The Board is responsible for managing the business and affairs of the Funds. Among other things, the Board generally oversees
the portfolio management of the Funds and reviews and approves the Funds’ investment management agreement and other principal contracts. It is the Funds’ policy that at least three quarters of the Board shall be comprised of Fund Directors who
are not “interested persons” of NBIA (including its affiliates) or the Funds (“Independent Fund Directors”).
The Board has appointed an Independent Director to serve in the role of Chairman of the Board. The Chair’s primary
responsibilities are (i) to participate in the preparation of the agenda for meetings of the Board and in the identification of information to be presented to the Board; (ii) to preside at all meetings of the Board; (iii) to act as the Board’s
liaison with management between meetings of the Board; and (iv) to act as the primary contact for board communications. The Chair may perform such other functions as may be requested by the Board from time to time. Except for any duties
specified herein or pursuant to the Funds’ Articles of Incorporation or Bylaws, the designation as Chair does not impose on such Independent Director any duties, obligations or liability that is greater than the duties, obligations or liability
imposed on such person as a member of the Board, generally.
As described below, the Board has an established committee structure through which the Board considers and addresses important
matters involving the Funds, including those identified as presenting conflicts or potential conflicts of interest for management. The Independent Fund Directors also regularly meet outside the presence of management and are advised by
experienced independent legal counsel knowledgeable in matters of investment company regulation. The Board periodically evaluates its structure and composition as well as various aspects of its operations. The Board believes that its
leadership structure, including its Independent Chair and its committee structure, is appropriate in light of, among other factors, the asset size of the fund complex overseen by the Board, the nature and number of funds overseen by the Board,
the number of Fund Directors, the range of experience represented on the Board and the Board’s responsibilities.
In nominating each candidate to serve, the Board is generally aware of each Director’s skills, experience, judgment, analytical
ability, intelligence, common sense, previous profit and not-for-profit board membership and, for each Independent Director, his or her demonstrated willingness to take an independent and questioning stance toward management. For candidates to
serve as Independent Directors, independence from the Manager, its affiliates and other principal service providers is critical. Each Director also has considerable familiarity with the funds in the Neuberger Berman fund complex, the Manager,
and their operations, as well as the special regulatory requirements governing regulated investment companies and the special responsibilities of investment company directors as a result of his or her substantial prior service as a director of
the funds in the Neuberger Berman fund complex. No particular qualification, experience or background establishes the basis for any Director’s position on the Board and the Governance and Nominating Committee and individual Board members may
have attributed different weights to the various factors.
In addition to the information set forth in the table above and other relevant qualifications, experience, attributes or skills
applicable to a particular Director, the following provides further information about the qualifications and experience of each Director.
The standing committees that oversee particular aspects of the management of the Target Funds are identical to those of the
Acquiring Fund. The standing committees of the Board are described below.
agent, (collectively, “Service Providers”) is responsible for its own compliance with the federal securities laws and for devising, implementing,
maintaining and updating appropriate policies, procedures and codes of ethics to ensure compliance with applicable laws and regulations and their contracts with each Fund. The CCO is responsible for administering the Funds’ compliance program,
including devising and implementing appropriate methods of testing compliance by the Funds and their Service Providers. Its members are Marc Gary (Chair), Michael M. Knetter, Tom D. Seip, and James G.
Stavridis (Vice Chair). All members are Independent Fund Directors. The entire Board will receive at least annually a report on the compliance programs of the Funds and service providers and the required annual reports on the
administration of the Code of Ethics and the required annual certifications from each Fund and NBIA. The currently effective Code of Ethics is available at www.sec.gov, and copies of these codes may be obtained, after paying a publicating
fee, by electronic request at the following email address: publicinfo@sec.gov. During the fiscal year ended October 31, 2022, the Ethics and Compliance Committee met [ ] times.
As an integral part of its responsibility for oversight of the Fund in the interests of stockholders, the Board oversees risk
management of the Fund’s portfolio management, administration and operations. The Board views risk management as an important responsibility of management.
The Fund faces a number of risks, such as investment risk, counterparty risk, valuation risk, liquidity risk, reputational risk,
risk of operational failure or lack of business continuity, cybersecurity risk, and legal, compliance and regulatory risk.
Risk management seeks to identify and address risks, i.e., events or circumstances that could have material adverse effects on
the business, operations, stockholder services, investment performance or reputation of the Fund. Under the overall supervision of the Board, the Fund, the Manager, and the affiliates of the Manager, or other service providers to the Fund,
employ a variety of processes, procedures and controls to identify various of those possible events or circumstances, to lessen the probability of their occurrence and/or to mitigate the effects of such events or circumstances if they do occur.
Different processes, procedures and controls are employed with respect to different types of risks.
The Board exercises oversight of the Manager’s risk management processes primarily through the Board’s committee structure. The
various committees, as appropriate, and/or at times the Board, meet periodically with the Chief Risk Officer, head of operational risk, the Chief Information Security Officer, the CCO, the Treasurer, and the Chief Investment Officers for
equity, alternative and fixed income, the head of Internal Audit, and the Fund’s independent auditor. The committees, or the Board, as appropriate, review with these individuals, among other things, the design and implementation of risk
management strategies in their respective areas, and events and circumstances that have arisen and responses thereto.
The Board recognizes that not all risks that may affect the Fund can be identified, that it may not be practical or
cost-effective to eliminate or mitigate certain risks, that it may be necessary to bear certain risks (such as investment-related risks) to achieve the Fund’s goals, and that the processes, procedures and controls employed to address certain
risks may be limited in their effectiveness. Moreover, reports received by the Directors as to risk management matters are typically summaries of the relevant information. Furthermore, it is in the very nature of certain risks that they can be
evaluated only as probabilities, and not as certainties. As a result of the foregoing and other factors, the Board’s risk management oversight is subject to substantial limitations, and no risk management program can predict the likelihood or
seriousness of, or mitigate the effects of, all potential risks.
Each Fund’s Articles provide that the Fund will indemnify its Fund Directors and officers against liabilities and expenses
reasonably incurred in connection with litigation in which they may be involved because of their offices with the Fund, unless it is adjudicated that they (a) engaged in bad faith, willful misfeasance, gross negligence, or reckless disregard of
the duties involved in the conduct of their offices, or (b) did not act in good faith in the reasonable belief that their action was in the best interest of the Fund. In the case of settlement, such indemnification will not be provided unless
it has been determined (by a court or other body approving the settlement or other disposition, by a majority of disinterested directors based upon a review of readily available facts, or in a written opinion of independent counsel) that such
officers or Fund Directors have not engaged in willful misfeasance, bad faith, gross negligence, or reckless disregard of their duties.
Officers and Directors who are interested persons of a Fund, as defined in the 1940 Act, will receive no salary or fees from the
Fund.
Effective January 1, 2022, for serving as a trustee/director of the funds in the Neuberger Berman fund family, each Independent
Fund Director receives a combined annual retainer of $180,000, paid quarterly, and a fee of $15,000 for each of the regularly scheduled meetings he or she attends in-person or by telephone. For any additional special in-person or telephonic
meeting of the Board, the Governance and Nominating Committee will determine whether a fee is warranted. To compensate for the additional time commitment, the Chair of the Audit Committee receives $20,000 per year, the Chair of the Contract
Review Committee and the Chair of the Closed-End Funds Committee each receives $25,000 per year, and each Chair of the other Committees receives $15,000 per year, with the exception of the Chair of the Executive Committee who receives no
additional compensation for this role. No additional compensation is provided for service on a Board committee. The Chair of the Board who is also an Independent Fund Director receives an additional $70,000 per year.
The Neuberger Berman Funds reimburse Independent Fund Directors for their travel and other out-of-pocket expenses related to
attendance at Board meetings. The Independent Fund Director compensation is allocated to each fund in the Neuberger Berman fund family based on a method the Board finds reasonable.
The following table sets forth information concerning the compensation of the Fund Directors. Each Fund does not have any retirement plan for the Fund
Directors.
The following table sets forth the aggregate dollar range of securities owned by each Fund Director in all the funds in the fund family overseen by the Fund Director,
valued as of December 31, 2022.
A = None; B = $1-$10,000; C = $10,001-$50,000; D = $50,001-$100,000; E = over $100,000
As of December 31, 2022, no Independent Fund Director (or his/her immediate family members) owned securities of NBIA or securities in an entity controlling, controlled by
or under common control with NBIA (not including shares of registered investment companies).
Each Fund and NBIA have personal securities trading policies that restrict the personal securities transactions of employees,
officers, and Directors. Their primary purpose is to ensure that personal trading by these individuals does not disadvantage any fund managed by NBIA. The portfolio managers and other investment personnel who comply with the policies’
pre-clearance and disclosure procedures may be permitted to purchase, sell or hold certain types of securities which also may be or are held in the funds they advise, but are restricted from trading in close conjunction with each Fund or taking
personal advantage of investment opportunities that may belong to the Fund. Text-only versions of the Codes of Ethics can be viewed online or downloaded from the EDGAR Database on the SEC’s internet web site at www.sec.gov.
NBIA serves, as the investment manager to each Fund pursuant to a management agreement with the Fund, dated as of May 13, 2009, as novated January 1, 2016 (each, a
“Management Agreement”). NBIA also provides investment management and advisory services to private accounts of institutional and individual clients and to mutual funds.
Each Management Agreement provides, in substance, that NBIA will make and implement investment decisions for the respective Fund in its discretion and will continuously
develop an investment program for the Fund’s assets. Each Management Agreement permits NBIA to effect securities transactions on behalf of the respective Fund through associated persons of NBIA. Each Management Agreement also specifically
permits NBIA to compensate, through higher commissions, brokers and dealers who provide investment research and analysis to the respective Fund, although NBIA has no current plans to pay a material amount of such compensation.
The Management Agreement provides that NBIA shall not be subject to any liability in connection with the performance of its services thereunder in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its obligations and duties. In the event that litigation against NBIA, in connection with its obligations under the Management Agreement or administration agreement (described
below), ends with a determination that NBIA acted without culpability, the Fund will reimburse NBIA for reasonable attorney’s fees and other expenses. In the event a matter ends without a court ruling on NBIA’s culpability, any unresolved issue
will be determined by a committee of disinterested Directors who were not party to the suit or by an opinion of independent legal counsel. The Fund may advance expenses to NBIA if (1) a committee of non-party disinterested Directors or
independent legal counsel determines that NBIA is likely to prevail, and (2) the Fund is adequately assured of repayment in the event of an adverse result.
NBIA provides to each Fund, without separate cost, office space, equipment, and facilities and the personnel necessary to perform executive, administrative, and clerical
functions. NBIA pays all salaries, expenses, and fees of the Directors, officers and employees of the Funds who are officers, directors, or employees of NBIA. Each of these Funds pays NBIA a management fee based on the Fund’s average daily net
assets, as described herein.
Pursuant to each Management Agreement, each Fund has agreed to pay NB NBIA an annual management fee, payable on a monthly basis, at the annual rate of 0.25% of the Fund’s
average daily Managed Assets. As the context requires, total assets minus liabilities other than the aggregate indebtedness entered into for purposes of leverage are defined to mean “Managed Assets.” The
liquidation preference of Preferred Stock is not considered a liability or permanent equity.
NBIA provides facilities, services, and personnel to the Funds pursuant to administration agreements dated as of May 13, 2009, as novated January 1, 2016 (each, an
“Administration Agreement”). Under the Administration Agreements, NBIA also provides certain stockholder, stockholder-related, and other services that are not furnished by a Fund’s stockholder servicing agent. NBIA provides the direct
stockholder services specified in the Administration Agreements and assists the stockholder servicing agent in the development and implementation of specified programs and systems to enhance overall stockholder servicing capabilities. NBIA
solicits and gathers stockholder proxies, performs services connected with a Fund’s exchange listing, and furnishes other services the parties agree from time to time should be provided under the Administration Agreements.
For administrative services, each Fund pay NBIA at the annual rate of 0.30%, of average daily Managed Assets. With a Fund’s consent, NBIA may subcontract to third parties
some of its responsibilities to each Fund under the Administration Agreement. In addition, a Fund may compensate such third parties for accounting and other services.
All fees and expenses are accrued daily and deducted before payment of dividends to investors.
During the fiscal years ended October 31, 2022, 2021 and 2020 for California Municipal Fund, it accrued management and administration fees as follows:
During the fiscal years ended October 31, 2022, 2021 and 2020 for New York Municipal Fund, it accrued management and administration fees as follows:
During the fiscal years ended October 31, 2022, 2021 and 2020 for Municipal Fund, it accrued management and administration fees as follows:
The Management Agreement continues until October 31, 2023, and is renewable from year to year thereafter with respect to a Fund, so long as its continuance is approved at
least annually (1) by the vote of a majority of the Directors who are Independent Directors, cast in person at a meeting called for the purpose of voting on such approval, and (2) by the vote of a majority of the Directors or by a 1940 Act
majority vote of the outstanding stock in the Fund. The Administration Agreement continues until October 31, 2023 and is renewable from year to year, so long as its continuance is approved at least annually (1) by the vote of a majority of the
Independent Directors, and (2) by the vote of a majority of the Directors or by a 1940 Act majority vote of the outstanding stock in the Fund.
The Management Agreement is terminable, without penalty, on 60 days’ written notice either by a Fund or by NBIA. The Administration Agreement is terminable, without
penalty, on 60 days’ written notice either by NBIA or by a Fund. Each Agreement terminates automatically if it is assigned.
Except as otherwise described in the Proxy Statement/Prospectus, a Fund pays, in addition to the investment management fee described above, all expenses not assumed by
NBIA, including, without limitation, fees and expenses of Directors who are not “interested persons” of NBIA or the Fund, interest charges, taxes, brokerage commissions, expenses of issue of shares, fees and expenses of registering and
qualifying each Fund and its classes of shares for distribution under federal and state laws and regulations, charges of custodians, auditing and legal expenses, expenses of determining NAV of the Fund, reports to stockholders, expenses of
meetings of stockholders, expenses of printing and mailing prospectuses, proxy statements and proxies to existing stockholders, and its proportionate share of insurance premiums and professional association dues or assessments. A Fund is also
responsible for such nonrecurring expenses as may arise, including litigation in which each Fund may be a party, and other expenses as determined by the Board. A Fund may have an obligation to indemnify its officers and Directors with respect
to such litigation.
NBIA is an indirect subsidiary of Neuberger Berman Group LLC (“NBG,” and together with its consolidated subsidiaries “NB Group”). The directors, officers and/or employees of
NBIA who are deemed “control persons,” all of whom have offices at the same address as NBIA are: Joseph Amato and Brad Tank. Mr. Amato is both a Director and an officer of the Fund.
NBG’s voting equity is owned by NBSH Acquisition, LLC (“NBSH”). NBSH is owned by portfolio managers, members of the NBG’s management team, and certain of NBG’s key employees
and senior professionals.
Portfolio Manager Information
Accounts Managed
James L. Iselin and S. Blake Miller serve as Portfolio Managers of each Fund. The table below describes the accounts for which Messrs.
Iselin and Miller have day-to-day management responsibility as of October 31, 2022.
Conflicts of Interest
Actual or apparent conflicts of interest may arise when a portfolio manager has day-to-day management responsibilities with
respect to more than one fund or other account. The management of multiple funds and accounts (including proprietary accounts) may give rise to actual or potential conflicts of interest if the funds and accounts have different or similar
objectives, benchmarks, time horizons, and fees, as the portfolio manager must allocate his or her time and investment ideas across multiple funds and accounts. The portfolio manager may execute transactions for another fund or account that may
adversely impact the value of securities or instruments held by a Fund, and which may include transactions that are directly contrary to the positions taken by the Fund. For example, a portfolio manager may engage in short sales of securities
or instruments for another account that
are the same type of securities or instruments in which a fund it manages also invests. In such a case, the portfolio manager could be seen as
harming the performance of a Fund for the benefit of the account engaging in short sales if the short sales cause the market value of the securities or instruments to fall. Additionally, if a portfolio manager identifies a limited investment
opportunity that may be suitable for more than one fund or other account, a Fund may not be able to take full advantage of that opportunity. There may also be regulatory limitations that prevent a Fund from participating in a transaction that
another account or fund managed by the same portfolio manager will invest. For example, the 1940 Act prohibits a Fund from participating in certain transactions with certain of its affiliates and from participating in “joint” transactions
alongside certain of its affiliates. The prohibition on “joint” transactions may limit the ability of a Fund to participate alongside its affiliates in privately negotiated transactions unless the transaction is otherwise permitted under
existing regulatory guidance and may reduce the amount of privately negotiated transactions that a Fund may participate. Further, the Manager may take an investment position or action for a fund or account that may be different from,
inconsistent with, or have different rights than (e.g., voting rights, dividend or repayment priorities or other features that may conflict with one another), an action or position taken for one or more other funds or accounts, including the
Fund, having similar or different objectives. A conflict may also be created by investing in different parts of an issuer’s capital structure (e.g., equity or debt, or different positions in the debt structure). Those positions and actions may
adversely impact, or in some instances benefit, one or more affected accounts, including the funds. Potential conflicts may also arise because portfolio decisions and related actions regarding a position held for a fund or another account may
not be in the best interests of a position held by another fund or account having similar or different objectives. If one account were to buy or sell portfolio securities or instruments shortly before another account bought or sold the same
securities or instruments, it could affect the price paid or received by the second account. Securities selected for funds or accounts other than a Fund may outperform the securities selected for the Fund. Finally, a conflict of interest may
arise if the Manager and a portfolio manager have a financial incentive to favor one account over another, such as a performance-based management fee that applies to one account but not all funds or accounts for which the portfolio manager is
responsible. In the ordinary course of operations, certain businesses within the Neuberger Berman organization (the “Firm”) will seek access to material nonpublic information. For instance, NBIA portfolio managers may obtain and utilize
material non-public information in purchasing loans and other debt instruments and certain privately placed or restricted equity instruments. From time to time, NBIA portfolio managers will be offered the opportunity on behalf of applicable
clients to participate on a creditors or other similar committee in connection with restructuring or other “work-out” activity, which participation could provide access to material nonpublic information. The Firm maintains procedures that
address the process by which material non-public information may be acquired intentionally by the Firm. When considering whether to acquire material nonpublic information, the Firm will attempt to balance the interests of all clients, taking
into consideration relevant factors, including the extent of the prohibition on trading that would occur, the size of the Firm’s existing position in the issuer, if any, and the value of the information as it relates to the investment
decision-making process. The acquisition of material non-public information would likely give rise to a conflict of interest since the Firm may be prohibited from rendering investment advice to clients regarding the securities or instruments of
such issuer and thereby potentially limiting the universe of securities or instruments that the Firm, including the Fund, may purchase or potentially limiting the ability of the Firm, including the Fund, to sell such securities or instruments.
Similarly, where the Firm declines access to (or otherwise does not receive or share within the Firm) material non-public information regarding an issuer, the portfolio managers could potentially base investment decisions with respect to assets
of such issuer solely on public information, thereby limiting the amount of information available to the portfolio managers in connection with such investment decisions. In determining whether or not to elect to receive material non-public
information, the Firm will endeavor to act fairly to its clients as a whole. The Firm reserves the right to decline access to material nonpublic information, including declining to join a creditors or similar committee. NBIA and each Fund have
adopted certain compliance procedures which are designed to address these types of conflicts. However, there is no guarantee that such procedures will detect each and every situation in which a conflict arises.
Compensation of Portfolio Managers
Our compensation philosophy is one that focuses on rewarding performance and incentivizing our employees. We
are also focused on creating a compensation process that we believe is fair, transparent, and competitive with the market.
Compensation for portfolio managers consists of fixed (salary) and variable (bonus) compensation but is
more heavily weighted on the variable portion of total compensation and is paid from a team compensation pool made available to the portfolio
management team with which the portfolio manager is associated. The size of the team compensation pool is determined based on a formula that takes into consideration a number of factors including the pre-tax revenue that is generated by that
particular portfolio management team, less certain adjustments. The bonus portion of the compensation is discretionary and is determined on the basis of a variety of criteria, including investment performance (including the aggregate multi-year
track record), utilization of central resources (including research, sales and operations/support), business building to further the longer term sustainable success of the investment team, effective team/people management, and overall
contribution to the success of Neuberger Berman. Certain portfolio managers may manage products other than mutual funds, such as high net worth separate accounts. For the management of these accounts, a portfolio manager may generally receive a
percentage of pre-tax revenue determined on a monthly basis less certain deductions. The percentage of revenue a portfolio manager receives pursuant to this arrangement will vary based on certain revenue thresholds.
The terms of our long-term retention incentives are as follows:
Employee-Owned Equity. Certain employees (primarily senior leadership and investment
professionals) participated in Neuberger Berman’s equity ownership structure, which was designed to incentivize and retain key personnel. In addition, in prior years certain employees may have elected to have a portion of their compensation
delivered in the form of equity. We also offer an equity acquisition program which allows employees a more direct opportunity to invest in Neuberger Berman.
For confidentiality and privacy reasons, we cannot disclose individual equity holdings or program participation.
Contingent Compensation Plan. Certain employees may participate in the Neuberger
Berman Group Contingent Compensation Plan (the “CCP”) to serve as a means to further align the interests of our employees with the success of the firm and the interests of our clients, and to reward continued employment. Under the CCP, up to
20% of a participant’s annual total compensation in excess of $500,000 is contingent and subject to vesting. The contingent amounts are maintained in a notional account that is tied to the performance of a portfolio of Neuberger Berman
investment strategies as specified by the firm on an employee-by-employee basis. By having a participant’s contingent compensation tied to Neuberger Berman investment strategies, each employee is given further incentive to operate as a prudent
risk manager and to collaborate with colleagues to maximize performance across all business areas. In the case of members of investment teams, including portfolio managers, the CCP is currently structured so that such employees have exposure to
the investment strategies of their respective teams as well as the broader Neuberger Berman portfolio.
Restrictive Covenants. Most investment professionals, including portfolio managers,
are subject to notice periods and restrictive covenants which include employee and client non-solicit restrictions as well as restrictions on the use of confidential information. In addition, depending on participation levels, certain senior
professionals who have received equity grants have also agreed to additional notice and transition periods and, in some cases, non-compete restrictions. For confidentiality and privacy reasons, we cannot disclose individual restrictive covenant
arrangements.
Ownership of Securities
Set forth below is the dollar range of equity securities beneficially owned by the Portfolio Manager, as of October 31, 2022, in each Fund.
PORTFOLIO TRANSACTIONS
Other Investment Companies or Accounts Managed
The investment decisions concerning each Fund and the other registered investment companies managed by NBIA (collectively,
“Other NB Funds”) have been and will continue to be made independently of one another. In terms of their investment objectives, most of the Other NB Funds differ from the Fund. Even where the investment objectives are similar, however, the
methods used by the Other NB Funds and each Fund to achieve their objectives may differ. The investment results achieved by all of the registered investment companies managed by NBIA have varied from one another in the past and are likely to
vary in the future. In addition, NBIA or its affiliates may manage one or more Other NB Funds or other accounts with similar investment objectives and strategies as each Fund that may have risks that are greater or less than the Fund.
There may be occasions when each Fund and one or more of the Other NB Funds or other accounts or funds
managed by NBIA are contemporaneously engaged in purchasing or selling the same securities from or to third parties. When this occurs, the transactions may be aggregated to obtain favorable execution to the extent permitted by applicable law
and regulations. The transactions will be allocated according to one or more methods designed to ensure that the allocation is equitable to each Fund and accounts involved. Although in some cases this arrangement may have a detrimental effect
on the price or volume of the securities as to the Fund, in other cases it is believed that the Fund’s ability to participate in volume transactions may produce better executions for it. In any case, it is the judgment of the Directors and NBIA
that the desirability of each Fund having its advisory arrangements with NBIA outweighs any disadvantages that may result from contemporaneous transactions.
Each Fund is subject to certain limitations imposed on all advisory clients of NBIA (including the Fund, the Other NB Funds, and
other managed funds or accounts) and personnel of NBIA and its affiliates. These may include, for example, limits that may be imposed in certain industries or by certain companies, and policies of NBIA that limit the aggregate purchases, by all
accounts under management, of the outstanding shares of public companies.
Proxy Voting
Each Fund’s Board has delegated to NBIA the responsibility to vote proxies related to the securities held in the Fund’s
portfolio. Under this authority, NBIA would be required by the Boards to vote proxies related to portfolio securities in the best interests of the Fund and its stockholders. The Boards permit NBIA to contract with a third party to obtain proxy
voting and related services, including research of current issues.
NBIA has implemented written Proxy Voting Policies and Procedures (“Proxy Voting Policy”) that are designed to reasonably ensure
that NBIA votes proxies prudently and in the best interest of its advisory clients for whom NBIA has voting authority, including the Fund. The Proxy Voting Policy also describes how NBIA addresses any conflicts that may arise between its
interests and those of its clients with respect to proxy voting.
NBIA’s Governance and Proxy Committee (“Proxy Committee”) is responsible for developing, authorizing, implementing and updating
the Proxy Voting Policy, administering and overseeing the proxy voting
process and engaging and overseeing any independent third-party vendors as voting delegates to review, monitor and/or vote proxies. In order to
apply the Proxy Voting Policy noted above in a timely and consistent manner, NBIA utilizes Glass, Lewis & Co. (“Glass Lewis”) to vote proxies in accordance with NBIA’s voting guidelines or, in instances where a material conflict has been
determined to exist, in accordance with the voting recommendations of an independent third party. NBIA retains final authority and fiduciary responsibility for proxy voting. NBIA believes that this process is reasonably designed to address
material conflicts of interest that may arise between NBIA and a client as to how proxies are voted.
In the event that an investment professional at NBIA believes that it is in the best interests of a client or clients to vote
proxies in a manner inconsistent with the voting guidelines, the Proxy Committee will review information submitted by the investment professional to determine that there is no material conflict of interest between NBIA and the client with
respect to the voting of the proxy in the requested manner.
If the Proxy Committee determines that the voting of a proxy as recommended by the investment professional would not be
appropriate, the Proxy Committee shall: (i) take no further action, in which case Glass Lewis shall vote such proxy in accordance with the voting guidelines; (ii) disclose such conflict to the client or clients and obtain written direction from
the client as to how to vote the proxy; (iii) suggest that the client or clients engage another party to determine how to vote the proxy; or (iv) engage another independent third party to determine how to vote the proxy.
Each Fund may invest in shares of affiliated funds and may own substantial portions of these underlying affiliated funds. When a
Fund holds shares of underlying affiliated funds, the Fund will vote proxies of those funds in the same proportion as the vote of all other holders of the fund’s shares, unless the Board otherwise instructs. Information regarding how each Fund
voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available, without charge, by calling 1-800-877-9700 (toll-free) or by visiting www.nb.com or the website of the SEC, www.sec.gov.
Brokerage and Research Services
Orders for the purchase or sale of portfolio securities are placed on behalf of each Fund by NBIA pursuant to the terms of the
advisory agreement. In effecting securities transactions, a Fund seeks to obtain the best price and execution of orders. While affiliates of NBIA are permitted to act as brokers for a Fund in the purchase and sale of its portfolio securities
(other than certain securities traded on the OTC market) where such brokers are capable of providing best execution (“Affiliated Brokers”), each Fund generally uses unaffiliated brokers.
For Fund transactions which involve securities traded on the OTC market, each Fund purchases and sells OTC securities in
principal transactions with dealers who are the principal market makers for such securities.
During the fiscal years ended October 31, 2022, October 31, 2021 and October 31, 2020, none of the Funds paid any brokerage
commissions.
During the fiscal year ended October 31, 2022, no Fund acquired or held any securities of its “regular brokers or dealers” (as
defined under the 1940 Act).
The amount of brokerage commissions paid by the Fund may vary significantly from year to year due to a variety of factors,
including the types of investments selected by the Manager, investment strategy changes, changing asset levels, and/or portfolio turnover.
Commission rates, being a component of price, are considered along with other relevant factors in evaluating best price and
execution. In selecting a broker other than an Affiliated Broker to execute Fund transactions, NBIA generally considers the quality and reliability of brokerage services, including execution capability, speed of execution, overall performance,
and financial responsibility, and may consider, among other factors, research and other investment information or services (“research services”) provided by those brokers as well as any expense offset arrangements offered by the brokers.
Each Fund may use an Affiliated Broker where, in the judgment of NBIA, that firm is able to obtain a price and execution at
least as favorable as other qualified brokers. To the Fund’s knowledge, no affiliate of each Fund receives give-ups or reciprocal business in connection with its securities transactions.
The use of an Affiliated Broker for each Fund is subject to the requirements of Section 11(a) of the Securities Exchange Act of
1934, as amended (the “1934 Act”). Section 11(a) prohibits members of national securities exchanges from retaining compensation for executing exchange transactions for accounts which they or their affiliates manage, except where they have the
authorization of the persons authorized to transact business for the account and comply with certain annual reporting requirements. Before an Affiliated Broker is used, each Fund and NBIA expressly authorize the Affiliated Broker to retain such
compensation, and the Affiliate Broker would have to agree to comply with the reporting requirements of Section 11(a).
Under the 1940 Act, commissions paid by a Fund to an Affiliated Broker in connection with a purchase or sale of securities on a
securities exchange may not exceed the usual and customary broker’s commission. Accordingly, it is each Fund’s policy that the commissions paid an Affiliated Broker will be at least as favorable to the Fund as those that would be charged by
other qualified brokers having comparable execution capability in NBIA’s judgment. Each Fund does not deem it practicable and in its best interests to solicit competitive bids for commissions on each transaction effected by an Affiliated
Broker. However, when an Affiliated Broker is executing portfolio transactions on behalf of the Fund, consideration regularly will be given to information concerning the prevailing level of commissions charged by other brokers on comparable
transactions during comparable periods of time. The 1940 Act generally prohibits an Affiliated Broker from acting as principal in the purchase of portfolio securities from, or the sale of portfolio securities to, each Fund unless an appropriate
exemption is available.
A committee of Independent Fund Directors from time to time reviews, among other things, information relating to the commissions
charged by an Affiliated Broker to each Fund and to their other customers and information concerning the prevailing level of commissions charged by other brokers having comparable execution capability.
To ensure that accounts of all investment clients, including the Fund, are treated fairly in the event that an Affiliated Broker receives transaction
instructions regarding the same security for more than one investment account at or about the same time, the Affiliated Broker may combine orders placed on behalf of clients, including advisory accounts in which affiliated persons have an
investment interest, for the purpose of negotiating brokerage commissions or obtaining a more favorable price. Where appropriate, securities purchased or sold may be allocated, in terms of amount, to a client according to the proportion that
the size of the order placed by that account bears to the aggregate size of orders contemporaneously placed by the other accounts, subject to de minimis exceptions. All participating accounts pay or receive the same price when orders are
combined.
Under policies adopted by the Boards, an Affiliated Broker may enter into agency cross-trades on behalf of the Fund. An agency
cross-trade is a securities transaction in which the same broker acts as agent on both sides of the trade and the broker or an affiliate has discretion over one of the participating accounts. In this situation, the Affiliated Broker would
receive brokerage commissions from both participants in the trade. The other account participating in an agency cross-trade with each Fund cannot be an account over which the Affiliated Broker exercises investment discretion. A member of the
Boards of Directors who will not be affiliated with the Affiliated Broker will review information about each agency cross-trade that each Fund participates in.
In selecting a broker to execute Fund transactions, the Manager considers the quality and reliability of brokerage services,
including execution capability, speed of execution, overall performance, and financial responsibility, and may consider, among other factors, research and other investment information provided by non-affiliated brokers.
A committee comprised of officers of NBIA who are portfolio managers of each Fund and Other NB Funds (collectively, “NB Funds”)
and some of NBIA’s managed accounts (“Managed Accounts”) periodically evaluates throughout the year the nature and quality of the brokerage and research services provided by other brokers. Based on this evaluation, the committee establishes a
list and projected rankings of preferred brokers for use in determining the relative amounts of commissions to be allocated to those brokers. Ordinarily, the brokers
on the list effect a large portion of the brokerage transactions for the NB Funds and the Managed Accounts. However, in any semi-annual period,
brokers not on the list may be used, and the relative amounts of brokerage commissions paid to the brokers on the list may vary substantially from the projected rankings. These variations reflect the following factors, among others: (1) brokers
not on the list or ranking below other brokers on the list may be selected for particular transactions because they provide better price and/or execution, which is the primary consideration in allocating brokerage; (2) adjustments may be
required because of periodic changes in the execution capabilities of or research or other services provided by particular brokers or in the execution or research needs of the NB Funds and/or the Managed Accounts; and (3) the aggregate amount
of brokerage commissions generated by transactions for the NB Funds and the Managed Accounts may change substantially from one semi-annual period to the next.
The commissions paid to a broker other than an Affiliated Broker may be higher than the amount another firm might charge if the
Manager determines in good faith that the amount of those commissions is reasonable in relation to the value of the brokerage and research services provided by the broker. The Manager believes that those research services benefit each Fund by
supplementing the information otherwise available to the Manager. That research may be used by the Manager in servicing Other NB Funds and in servicing Managed Accounts. On the other hand, research received by the Manager from brokers effecting
portfolio transactions on behalf of the Other NB Funds and from brokers effecting portfolio transactions on behalf of the Managed Accounts may be used for the Fund’s benefit.
In certain instances, the Manager may specifically allocate brokerage for research services (including research reports on
issuers and industries as well as economic and financial data) which may otherwise be purchased for cash. While the receipt of such services has not reduced the Manager’s normal internal research activities, the Manager’s expenses could be
materially increased if it were to generate such additional information internally. To the extent such research services are provided by others, the Manager is relieved of expenses it may otherwise incur. In some cases research services are
generated by third parties but provided to the Manager by or through broker dealers. Research obtained in this manner may be used in servicing any or all clients of the Manager and may be used in connection with clients other than those
client’s whose brokerage commissions are used to acquire the research services described herein. With regard to allocation of brokerage to acquire research services described above, the Manager always considers its best execution obligation
when deciding which broker to utilize.
Insofar as Fund transactions result from active management of equity securities, and insofar as Fund transactions result from
seeking capital appreciation by selling securities whenever sales are deemed advisable without regard to the length of time the securities may have been held, it may be expected that the aggregate brokerage commissions paid by each Fund to
brokers (including to Affiliated Brokers) may be greater than if securities were selected solely on a long-term basis.
Each Fund may, from time to time, loan portfolio securities to broker-dealers affiliated with NBIA (“Affiliated Borrowers”) in
accordance with the terms and conditions of an order issued by the SEC. The order exempts such transactions from the provisions of the 1940 Act that would otherwise prohibit these transactions, subject to certain conditions. In accordance with
the order, securities loans made by a Fund to Affiliated Borrowers are fully secured by cash collateral. Each loan to an Affiliated Borrower by a Fund will be made on terms at least as favorable to a Fund as comparable loans to unaffiliated
borrowers, and no loans will be made to an Affiliated Borrower unless the Affiliated Borrower represents that the terms are at least as favorable to a Fund as those it provides to unaffiliated lenders in comparable transactions. All
transactions with Affiliated Borrowers will be reviewed periodically by officers of a Fund and reported to the Boards.
NET ASSET VALUE
The net asset value attributable to the Common Shares is calculated by subtracting a Fund’s total liabilities and the
liquidation preference of any outstanding VMTPS from total assets (the market value of the securities a Fund holds plus cash and other assets). The net asset value per Common Share is calculated by dividing its net asset value by the number of
Common Shares outstanding and rounding the result to the nearest full cent. A Fund calculates its net asset value as of the close of regular trading on the New York Stock Exchange, usually 4 p.m. Eastern time, every day on which the New York
Stock Exchange is open. Information that becomes known to a
Fund or its agent after a Fund’s net asset value has been calculated on a particular day will not be used to retroactively adjust the price of a
security or a Fund’s net asset value determined earlier that day.
A Fund values its portfolio securities on the basis of bid quotations from independent pricing services or principal market makers, or, if quotations are not available, by
a method that the Board of Directors believes accurately reflects fair value. A Fund periodically verifies valuations provided by the pricing services. Short-term securities with remaining maturities of less than 60 days may be valued at cost
which, when combined with interest earned, approximates market value.
If NBIA believes that the price of a security obtained under the Fund’s valuation procedures (as described above) does not represent the amount that reasonably expects to
receive on a current sale of the security, a Fund will value the security based on a method NBIA believes accurately reflects fair value. Pursuant to Rule 2a-5 under the 1940 Act, the Board designated NBIA as the Funds’ valuation designee. As
the Funds’ valuation designee, NBIA is responsible for determining fair value in good faith for any and all Fund investments. Common stock of closed-end investment companies frequently trade at a discount from net asset value, but in some cases
trade at a premium. Since the market price of a Fund’s Common Shares is determined by such factors as trading volume of the shares, general market and economic conditions and other factors beyond the control of a Fund, a Fund cannot predict
whether its Common Shares will trade at, below or above its computed net asset value.
DISTRIBUTIONS
To permit a Fund to maintain more stable monthly distributions, a Fund may from time to time distribute less than the entire
amount of distributable cash flow received as cash distributions from its portfolio securities in a particular period. Such undistributed cash flow would be available to supplement future distributions, including distributions that might
otherwise have been reduced by a decrease in the Fund’s net cash flow due to fluctuations in cash distributions received on portfolio securities (or other sources of income) or expenses or due to an increase in the distribution rate or interest
rate on the Fund’s borrowings, Preferred Stock or Notes, if any. As a result, the distributions each Fund pays for any particular period may be more or less than the amount of cash flow received as cash distributions from portfolio securities
during such period. Undistributed cash flow received as cash distributions from portfolio securities are be included in the Fund’s NAV and, correspondingly, distributions from undistributed cash flow received as cash distributions from
portfolio securities will reduce that NAV.
While any borrowings or Notes are outstanding, each Fund may not declare any cash dividend or other distribution on its Common
Stock unless at the time of such declaration the NAV of the Fund’s portfolio (determined after deducting the amount of such dividend or other distribution) is at least 300% of the principal amount of any borrowings or Notes. While any Preferred
Stock is outstanding, each Fund may not declare any cash dividend or other distribution on its Common Stock unless at the time of such declaration (1) all accumulated distributions on the Preferred Stock have been paid and (2) the NAV of the
Fund’s portfolio (determined after deducting the amount of such dividend or other distribution) is at least 200% of the liquidation value of any outstanding Preferred Stock.
CERTAIN PROVISIONS IN THE ARTICLES OF INCORPORATION
Each Fund’s Articles of Incorporation (“Articles”) include provisions that could limit the ability of other entities or persons
to acquire control of the Fund or convert the Fund to an open-end fund.
Each Fund’s Articles require a vote or consent by 75% of the Directors of the Fund, and holders of at least 75% of the shares of
capital stock of the Fund outstanding and entitled to vote, except as described below, to authorize (1) the Fund’s conversion from a closed-end to an open-end investment company; (2) any merger or consolidation or share exchange of a Fund with
or into any other company; (3) the dissolution or liquidation of the Fund; (4) any sale, lease or exchange of all or substantially all of the Fund’s assets to any Principal Stockholder (as defined below); (5) a change in the nature of the
business of the Fund so that it would cease to be an investment company registered under the 1940 Act; (6) with certain exceptions, the issuance of any securities of the Fund to any Principal Stockholder for cash; or (7) any transfer by the
Fund of any securities of the Fund to any Principal Stockholder in exchange for cash, securities or other property having an aggregate fair market value of $1 million ($1,000,000) or more; provided, with respect to (1) through (5), if such
action has been authorized by the affirmative vote of a majority of the Directors, including a majority of the Independent Fund Directors, then the affirmative vote of the holders of only a majority of the Fund’s shares of capital stock
outstanding and entitled to vote at the time is required; and provided, further, with respect to (6) and (7), if such transaction has been authorized by the affirmative vote of a majority of the Directors, including a majority of the
Independent Fund Directors, no stockholder vote is required to authorize such action. The term “Principal Stockholder” means any person, entity or group that holds, directly or indirectly, more than 5% of the outstanding shares of the Fund and
includes any associates or affiliates of such person or entity or of any member of the group. None of the foregoing provisions may be amended except by the vote of at least 75% of the outstanding shares of capital stock of the Fund outstanding
and entitled to vote thereon. As discussed in the Prospectus, certain of the actions described above also require approval by the holders of the Preferred Shares, tallied separately. Certain of the transactions described above, even if approved
by stockholders, may be prohibited by the 1940 Act.
The percentage votes required under these provisions, which are greater than the minimum requirements under Maryland law or the
1940 Act, will make more difficult a change in the Fund’s business or management and may have the effect of depriving Common Stockholders of an opportunity to sell shares at a premium over prevailing market prices by discouraging a third party
from seeking to obtain control of each Fund in a tender offer or similar transaction. The Board believes that the provisions of the Articles relating to such higher votes are in the best interest of each Fund and its stockholders.
The Bylaws contain provisions the effect of which is to prevent matters, including nominations of Directors, from being
considered at a stockholders’ meeting where each Fund has not received notice of the matters generally at least 120 but no more than 150 days prior to the first anniversary of the date of mailing of the preceding year’s annual meeting of
stockholders.
Reference should be made to the Articles and Bylaws on file with the SEC for the full text of these provisions.
REPURCHASE OF COMMON STOCK; TENDER OFFERS;
CONVERSION TO OPEN-END FUND
Each Fund is a closed-end management investment company, and as such its stockholders do not have
the right to cause a Fund to redeem their shares. Instead, the Fund’s Common Stock trades in the open market at a price that is a function of
several factors, including distribution levels (which are in turn affected by expenses), NAV, call protection, distribution stability, portfolio credit quality, relative demand for and supply of such shares in the market, general market and
economic conditions and other factors. Shares of a closed-end management investment company may frequently trade at prices lower than NAV. Each Board regularly monitors the relationship between the market price and NAV of the Common Stock. If
the Common Stock were to trade at a substantial discount to NAV for an extended period of time, the respective Board may consider the repurchase of its Common Stock on the open market or in private transactions, the making of a tender offer for
such shares, or the conversion of a Fund to an open-end management investment company. A Fund cannot assure you that its Board will decide to take or propose any of these actions, or that share repurchases or tender offers will actually reduce
market discount.
Notwithstanding the foregoing, at any time when a Fund has Preferred Stock outstanding, the Fund may not purchase, redeem or
otherwise acquire any of its Common Stock unless (1) all accrued dividends or other distributions on Preferred Stock have been paid and (2) at the time of such purchase, redemption or acquisition, the NAV of the Fund’s portfolio (determined
after deducting the acquisition price of the Common Stock) is at least 200% of the liquidation value of the outstanding Preferred Stock (expected to equal the original purchase price per share plus any accrued and unpaid dividends thereon).
Subject to its investment limitations, a 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 a Fund in anticipation of share repurchases or tenders will reduce the Fund’s net income. Any share repurchase, tender offer or borrowing that might be
approved by the Board would have to comply with the 1934 Act and the 1940 Act and the rules and regulations thereunder.
A Board may also from time to time consider submitting to the holders of the shares of stock of its Fund a proposal to convert a
Fund to an open-end investment company. In determining whether to exercise its sole discretion to submit this issue to stockholders, the Board would consider all factors then relevant, including the relationship of the market price of the
Common Stock to NAV, the extent to which the Fund’s capital structure is leveraged and the possibility of re-leveraging, the spread, if any, between the yields on securities in the Fund’s portfolio and interest and dividend charges on any
Preferred Stock and/or Notes issued by the Fund and general market and economic conditions.
See “Anti-Takeover and Other Provisions in the Articles of Incorporation” in the Prospectus and “Certain Provisions in the
Articles of Incorporation” in this SAI for a discussion of voting requirements applicable to conversion of a Fund to an open-end company. If a Fund converted to an open-end management investment company, it would be required to redeem all
Preferred Stock and Notes then outstanding (requiring in turn that it liquidate a portion of its investment portfolio), if any, and the Fund’s Common Stock would no longer be listed on the NYSE American. In contrast to a closed-end management
investment company, stockholders of an open-end management investment company may require the company to redeem their shares at any time (except in certain circumstances as authorized by or under the 1940 Act) at their NAV, less any redemption
charge that is in effect at the time of redemption. In order to avoid maintaining large cash positions or liquidating favorable investments to meet redemptions, open-end companies typically engage in a continuous offering of their common stock.
Open-end companies are thus subject to periodic asset in-flows and out-flows that can complicate portfolio management.
The repurchase by a 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 tenders at or below NAV will result in the Fund’s shares trading at a price equal to their NAV. Nevertheless, the fact that the Fund’s shares may be the subject of
repurchase or tender offers at NAV from time to time, or that a Fund may be converted to an open-end company, may reduce any spread between market price and NAV that might otherwise exist.
In addition, a purchase by a Fund of its Common Stock will decrease the Fund’s total assets. This would likely have the effect
of increasing the Fund’s expense ratio. Any purchase by a Fund of its Common Stock at a time when Preferred Stock or Notes are outstanding will increase the leverage applicable to the outstanding
Common Stock then remaining. See the Fund’s Prospectus under “Risks – Leverage Risk.”
Before deciding whether to take any action if the Fund’s Common Stock trades below NAV, the Board would consider all relevant
factors, including the extent and duration of the discount, the liquidity of the Fund’s portfolio, the impact of any action that might be taken on a Fund or its stockholders, market considerations and alternative actions that might be taken.
Based on these considerations, even if the Fund’s Common Stock should trade at a discount, the Board may determine that, in the interest of a Fund and its stockholders, that a Fund should not be converted to an open-end structure and, perhaps,
that no action should be taken at that time.
TAX MATTERS
The following is a brief general summary of certain material federal tax considerations affecting a Fund and its stockholders
with respect to the purchase, ownership, and disposition of Common Stock. It is based on the Code, the regulations thereunder, judicial authorities, published positions of the IRS, and other applicable authorities, all as in effect on the date
hereof and all of which are subject to change or differing interpretations (possibly with retroactive effect); no assurance can be given that future legislation, regulations, court decisions, and/or administrative pronouncements will not
significantly change applicable law and materially affect the conclusions expressed herein, and any such change, even though made after an investor has invested in the Fund, could be applied retroactively. Tax matters are complicated, and this
discussion does not purport to be complete or to deal with all aspects of federal income taxation that may be relevant to an investor in light of his, her, or its particular circumstances or to Common Stockholders (such as those enumerated in
the Prospectus) who or that are subject to special federal tax rules.
Unless otherwise noted, this discussion applies only to a U.S. Stockholder that holds Common Stock as a capital asset
(generally, an asset held for investment). If a partnership holds Common Stock, the federal income tax treatment of a partner in the partnership generally will depend on the partner’s status and the partnership’s activities.
The tax consequences of an investment in and holding Common Stock will depend on the
particular facts of each investor’s situation. Prospective investors are advised to consult their own tax advisers with respect to the application to their own circumstances of the general federal income tax rules summarized below, and with
respect to other federal, state, local, or foreign tax consequences to them, before making an investment in Common Stock.
Taxation of the Fund
Each Fund intends to qualify each taxable year for treatment as a RIC. To qualify for that treatment, each Fund must, among
other things:
(a) derive at least 90% of its gross income
each taxable year from interest, dividends, payments with respect to securities loans and gains from the sale or other disposition of securities or foreign currencies, or other income (including gains from options, futures or forward
contracts) derived with respect to its business of investing in securities or those currencies and net income derived from an interest in a qualified publicly traded partnership (“QPTP”) (“Income Requirement”);
(b) distribute with respect to each taxable
year at least the sum of 90% of its investment company taxable income (consisting generally of net investment income, the excess, if any, of net short-term capital gain over net long-term capital loss, and net gains from certain foreign
currency transactions, if any, all determined without regard to any deduction for dividends paid) and 90% of its net exempt interest, if any, for that year (“Distribution Requirement”); and
(c) diversify its holdings so that, at the
end of each quarter of its taxable year, (1) at least 50% of the value of its total assets is represented by cash and cash items, Government securities, securities of other RICs and other securities limited in respect of any one issuer to a
value not greater than 5% of the value
of the Fund’s total assets and to not more than 10% of the issuer’s outstanding voting securities, and (2) not more than 25% of the value of the Fund’s
total assets is invested in the securities (other than those of the Government or other RICs) of any one issuer or of two or more issuers that each Fund controls and are engaged in the same, similar or related trades or businesses, or the
securities of one or more QPTPs (“Diversification Requirements”).
If a Fund qualifies for treatment as a RIC, it will not be subject to federal income tax on net income and realized gains it
timely distributes to its stockholders. If a Fund failed to qualify for that treatment for any taxable year — either (1) by failing to satisfy the Distribution Requirement, even if it satisfied the Income and Diversification Requirements, or
(2) by failing to satisfy the Income Requirement and/or either Diversification Requirement and was unable to, or determined not to, avail itself of Code provisions that enable a RIC to cure a failure to satisfy any of the Income and
Diversification Requirements as long as the failure “is due to reasonable cause and not due to willful neglect” and the RIC pays a deductible tax calculated in accordance with those provisions and meets certain other requirements — then for
federal income tax purposes it would be taxed as an ordinary corporation on the full amount of its taxable income for that year without being able to deduct the distributions it makes to its stockholders. In addition, for those purposes the
stockholders would treat all those distributions, including distributions of net capital gain (i.e., the excess of net long-term capital gain over net short-term capital loss), as dividends to the extent
of the Fund’s earnings and profits, taxable as ordinary income, except that, for individual and certain other non-corporate stockholders (each, an “individual stockholder”), the part thereof that is “qualified dividend income” (“QDI”) would be
subject to federal income tax at the rates for net capital gain — a maximum of 15% for a single stockholder with taxable income not exceeding $492,300 ($553,850 for married stockholders filing jointly) and 20% for those individual stockholders
with taxable income exceeding those respective amounts (which apply for 2023 and will be adjusted for inflation annually); and all or part of those dividends distributions might be eligible for the dividends received deduction. Furthermore,
the Fund could be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before requalifying for RIC treatment.
Each Fund intends to distribute at least annually to its stockholders all or substantially all of its investment company taxable
income. Each Fund also will annually (1) distribute its net capital gain or (2) retain all or a portion of its net capital gain for investment. If a Fund retains any such income or gain, it will be subject to tax at regular corporate rates on
the retained amount. See “Taxation of the Stockholders” below for a description of the consequences to a Fund’s stockholders of its retention of net capital gain.
To the extent a Fund fails to distribute in a calendar year at least an amount equal to the sum of (1) 98% of its ordinary
income for that year plus (2) 98.2% of its capital gain net income for the one-year period ending October 31 of that year plus (3) 100% of any retained amount of either from the prior year, it will be subject to a nondeductible 4% excise tax
(“Excise Tax”). For these purposes, a Fund will be treated as having distributed any amount with respect to which it pays income tax. Each Fund intends generally to make distributions sufficient to avoid imposition of the Excise Tax.
If a Fund issues Preferred Stock, then, at any time when Preferred Stock is outstanding, and the Fund’s assets are insufficient
to satisfy certain requirements, the Fund will be required to suspend distributions to holders of the Common Stock until those requirements are satisfied. Doing so may prevent the Fund from satisfying the Distribution Requirement and may
therefore jeopardize its qualification for treatment as a RIC or cause it to incur an income tax or Excise Tax liability or both.
Taxation of the Stockholders
Distributions on a Fund’s shares to a stockholder are generally subject to federal income tax as described in the Prospectus and
below, even though those distributions may economically represent a return of the stockholder’s investment. Such a distribution is likely to occur in respect of shares purchased when a Fund has undistributed income or gains that are either
unrealized or realized but not distributed. Those realized gains may be required to be distributed even when a Fund has unrealized losses. Distributions are taxable to a stockholder even if they are paid from net income or gains the Fund earned
before the stockholder’s investment (and thus included in the price the stockholder paid).
A Fund will qualify to pay exempt-interest dividends to its stockholders only if, at the close of each quarter of its taxable year, at least 50% of the value of its total
assets consists of obligations the interest on which is exempt from federal income tax under Code section 103(a). Distributions that a Fund properly designates as exempt-interest dividends will be treated as interest excludable from
stockholders’ gross income for federal income tax purposes but may be a tax preference item for purposes of the alternative minimum tax (“AMT”) and may be taxable for state and local purposes. Because each Fund intends to qualify to pay
exempt-interest dividends, it may be limited in its ability to enter into taxable transactions involving forward commitments, repurchase agreements, financial futures and options contracts on financial futures, tax-exempt bond indices, and
other assets.
The receipt of exempt-interest dividends may affect the portion, if any, of a person’s Social Security and Railroad Retirement benefits (collectively “Benefits”) that will
be includable in gross income subject to federal income tax. Stockholders receiving Benefits should consult their tax advisers.
The Code imposes the AMT with respect to individuals, trusts, and estates. The interest on certain “private activity bonds” (e.g.,
municipal bonds issued to make loans for housing purposes or to private entities, but not certain tax-exempt organizations such as universities and non-profit hospitals) is treated as a Tax Preference Item and, after reduction by applicable
expenses, is included in federal alternative minimum taxable income. Each Fund will furnish to stockholders annually a report indicating the percentage of Fund income treated as a Tax Preference Item. Accordingly, a portion of the Fund’s
dividends that would otherwise be tax-exempt to its stockholders may cause certain stockholders to become subject to the AMT or may increase the tax liability of stockholders who already are subject to that tax.
A Fund will inform investors within 60 days after each taxable year-end of the percentage of its income dividends that qualify as exempt-interest dividends. The percentage
will be applied uniformly to all dividends paid during the year. Thus, the percentage of any particular dividend designated as an exempt-interest dividend may be substantially different from the percentage of the Fund’s income that was
tax-exempt during the period covered by the dividend.
As long as a Fund qualifies for treatment as a RIC, distributions from it (other than exempt-interest dividends) will be taxable to its stockholders as ordinary income to the extent the
distributions are derived from taxable net investment income and net short-term capital gains, and generally will not be eligible for the dividends received deduction available to corporations. Distributions of net capital gain (after applying
any available capital loss carryovers) that are properly designated as capital gain dividends (“Capital Gain Dividends”) will be taxable to each stockholder as long-term gain, regardless of how long the stockholder has held the shares in the
Fund.
A Fund’s expenses attributable to earning tax-exempt income do not reduce its current earnings and profits; therefore, distributions in excess of the sum of its net
tax-exempt and taxable income may be treated as taxable dividends to the extent of its remaining earnings and profits. Distributions in excess of the sum of the Fund’s net tax-exempt and taxable income could occur, for example, if its book
income exceeded that sum, which could arise as a result of certain of its hedging and investment activities. See “—Tax Consequences of Certain Investments” below.
For federal income tax purposes, a Fund is required to allocate its tax-exempt income, net capital gain, and other taxable income, if any, between the Common Shares and
preferred stock it issues on a pro rata basis in proportion to the total distributions paid to each such class of stock for the taxable year.
Dividends (including Capital Gain Dividends) will be taxable as described above whether received in cash or reinvested in additional Common Shares through the Distribution
Reinvestment Plan. A Common Stockholder whose distributions are so reinvested will be treated as having received a dividend equal to either (1) the fair market value of the newly issued shares or (2) if the Common Shares are trading below
their net asset value, the amount of cash allocated to the stockholder for the purchase of shares on its behalf in the open market.
Dividends on a Fund’s shares (other than exempt-interest dividends) are generally subject to federal income tax as described herein to the extent they do not exceed its
realized income and gains, even though those dividends may economically represent a return of a particular stockholder’s investment. Those distributions are likely to occur in respect of shares purchased when the Fund’s net asset value
reflects gains that are either unrealized or realized but
not distributed, or income that is not distributed. Those realized gains may be required to be distributed even when the Fund’s net asset value
also reflects unrealized losses. Distributions are taxable to a stockholder even if they are paid from income or gains the Fund earned before the stockholder’s investment (and thus included in the price paid by the stockholder).
If a Fund makes a distribution to a stockholder in excess of its current and accumulated earnings and profits, the excess distribution will be treated as a return of
capital to the extent of the stockholder’s tax basis in its shares and thereafter as capital gain. A return of capital is not taxable, but it reduces a stockholder’s tax basis in its shares, thus reducing any loss or increasing any gain on a
subsequent taxable disposition by the stockholder of its shares. If one or more such distributions occur in any taxable year, the available earnings and profits first will be allocated to the distributions made to the Preferred Stockholders
and only thereafter to distributions made to Common Stockholders. As a result, the Preferred Stockholders will receive a disproportionate share of the distributions treated as dividends, and the Common Stockholders will receive a
disproportionate share of the distributions treated as a return of capital.
Part or all of the interest on indebtedness, if any, incurred or continued by a stockholder to purchase or carry Fund shares is not deductible for federal income tax
purposes. The non-deductible part is equal to the total interest paid or accrued on the indebtedness, multiplied by the percentage of the Fund’s total distributions (not including Capital Gain Dividends) paid to the stockholder that are
exempt-interest dividends. Under rules the Service uses to determine when borrowed funds are considered used for the purpose of purchasing or carrying particular assets, the purchase of Fund shares may be considered to have been made with
borrowed funds even though those funds are not directly traceable to the purchase of the shares.
In general, exempt-interest dividends, if any, attributable to interest received on certain private activity bonds will not be tax-exempt to any stockholders who are
“substantial users” (or persons related to “substantial users”) of facilities financed by those bonds. For these purposes, “substantial user” is defined to include a “non-exempt person” who regularly uses in a trade or business a part of a
facility financed from the proceeds of those bonds.
Dividends and other distributions by a Fund are generally treated under the Code as received by the stockholders at the time the dividend or
distribution is made. However, if any dividend or distribution is declared by a Fund in October, November or December of any calendar year and payable to its stockholders of record on a specified date in such a month but is actually paid during
the following January, such dividend or distribution will be deemed to have been received by stockholders on December 31 of the year in which the dividend was declared.
If a Fund retains any net capital gain, it may designate all or part of the retained amount as undistributed capital gains in a notice to its
stockholders. If a Fund makes such a designation, it would be required to pay federal income tax at the rate of 21% on the undistributed gain (“Fund tax”) and each stockholder subject to federal income tax (1) would be required to include in
income for federal income tax purposes, as long-term capital gain, his or her proportionate share of the designated gain (which, in the case of an individual stockholder, would be taxed at the rates for net capital gain described above), (2)
would be entitled to credit his or her proportionate share of the Fund tax against his or her federal income tax liability, if any, and to claim a refund to the extent the credit exceeds that liability, and (3) would increase the tax basis in
his or her Common Stock by an amount equal to the difference between the included gain and that share of the Fund tax.
For U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly), a 3.8% Medicare contribution tax will apply on all or a
portion of their “net investment income,” including interest, dividends, and capital gains, which generally includes taxable distributions received from a Fund. This 3.8% tax also applies to all or a portion of the undistributed net investment
income of certain stockholders that are estates and trusts.
A sale or exchange of shares in a Fund may give rise to a gain or loss. In general, any gain or loss realized upon a taxable disposition of shares
will be treated as long-term capital gain or loss if the shares have been held for more than 12 months. Otherwise, the gain or loss on the taxable disposition of shares will be treated as short-term capital gain or loss. However, any loss
realized upon a taxable disposition of shares held for six
months or less will be treated as long-term, rather than short-term, to the extent of any long-term capital gain distributions received (or deemed
received) by the stockholder with respect to the shares. All or a portion of any loss realized upon a taxable disposition of shares will be disallowed if shares of the same Fund are purchased within 30 days before or after the disposition. In
such a case, the basis of the newly purchased shares will be adjusted to reflect the disallowed loss.
As noted above, for U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly), a 3.8% Medicare
contribution tax will apply on “net investment income,” including interest, dividends, and capital gains, which generally includes taxable distributions received from a Fund and taxable gains on the disposition of shares of a Fund.
A Fund generally is required to withhold and to remit to the U.S. Treasury a percentage of the taxable distributions and sale or
redemption proceeds paid to any stockholder who fails to properly furnish a correct taxpayer identification number, who has under-reported dividend or interest income, or who fails to certify that he, she or it is not subject to such
withholding. The backup withholding tax rate is currently 24%.
A stockholder’s basis in shares of Common Stock that he or she acquired or acquires after December 31, 2011 (“Covered Shares”),
will be determined in accordance with the Funds’ default method, which is average basis, unless the stockholder affirmatively elects in writing (which may be electronic) to use a different acceptable basis determination method, such as a
specific identification method. The basis determination method a Stockholder elects (or the default method) may not be changed with respect to a redemption of Covered Shares after the settlement date of the redemption.
In addition to the requirement to report the gross proceeds from a redemption of shares, a Fund (or its administrative agent)
must report to the Service and furnish to its stockholders the basis information for Covered Shares and indicate whether they had a short-term (one year or less) or long-term (more than one year) holding period. Fund stockholders should consult
with their tax advisers to determine the best Service-accepted basis determination method for their tax situation and to obtain more information about how the basis reporting law applies to them.
Non-U.S. Stockholders
Distributions of a Fund’s “investment company taxable income” to non-U.S. stockholders (including interest income and the excess of net short-term capital gain over net
long-term capital losses) will generally be subject to withholding of federal tax at a 30% rate (or lower rate provided by an applicable treaty) as dividends to the extent of the Fund’s current and accumulated earnings and profits unless the
distributions are effectively connected with a U.S. trade or business of the non-U.S. stockholders, and, if an income tax treaty applies, attributable to a permanent establishment in the United States of the non-U.S. stockholders. In the case
of such effectively connected income, the distributions will be subject to U.S. federal income tax at the rates applicable to U.S. persons, plus, in certain cases where the Non-U.S. stockholders is a corporation, a branch profits tax at a 30%
rate (or lower rate provided by an applicable treaty). Exemptions from the 30% withholding tax are provided for dividends properly designated as interest related dividends or as short-term capital gain dividends paid by a Fund with respect to
its qualified net interest income or qualified short-term gain.
Actual or deemed distributions of a Fund’s net capital gains (i.e., net long-term capital gains in excess of short-term capital
losses) to a non-U.S. stockholders, and gains realized by a non-U.S. stockholders upon the sale of Fund shares, will not be subject to federal withholding tax and generally will not be subject to U.S. federal income tax unless (a) the
distributions or gains are effectively connected with a U.S. trade or business of the non-U.S. stockholder and, if an income tax treaty applies, are attributable to a permanent establishment or fixed base maintained by the non-U.S. stockholder
in the United States, or (b) the non-U.S. stockholder is an individual, has been present in the United States for 183 days or more during the taxable, and certain other conditions are satisfied.
If a Fund distributes its net capital gains in the form of deemed rather than actual distributions, a non-U.S. stockholder will be entitled to a U.S. federal income tax credit
or tax refund equal to the stockholder’s allocable share of the tax a Fund pays on the capital gains deemed to have been distributed. In order to obtain the refund, the non-U.S. stockholder must obtain a U.S. taxpayer identification number and
file a U.S. federal income tax return
even if the non-U.S. stockholder would not otherwise be required to obtain a U.S. taxpayer identification number or file a U.S. federal income tax
return. For a corporate non-U.S. stockholder, distributions (both actual and deemed), and gains realized upon the sale of shares that are effectively connected to a U.S. trade or business may, under certain circumstances, be subject to an
additional “branch profits tax” at a 30% rate (or at a lower rate if provided for by an applicable treaty).
A non-U.S. stockholder who is a non-resident alien individual, and who is otherwise subject to withholding of federal tax, may be subject to information reporting and
backup withholding of U.S. federal income tax on dividends unless the non-U.S. stockholder provides the Fund or the dividend paying agent with an IRS Form W-8BEN (or an acceptable substitute form) or otherwise meets documentary evidence
requirements for establishing that it is a non-U.S. stockholder or otherwise establishes an exemption from backup withholding.
Under the Foreign Account Tax Compliance Act (“FATCA”), “foreign financial institutions” (“FFIs”) or “non-financial foreign
entities” (“NFFEs”) that are Fund stockholders may be subject to a generally nonrefundable 30% withholding tax on income dividends a Fund pays. Proposed regulations (effective while pending) have been issued to eliminate the application of the
withholding tax to capital gain distributions and the proceeds from the repurchase of Common Stock that was scheduled to take effect in 2019. As discussed below, the FATCA withholding tax generally can be avoided (a) by an FFI, if it reports
certain information regarding direct and indirect ownership of financial accounts U.S. persons hold with the FFI and (b) by an NFFE, if (i) it certifies that it has no substantial U.S. persons as owners or (ii) it does have such owners and
reports information relating to them to the withholding agent. The U.S. Treasury Department has negotiated intergovernmental agreements (“IGAs”) with certain countries and is in various stages of negotiations with other foreign countries with
respect to one or more alternative approaches to implement FATCA; entities in those countries may be required to comply with the terms of the IGA instead of Treasury regulations.
An FFI can avoid FATCA withholding by becoming a “participating FFI,” which requires the FFI to enter into a tax compliance
agreement with the IRS under section 1471(b) of the Code. Under such an agreement, a participating FFI agrees to (1) verify and document whether it has U.S. accountholders, (2) report certain information regarding their accounts to the IRS, and
(3) meet certain other specified requirements.
An FFI resident in a country that has entered into a Model I IGA with the United States must report to that country’s government
(pursuant to the terms of the applicable IGA and applicable law), which will, in turn, report to the IRS. An FFI resident in a Model II IGA country generally must comply with U.S. regulatory requirements, with certain exceptions, including the
treatment of recalcitrant accountholders. An FFI resident in one of those countries that complies with whichever of the foregoing that applies will be exempt from FATCA withholding.
An NFFE that is the beneficial owner of a payment from a Fund can avoid FATCA withholding generally by certifying that it does
not have any substantial U.S. owners or by providing the name, address, and taxpayer identification number of each such owner. The NFFE will report to the Fund or other applicable withholding agent, which will, in turn, report information to
the IRS.
Those foreign stockholders also may fall into certain exempt, excepted, or deemed compliant categories established by Treasury
regulations, IGAs, and other guidance regarding FATCA. An FFI or NFFE that invests in a Fund will need to provide the Fund with documentation properly certifying the entity’s status under FATCA to avoid FATCA withholding. The requirements
imposed by FATCA are different from, and in addition to, the tax certification rules to avoid backup withholding described in the Prospectus. Foreign investors are urged to consult their tax advisers regarding the application of these
requirements to their own situation and the impact thereof on their investment in the Fund.
Tax Consequences of Certain Investments
Hedging Transactions. The use of hedging strategies, such as writing (selling) and
purchasing options and futures contracts and entering into forward currency contracts, involves complex rules that will determine for income tax purposes the amount, character and timing of recognition of the gains and losses a Fund realizes in
connection therewith. Gains from the disposition of foreign currencies (except certain gains that may be excluded by future regulations), and gains
from options, futures and forward currency contracts a Fund derives with respect to its business of investing in securities or foreign currencies, will be treated as qualifying income under the Income Requirement. Certain of the Fund’s
investment practices are subject to special and complex federal income tax provisions that may, among other things, (1) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (2) convert lower taxed long-term
capital gain to higher taxed short-term capital gain or ordinary income, (3) convert an ordinary loss or a deduction to a capital loss (the deductibility of which is more limited), (4) cause a Fund to recognize income or gain without a
corresponding receipt of cash, (5) adversely affect the timing as to when a purchase or sale of securities is deemed to occur and (6) adversely alter the characterization of certain complex financial transactions. A Fund will monitor its
transactions and may make certain tax elections to mitigate the effect of these rules and prevent its disqualification as a RIC.
Securities Issued or Purchased at a Discount. A Fund may acquire zero coupon or other
securities issued with original issue discount (“OID”). As a holder of those securities, a Fund must include in gross income the OID that accrues on them during the taxable year, even if it receives no corresponding payment on them during the
year. Because a Fund annually must distribute substantially all of its investment company taxable income, and net tax exempt income, including any OID, to satisfy the Distribution Requirement and avoid imposition of the Excise Tax, it may be
required in a particular taxable year to distribute as a dividend an amount that is greater than the total amount of cash it actually receives. Those distributions will be made from the Fund’s cash assets or from the proceeds of sales of its
portfolio securities, if necessary. A Fund may realize capital gains or losses from those sales, which would increase or decrease its investment company taxable income and/or net capital gain.
Some futures contracts, certain foreign currency contracts, and “nonequity” options (i.e., certain listed options, such as those
on a “broad-based” securities index) — except any “securities futures contract” that is not a “dealer securities futures contract” (both as defined in the Code) and any interest rate swap, currency swap, basis swap, interest rate cap, interest
rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement — in which a Fund invests may be subject to Code section 1256 (collectively, “Section 1256 contracts”). Any Section 1256 contracts a Fund
holds at the end of its taxable year (and generally for purposes of the Excise Tax, on October 31 of each year) must be “marked to market” (that is, treated as having been sold at that time for their fair market value) for federal tax purposes,
with the result that unrealized gains or losses will be treated as though they were realized. Sixty percent of any net gain or loss recognized as a result of these deemed sales, and 60% of any net realized gain or loss from any actual sales, of
Section 1256 contracts are treated as long-term capital gain or loss; the remainder is treated as short-term capital gain or loss. These rules may operate to increase the amount that a Fund must distribute to satisfy the Distribution
Requirement (i.e., with respect to the portion treated as short-term capital gain), which will be taxable to its stockholders as ordinary income when distributed to them, and to increase the net capital gain a Fund recognizes, without in either
case increasing the cash available to it. A Fund may elect to exclude certain transactions from the operation of these rules, although doing so may have the effect of increasing the relative proportion of short-term capital gain (taxable to its
stockholders as ordinary income when distributed to them) and/or increasing the amount of dividends it must distribute to meet the Distribution Requirement and avoid imposition of the Excise Tax.
The premium a Fund receives for writing (selling) a put or call option is not included in gross income at the time of receipt.
If an option written (sold) by a Fund expires, it realizes a short-term capital gain equal to the amount of the premium it received for writing the option. When a Fund terminates its obligations under such an option by entering into a closing
transaction, it realizes a short-term capital gain (or loss), depending on whether the cost of the closing transaction is less (or more) than that amount. When an option written by a Fund is exercised, it is treated as having sold the
underlying security, producing long-term or short-term capital gain or loss, depending on the holding period of the underlying security and whether the sum of the option price it receives on the exercise plus the premium it received when it
wrote the option is more or less than its basis in the underlying security.
* * *
The foregoing is only a general summary of some of the important federal tax considerations generally affecting a Fund and its
stockholders. No attempt is made to present a complete explanation of the federal tax
treatment of the Fund’s activities, and this discussion is not intended to be a substitute for careful tax planning. Accordingly, potential
investors are urged to consult their own tax advisers for more detailed information and for information regarding any state, local or foreign taxes applicable to a Fund and their purchasing, holding and disposing of Common Stock.
REPORTS TO STOCKHOLDERS
Stockholders of each Fund receive unaudited semi-annual financial statements, as well as year-end financial statements audited
by the independent auditors for the Fund. The Fund’s statements show the investments owned by it and the market values thereof and provide other information about each Fund and its operations.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSEMENT AGENT
State Street Bank and Trust Company, One Lincoln Street, Boston, MA 02111, serves as custodian for assets of the Fund. American
Stock Transfer & Trust Company, LLC serves as the transfer agent, registrar and distribution disbursement agent for the Common Stock. American Stock Transfer & Trust Company, LLC serves as
agent for the Distribution Reinvestment Plan relating to the Common Stock.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
[ ], serves as independent auditors for the Fund. [ ] provides audit services, tax return preparation and assistance and
consultation in connection with review of the Fund’s filings with the SEC.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Information regarding the control persons of the Acquiring Fund is included in the section entitled “Shareholders of the
Acquiring Fund and the Target Funds” in the Proxy Statement/Prospectus.
COUNSEL
K&L Gates LLP, 1601 K Street, N.W., Washington D.C. 20006, will pass upon certain legal matters in connection with shares of Common Stock offered
by the Fund, and also acts as counsel to the Fund.
FINANCIAL STATEMENTS
The audited financial statements included in the Funds’ Annual Report on Form N-CSR for the fiscal year ended October 31, 2022 (the “Annual
Report”), together with the report of [ ] for the Fund’s Annual Report, are incorporated herein by reference to the Fund’s Annual Report. All other portions of the Annual Report are not incorporated herein by reference and are not part of the
registration statement or the SAI, the Proxy Statement/Prospectus or any supplement thereto.
SUPPLEMENTAL FINANCIAL INFORMATION
Tables showing the fees and expenses of the Funds, and the fees and expenses of the Acquiring Fund on a pro forma basis after giving effect to the proposed Reorganization, are
included in the section entitled [“Synopsis – Comparative Expense Information” in the Proxy Statement/Prospectus]. Changes may be made to a Target Fund’s portfolio in advance of its proposed Reorganization and/or the Acquiring Fund’s portfolio
following the proposed Reorganization(s). There are no material differences in the accounting, valuation and tax policies of the Target Funds as compared to those of the Acquiring Fund.
REGISTRATION STATEMENT
A Registration Statement on Form N-14, including any amendments thereto, will be filed by the Acquiring Fund with the SEC, Washington, D.C. The Proxy Statement/Prospectus
and this SAI do not contain all of the information set forth in the Registration Statement, including any exhibits and schedules thereto. For further information with respect to the Acquiring Fund and the shares offered or to be offered hereby,
reference is made to the Acquiring Fund’s Registration Statement. Statements contained in the Proxy Statement/Prospectus and this SAI as to the contents of any contract or other document referred to are not necessarily complete and in each
instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. Copies of the Registration Statement may be
inspected without charge at the SEC’s principal office in Washington, D.C., and copies of all or any part thereof may be obtained from the SEC upon the payment of certain fees prescribed by the SEC.
APPENDIX A
RATINGS
Long-Term and Short-Term Debt Securities Rating Descriptions
S&P Global Ratings -- Long-Term Issue Credit Ratings*:
The following descriptions have been published by Standard & Poor’s Financial Services LLC.
AAA – An obligation rated ‘AAA’ has the highest rating assigned by S&P Global Ratings. The obligor’s capacity to meet its financial
commitment on the obligation is extremely strong.
AA – An obligation rated ‘AA’ differs from the highest-rated obligations only to a small degree. The obligor’s capacity to meet its financial
commitment on the obligation is very strong.
A – An obligation rated ‘A’ is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor’s capacity to meet its financial commitment on the obligation is still strong.
BBB – An obligation rated ‘BBB’ exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
BB, B, CCC, CC, and C – Obligations rated ‘BB’, ‘B’, ‘CCC’, ‘CC’, and ‘C’ are regarded as having significant speculative characteristics. ‘BB’
indicates the least degree of speculation and ‘C’ the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
BB – An obligation rated ‘BB’ is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.
B – An obligation rated ‘B’ is more vulnerable to nonpayment than obligations rated ‘BB’, but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitment on the obligation.
CCC – An obligation rated ‘CCC’ is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment 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 commitment on the
obligation.
CC – An obligation rated ‘CC’ is currently highly vulnerable to nonpayment. The ‘CC’ rating is used when a default has not yet occurred, but
S&P Global Ratings expects default to be a virtual certainty, regardless of the anticipated time to default.
C – An obligation rated ‘C’ is currently highly vulnerable to nonpayment, and the obligation is expected to have lower relative seniority or
lower ultimate recovery compared to obligations that are rated higher.
D – An obligation rated ‘D’ is in default or in breach of an imputed promise. For non-hybrid capital instruments, the ‘D’ rating category is
used when payments on an obligation are not made on the date due, unless S&P Global Ratings believes that such payments will be made within five business days in the absence of a stated grace period or within the earlier of the stated grace
period or 30 calendar days. The ‘D’ rating also will be used upon the filing of
a bankruptcy petition or the taking of similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions. A rating on an obligation is
lowered to ‘D’ if it is subject to a distressed 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.
Moody’s Investors Service, Inc. (“Moody’s”) -- Global Long-Term Rating Scale:
The following descriptions have been published by Moody’s Investors Service, Inc.
Aaa – Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk.
Aa – Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
A – Obligations rated A are judged to be upper-medium grade and are subject to low credit risk.
Baa – Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative
characteristics.
Ba – Obligations rated Ba are judged to be speculative and are subject to substantial credit risk.
B – Obligations rated B are considered speculative and are subject to high credit risk.
Caa – Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk.
Ca – Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and
interest.
C – Obligations rated C are the lowest rated and are typically in default, with little prospect for recovery of principal or interest.
Note: Moody’s 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.
Fitch Ratings (“Fitch”) -- Corporate Finance Obligations -- Long-Term Rating Scale:
The following descriptions have been published by Fitch, Inc. and Fitch Ratings Ltd. and its subsidiaries.
AAA – 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.
AA – 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.
A – 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.
BBB – 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.
BB – 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.
B – Highly speculative. ‘B’ ratings indicate that material credit risk is present.
CCC – Substantial credit risk. ‘CCC’ ratings indicate that substantial credit risk is present.
CC – Very high levels of credit risk. ‘CC’ ratings indicate very high levels of credit risk.
C – Exceptionally high levels of credit risk. ‘C’ indicates exceptionally high levels of credit risk.
Ratings in the categories of ‘CCC’, ‘CC’ and ‘C’ relate to obligations that are in default. In this case, the rating does not opine on default risk, but reflects recovery expectation only.
Note: The modifiers “+” or “-” may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to
the ‘AAA’ obligation rating category, or to corporate finance obligation ratings in the categories below ‘CCC’.
DBRS -- Long Term Obligations Rating Scale:
The following descriptions have been published by Dominion Bond Rating Service.
AAA – Highest credit quality. The capacity for the payment of financial obligations is exceptionally high and unlikely to be adversely affected
by future events.
AA – Superior credit quality. The capacity for the payment of financial obligations is considered high. Credit quality differs from AAA only to
a small degree. Unlikely to be significantly vulnerable to future events.
A – Good credit quality. The capacity for the payment of financial obligations is substantial, but of lesser credit quality than AA. May be
vulnerable to future events, but qualifying negative factors are considered manageable.
BBB – Adequate credit quality. The capacity for the payment of financial obligations is considered acceptable. May be vulnerable to future
events.
BB – Speculative, non investment-grade credit quality. The capacity for the payment of financial obligations is uncertain. Vulnerable to future
events.
B – Highly speculative credit quality. There is a high level of uncertainty as to the capacity to meet financial obligations.
CCC, CC, C – Very highly speculative credit quality. In danger of defaulting on financial obligations. There is little difference between these
three categories, although CC and C ratings are normally applied to obligations that are seen as highly likely to default, or subordinated to obligations rated in the CCC to B range. Obligations in respect of which default has not technically
taken place but is considered inevitable may be rated in the C category.
D – When the issuer has filed under any applicable bankruptcy, insolvency or winding up statute or there is a failure
to satisfy an obligation after the exhaustion of grace periods, a downgrade to D may occur. DBRS Morningstar may also use SD (Selective Default) in cases where only some securities are
impacted, such as the case of a “distressed exchange.”
S&P Global Ratings -- Short-Term Issue Credit Ratings:
The following descriptions have been published by Standard & Poor’s Financial Services LLC.
A-1 – A short-term obligation rated ‘A-1’ is rated in the highest category by S&P Global Ratings. The obligor’s capacity to meet its
financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor’s capacity to meet its financial commitment on these obligations is extremely
strong.
A-2 - A short-term obligation rated ‘A-2’ is somewhat more susceptible to the adverse effects of changes in circumstances and economic
conditions than obligations in higher rating categories. However, the obligor’s capacity to meet its financial commitment on the obligation is satisfactory.
A-3 - A short-term obligation rated ‘A-3’ exhibits adequate protection parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
B - A short-term obligation rated ‘B’ is regarded as vulnerable and has significant speculative characteristics. The obligor currently has the
capacity to meet its financial commitments; however, it faces major ongoing uncertainties which could lead to the obligor’s inadequate capacity to meet its financial commitments.
C - A short-term obligation rated ‘C’ is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the obligation.
D - A short-term obligation rated ‘D’ is in default or in breach of an imputed promise. For non-hybrid capital instruments, the ‘D’ rating
category is used when payments on an obligation are not made on the date due, unless S&P Global Ratings 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.
Dual ratings may be assigned to debt issues that have a put option or demand feature. The first component of the rating addresses the likelihood of
repayment of principal and interest as due, and the second component of the rating addresses only the demand feature. The first component of the rating can relate to either a short-term or long-term transaction and accordingly use either
short-term or long-term rating symbols. The second component of the rating relates to the put option and is assigned a short-term rating symbol (for example, ‘AAA/A-1+’ or ‘A-1+/A-1’). With U.S. municipal short-term demand debt, the U.S.
municipal short-term note rating symbols are used for the first component of the rating (for example, ‘SP-1+/A-1+’).
Moody’s -- Global Short-Term Rating Scale:
The following descriptions have been published by Moody’s Investors Service, Inc.
P-1 - Issuers (or supporting institutions) rated Prime-1 reflect a superior ability to repay short-term obligations.
P-2 - Issuers (or supporting institutions) rated Prime-2 reflect a strong ability to repay short-term obligations.
P-3 - Issuers (or supporting institutions) rated Prime-3 reflect an acceptable ability to repay short-term obligations.
NP - Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.
Fitch -- Short-Term Ratings Assigned to Issuers or Obligations in Corporate, Public and Structured Finance:
The following descriptions have been published by Fitch Inc. and Fitch Ratings Ltd. and its subsidiaries.
F1 - Highest short-term credit quality. Indicates the strongest intrinsic capacity for timely payment of financial commitments; may have an
added “+” to denote any exceptionally strong credit feature.
F2 - Good short-term credit quality. Good intrinsic capacity for timely payment of financial commitments.
F3 - Fair short-term credit quality. The intrinsic capacity for timely payment of financial commitments is adequate.
B – Speculative short-term credit quality. Minimal capacity for timely payment of financial commitments, plus heightened vulnerability to near
term adverse changes in financial and economic conditions.
C - High short-term default risk. Default is a real possibility.
RD – Restricted default. Indicates an entity that has defaulted on one or more of its financial commitments, although it continues to meet
other financial obligations. Typically applicable to entity ratings only.
D – Default. Indicates a broad-based default event for an entity, or the default of a short-term obligation.
DBRS -- Commercial Paper and Short-Term Debt Rating Scale:
The following descriptions have been published by Dominion Bond Rating Service.
R-1 (high) – Highest credit quality. The capacity for the payment of short-term financial obligations as they fall due is exceptionally high.
Unlikely to be adversely affected by future events.
R-1 (middle) – Superior credit quality. The capacity for the payment of short-term financial obligations as they fall due is very high. Differs
from R-1 (high) by a relatively modest degree. Unlikely to be significantly vulnerable to future events.
R-1 (low) – Good credit quality. The capacity for the payment of short-term financial obligations as they fall due is substantial. Overall
strength is not as favourable as higher rating categories. May be vulnerable to future events, but qualifying negative factors are considered manageable.
R-2 (high) – Upper end of adequate credit quality. The capacity for the payment of short-term financial obligations as they fall due is
acceptable. May be vulnerable to future events.
R-2 (middle) – Adequate credit quality. The capacity for the payment of short-term financial obligations as they fall due is acceptable. May be
vulnerable to future events or may be exposed to other factors that could reduce credit quality.
R-2 (low) – Lower end of adequate credit quality. The capacity for the payment of short-term financial obligations as they fall due is
acceptable. May be vulnerable to future events. A number of challenges are present that could affect the issuer’s ability to meet such obligations.
R-3 – Lowest end of adequate credit quality. There is capacity for the payment of short-term financial obligations as they fall due. May be
vulnerable to future events and the certainty of meeting such obligations could be impacted by a variety of developments.
R-4 – Speculative credit quality. The capacity for the payment of short-term financial obligations as they fall due is uncertain.
R-5 – Highly speculative credit quality. There is a high level of uncertainty as to the capacity to meet short-term financial obligations as
they fall due.
D – When the issuer has filed under any applicable bankruptcy, insolvency or winding up statute or there is a failure to satisfy an obligation
after the exhaustion of grace periods, a downgrade to D may occur. DBRS Morningstar may also use SD (Selective Default) in cases where only some securities are impacted, such as the case of a “distressed exchange.”