The following table describes
the performance for the fiscal periods indicated. Market price total return is calculated assuming an
initial investment made at the market price at the beginning of the period, reinvestment of all dividends
and distributions at market price during the period, and sale at the market price on the last day of
the period. These figures have been derived from the fund’s financial statements, and with respect
to common stock, market price data for the fund’s common shares.
NOTE 1—Significant Accounting Policies:
BNY
Mellon Strategic Municipal Bond Fund, Inc. (the “fund”), which is registered under the Investment
Company Act of 1940, as amended (the “Act”), is a diversified closed-end management investment company.
The fund’s investment objective is to seek to maximize current income exempt from federal income tax
to the extent consistent with the preservation of capital. BNY Mellon Investment Adviser, Inc. (the “Adviser”),
a wholly-owned subsidiary of The Bank of New York Mellon Corporation (“BNY Mellon”), serves as the
fund’s investment adviser. The fund’s Common Stock trades on the New York Stock Exchange (the “NYSE”)
under the ticker symbol DSM.
On February 10, 2021, BNY Mellon Investment Management announced its intention to
realign several of its investment firms. As a result of this realignment, which is scheduled to occur,
subject to regulatory requirements, in the third quarter of 2021 (the “Effective Date”), portfolio
managers responsible for managing the fund’s investments who are employees of Mellon Investments Corporation
(“Mellon”) in a dual employment arrangement with the Adviser, will become employees of Insight North
America LLC (“INA”), which, like Mellon, is an affiliate of the Adviser, and will no longer be employees
of Mellon. Consequently, as of the Effective Date and subject to the approval of the fund’s Board of
Directors (the “Board”), the Adviser will engage INA to serve as the fund’s sub-adviser, pursuant
to a sub-investment advisory agreement between the Adviser and INA. As the fund’s sub-adviser, INA
will provide the day-to-day management of the fund’s investments, subject to the Adviser’s supervision
and approval. It is currently anticipated that the fund’s portfolio managers who are responsible for
the day-to-day management of the fund’s investments will continue to manage the fund’s investments
as of the Effective Date. It is also currently anticipated that there will be no material changes to
the fund’s investment objective, strategies or policies, no reduction in the nature or level of services
provided to the fund, and no increase in the management fee payable by the fund as a result of the engagement
of INA as the fund’s sub-adviser. The Adviser (and not the fund) will pay INA for its sub-advisory
services.
The
fund has outstanding 698 Series A shares, 662 Series B shares and 612 Series C shares, Auction Preferred
Stock (“APS”), with a liquidation preference of $25,000 per share (plus an amount equal to accumulated
but unpaid dividends upon liquidation). APS dividend rates are determined pursuant to periodic auctions
or by reference to a market rate. Deutsche Bank Trust Company America, as the Auction Agent, receives
a fee from the fund for its services in connection with such auctions. The fund also
28
compensates
broker-dealers generally at an annual rate of .15%-.25% of the purchase price of shares of APS.
The
fund is subject to certain restrictions relating to the APS. Failure to comply with these restrictions
could preclude the fund from declaring any distributions to shareholders of Common Stock (“Common Shareholders”)
or repurchasing shares of Common Stock and/or could trigger the mandatory redemption of APS at liquidation
value. Thus, redemptions of APS may be deemed to be outside of the control of the fund.
The holders of APS, voting
as a separate class, have the right to elect at least two directors. The holders of APS will vote as
a separate class on certain other matters, as required by law. The Board has designated Joni Evans and
Robin A. Melvin as director to be elected by the holders of APS.
The Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) is the exclusive reference of authoritative
U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under
authority of federal laws are also sources of authoritative GAAP for SEC registrants. The fund is an
investment company and applies the accounting and reporting guidance of the FASB ASC Topic 946 Financial
Services-Investment Companies. The fund’s financial statements are prepared in accordance with GAAP,
which may require the use of management estimates and assumptions. Actual results could differ from those
estimates.
The
fund enters
into contracts that contain a variety of indemnifications. The fund’s maximum exposure under these
arrangements is unknown. The fund does not anticipate recognizing any loss related to these arrangements.
(a) Portfolio valuation: The fair
value of a financial instrument is the amount that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date (i.e., the
exit price). GAAP establishes a fair value hierarchy that prioritizes the inputs of valuation techniques
used to measure fair value. This hierarchy gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to
unobservable inputs (Level 3 measurements).
Additionally, GAAP provides guidance on determining whether
the volume and activity in a market has decreased significantly and whether
29
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
such
a decrease in activity results in transactions that are not orderly. GAAP requires enhanced disclosures
around valuation inputs and techniques used during annual and interim periods.
Various inputs are used
in determining the value of the fund’s investments relating to fair value measurements. These inputs
are summarized in the three broad levels listed below:
Level 1—unadjusted quoted prices in active markets for
identical investments.
Level
2—other significant observable inputs (including quoted prices for similar investments, interest
rates, prepayment speeds, credit risk, etc.).
Level 3—significant unobservable inputs (including the fund’s own assumptions
in determining the fair value of investments).
The inputs or methodology used for valuing securities are not
necessarily an indication of the risk associated with investing in those securities.
Changes in valuation techniques
may result in transfers in or out of an assigned level within the disclosure hierarchy. Valuation techniques
used to value the fund’s investments are as follows:
Investments in securities are valued each
business day by an independent pricing service (the “Service”) approved by the Board. Investments
for which quoted bid prices are readily available and are representative of the bid side of the market
in the judgment of the Service are valued at the mean between the quoted bid prices (as obtained by the
Service from dealers in such securities) and asked prices (as calculated by the Service based upon its
evaluation of the market for such securities). Debt investments (which constitute a majority of the portfolio
securities) are carried at fair value as determined by the Service, based on methods which include consideration
of the following: yields or prices of municipal securities of comparable quality, coupon, maturity and
type; indications as to values from dealers; and general market conditions. All of the preceding securities
are generally categorized within Level 2 of the fair value hierarchy.
The Service is engaged
under the general oversight of the Board.
When market quotations or official closing prices are not readily
available, or are determined not to accurately reflect fair value, such as when the value of a security
has been significantly affected by events after the close of the exchange or market on which the security
is principally traded, but before the fund calculates its net asset value, the fund may value these
30
investments
at fair value as determined in accordance with the procedures approved by the Board. Certain factors
may be considered when fair valuing investments such as: fundamental analytical data, the nature and
duration of restrictions on disposition, an evaluation of the forces that influence the market in which
the securities are purchased and sold, and public trading in similar securities of the issuer or comparable
issuers. These securities are either categorized within Level 2 or 3 of the fair value hierarchy depending
on the relevant inputs used.
For securities where observable inputs are limited, assumptions about market activity
and risk are used and such securities are generally categorized within Level 3 of the fair value hierarchy.
The
following is a summary of the inputs used as of May 31, 2021 in valuing the fund’s investments:
|
|
|
|
|
|
|
|
Level
1-Unadjusted Quoted Prices
|
Level 2- Other Significant Observable Inputs
|
|
Level
3-Significant Unobservable Inputs
|
Total
|
|
Assets
($)
|
|
|
Investments
In Securities:†
|
|
|
Collateralized Municipal-Backed
Securities
|
-
|
1,440,495
|
|
-
|
1,440,495
|
|
Municipal Securities
|
-
|
598,430,600
|
|
-
|
598,430,600
|
|
Liabilities
($)
|
|
|
Other
Financial Instruments:
|
|
|
Floating
Rate Notes††
|
-
|
(140,954,671)
|
|
-
|
(140,954,671)
|
|
† See Statement of Investments for additional detailed categorizations,
if any.
†† Certain of the fund’s liabilities are held at carrying amount,
which approximates fair value for financial reporting purposes.
(b) Securities transactions and investment income: Securities transactions
are recorded on a trade date basis. Realized gains and losses from securities transactions are recorded
on the identified cost basis. Interest income, adjusted for accretion of discount and amortization of
premium on investments, is earned from settlement date and recognized on the accrual basis. Securities
purchased or sold on a when issued or delayed delivery basis may be settled a month or more after the
trade date.
(c) Risk:
The value of the securities in which the fund invests may be affected by political, regulatory, economic
and social developments, and developments that impact specific economic sectors, industries or segments
of the market. In addition, turbulence in financial markets and
31
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
reduced
liquidity in equity, credit and/or fixed income markets may negatively affect many issuers, which could
adversely affect the fund. Global economies and financial markets are becoming increasingly interconnected,
and conditions and events in one country, region or financial market may adversely impact issuers in
a different country, region or financial market. These risks may be magnified if certain events or developments
adversely interrupt the global supply chain; in these and other circumstances, such risks might affect
companies world-wide. Recent examples include pandemic risks related to COVID-19 and aggressive measures
taken world-wide in response by governments, including closing borders, restricting international and
domestic travel, and the imposition of prolonged quarantines of large populations, and by businesses,
including changes to operations and reducing staff. The effects of COVID-19 have contributed to increased
volatility in global markets and will likely affect certain countries, companies, industries and market
sectors more dramatically than others. The COVID-19 pandemic has had, and any other outbreak of an infectious
disease or other serious public health concern could have, a significant negative impact on economic
and market conditions and could trigger a prolonged period of global economic slowdown. To the extent
the fund may overweight its investments in certain countries, companies, industries or market sectors,
such positions will increase the fund's exposure to risk of loss from adverse developments affecting
those countries, companies, industries or sectors.
(d) Dividends and distributions to Common Shareholders: Dividends and distributions
are recorded on the ex-dividend date. Dividends from investment income-net are normally declared and
paid monthly. Dividends from net realized capital gains, if any, are normally declared and paid annually,
but the fund may make distributions on a more frequent basis to comply with the distribution requirements
of the Internal Revenue Code of 1986, as amended (the “Code”). To the extent that net realized capital
gains can be offset by capital loss carryovers, it is the policy of the fund not to distribute such gains.
Income and capital gain distributions are determined in accordance with income tax regulations, which
may differ from GAAP.
Common Shareholders will have their distributions reinvested in additional shares
of the fund, unless such Common Shareholders elect to receive cash, at the lower of the market price
or net asset value per share (but not less than 95% of the market price). If market price is equal to
or exceeds net asset value, shares will be issued at net asset value. If net asset value exceeds market
price, Computershare Inc., the transfer agent for the fund’s Common Stock, will buy fund shares in
the open market and reinvest those shares accordingly.
32
On
May 27, 2021, the Board declared a cash dividend of $.030 per share from investment income-net, payable
on June 30, 2021 to Common shareholders of record as of the close of business on June 14, 2021. The ex-dividend
date was June 11, 2021.
(e) Dividends
and distributions to shareholders of APS: Dividends, which are cumulative, are generally reset
every seven days for each series of APS pursuant to a process specified in related fund charter documents.
Dividend rates as of May 31, 2021, for each series of APS were as follows: series A-0.095%, series B-0.095%
and series C-0.095%. These rates reflect the “maximum rates” under the governing instruments as a
result of “failed auctions” in which sufficient clearing bids are not received. The average dividend
rates for the period ended May 31, 2021 for each series of APS were as follows: series A-0.113%, series
B-0.109% and series C-0.112%.
(f) Federal
income taxes: It is the policy of the fund to continue to qualify as a regulated investment company,
which can distribute tax-exempt dividends, by complying with the applicable provisions of the Code, and
to make distributions of income and net realized capital gain sufficient to relieve it from substantially
all federal income and excise taxes.
As of and during the period ended May 31, 2021, the fund did
not have any liabilities for any uncertain tax positions. The fund recognizes interest and penalties,
if any, related to uncertain tax positions as income tax expense in the Statement of Operations. During
the period ended May 31, 2021, the fund did not incur any interest or penalties.
Each tax year in the three-year
period ended November 30, 2020 remains subject to examination by the Internal Revenue Service and state
taxing authorities.
The fund is permitted to carry forward capital losses for an unlimited period. Furthermore,
capital loss carryovers retain their character as either short-term or long-term capital losses.
The
fund has an unused capital loss carryover of $7,728,781 available for federal income tax purposes to
be applied against future net realized capital gains, if any, realized subsequent to November 30, 2020.
The fund has $6,836,233 of short-term capital losses and $892,548 of long-term capital losses which can
be carried forward for an unlimited period.
The tax character of distributions paid to shareholders during
the fiscal year ended November 30, 2020 was as follows: tax-exempt income $18,180,918 and ordinary income
$203,536. The tax character of current year distributions will be determined at the end of the current
fiscal year.
33
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
(g) New accounting pronouncements:
In March 2020, the FASB issued Accounting Standards Update 2020-04, Reference Rate Reform (Topic 848):
Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), and
in January 2021, the FASB issued Accounting Standards Update 2021-01, Reference Rate Reform (Topic 848):
Scope (“ASU 2021-01”), which provides optional, temporary relief with respect to the financial reporting
of contracts subject to certain types of modifications due to the planned discontinuation of the LIBOR
and other interbank offered rates as of the end of 2021. The temporary relief provided by ASU 2020-04
and ASU 2021-01 is effective for certain reference rate-related contract modifications that occur during
the period from March 12, 2020 through December 31, 2022. Management is evaluating the impact of ASU
2020-04 and ASU 2021-01
on the fund’s investments, derivatives, debt and other contracts that will undergo reference
rate-related modifications as a result of the reference rate reform. Management is also currently actively
working with other financial institutions and counterparties to modify contracts as required by applicable
regulation and within the regulatory deadlines.
NOTE 2—Investment Advisory Fee, Administration Fee and Other Transactions
with Affiliates:
(a) Pursuant
to an investment advisory agreement with the Adviser, the management fee is computed at the annual rate
of .50% of the value of the fund’s average weekly net assets, inclusive of the outstanding APS, and
is payable monthly. The fund also has an administration agreement with the Adviser and a custody agreement
with The Bank of New York Mellon (the “Custodian”), a subsidiary of BNY Mellon and an affiliate of
the Adviser. The fund pays in the aggregate for administration, custody and transfer agency services,
a monthly fee based on an annual rate of .25% of the value of the fund’s average weekly net assets,
inclusive of the outstanding APS. All out-of-pocket transfer agency and custody expenses, including custody
transaction expenses, are paid separately by the fund.
The Adviser has currently undertaken, from
December 1, 2020 through November 30, 2021, to waive receipt of a portion of the fund’s investment
advisory fee, in the amount of .10% of the value of the fund’s average weekly net assets (including
net assets representing APS outstanding). The reduction in expenses, pursuant to the undertaking, amounted
to $226,624 during the period ended May 31, 2021.
(b) The fund compensates the Custodian under a custody agreement for providing
custodial services for the fund. These fees are determined based on transaction activity. During the
period ended May 31, 2021,
the fund was charged $4,321 for out-of-pocket and custody transaction expenses,
34
pursuant
to the custody agreement. These fees were partially offset by earnings credits of the amount of $3,264.
The fund has an arrangement
with the Custodian whereby the fund may receive earnings credits when positive cash balances are
maintained, which are used to offset custody fees. For financial reporting purposes, the fund includes
net earnings credits as an expense offset in the Statement of Operations.
During the period ended
May 31, 2021, the fund was charged $4,717 for services performed by the Chief Compliance Officer and
his staff. These fees are included in Chief Compliance Officer fees in the Statement of Operations.
The
components of “Due to BNY Mellon Investment Adviser, Inc. and affiliates” in the Statement of Assets
and Liabilities consist of: investment advisory fees of $197,244, Administration fees of $98,622, Custodian
fees of $3,475 and Chief Compliance Officer fees of $3,931, which are offset against an expense reimbursement
currently in effect in the amount of $35,603.
(c)
Each Board member also serves as a Board member of other funds in the BNY Mellon Family of Funds complex.
Annual retainer fees and attendance fees are allocated to each fund based on net assets.
NOTE 3—Securities Transactions:
The
aggregate amount of purchases and sales (including paydowns) of investment securities, excluding short-term
securities, during the period ended May 31, 2021, amounted to $29,198,081 and $28,577,573, respectively.
Inverse Floater Securities: The
fund participates in secondary inverse floater structures in which fixed-rate, tax-exempt municipal bonds
are transferred to a trust (the “Inverse Floater Trust”). The Inverse Floater Trust typically issues
two variable rate securities that are collateralized by the cash flows of the fixed-rate, tax-exempt
municipal bonds. One of these variable rate securities pays interest based on a short-term floating rate
set by a remarketing agent at predetermined intervals (“Trust Certificates”). A residual interest
tax-exempt security is also created by the Inverse Floater Trust, which is transferred to the fund, and
is paid interest based on the remaining cash flows of the Inverse Floater Trust, after payment of interest
on the other securities and various expenses of the Inverse Floater Trust. An Inverse Floater Trust may
be collapsed without the consent of the fund due to certain termination events such as bankruptcy, default
or other credit event.
35
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
The
fund accounts for the transfer of bonds to the Inverse Floater Trust as secured borrowings, with the
securities transferred remaining in the fund’s investments, and the Trust Certificates reflected as
fund liabilities in the Statement of Assets and Liabilities.
The fund may invest in inverse floater securities
on either a non-recourse or recourse basis. These securities are typically supported by a liquidity facility
provided by a bank or other financial institution (the “Liquidity Provider”) that allows the holders
of the Trust Certificates to tender their certificates in exchange for payment from the Liquidity Provider
of par plus accrued interest on any business day prior to a termination event. When the fund invests
in inverse floater securities on a non-recourse basis, the Liquidity Provider is required to make a payment
under the liquidity facility due to a termination event to the holders of the Trust Certificates. When
this occurs, the Liquidity Provider typically liquidates all or a portion of the municipal securities
held in the Inverse Floater Trust. A liquidation shortfall occurs if the Trust Certificates exceed the
proceeds of the sale of the bonds in the Inverse Floater Trust (“Liquidation Shortfall”). When a
fund invests in inverse floater securities on a recourse basis, the fund typically enters into a reimbursement
agreement with the Liquidity Provider where the fund is required to repay the Liquidity Provider the
amount of any Liquidation Shortfall. As a result, a fund investing in a recourse inverse floater security
bears the risk of loss with respect to any Liquidation Shortfall.
The average amount of borrowings outstanding
under the inverse floater structure during the period ended May 31, 2021 was approximately $140,641,040,
with a related weighted average annualized interest rate of .65%.
At May 31, 2021, accumulated net unrealized
appreciation on investments was $54,094,302, consisting of $54,762,096 gross unrealized appreciation
and $667,794 gross unrealized depreciation.
At May 31, 2021, the cost of investments for federal income
tax purposes was substantially the same as the cost for financial reporting purposes (see the Statement
of Investments).
36