the extent that the credit exceeds such liability and
(iii) will increase its basis in its common shares by the amount of undistributed capital gains included in the shareholders income less the tax deemed paid by the shareholder under clause (ii).
Distributions paid to you by the Fund from its net capital gain, if any, that the Fund properly reports as capital gain dividends
(capital gain dividends) are taxable as long-term capital gains, regardless of how long you have held your common shares. All other dividends paid to you by the Fund (including dividends from net short-term capital gains) from its
current or accumulated earnings and profits, other than exempt-interest dividends (ordinary income dividends), are generally subject to tax as ordinary income. Provided that certain holding period and other requirements are met, ordinary
income dividends (if properly reported by the Fund) may qualify (i) for the dividends received deduction in the case of corporate shareholders to the extent that the Funds income consists of dividend income from U.S. corporations, and
(ii) in the case of individual
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shareholders, as qualified dividend income eligible to be taxed at long-term capital gains rates to the extent that the Fund receives qualified dividend income. Qualified dividend
income is, in general, dividend income from taxable domestic corporations and certain qualified foreign corporations (e.g., generally, foreign corporations incorporated in a possession of the United States or in certain countries with a qualifying
comprehensive tax treaty with the United States, or whose stock with respect to which such dividend is paid is readily tradable on an established securities market in the United States). There can be no assurance as to what portion, if any, of the
Funds distributions will constitute qualified dividend income or be eligible for the dividends received deduction.
Any
distributions you receive that are in excess of the Funds current and accumulated earnings and profits will be treated as a return of capital to the extent of your adjusted tax basis in your common shares, and thereafter as capital gain from
the sale of common shares. The amount of any Fund distribution that is treated as a return of capital will reduce your adjusted tax basis in your common shares, thereby increasing your potential gain or reducing your potential loss on any subsequent
sale or other disposition of your common shares.
Common shareholders may be entitled to offset their capital gain dividends with capital
losses. The Code contains a number of statutory provisions affecting when capital losses may be offset against capital gain, and limiting the use of losses from certain investments and activities. Accordingly, common shareholders that have capital
losses are urged to consult their tax advisers.
Dividends and other taxable distributions are taxable to you even though they are
reinvested in additional common shares of the Fund. Dividends and other distributions paid by the Fund are generally treated under the Code as received by you at the time the dividend or distribution is made. If, however, the Fund pays you a
dividend in January that was declared in the previous October, November or December to common shareholders of record on a specified date in one of such months, then such dividend will be treated for U.S. federal income tax purposes as being paid by
the Fund and received by you on December 31 of the year in which the dividend was declared. In addition, certain other distributions made after the close of the Funds taxable year may be spilled back and treated as paid by the
Fund (except for purposes of the 4% nondeductible excise tax) during such taxable year. In such case, you will be treated as having received such dividends in the taxable year in which the distributions were actually made.
Interest on certain private activity bonds is an item of tax preference subject to the alternative minimum tax on individuals. The
Fund may invest a portion of its assets in municipal bonds subject to this provision so that a portion of its exempt-interest dividends is an item of tax preference to the extent such dividends represent interest received from these private activity
bonds. Accordingly, investment in the Fund could cause a holder of common shares to be subject to, or result in an increased liability under, the alternative minimum tax.
Exempt-interest dividends are included in determining what portion, if any, of a persons Social Security and railroad retirement
benefits will be includable in gross income subject to federal income tax.
The price of common shares purchased at any time may reflect
the amount of a forthcoming distribution. Those purchasing common shares just prior to the record date for a distribution will receive a distribution which will be taxable to them even though it represents, economically, a return of invested
capital.
The Fund will send you information after the end of each year setting forth the amount and tax status of any distributions paid
to you by the Fund.
The sale or other disposition of common shares will generally result in capital gain or loss to you and will be
long-term capital gain or loss if you have held such common shares for more than one year at the time of sale. Any loss upon the sale or other disposition of common shares held for six months or less will be treated as long-term capital loss to the
extent of any capital gain dividends received (including amounts credited as an undistributed capital gain dividend) by you with respect to such common shares. Any loss you recognize on a sale or other disposition of common shares will be disallowed
if you acquire other common shares (whether
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through the automatic reinvestment of dividends or otherwise) within a 61-day period beginning 30 days before and ending 30 days after your sale or
exchange of the common shares. In such case, your tax basis in the common shares acquired will be adjusted to reflect the disallowed loss.
If the Fund conducts a tender offer for its shares, a repurchase by the Fund of a shareholders shares pursuant to such tender offer
generally will be treated as a sale or exchange of the shares by a shareholder provided that either (i) the shareholder tenders, and the Fund repurchases, all of such shareholders shares, thereby reducing the shareholders percentage
ownership of the Fund, whether directly or by attribution under Section 318 of the Code, to 0%, (ii) the shareholder meets numerical safe harbors under the Code with respect to percentage voting interest and reduction in ownership of the
Fund following completion of the tender offer, or (iii) the tender offer otherwise results in a meaningful reduction of the shareholders ownership percentage interest in the Fund, which determination depends on a particular
shareholders facts and circumstances.
If a tendering shareholders proportionate ownership of the Fund (determined after
applying the ownership attribution rules under Section 318 of the Code) is not reduced to the extent required under the tests described above, such shareholder will be deemed to receive a distribution from the Fund under Section 301 of the
Code with respect to the shares held (or deemed held under Section 318 of the Code) by the shareholder after the tender offer (a Section 301 distribution). The amount of this distribution will equal the price paid by the Fund
to such shareholder for the shares sold, and will be taxable as a dividend, i.e., as ordinary income, to the extent of the Funds current or accumulated earnings and profits allocable to such distribution, with the excess treated as a
return of capital reducing the shareholders tax basis in the shares held after the tender offer, and thereafter as capital gain. Any Fund shares held by a shareholder after a tender offer will be subject to basis adjustments in accordance with
the provisions of the Code.
Provided that no tendering shareholder is treated as receiving a Section 301 distribution as a result of
selling shares pursuant to a particular tender offer, shareholders who do not sell shares pursuant to that tender offer will not realize constructive distributions on their shares as a result of other shareholders selling shares in the tender offer.
In the event that any tendering shareholder is deemed to receive a Section 301 distribution, it is possible that shareholders whose proportionate ownership of the Fund increases as a result of that tender offer, including shareholders who do
not tender any shares, will be deemed to receive a constructive distribution under Section 305(c) of the Code in an amount equal to the increase in their percentage ownership of the Fund as a result of the tender offer. Such constructive
distribution will be treated as a dividend to the extent of current or accumulated earnings and profits allocable to it.
Use of the
Funds cash to repurchase shares may adversely affect the Funds ability to satisfy the distribution requirements for treatment as a regulated investment company described above. The Fund may also recognize income in connection with the
sale of portfolio securities to fund share purchases, in which case the Fund would take any such income into account in determining whether such distribution requirements have been satisfied.
If the Fund liquidates, shareholders generally will realize capital gain or loss upon such liquidation in an amount equal to the difference
between the amount of cash or other property received by the shareholder (including any property deemed received by reason of its being placed in a liquidating trust) and the shareholders adjusted tax basis in its shares. Any such gain or loss
will be long-term if the shareholder is treated as having a holding period in Fund shares of greater than one year, and otherwise will be short-term.
The foregoing discussion does not address the tax treatment of shareholders who do not hold their shares as a capital asset. Such shareholders
should consult their own tax advisors on the specific tax consequences to them of participating or not participating in the tender offer or upon liquidation of the Fund.
Current U.S. federal income tax law taxes both long-term and short-term capital gain of corporations at the rates applicable to ordinary
income. For non-corporate taxpayers, short-term capital gain is currently taxed at
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rates applicable to ordinary income while long-term capital gain generally is taxed at a reduced maximum rate. The deductibility of capital losses is subject to limitations under the Code.
Certain U.S. holders who are individuals, estates or trusts and whose income exceeds certain thresholds will be required to pay a 3.8%
Medicare tax on all or a portion of their net investment income, which includes dividends received from the Fund and capital gains from the sale or other disposition of the Funds common shares.
A common shareholder that is a nonresident alien individual or a foreign corporation (a foreign investor) generally will be
subject to U.S. federal withholding tax at the rate of 30% (or possibly a lower rate provided by an applicable tax treaty) on ordinary income dividends (except as discussed below). In general, U.S. federal withholding tax and U.S. federal income tax
will not apply to any gain or income realized by a foreign investor in respect of any distribution of exempt-interest dividends or net capital gain (including amounts credited as an undistributed capital gain dividend) or upon the sale or other
disposition of common shares of the Fund. Different tax consequences may result if the foreign investor is engaged in a trade or business in the United States or, in the case of an individual, is present in the United States for 183 days or more
during a taxable year and certain other conditions are met. Foreign investors should consult their tax advisers regarding the tax consequences of investing in the Funds common shares.
Ordinary income dividends properly reported by a RIC are generally exempt from U.S. federal withholding tax where they (i) are paid in
respect of the RICs qualified net interest income (generally, its U.S.-source interest income, other than certain contingent interest and interest from obligations of a corporation or partnership in which the RIC is at least a 10%
shareholder, reduced by expenses that are allocable to such income) or (ii) are paid in respect of the RICs qualified short-term capital gains (generally, the excess of the RICs net short-term capital gain over its
long-term capital loss for such taxable year). Depending on its circumstances, the Fund may report all, some or none of its potentially eligible dividends as such qualified net interest income or as qualified short-term capital gains, and/or treat
such dividends, in whole or in part, as ineligible for this exemption from withholding. In order to qualify for this exemption from withholding, a foreign investor needs to comply with applicable certification requirements relating to its non-U.S. status (including, in general, furnishing an IRS Form W-8BEN, W-8BEN-E, or substitute
Form). In the case of common shares held through an intermediary, the intermediary may have withheld tax even if the Fund reported the payment as qualified net interest income or qualified short-term capital gain. Foreign investors should contact
their intermediaries with respect to the application of these rules to their accounts. There can be no assurance as to what portion of the Funds distributions would qualify for favorable treatment as qualified net interest income or qualified
short-term capital gains.
In addition withholding at a rate of 30% will apply to dividends paid in respect of common shares of the Fund
held by or through certain foreign financial institutions (including investment funds), unless such institution enters into an agreement with the Treasury to report, on an annual basis, information with respect to shares in, and accounts maintained
by, the institution to the extent such shares or accounts are held by certain U.S. persons and by certain non-U.S. entities that are wholly or partially owned by U.S. persons and to withhold on certain
payments. Accordingly, the entity through which common shares of the Fund are held will affect the determination of whether such withholding is required. Similarly, dividends paid in respect of common shares of the Fund held by an investor that is a
non-financial foreign entity that does not qualify under certain exemptions will be subject to withholding at a rate of 30%, unless such entity either (i) certifies that such entity does not have any
substantial United States owners or (ii) provides certain information regarding the entitys substantial United States owners, which the applicable withholding agent will in turn provide to the Secretary of the
Treasury. An intergovernmental agreement between the United States and an applicable foreign country, or future Treasury regulations or other guidance, may modify these requirements. The Fund will not pay any additional amounts to common
shareholders in respect of any amounts withheld. Foreign investors are encouraged to consult with their tax advisers regarding the possible implications of these rules on their investment in the Funds common shares.
S-64
U.S. federal backup withholding tax may be required on dividends, distributions and sale proceeds
payable to certain non-exempt common shareholders who fail to supply their correct taxpayer identification number (in the case of individuals, generally, their social security number) or to make required
certifications, or who are otherwise subject to backup withholding. Backup withholding is not an additional tax and any amount withheld may be refunded or credited against your U.S. federal income tax liability, if any, provided that you timely
furnish the required information to the Internal Revenue Service.
Ordinary income dividends, capital gain dividends, and gain from the
sale or other disposition of common shares of the Fund also may be subject to state, local, and/or foreign taxes. Common shareholders are urged to consult their own tax advisers regarding specific questions about U.S. federal, state, local or
foreign tax consequences to them of investing in the Fund.
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 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 Fund and its shareholders. For complete provisions, reference should be made to the pertinent Code
sections and Treasury Regulations. The Code and the Treasury Regulations are subject to change by legislative or administrative action, and any such change may be retroactive with respect to Fund transactions. Holders of common shares are advised to
consult their own tax advisers for more detailed information concerning the U.S. federal income taxation of the Fund and the income tax consequences to its holders of common shares.
S-65
CUSTODIAN AND TRANSFER AGENT
The custodian of the assets of the Fund is State Street Bank and Trust Company, whose principal business address is One Lincoln Street,
Boston, Massachusetts 02111. The custodian will be responsible for, among other things, receipt of and disbursement of funds from the Funds accounts, establishment of segregated accounts as necessary, and transfer, exchange and delivery of
Fund portfolio securities.
Computershare Trust Company, N.A., whose principal business address is 150 Royall Street, Canton,
Massachusetts 02021, will serve as the Funds transfer agent with respect to the common shares.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP, whose principal business address is 200 Berkeley Street, Boston, MA 02116, is the independent registered public
accounting firm of the Fund and is expected to render an opinion annually on the financial statements of the Fund.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
A control person is a person who beneficially owns, either directly or
indirectly, more than 25% of the voting securities of a company. As of May 31, 2022, the Fund did not know of any person or entity who controlled the Fund. As of May 31, 2022, to the knowledge of the Fund, the following person(s) owned
of record or beneficially 5% or more of the outstanding shares of any class of the Fund:
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Name |
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Address |
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Percentage of Common Shares Held |
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Percentage of VMTP Shares Held |
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Record or Beneficial Owner |
Sakharam D. Mahurkar |
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2768 Palm Springs Lane Aurora
IL 60502 |
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11.65 |
% |
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Beneficial |
JPMorgan Chase Bank, National Association |
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1111 Polaris Parkway, Columbus Ohio 43240 |
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100.00 |
% |
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Beneficial |
S-66
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 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 Funds Prospectus, dated June 6, 2022, filed with this SAI; |
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our annual report
on Form N-CSR for the fiscal year ended April 30, 2021 filed with the SEC on July 6, 2021; and |
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our semi-annual report
on Form N-CSR for the fiscal period ended October 31, 2021 filed with the SEC on January 4, 2022. |
The Fund 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 Fund makes available the Prospectus, SAI and the Funds 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 Fund 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 Funds 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 Funds shareholders for the fiscal year ended April
30, 2021 (the 2021 Annual Report), together with the report of Deloitte & Touche LLP on the financial statements and financial highlights included in the Funds 2021 Annual Report, and the unaudited financial statements financial highlights
included in the Funds semi-annual report to the Funds shareholders for the six months ended October 31, 2021, are incorporated
herein.
On May 20, 2022, the Board approved a change in the Funds fiscal year end from April 30 to July 31, effective as of July
31, 2022.
S-67
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. |
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C |
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Obligations rated C are the lowest rated and are typically in default, with little prospect for recovery of principal or interest. |
A-1
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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Ratings of Prime-1 reflect a superior ability to repay short-term obligations. |
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P-2 |
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Ratings of Prime-2 reflect a strong ability to repay short-term obligations. |
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P-3 |
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Ratings of 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.
A-3
Issue credit ratings are based, in varying degrees, on S&Ps analysis of the following
considerations:
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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. |
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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. |
A-4
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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 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 |
A-5
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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 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.
A-6
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:
|
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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. |
A-7
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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. |
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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. |
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APPENDIX B
CLOSED-END FUND PROXY VOTING POLICY
Effective Date: August 1, 2021
Applies to the following types of Funds registered under the 1940 Act:
☐ Open-End Mutual Funds (including money market funds)
☐ Money Market Funds Only
☐ iShares and BlackRock
ETFs
☒ Closed-End Funds
☐ Other
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
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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.
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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
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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 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.
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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 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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● |
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Establishing an appropriate corporate governance structure |
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● |
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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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● |
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Providing oversight on the identification and management of material, business operational, and
sustainability-related risks |
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● |
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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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● |
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Establishing appropriate executive compensation structures |
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● |
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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.
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). |
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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.
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.
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
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.
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.
B-8
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.
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
B-9
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.
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.
B-10
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
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-12
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 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.
6 |
Corporate form refers to the legal structure by which a business is organized. |
B-13
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 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.
B-14
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 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.
B-15
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
|
B-16
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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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o |
public companies that include BlackRock employees on their boards of directors, |
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o |
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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o |
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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o |
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 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.
7 |
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-17
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.
B-18
BlackRock Investment
Stewardship
Proxy voting guidelines for U.S. securities
Effective as of January 2022
B-19
Contents
B-20
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.
B-21
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.
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 |
B-22
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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 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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✓ |
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1 |
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2 |
Director
B9
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3 |
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4 |
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-23
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
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-24
We ask that boards disclose:
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The aspects of diversity that the company believes are relevant to its business and how the diversity
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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.
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. |
B-25
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 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.
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. |
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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 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.
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. |
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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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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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Board Meetings |
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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 |
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
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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 |
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.
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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 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.
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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.
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.
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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 |
● |
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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.
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. |
B-35
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 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.
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Multi-jurisdictional companies
Where a company is listed on multiple exchanges or incorporated in a country different from its primary listing, we will seek to apply the most relevant
market guideline(s) to our analysis of the companys governance structure and specific proposals on the shareholder meeting agenda. In doing so, we typically consider the governance standards of the companys primary listing, the market
standards by which the company governs itself, and the market context of each specific proposal on the agenda. If the relevant standards are silent on the issue under consideration, we will use our professional judgment as to what voting outcome
would best protect the long-term economic interests of investors. We expect 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
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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.
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.
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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.
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-39
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