As filed with the Securities and Exchange Commission on January 12, 2022
Securities Act File No. 333-
Investment Company Act File No. 811-22774
U.S. SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
Registration Statement
under
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the Securities Act of 1933
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Pre-Effective Amendment No.
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☐
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Post-Effective Amendment No.
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☐
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and/or
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Registration Statement
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Under
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the Investment Company Act of 1940
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Amendment No. 6
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BlackRock Multi-Sector Income Trust
(Exact Name of Registrant as Specified In Charter)
100 Bellevue
Parkway
Wilmington, Delaware 19809
(Address of Principal Executive Offices)
Registrants Telephone Number, including Area Code: (800) 882-0052
John M. Perlowski, President
BlackRock Multi-Sector Income Trust
55 East 52nd Street
New
York, New York 10055
(Name and Address of Agent For Service)
Copies of information to:
Margery K. Neale, Esq.
Elliot J. Gluck, Esq.
Willkie Farr & Gallagher LLP
787 Seventh Avenue
New
York, New York 10019
Approximate Date of Commencement of Proposed Public Offering: From time to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, check the following
box ☐
If any securities being registered on this Form will be offered on a delayed or continuous basis in reliance on Rule 415 under the
Securities Act of 1933 (Securities Act), other than securities offered in connection with a dividend reinvestment plan, check the following box ☒
If this Form is a registration statement pursuant to General Instruction A.2 or a post-effective amendment thereto, check the following box ☒
If this Form is a registration statement pursuant to General Instruction B or a post-effective amendment thereto that will become effective upon filing
with the Commission pursuant to Rule 462(e) under the Securities Act, check the following box ☐
If this Form is a post-effective
amendment to a registration statement filed pursuant to General Instruction B to register additional securities or additional classes of securities pursuant to Rule 413(b) under the Securities Act, check the following box ☐
It is proposed that this filing will become effective (check appropriate box):
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when declared effective pursuant to Section 8(c) of the Securities Act
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If appropriate, check the following box:
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This [post-effective] amendment designates a new effective date for a previously filed [post-effective
amendment] [registration statement].
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This Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the
Securities Act, and the Securities Act registration statement number of the earlier effective registration statement for the same offering is: ______.
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This Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, and the
Securities Act registration statement number of the earlier effective registration statement for the same offering is: ______.
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This Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, and the
Securities Act registration statement number of the earlier effective registration statement for the same offering is: ______.
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Check
each box that appropriately characterizes the Registrant:
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Registered Closed-End Fund
(closed-end company that is registered under the Investment Company Act of 1940 (the Investment Company Act)).
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Business Development Company (closed-end company that intends or has
elected to be regulated as a business development company under the Investment Company Act).
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Interval Fund (Registered Closed-End Fund or a Business Development
Company that makes periodic repurchase offers under Rule 23c-3 under the Investment Company Act).
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A.2 Qualified (qualified to register securities pursuant to General Instruction A.2 of this Form).
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Well-Known Seasoned Issuer (as defined by Rule 405 under the Securities Act).
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Emerging Growth Company (as defined by Rule 12b-2 under the Securities
and Exchange Act of 1934).
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If an Emerging Growth Company, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.
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New Registrant (registered or regulated under the Investment Company Act for less than 12 calendar months
preceding this filing).
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CALCULATION
OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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Title of Securities Being Registered
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Amount Being
Registered
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Proposed
Maximum
Offering Price
Per Unit
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Proposed
Maximum
Aggregate
Offering Price(1)
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Amount of
Registration Fee
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Common Shares of Beneficial Interest, $0.001 par
value
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Not applicable
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Not applicable
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$1,000,000
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$92.70
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Rights to Purchase Common Shares of Beneficial
Interest (2)
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Total
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$1,000,000
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$92.70
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(1)
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Estimated solely for the purpose of calculating the registration fee, pursuant to Rule 457(o) under the
Securities Act of 1933.
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(2)
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No separate consideration will be received by the Registrant. Any shares issued pursuant to an offering of
rights to purchase shares of beneficial interest, including any shares issued pursuant to an over-subscription privilege or a secondary over-subscription privilege, will be shares registered under this Registration Statement.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS
THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
The information in this Preliminary Prospectus is not complete and may be
changed. BlackRock Multi-Sector Income Trust may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Preliminary Prospectus is not an offer to sell these securities and it
is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JANUARY 12, 2022
BASE PROSPECTUS
[15,000,000 Shares]
BlackRock Multi-Sector Income Trust
Shares of Beneficial Interest
Rights to Purchase Shares of Beneficial Interest
BlackRock Multi-Sector Income Trust (the Trust, we, us or our) is a
diversified, closed-end management investment company. The Trusts investment objective is to seek high current income, with a secondary objective of capital appreciation.
We may offer, from time to time, in one or more offerings, our common shares of beneficial interest, par value $.001 per share
(common shares), or subscription rights to purchase our common shares. Common shares may be offered at prices and on terms to be set forth in one or more supplements to this Prospectus (each, a Prospectus Supplement). You
should read this Prospectus and the applicable Prospectus Supplement carefully before you invest in our common shares.
Our common shares may be offered directly to one or more purchasers, including existing shareholders in a rights offering,
through agents designated from time to time by us, or to or through underwriters or dealers. The Prospectus Supplement relating to the offering will identify any agents or underwriters involved in the sale of our common shares, and will set forth
any applicable purchase price, fee, commission or discount arrangement between us and our agents or underwriters, or among our underwriters, or the basis upon which such amount may be calculated. The Prospectus Supplement relating to any offering of
rights will set forth the number of common shares issuable upon the exercise of each right (or number of rights) and the other terms of such rights offering. We may not sell any of our common shares through agents, underwriters or dealers without
delivery of a Prospectus Supplement describing the method and terms of the particular offering of our common shares.
Our
common shares are listed on the New York Stock Exchange (NYSE) under the symbol BIT. The last reported sale price of our common shares, as reported by the NYSE on December 14, 2021 was $18.20 per common share. The net
asset value of our common shares at the close of business on December 14, 2021 was $17.59 per common share. Rights issued by the Trust may also be listed on a securities exchange.
Investing in the Trusts common shares involves certain risks that are described in the Risks section
beginning on page 36 of this Prospectus. Certain of these risks are summarized in Prospectus SummarySpecial Risk Considerations beginning on page 4.
Shares of closed-end management investment companies frequently trade at a discount
to their net asset value. The Trusts common shares have traded at a discount to net asset value, including during recent periods. If the Trusts common shares trade at a discount to their net asset value, the risk of loss may increase for
purchasers in a public offering.
Neither the Securities and Exchange Commission (SEC) nor any state
securities commission has approved or disapproved these securities or passed upon the adequacy of this Prospectus. Any representation to the contrary is a criminal offense.
This Prospectus, together with any Prospectus Supplement, sets forth concisely the information about the Trust that a
prospective investor should know before investing. You should read this Prospectus and applicable Prospectus Supplement, which contain important information, before deciding whether to invest in the common shares. You should retain the Prospectus
and Prospectus Supplement for future reference. A Statement of Additional Information (SAI), dated [●], 2022, containing additional information about the Trust, has been filed with the SEC and, as amended from time to time, is
incorporated by reference in its entirety into this Prospectus. You may call (800) 882-0052, visit the Trusts website (http://www.blackrock.com) or write to the Trust to obtain, free of charge, copies of
the SAI and the Trusts semi-annual and annual reports, as well as to obtain other information about the Trust or to make shareholder inquiries. The SAI, as well as the Trusts semi-annual and annual reports, are also available for free on
the SECs website (http://www.sec.gov). You may also e-mail requests for these documents to publicinfo@sec.gov. Information contained in, or that can be accessed through, the Trusts website is not
part of this Prospectus.
You should not construe the contents of this Prospectus as legal, tax or financial advice. You
should consult with your own professional advisors as to the legal, tax, financial or other matters relevant to the suitability of an investment in the Trust.
The Trusts common shares do not represent a deposit or an obligation of, and are not guaranteed or endorsed by, any
bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.
Prospectus dated [●], 2022
TABLE OF CONTENTS
You should rely only on the information contained in, or incorporated by reference into, this Prospectus
and any related Prospectus Supplement in making your investment decisions. The Trust has not authorized any person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on
it. The Trust is not making an offer to sell the common shares in any jurisdiction where the offer or sale is not permitted. You should assume that the information in this Prospectus and any Prospectus Supplement is accurate only as of the dates on
their covers. The Trusts business, financial condition and prospects may have changed since the date of its description in this Prospectus or the date of its description in any Prospectus Supplement.
PROSPECTUS SUMMARY
This is only a summary of certain information relating to BlackRock Multi-Sector Income Trust. This summary may not contain
all of the information that you should consider before investing in our common shares. You should consider the more detailed information contained in the Prospectus and in any related Prospectus Supplement and in the Statement of Additional
Information (SAI) before purchasing common shares.
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The Trust
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BlackRock Multi-Sector Income Trust is a diversified, closed-end management
investment company. Throughout this Prospectus, we refer to BlackRock Multi-Sector Income Trust simply as the Trust or as we, us or our. See The Trust.
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The Trusts common shares are listed for trading on the New York Stock Exchange (NYSE) under the symbol
BIT. As of December 14, 2021, the net assets of the Trust were $661,637,271, the total assets of the Trust were $1,025,341,175, and the Trust had outstanding 37,623,292 common shares. The last reported sale price of the
Trusts common shares, as reported by the NYSE on December 14, 2021 was $18.20 per common share. The net asset value (NAV) of the Trusts common shares at the close of business on December 14, 2021 was $17.59 per
common share. See Description of Shares. Rights issued by the Trust may also be listed on a securities exchange.
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The Offering
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We may offer, from time to time, in one or more offerings, up to [15,000,000] of our common shares on terms to be
determined at the time of the offering. We may also offer subscription rights to purchase our common shares. The common shares may be offered at prices and on terms to be set forth in one or more Prospectus Supplements. You
should read this Prospectus and the applicable Prospectus Supplement carefully before you invest in our common shares. Our common shares may be offered directly to one or more purchasers, through agents designated from time to time by us, or
to or through underwriters or dealers. The offering price per common share will not be less than the NAV per common share at the time we make the offering, exclusive of any underwriting commissions or discounts, provided that rights offerings
that meet certain conditions may be offered at a price below the then current NAV. See Rights Offerings. The Prospectus Supplement relating to the offering will identify any agents, underwriters or dealers involved in the sale of
our common shares, and will set forth any applicable purchase price, fee, commission or discount arrangement between us and our agents or underwriters, or among our underwriters, or the basis upon which such amount may be calculated. See
Plan of Distribution. The Prospectus Supplement relating to any offering of rights will set forth the number of common shares issuable upon the exercise of each right (or number of rights) and the other terms of such rights offering.
We may not sell any of our common shares through agents, underwriters or dealers without delivery of a Prospectus Supplement describing the method and terms of the particular offering of our common shares.
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Use of Proceeds
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The net proceeds from the issuance of common shares hereunder will be invested in accordance with our investment objectives
and policies as appropriate investment opportunities are identified, which is expected to be substantially completed in approximately three months from the date on which the proceeds from an offering are received by the Trust; however, the
identification of appropriate investment opportunities pursuant to the Trusts investment style or changes in market conditions could result in the Trusts anticipated investment period extending to as long as six months. See
Use of Proceeds.
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Investment Objectives and Policies
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Please refer to the section
of the Trusts most recent annual report on Form N-CSR entitled Trust SummaryInvestment Objective, which is incorporated by reference herein, for a discussion of the Trusts
investment objectives and policies.
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Leverage
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The Trust uses leverage to seek to achieve its investment objectives. The Trusts use of leverage may increase or
decrease from time to time in its discretion and the Trust may, in the future, determine not to use leverage. The Trust currently leverages its assets through the use of reverse repurchase agreements and/or dollar rolls. The Trust currently does not
intend to borrow money or issue debt securities or preferred shares. Although it has no present intention to do so, the Trust reserves the right to borrow money from banks or other financial institutions or issue debt securities or preferred shares
in the future if it believes that market conditions would be conducive to the successful implementation of a leveraging strategy through borrowing money or issuing debt securities or preferred shares. The Trust is permitted to use leverage of up to
50% of its Managed Assets. Managed Assets means the total assets of the Trust (including any assets attributable to money borrowed for investment purposes) minus the sum of the Trusts accrued liabilities (other than money borrowed
for investment purposes). See Leverage.
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The use of leverage is subject to numerous risks. When leverage is employed, the Trusts NAV, the market price of the
common shares and the yield to holders of common shares will be more volatile than if leverage were not used. For example, a rise in short-term interest rates, which currently are near historically low levels, generally will cause the Trusts
NAV to decline more than if the Trust had not used leverage. A reduction in the Trusts NAV may cause a reduction in the market price of the Trusts common shares. When the Trust uses leverage, the management fee and sub-advisory fees payable to the Advisors (as defined below) will be higher than if the Trust did not use leverage.
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The Trust cannot assure you that the use of leverage will result in a higher yield on the Trusts common shares. Any
leveraging strategy the Trust employs may not be successful.
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Investment Advisor and Sub-Advisors
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BlackRock Advisors, LLC is the Trusts investment adviser. BlackRock International Limited (BIL) and
BlackRock (Singapore) Limited (BSL) serve as sub-advisers to the Trust (each, a Sub-Advisor and, together with the Advisor, the
Advisors). The Advisor and the Sub-Advisors are subsidiaries of BlackRock, Inc. (BlackRock). The Advisor receives an annual fee, payable monthly, in an amount equal to 0.80% of the
average daily value of the Trusts Managed Assets. The Advisor, and not the Trust, pays BIL and BSL, for services they provide for that portion of the Trust for which BIL and BSL, as applicable, acts as
sub-adviser, a monthly fee that is equal to a percentage of the investment advisory fees paid by the Trust to the Advisor. See Management of the TrustInvestment Advisor and Sub-Advisors.
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Distributions
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The Trust distributes monthly all or a portion of its net investment income, including current gains, to holders of common
shares.
The Trust has, pursuant to an SEC exemptive
order granted to certain of BlackRocks closed-end funds, adopted a plan to support a level distribution of income, capital gains and/or return of capital (the Distribution Plan). The
Distribution Plan has been approved by the Board and is consistent with the Trusts investment objectives and policies. Under the Distribution Plan, the Trust will distribute all available investment income, including current gains, to its
shareholders, consistent with its investment objectives and as required by the Internal Revenue Code of 1986, as amended (the Code). If sufficient investment income, including current gains, is not available on a monthly basis, the Trust
will distribute long-term capital gains and/or return of capital to shareholders in order to maintain a level distribution. A return of capital distribution may involve a return of the shareholders original investment. Though not currently
taxable, such a distribution may lower a shareholders basis in the Trust, thus potentially subjecting the shareholder to future tax consequences in connection with the sale of Trust shares, even if sold at a loss to the shareholders
original investment. Each monthly distribution to shareholders is expected to be at a fixed amount established by the Board, except for extraordinary distributions and potential distribution rate increases or decreases to enable the Trust to comply
with the distribution requirements imposed by the Code. Shareholders should not draw any conclusions about the Trusts investment performance from the amount of these distributions or from the terms of the Distribution Plan.
Various factors will affect the level of the Trusts
income, including the asset mix and the Trusts use of options and hedging. To permit the Trust to maintain a more stable monthly distribution, the Trust may from time to time distribute less than the entire amount of income earned in a
particular period. The undistributed income would be available to supplement future distributions. As a result, the distributions paid by the Trust for any particular monthly period may be more or less than the amount of income actually earned by
the Trust during that period. Undistributed income will add to the Trusts NAV (and indirectly benefits the Advisor by increasing its fee) and, correspondingly, distributions from undistributed income will reduce the Trusts NAV. The Trust
intends to distribute any long-term capital gains not distributed under the Distribution Plan annually.
Shareholders will automatically have all dividends and distributions reinvested in common shares of the Trust in accordance with the
Trusts dividend reinvestment plan, unless an election is made to receive cash by contacting the Reinvestment Plan Agent (as defined herein), at (800) 699-1236. See Dividend Reinvestment
Plan.
Under normal market conditions, the Advisor
seeks to manage the Trust in a manner such that the Trusts distributions are reflective of the Trusts current and projected earnings levels. The distribution level of the Trust is subject to change based upon a number of factors,
including the current and projected level of the Trusts earnings, and may fluctuate over time.
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The Trust reserves the right to change its distribution policy and the basis for establishing the rate of its monthly
distributions at any time and may do so without prior notice to common shareholders. See Distributions.
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Listing
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The Trusts common shares are listed on the NYSE under the symbol BIT. See Description of
SharesCommon Shares.
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Custodian and Transfer Agent
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State Street Bank and Trust Company serves as the Trusts custodian, and Computershare Trust Company, N.A. serves as
the Trusts transfer agent.
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Administrator
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State Street Bank and Trust Company serves as the Trusts administrator and fund accountant.
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Market Price of Shares
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Common shares of closed-end investment companies frequently trade at prices lower
than their NAV. The Trust cannot assure you that its common shares will trade at a price higher than or equal to NAV. See Use of Proceeds. The Trusts common shares trade in the open market at market prices that are a function of
several factors, including dividend levels (which are in turn affected by expenses), NAV, call protection for portfolio securities, portfolio credit quality, liquidity, dividend stability, relative demand for and supply of the common shares in the
market, general market and economic conditions and other factors. See Leverage, Risks, Description of Shares and Repurchase of Common Shares. The common shares are designed primarily for long-term
investors and you should not purchase common shares of the Trust if you intend to sell them shortly after purchase.
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Special Risk Considerations
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An investment in common shares of the Trust involves risk. Please refer to the
section of the Trusts most recent annual report on Form N-CSR entitled Investment Objectives, Policies and RisksRisk Factors, which is incorporated by reference herein, for a
discussion of the risks of investing in the Trust. You should carefully consider those risks, which are described in more detail under Risks beginning on page 36 of this Prospectus, along with additional risks relating to investments in
the Trust.
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SUMMARY OF TRUST EXPENSES
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Shareholder Transaction Expenses
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Sales load paid by you (as a percentage of offering price)(1)
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1.00
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%
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Offering expenses borne by the Trust (as a percentage of offering price)(1)
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0.03
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%
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Dividend reinvestment plan fees
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$
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0.02(2) per share for open-market
purchases of common shares(2)
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Estimated Annual Expenses (as a percentage of net assets attributable to common
shares)
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Management fees(3)(4)
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1.26
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%
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Other Expenses
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0.44
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%
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Miscellaneous Other Expenses
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0.16%
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Interest Expense
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0.28%
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Total Annual Trust Operating Expenses
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1.70
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%
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Fee Waivers and/or Expense
Reimbursements(4)
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Total Annual Trust Operating Expenses after Fee Waivers and/or Expense Reimbursements(4)
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1.70
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%
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(1)
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If the common shares are sold to or through underwriters, the Prospectus Supplement will set forth any
applicable sales load and the estimated offering expenses. Trust shareholders will pay all offering expenses involved with an offering.
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(2)
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The Reinvestment Plan Agents (as defined below under Dividend Reinvestment Plan) fees for
the handling of the reinvestment of dividends will be paid by the Trust. However, you will pay a $0.02 per share fee incurred in connection with open-market purchases, which will be deducted from the value of the dividend. You will also be charged a
$2.50 sales fee and pay a $0.15 per share fee if you direct the Reinvestment Plan Agent to sell your common shares held in a dividend reinvestment account. Per share fees include any applicable brokerage commissions the Reinvestment Plan Agent is
required to pay.
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(3)
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The Trust currently pays the Advisor a monthly fee at an annual contractual investment management fee rate of
0.80% of the average daily value of the Trusts managed assets. For purposes of calculating these fees, managed assets means the total assets of the Trust (including any assets attributable to money borrowed for investment purposes)
minus the sum of the Trusts accrued liabilities (other than money borrowed for investment purposes).
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(4)
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The Trust and the Advisor have entered into a fee waiver agreement (the Fee Waiver Agreement),
pursuant to which the Advisor has contractually agreed to waive the management fee with respect to any portion of the Trusts assets attributable to investments in any equity and fixed-income mutual funds and ETFs managed by the Advisor or its
affiliates that have a contractual management fee, through June 30, 2023. In addition, pursuant to the Fee Waiver Agreement, the Advisor has contractually agreed to waive its management fees by the amount of investment advisory fees the Trust
pays to the Advisor indirectly through its investment in money market funds managed by the Advisor or its affiliates, through June 30, 2023. The Fee Waiver Agreement may be terminated at any time, without the payment of any penalty, only by the
Trust (upon the vote of a majority of the Trustees who are not interested persons (as defined in the Investment Company Act of 1940, as amended (the Investment Company Act), of the Trust (the Independent
Trustees)) or a majority of the outstanding voting securities of the Trust), upon 90 days written notice by the Trust to the Advisor.
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The following example illustrates the expenses (including the sales load of $10.00 and offering costs of $0.26 that you would
pay on a $1,000 investment in common shares, assuming (i) total net annual expenses of 1.70% of net assets attributable to common shares, and (ii) a 5% annual return:
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One
Year
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Three Years
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Five Years
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Ten Years
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Total expenses incurred
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$
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27
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$
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63
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$
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102
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$
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209
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The example should not be considered a representation of future expenses. The example
assumes that the estimated Other expenses set forth in the Estimated Annual Expenses table are accurate and that all dividends and distributions are reinvested at NAV. Actual expenses may be greater or less than those assumed. Moreover,
the Trusts actual rate of return may be greater or less than the hypothetical 5% return shown in the example.
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FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Trusts financial performance for the periods
presented. Certain information reflects financial results for a single common share of the Trust. The information for the fiscal years ended October 31, 2021, 2020, 2019, 2018 and 2017 has been audited by [ ], independent registered public
accounting firm for the Trust. The report of [ ] is included in the Trusts October 31, 2021 annual report, is incorporated by reference into the SAI and can be obtained by shareholders. The Trusts financial statements are included
in the Trusts annual report and are incorporated by reference into the SAI.
(For a share outstanding throughout
each period)
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Year Ended October 31,
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2021
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2020 (a)
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2019 (a)
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2018 (a)
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2017 (a)
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Net asset value, beginning of year
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$
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17.66
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$
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17.28
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$
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18.79
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$
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20.07
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$
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18.91
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Net investment income(b)
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1.13
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1.08
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1.18
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1.38
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|
|
|
1.51
|
|
Net realized and unrealized gain (loss)
|
|
|
0.67
|
|
|
|
0.78
|
|
|
|
(1.28
|
)
|
|
|
(1.13
|
)
|
|
|
1.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) from investment operations
|
|
|
1.80
|
|
|
|
1.86
|
|
|
|
(0.10
|
)
|
|
|
0.25
|
|
|
|
2.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From net investment income
|
|
|
(1.11
|
)
|
|
|
(0.99
|
)
|
|
|
(1.14
|
)
|
|
|
(1.49
|
)
|
|
|
(1.77
|
)
|
Return of capital
|
|
|
(0.37
|
)
|
|
|
(0.49
|
)
|
|
|
(0.27
|
)
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions
|
|
|
(1.48
|
)
|
|
|
(1.48
|
)
|
|
|
(1.41
|
)
|
|
|
(1.53
|
)
|
|
|
(1.77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of year
|
|
$
|
17.98
|
|
|
$
|
17.66
|
|
|
$
|
17.28
|
(d)
|
|
$
|
18.79
|
|
|
$
|
20.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price, end of year
|
|
$
|
18.90
|
|
|
$
|
15.65
|
|
|
$
|
17.15
|
|
|
$
|
16.25
|
|
|
$
|
18.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net asset value
|
|
|
10.55
|
%
|
|
|
12.68
|
%(f)
|
|
|
0.00
|
%(d)(g)
|
|
|
2.18
|
%(h)
|
|
|
17.34
|
%(i)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on market price
|
|
|
31.13
|
%
|
|
|
0.61
|
%
|
|
|
14.76
|
%
|
|
|
(4.40
|
)%
|
|
|
22.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1.70
|
%
|
|
|
2.36
|
%
|
|
|
2.89
|
%
|
|
|
2.90
|
%
|
|
|
2.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and/or reimbursed
|
|
|
1.70
|
%
|
|
|
2.19
|
%(j)
|
|
|
2.89
|
%
|
|
|
2.89
|
%
|
|
|
2.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and/or reimbursed and excluding interest expense
|
|
|
1.42
|
%
|
|
|
1.39
|
%
|
|
|
1.35
|
%
|
|
|
1.42
|
%
|
|
|
1.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
6.14
|
%
|
|
|
6.51
|
%
|
|
|
6.43
|
%
|
|
|
7.17
|
%
|
|
|
7.86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of year (000)
|
|
$
|
676,391
|
|
|
$
|
662,853
|
|
|
$
|
648,617
|
|
|
$
|
710,832
|
|
|
$
|
765,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 6 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
|
|
2021
|
|
|
2020 (a)
|
|
|
2019 (a)
|
|
|
2018 (a)
|
|
|
2017 (a)
|
|
Borrowings outstanding, end of year (000)
|
|
$
|
386,820
|
|
|
$
|
353,128
|
|
|
$
|
373,345
|
|
|
$
|
376,302
|
|
|
$
|
471,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate(k)
|
|
|
75
|
%
|
|
|
101
|
%
|
|
|
32
|
%
|
|
|
38
|
%
|
|
|
53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Consolidated Financial Highlights.
|
(b)
|
Based on average shares outstanding.
|
(c)
|
Distributions for annual periods determined in accordance with U.S. federal income tax regulations.
|
(d)
|
For financial reporting purposes, the market value of certain investments were adjusted as of report date.
Accordingly, the NAV per share and total return performance based on NAV presented herein are different than the information previously published on October 31, 2019.
|
(e)
|
Total returns based on market price, which can be significantly greater or less than the net asset value,
may result in substantially different returns. Where applicable, excludes the effects of any sales charges and assumes the reinvestment of distributions at actual reinvestment prices.
|
(f)
|
Includes payments received from an affiliate and unaffiliated third parties, which impacted the Trusts
total return. Excluding the payments, the Trusts total return would have been 1.38%.
|
(g)
|
Amount is greater than (0.005)%.
|
(h)
|
Includes payment received from an affiliate, which had no impact on the Trusts total return.
|
(i)
|
Includes payment received from a settlement of litigation, which impacted the Trusts total return.
Excluding the payment from a settlement of litigation, the Trusts total return is 16.70%.
|
(j)
|
Includes reimbursement of professional fees by unaffiliated third parties, which impacted the Trusts
expense ratio. Excluding the payment, the Trusts total expense ratio would have been 2.36%.
|
(k)
|
Includes mortgage dollar roll transactions (MDRs). Additional information regarding portfolio
turnover rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
|
|
2021
|
|
|
2020(a)
|
|
|
2019(a)
|
|
|
2018(a)
|
|
|
2017(a)
|
|
Portfolio turnover rate (excluding MDRs)
|
|
|
58
|
%
|
|
|
72
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 7 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
|
Period
February 27, 20132
to October 31,
2013
|
|
|
|
20161
|
|
|
2015
|
|
|
2014
|
|
Per Share Operating Performance
|
|
|
|
Net asset value, beginning of period
|
|
$
|
18.91
|
|
|
$
|
19.87
|
|
|
$
|
18.95
|
|
|
$
|
19.10
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income4
|
|
|
1.69
|
|
|
|
1.55
|
|
|
|
1.62
|
|
|
|
1.02
|
|
Net realized and unrealized gain (loss)
|
|
|
(0.05
|
)
|
|
|
(1.03
|
)
|
|
|
0.70
|
|
|
|
(0.35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase from investment operations
|
|
|
1.64
|
|
|
|
0.52
|
|
|
|
2.32
|
|
|
|
0.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions5:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From net investment income
|
|
|
(1.64
|
)
|
|
|
(1.40
|
)
|
|
|
(1.40
|
)
|
|
|
(0.70
|
)
|
From net realized gain
|
|
|
|
|
|
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
From return of capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions
|
|
|
(1.64
|
)
|
|
|
(1.48
|
)
|
|
|
(1.40
|
)
|
|
|
(0.82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
$
|
18.91
|
|
|
$
|
18.91
|
6
|
|
$
|
19.87
|
|
|
$
|
18.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price, end of period
|
|
$
|
16.76
|
|
|
$
|
16.31
|
|
|
$
|
17.79
|
|
|
$
|
17.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return7
|
|
|
|
Based on net asset value
|
|
|
10.51
|
%8
|
|
|
3.87
|
%6
|
|
|
13.40
|
%
|
|
|
4.04
|
%9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on market price
|
|
|
13.56
|
%
|
|
|
0.06
|
%
|
|
|
12.91
|
%
|
|
|
(10.66
|
)%9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net Assets
|
|
|
|
Total expenses
|
|
|
2.05
|
%10
|
|
|
2.09
|
%10
|
|
|
2.04
|
%
|
|
|
1.67
|
%11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and paid indirectly
|
|
|
2.05
|
%10
|
|
|
2.09
|
%10
|
|
|
2.04
|
%
|
|
|
1.67
|
%11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and paid indirectly and excluding interest expense
|
|
|
1.43
|
%10
|
|
|
1.53
|
%10
|
|
|
1.52
|
%
|
|
|
1.33
|
%11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
9.24
|
%10
|
|
|
7.97
|
%10
|
|
|
8.27
|
%
|
|
|
8.05
|
%11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data
|
|
|
|
Net assets, end of period (000)
|
|
$
|
726,381
|
|
|
$
|
726,432
|
|
|
$
|
763,360
|
|
|
$
|
727,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings outstanding, end of period (000)
|
|
$
|
427,329
|
|
|
$
|
510,352
|
|
|
$
|
707,294
|
|
|
$
|
552,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
52
|
%
|
|
|
21
|
%
|
|
|
29
|
%
|
|
|
77
|
%12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
Consolidated Financial Highlights.
|
2
|
Commencement of operations.
|
3
|
Net asset value, beginning of period, reflects a deduction of $0.90 per share sales charge from the initial
offering price of $20.00 per share.
|
4
|
Based on average shares outstanding.
|
5
|
Distributions for annual periods determined in accordance with federal income tax regulations.
|
6
|
For financial reporting purposes, the market value of certain investments were adjusted as of report date.
Accordingly, the net asset value (NAV) per share and total return performance based on net asset value presented herein are different than the information previously published on October 31, 2015.
|
- 8 -
7
|
Total returns based on market price, which can be significantly greater or less than the net asset value,
may result in substantially different returns. Where applicable, excludes the effects of any sales charges and assumes the reinvestment of distributions.
|
8
|
Includes payment received from an affiliate, which had no impact on the Trusts total return.
|
9
|
Aggregate total return.
|
10
|
Ratios do not include expenses incurred indirectly as a result of investments in underlying funds of
approximately 0.01% for the years ended October 31, 2016 and October 31, 2015.
|
12
|
Includes mortgage dollar roll transactions. Excluding these transactions, the portfolio turnover would have
been 54%.
|
- 9 -
USE OF
PROCEEDS
The net proceeds from the issuance of common shares hereunder will be invested in accordance with the
Trusts investment objectives and policies as stated below. We currently anticipate that we will be able to invest all of the net proceeds in accordance with our investment objectives and policies within approximately three months from the date
on which the proceeds from an offering are received by the Trust. Such investments may be delayed if suitable investments are unavailable at the time or for other reasons, such as market volatility and lack of liquidity in the markets of suitable
investments. Pending such investment, it is anticipated that the proceeds will be invested in short-term, tax-exempt or taxable investment grade securities or in high quality, short-term money market
instruments.
THE TRUST
The Trust is a diversified, closed-end management investment company registered under
the Investment Company Act. The Trust was formed as a Delaware statutory trust on November 13, 2012 pursuant to an Agreement and Declaration of Trust governed by the laws of the State of Delaware and the Certificate of Trust filed with the
Secretary of State of the State of Delaware. The Trusts principal office is located at 100 Bellevue Parkway, Wilmington, Delaware 19809, and its telephone number is (800) 882-0052.
The Trust commenced operations on February 25, 2013, upon the initiation of an initial public offering of 36 million
of its common shares. The proceeds of such offering were approximately $686.160 million after the payment of organizational and offering expenses. The Trusts common shares are traded on the NYSE under the symbol BIT.
DESCRIPTION OF SHARES
Common Shares
The Trust
is a statutory trust formed under the laws of Delaware and governed by an Agreement and Declaration of Trust dated as of November 13, 2012 (the Agreement and Declaration of Trust). The Trust is authorized to issue an unlimited
number of common shares of beneficial interest, par value $0.001 per share. Each common share has one vote and, when issued and paid for in accordance with the terms of this offering, will be fully paid and, under the Delaware Statutory Trust Act,
the purchasers of the common shares will have no obligation to make further payments for the purchase of the common shares or contributions to the Trust solely by reason of their ownership of the common shares, except that the Trustees shall have
the power to cause shareholders to pay certain expenses of the Trust by setting off charges due from shareholders from declared but unpaid dividends or distributions owed the shareholders and/or by reducing the number of common shares owned by each
respective shareholder. When preferred shares are outstanding, the holders of common shares will not be entitled to receive any distributions from the Trust unless all accrued dividends on preferred shares have been paid, unless asset coverage (as
defined in the Investment Company Act) with respect to preferred shares would be at least 200% after giving effect to the distributions and unless certain other requirements imposed by any rating agencies rating the preferred shares have been met.
See Description of SharesPreferred Shares in the SAI. All common shares are equal as to dividends, assets and voting privileges and have no conversion, preemptive or other subscription rights. The Trust will send annual and
semi-annual reports, including financial statements, to all holders of its shares.
Unlike
open-end funds, closed-end funds like the Trust do not continuously offer shares and do not provide daily redemptions. Rather, if a shareholder determines to buy
additional common shares or sell shares already held, the shareholder may do so by trading through a broker on the NYSE or otherwise. Shares of closed-end investment companies frequently trade on an exchange
at prices lower than NAV. Shares of closed-end investment companies like the Trust have during some periods traded at prices higher than NAV and during other periods have traded at prices lower than NAV.
Because the market value of the common shares may be influenced by such factors as dividend levels (which are in turn affected by expenses), call protection on its portfolio securities, dividend stability, portfolio credit quality, the Trusts
NAV, relative demand for and supply of such shares in the market, general market and economic conditions and other factors beyond the control of the Trust, the Trust cannot assure you that its common shares will trade at a price equal to or higher
than NAV in the future. The common shares are designed primarily for long-term investors and you should not purchase the common shares if you intend to sell them soon after purchase. See Repurchase of Common Shares below and
Repurchase of Common Shares in the SAI.
- 10 -
The Trusts outstanding common shares are, and when issued, the common
shares offered by this Prospectus will be, publicly held and listed and traded on the NYSE under the symbol BIT. The Trust determines its NAV on a daily basis. The following table sets forth, for the quarters indicated, the highest and
lowest daily closing prices on the NYSE per common share, and the NAV per common share and the premium to or discount from NAV, on the date of each of the high and low market prices. The table also sets forth the number of common shares traded on
the NYSE during the respective quarters.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NYSE Market Price
Per Common Share
|
|
|
NAV per
Common
Share on Date of
Market Price
|
|
|
Premium/
(Discount) on
Date of Market
Price
|
|
|
Trading
|
|
During Quarter Ended
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
Volume
|
|
October 31, 2021
|
|
$
|
19.15
|
|
|
$
|
18.31
|
|
|
$
|
18.38
|
|
|
$
|
18.16
|
|
|
|
4.19
|
%
|
|
|
0.83
|
%
|
|
|
6,538,043
|
|
July 31, 2021
|
|
$
|
18.92
|
|
|
$
|
18.26
|
|
|
$
|
18.55
|
|
|
$
|
18.41
|
|
|
|
1.99
|
%
|
|
|
-0.81
|
%
|
|
|
7,259,516
|
|
April 30, 2021
|
|
$
|
18.55
|
|
|
$
|
17.26
|
|
|
$
|
18.54
|
|
|
$
|
18.37
|
|
|
|
0.05
|
%
|
|
|
-6.07
|
%
|
|
|
8,595,716
|
|
January 29, 2021
|
|
$
|
17.54
|
|
|
$
|
15.75
|
|
|
$
|
18.27
|
|
|
$
|
17.69
|
|
|
|
-4.00
|
%
|
|
|
-10.97
|
%
|
|
|
6,963,337
|
|
October 31, 2020
|
|
$
|
16.31
|
|
|
$
|
15.19
|
|
|
$
|
17.80
|
|
|
$
|
16.82
|
|
|
|
-8.37
|
%
|
|
|
-9.69
|
%
|
|
|
7,441,219
|
|
July 31, 2020
|
|
$
|
15.21
|
|
|
$
|
12.94
|
|
|
$
|
16.74
|
|
|
$
|
14.88
|
|
|
|
-9.14
|
%
|
|
|
-13.04
|
%
|
|
|
9,711,030
|
|
April 30, 2020
|
|
$
|
16.83
|
|
|
$
|
9.41
|
|
|
$
|
17.55
|
|
|
$
|
13.39
|
|
|
|
-4.10
|
%
|
|
|
-29.72
|
%
|
|
|
18,592,784
|
|
January 31, 2020
|
|
$
|
17.29
|
|
|
$
|
15.94
|
|
|
$
|
17.95
|
|
|
$
|
17.29
|
|
|
|
-3.68
|
%
|
|
|
-7.81
|
%
|
|
|
14,506,399
|
|
As of December 14, 2021, the NAV per common share of the Trust was $17.59 and the market
price per common share was $18.20, representing a premium to NAV of 3.47%. Common shares of the Trust have historically traded at both a premium and discount to NAV.
As of December 14, 2021, the Trust has outstanding 37,623,292 common shares.
Preferred Shares
The
Agreement and Declaration of Trust provides that the Board of Trustees of the Trust (the Board) may authorize and issue preferred shares, with rights as determined by the Board, by action of the Board without the approval of the holders
of the common shares. Holders of common shares have no preemptive right to purchase any preferred shares that might be issued. The Trust does not currently intend to issue preferred shares.
Under the Investment Company Act, the Trust is not permitted to issue preferred shares unless immediately after such issuance
the value of the Trusts total assets is at least 200% of the liquidation value of the outstanding preferred shares (i.e., the liquidation value may not exceed 50% of the Trusts total assets). In addition, the Trust is not
permitted to declare any cash dividend or other distribution on its common shares unless, at the time of such declaration, the value of the Trusts total assets is at least 200% of such liquidation value. If the Trust issues preferred shares,
it may be subject to restrictions imposed by the guidelines of one or more rating agencies that may issue ratings for preferred shares issued by the Trust. These guidelines may impose asset coverage or portfolio composition requirements that are
more stringent than those imposed on the Trust by the Investment Company Act. It is not anticipated that these covenants or guidelines would impede the Advisors from managing the Trusts portfolio in accordance with the Trusts investment
objectives and policies. Please see Description of Shares in the SAI for more information.
- 11 -
Authorized Shares
The following table provides the Trusts authorized shares and common and preferred shares outstanding as of
December 31, 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
Title of Class
|
|
Amount
Authorized
|
|
|
Amount Held
by Trust or
for its
Account
|
|
|
Amount
Outstanding
Exclusive of
Amount
held by
Trust
|
|
Common Shares
|
|
|
Unlimited
|
|
|
|
0
|
|
|
|
37,635,253
|
|
THE TRUSTS
INVESTMENTS
Investment Objectives and Policies
Please refer to the section
of the Trusts most recent annual report on Form N-CSR entitled Investment Objectives, Policies and RisksInvestment Objectives and Policies, which is incorporated by reference
herein, for a discussion of the Trusts investment objectives and policies.
Portfolio Contents and Techniques
The Trusts portfolio will be composed principally of the following investments. Additional information with respect to
the Trusts investment policies and restrictions and certain of the Trusts portfolio investments is contained in the SAI.
Mortgage Related Securities. Under normal market conditions, the Trust will invest at least 25% of its total assets in
mortgage related securities. The Trusts investment in mortgage related securities may consist entirely of privately issued securities, which are issued by commercial banks, savings and loan institutions, mortgage bankers, private mortgage
insurance companies and other non-governmental issuers. On July 8, 2013, the Trust obtained formal no-action relief from the staff of the SEC
that the staff would not recommend any enforcement action in connection with the Trusts policy to concentrate its investments in the group if industries constituting mortgage related securities (including privately issued mortgage-backed
securities (MBS) and agency MBS). Certain mortgage related securities in which the Trust may invest are described below. Additional information regarding mortgage related securities is set forth in the SAI under Investment Policies
and TechniquesMortgage Related Securities.
MBS. MBS include structured debt obligations
collateralized by pools of commercial (CMBS) or residential (RMBS) mortgages. Pools of mortgage loans and mortgage-backed loans, such as mezzanine loans, are assembled as securities for sale to investors by various
governmental, government-related and private organizations. MBS include complex instruments such as collateralized mortgage obligations (CMOs), stripped MBS, mortgage pass-through securities and interests in real estate mortgage
investment conduits (REMICs). The MBS in which the Trust may invest include those with fixed, floating or variable interest rates, those with interest rates that change based on multiples of changes in a specified reference interest rate
or index of interest rates and those with interest rates that change inversely to changes in interest rates, as well as those that do not bear interest. The Trust may invest in RMBS and CMBS issued by governmental entities and private issuers,
including subordinated MBS and residual interests. The Trust may invest in sub-prime mortgages or MBS that are backed by sub-prime mortgages.
In general, losses on a mortgaged property securing a mortgage loan included in a securitization will be borne first by the
equity holder of the property, then by a cash reserve fund or letter of credit, if any, then by the holder of a mezzanine loan or B-Note, if any, then by the first loss subordinated
security holder (generally, the B-Piece buyer) and then by the holder of a higher rated security. The Trust may invest in any class of security included in a securitization. In the event
of default and the exhaustion of any equity support, reserve fund, letter of credit, mezzanine loans or B-Notes, and any classes of securities junior to those in which the Trust invests, the Trust
will not be able to recover all of its investment in the MBS it purchases. MBS in which the Trust invests may not contain reserve funds, letters of credit, mezzanine loans and/or junior classes of securities. The prices of lower credit quality
securities are generally less sensitive to interest rate changes than more highly rated investments, but more sensitive to adverse economic downturns or individual issuer developments.
- 12 -
Mortgage Pass-Through Securities. Mortgage pass-through securities differ
from other forms of fixed-income securities, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a pass through of the monthly payments made by the individual borrowers on their residential or commercial mortgage loans, net of any fees paid to the issuer or
guarantor of such securities. Additional payments are caused by repayments of principal resulting from the sale of the underlying property, refinancing or foreclosure, net of fees or costs that may be incurred. Some mortgage related securities (such
as securities issued by the Government National Mortgage Association (GNMA)) are described as modified pass-through. These securities entitle the holder to receive all interest and principal payments owed on the mortgage
pool, net of certain fees, at the scheduled payment dates regardless of whether or not the mortgagor actually makes the payment.
RMBS. RMBS are securities the payments on which depend primarily on the cash flow from residential mortgage loans made
to borrowers that are secured on a first priority basis or second priority basis, subject to permitted liens, easements and other encumbrances by residential real estate (one- to four-family properties), the
proceeds of which are used to purchase real estate and purchase or construct dwellings thereon or to refinance indebtedness previously used for such purposes. Non-agency residential mortgage loans are
obligations of the borrowers thereunder only and are not typically insured or guaranteed by any other person or entity. The ability of a borrower to repay a loan secured by residential property is dependent upon the income or assets of the borrower.
A number of factors, including a general economic downturn, acts of God, terrorism, social unrest and civil disturbances, may impair a borrowers ability to repay its loans.
Agency RMBS. The principal U.S. Governmental guarantor of mortgage related securities is GNMA, which is a wholly owned
U.S. Government corporation. GNMA is authorized to guarantee, with the full faith and credit of the U.S. Government, the timely payment of principal and interest on securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and backed by pools of mortgages insured by the Federal Housing Administration (FHA), or guaranteed by the Department of Veterans Affairs (VA). MBS issued by GNMA include
GNMA Mortgage Pass-Through Certificates (also known as Ginnie Maes) which are guaranteed as to the timely payment of principal and interest by GNMA and such guarantees are backed by the full faith and credit of the United States. GNMA
certificates also are supported by the authority of GNMA to borrow funds from the U.S. Treasury to make payments under its guarantee.
Government-related guarantors (i.e., not backed by the full faith and credit of the U.S. Government) include the Federal
National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). FNMA is a government-sponsored corporation the common stock of which is owned entirely by private stockholders. FNMA purchases
conventional (i.e., not insured or guaranteed by any government agency) residential mortgages from a list of approved seller/servicers which include state and federally chartered savings and loan associations, mutual savings banks, commercial banks
and credit unions and mortgage bankers. Pass-through securities issued by FNMA (also known as Fannie Maes) are guaranteed as to timely payment of principal and interest by FNMA, but are not backed by the full faith and credit of the U.S.
Government. FHLMC was created by Congress in 1970 for the purpose of increasing the availability of mortgage credit for residential housing. It is a government-sponsored corporation that issues FHLMC Guaranteed Mortgage Pass-Through Certificates
(also known as Freddie Macs or PCs), which are pass-through securities, each representing an undivided interest in a pool of residential mortgages. FHLMC guarantees the timely payment of interest and ultimate collection of
principal, but PCs are not backed by the full faith and credit of the U.S. Government.
In 2008, the Federal Housing
Finance Agency (FHFA) placed FNMA and FHLMC into conservatorship. FNMA and FHLMC are continuing to operate as going concerns while in conservatorship and each remains liable for all of its obligations, including its guaranty obligations,
associated with its MBS.
As the conservator, FHFA succeeded to all rights, titles, powers and privileges of FNMA and
FHLMC and of any stockholder, officer or director of FNMA and FHLMC with respect to FNMA and FHLMC and the assets of
- 13 -
FNMA and FHLMC. In connection with the conservatorship, the U.S. Treasury entered into a Senior Preferred Stock Purchase Agreement with each of FNMA and FHLMC pursuant to which the U.S. Treasury
would purchase up to an aggregate of $100 billion of each of FNMA and FHLMC to maintain a positive net worth in each enterprise. This agreement contains various covenants that severely limit each enterprises operations. In exchange for
entering into these agreements, the U.S. Treasury received $1 billion of each enterprises senior preferred stock and warrants to purchase 79.9% of each enterprises common stock. In February 2009, the U.S. Treasury doubled the size
of its commitment to each enterprise under the Senior Preferred Stock Program to $200 billion. The U.S. Treasurys obligations under the Senior Preferred Stock Program are for an indefinite period of time for a maximum amount of
$200 billion per enterprise. In December 2009, the U.S. Treasury announced further amendments to the Senior Preferred Stock Purchase Agreements which included additional financial support to certain governmentally supported entities, including
the Federal Home Loan Banks (FHLBs), FNMA and FHLMC. It is difficult, if not impossible, to predict the future political, regulatory or economic changes that could impact FNMA, FHLMC and the FHLBs, and the values of their related
securities or obligations. There is no assurance that the obligations of such entities will be satisfied in full, or that such obligations will not decrease in value or default.
Under the Federal Housing Finance Regulatory Reform Act of 2008 (the Reform Act), which was included as part of
the Housing and Economic Recovery Act of 2008, FHFA, as conservator or receiver, has the power to repudiate any contract entered into by FNMA or FHLMC prior to FHFAs appointment as conservator or receiver, as applicable, if FHFA determines, in
its sole discretion, that performance of the contract is burdensome and that repudiation of the contract promotes the orderly administration of FNMAs or FHLMCs affairs. The Reform Act requires FHFA to exercise its right to repudiate any
contract within a reasonable period of time after its appointment as conservator or receiver. FHFA, in its capacity as conservator, has indicated that it has no intention to repudiate the guaranty obligations of FNMA or FHLMC because FHFA views
repudiation as incompatible with the goals of the conservatorship. However, in the event that FHFA, as conservator or if it is later appointed as receiver for FNMA or FHLMC, were to repudiate any such guaranty obligation, the conservatorship or
receivership estate, as applicable, would be liable for actual direct compensatory damages in accordance with the provisions of the Reform Act. Any such liability could be satisfied only to the extent of FNMAs or FHLMCs assets available
therefor. In the event of repudiation, the payments of interest to holders of FNMA or FHLMC MBS would be reduced if payments on the mortgage loans represented in the mortgage loan groups related to such MBS are not made by the borrowers or advanced
by the servicer. Any actual direct compensatory damages for repudiating these guaranty obligations may not be sufficient to offset any shortfalls experienced by such mortgage-backed security holders. Further, in its capacity as conservator or
receiver, FHFA has the right to transfer or sell any asset or liability of FNMA or FHLMC without any approval, assignment or consent. Although FHFA has stated that it has no present intention to do so, if FHFA, as conservator or receiver, were to
transfer any such guaranty obligation to another party, holders of FNMA or FHLMC MBS would have to rely on that party for satisfaction of the guaranty obligation and would be exposed to the credit risk of that party. In addition, certain rights
provided to holders of MBS issued by FNMA and FHLMC under the operative documents related to such securities may not be enforced against FHFA, or enforcement of such rights may be delayed, during the conservatorship or any future receivership. The
operative documents for FNMA and FHLMC MBS may provide (or with respect to securities issued prior to the date of the appointment of the conservator may have provided) that upon the occurrence of an event of default on the part of FNMA or FHLMC, in
its capacity as guarantor, which includes the appointment of a conservator or receiver, holders of such MBS have the right to replace FNMA or FHLMC as trustee if the requisite percentage of MBS holders consent. The Reform Act prevents
mortgage-backed security holders from enforcing such rights if the event of default arises solely because a conservator or receiver has been appointed.
Non-Agency RMBS. Non-agency RMBS
are issued by commercial banks, savings and loan institutions, mortgage bankers, private mortgage insurance companies and other non-governmental issuers. Timely payment of principal and interest on
RMBS backed by pools created by non-governmental issuers often is supported partially by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance. The
insurance and guarantees are issued by government entities, private insurers and the mortgage poolers. There can be no assurance that the private insurers or mortgage poolers can meet their obligations under the policies, so that if the issuers
default on their obligations, the holders of the security could sustain a loss. No insurance or guarantee covers the Trust or the price of the Trusts common shares. RMBS issued
by non-governmental issuers generally offer a higher rate of interest than government agency and government-related securities because there are no direct or indirect government guarantees of
payment.
- 14 -
CMBS. CMBS generally are multi-class debt or pass-through certificates
secured or backed by mortgage loans on commercial properties. CMBS generally are structured to provide protection to the senior class investors against potential losses on the underlying mortgage loans. This protection generally is provided by
having the holders of subordinated classes of securities (Subordinated CMBS) take the first loss if there are defaults on the underlying commercial mortgage loans. Other protection, which may benefit all of the classes or particular
classes, may include issuer guarantees, reserve funds, additional Subordinated CMBS, cross-collateralization and over-collateralization.
The Trust may invest in Subordinated CMBS, which are subordinated in some manner as to the payment of principal and/or
interest to the holders of more senior CMBS arising out of the same pool of mortgages and which are often referred to as B-Pieces. The holders of Subordinated CMBS typically are
compensated with a higher stated yield than are the holders of more senior CMBS. On the other hand, Subordinated CMBS typically subject the holder to greater risk than senior CMBS and tend to be rated in a lower rating category (frequently a
substantially lower rating category) than the senior CMBS issued in respect of the same mortgage pool. Subordinated CMBS generally are likely to be more sensitive to changes in prepayment and interest rates and the market for such securities may be
less liquid than is the case for traditional income securities and senior CMBS.
CMOs. A CMO is a multi-class bond
backed by a pool of mortgage pass-through certificates or mortgage loans. CMOs may be collateralized by (i) GNMA, FNMA or FHLMC pass-through certificates, (ii) unsecuritized mortgage loans insured by the FHA or guaranteed by the VA,
(iii) unsecuritized conventional mortgages, (iv) other MBS or (v) any combination thereof. Each class of a CMO, often referred to as a tranche, is issued at a specific coupon rate and has a stated maturity or final
distribution date. Principal prepayments on collateral underlying a CMO may cause it to be retired substantially earlier than its stated maturity or final distribution date. The principal and interest on the underlying mortgages may be allocated
among the several classes of a series of a CMO in many ways. One or more tranches of a CMO may have coupon rates which reset periodically at a specified increment over an index, such as the London Interbank Offered Rate (LIBOR) (or
sometimes more than one index). These floating rate CMOs typically are issued with lifetime caps on the coupon rate thereon. The Trust does not intend to invest in CMO residuals, which represent the interest in any excess cash flow remaining after
making the payments of interest and principal on the tranches issued by the CMO and the payment of administrative expenses and management fees.
The Trust may invest in inverse floating rate CMOs. Inverse floating rate CMOs constitute a tranche of a CMO with a coupon
rate that moves in the reverse direction relative to an applicable index such as LIBOR. Accordingly, the coupon rate thereon will increase as interest rates decrease. Inverse floating rate CMOs are typically more volatile than fixed or floating rate
tranches of CMOs. Many inverse floating rate CMOs have coupons that move inversely to a multiple of an index. The effect of the coupon varying inversely to a multiple of an applicable index creates a leverage factor. Inverse floating rate debt
instruments (inverse floaters) based on multiples of a stated index are designed to be highly sensitive to changes in interest rates and can subject the holders thereof to extreme reductions of yield and loss of principal. The market for
inverse floating rate CMOs with highly leveraged characteristics at times may be very thin. The Trusts ability to dispose of its positions in such securities will depend on the degree of liquidity in the markets for such securities. It is
impossible to predict the amount of trading interest that may exist in such securities, and therefore the future degree of liquidity.
Stripped MBS. Stripped MBS are created by segregating the cash flows from underlying mortgage loans or mortgage
securities to create two or more new securities, each receiving a specified percentage of the underlying securitys principal or interest payments. Mortgage securities may be partially stripped so that each investor class receives some interest
and some principal. When securities are completely stripped, however, all of the interest is distributed to holders of one type of security, known as an interest-only security (or IO), and all of the principal is distributed to holders
of another type of security, known as a principal-only security (or PO). Strips can be created in a pass-through structure or as tranches of a CMO. The yields to maturity on IOs and POs are very sensitive to the rate of principal
payments (including prepayments) on the related underlying mortgage assets. If the underlying mortgage assets experience greater than anticipated prepayments of principal, the Trust may not fully recoup its initial investment in IOs. Conversely, if
the underlying mortgage assets experience less than anticipated prepayments of principal, the yield on POs could be materially and adversely affected.
- 15 -
Adjustable Rate Mortgage Securities. Adjustable rate mortgages
(ARMs) have interest rates that reset at periodic intervals. Acquiring ARMs permits the Trust to participate in increases in prevailing current interest rates through periodic adjustments in the coupons of mortgages underlying the pool
on which ARMs are based. Such ARMs generally have higher current yield and lower price fluctuations than is the case with more traditional fixed income securities of comparable rating and maturity. In addition, when prepayments of principal are made
on the underlying mortgages during periods of rising interest rates, the Trust may potentially reinvest the proceeds of such prepayments at rates higher than those at which they were previously invested. Mortgages underlying most ARMs, however, have
limits on the allowable annual or lifetime increases that can be made in the interest rate that the mortgagor pays. Therefore, if current interest rates rise above such limits over the period of the limitation, the Trust, when holding an ARM, does
not benefit from further increases in interest rates. Moreover, when interest rates are in excess of the coupon rates (i.e., the rates being paid by mortgagors) of the mortgages, ARMs behave more like fixed income securities and less like
adjustable-rate securities and are subject to the risks associated with fixed income securities. In addition, during periods of rising interest rates, increases in the coupon rate of ARMs generally lag current market interest rates slightly, thereby
creating the potential for capital depreciation on such securities.
Sub-Prime
Mortgages. Sub-prime mortgages are mortgages rated below A by Moodys, S&P or Fitch. Historically, sub-prime mortgage loans have been made to borrowers with
blemished (or non-existent) credit records, and the borrower is charged a higher interest rate to compensate for the greater risk of delinquency and the higher costs of loan servicing and collection. Sub-prime mortgages are subject to both state and federal anti-predatory lending statutes that carry potential liability to secondary market purchasers such as the Trust.
Sub-prime mortgages have certain characteristics and associated risks similar to below investment grade securities, including a higher degree of credit risk, and certain characteristics and associated risks
similar to MBS, including prepayment risk.
Mortgage REITs. A real estate investment trust (REIT) is a
corporation, or a business trust that would otherwise be taxed as a corporation, that meets the definitional requirements applicable to REITs under the Internal Revenue Code of 1986, as amended (the Code). The Code permits a qualifying
REIT to deduct dividends paid, thereby generally eliminating corporate level U.S. federal income tax and effectively making the REIT a pass-through vehicle for U.S. federal income tax purposes. To meet the definitional requirements of the Code, a
REIT must, among other things, invest substantially all of its assets in interests in real estate (including mortgages and other REITs) or cash and government securities, derive most of its income from rents from real property or interest on loans
secured by mortgages on real property, and distribute to shareholders annually substantially all of its otherwise taxable income. Mortgage REITs invest mostly in mortgages on real estate, which may secure construction, development or long-term
loans, and the main source of their income is mortgage interest payments. The value of securities issued by REITs is affected by tax and regulatory requirements and by perceptions of management skill. They also are subject to heavy cash flow
dependency and the possibility of failing to qualify for REIT status under the Code or to maintain exemption from the Investment Company Act.
Mortgage Related Derivative Instruments. The Trust may invest in MBS credit default swaps. MBS credit default swaps
include swaps the reference obligation for which is an MBS or related index, such as the CMBX Index (a tradeable index referencing a basket of CMBS), the TRX Index (a tradeable index referencing total return swaps based on CMBS) or the ABX Index (a
tradeable index referencing a basket of sub-prime MBS). The Trust may engage in other derivative transactions related to MBS, including purchasing and selling exchange-listed and
over-the-counter put and call options, futures and forwards on mortgages and MBS. The Trust may invest in newly developed mortgage related derivatives that may hereafter
become available.
Other Mortgage Related Securities. Other mortgage related securities include securities other
than those described above that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans on real property. Other mortgage related securities may be equity or debt securities issued by agencies or
instrumentalities of the U.S. Government or by private originators of, or investors in, mortgage loans, including savings and loan associations, homebuilders, mortgage banks, commercial banks, investment banks, partnerships, trusts and special
purpose entities of the foregoing.
Asset-Backed Securities. Asset-backed securities (ABS) are a form
of structured debt obligation. The securitization techniques used for ABS are similar to those used for MBS. ABS are bonds backed by pools of loans or other receivables. The collateral for these securities may include home equity loans, automobile
and credit card
- 16 -
receivables, boat loans, computer leases, airplane leases, mobile home loans, recreational vehicle loans and hospital account receivables. The Trust may invest in these and other types of ABS
that may be developed in the future. ABS present certain risks that are not presented by mortgage related securities. Primarily, these securities may provide the Trust with a less effective security interest in the related collateral than do
mortgage related securities. Therefore, there is the possibility that recoveries on the underlying collateral may not, in some cases, be available to support payments on these securities.
Collateralized Loan Obligations. A Collateralized Loan Obligation (CLO) is a structured debt security,
issued by a financing company (generally called a special purpose vehicle or SPV), that was created to reapportion the risk and return characteristics of a pool of bank loans. Investors in CLOs bear the credit risk of the underlying
collateral. The bank loans are used as collateral supporting the various debt tranches issued by the SPV. Multiple tranches of securities are issued by the CLO, offering investors various maturity and credit risk characteristics. Tranches are
categorized as senior, mezzanine, or subordinated/equity, according to their degree of risk. The key feature of the CLO structure is the prioritization of the cash flows from a pool of debt securities among the several classes of the CLO. If there
are defaults or the CLOs collateral otherwise underperforms, scheduled payments to senior tranches take precedence over those of mezzanine tranches, and scheduled payments to mezzanine tranches take precedence over those to subordinated/equity
tranches. The Trust may invest in the equity or residual portion of the capital structure of CLOs. The SPV is a company founded solely for the purpose of securitizing payment claims. On this basis, marketable securities are issued which, due to the
diversification of the underlying risk, generally represent a lower level of risk than the original assets. The redemption of the securities issued by the SPV takes place at maturity out of the cash flow generated by the collected claims. The vast
majority of CLOs are actively managed by an independent investment manager.
U.S. Government Debt Securities.
The Trust may invest in debt securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities, including U.S. Treasury obligations, which differ in their interest rates, maturities and times of issuance. Such obligations
include U.S. Treasury bills (maturity of one year or less), U.S. Treasury notes (maturity of one to ten years) and U.S. Treasury bonds (generally maturities of greater than ten years), including the principal components or the interest components
issued by the U.S. Government under the separate trading of registered interest and principal securities program (i.e., STRIPS), all of which are backed by the full faith and credit of the United States.
Senior Loans. The Trust may invest in senior secured floating rate and fixed rate loans or debt. Senior Loans hold the
most senior position in the capital structure of a business entity (the Borrower), are typically secured with specific collateral and have a claim on the assets and/or stock of the Borrower that is senior to that held by subordinated
debt holders and stockholders of the Borrower. The proceeds of Senior Loans primarily are used to finance leveraged buyouts, recapitalizations, mergers, acquisitions, stock repurchases, refinancings, to finance internal growth and for other
corporate purposes. Senior Loans typically have rates of interest that are determined daily, monthly, quarterly or semi-annually by reference to a base lending rate, plus a premium or credit spread. These base lending rates are primarily LIBOR and
secondarily the prime rate offered by one or more major U.S. banks and the certificate of deposit rate or other base lending rates used by commercial lenders.
Senior Loans typically have a stated term of between five and nine years and have rates of interest that typically are
redetermined daily, monthly, quarterly or semi-annually. Longer interest rate reset periods generally increase fluctuations in the Trusts NAV as a result of changes in market interest rates. The Trust is not subject to any restrictions with
respect to the maturity of Senior Loans held in its portfolio. As a result, as short-term interest rates increase, interest payable to the Trust from its investments in Senior Loans should increase, and as short-term interest rates decrease,
interest payable to the Trust from its investments in Senior Loans should decrease. Because of prepayments, the Advisors expect the average life of the Senior Loans in which the Trust invests to be shorter than the stated maturity.
Senior Loans are subject to the risk of non-payment of scheduled interest or
principal. Such non-payment would result in a reduction of income to the Trust, a reduction in the value of the investment and a potential decrease in the NAV of the Trust. There can be no assurances that the
liquidation of any collateral securing a Senior Loan would satisfy the Borrowers obligation in the event of non-payment of scheduled interest or principal payments or that such collateral could be
readily liquidated. In the event of bankruptcy of a Borrower, the Trust could experience delays or limitations with respect to its ability to realize the benefits of the collateral securing a Senior Loan. The
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collateral securing a Senior Loan may lose all or substantially all of its value in the event of the bankruptcy of a Borrower. Some Senior Loans are subject to the risk that a court, pursuant to
fraudulent conveyance or other similar laws, could subordinate such Senior Loans to presently existing or future indebtedness of the Borrower or take other action detrimental to the holders of Senior Loans including, in certain circumstances,
invalidating such Senior Loans or causing interest previously paid to be refunded to the Borrower. If interest were required to be refunded, it could negatively affect the Trusts performance.
Many Senior Loans in which the Trust will invest may not be rated by a rating agency, will not be registered with the
Securities and Exchange Commission (SEC), or any state securities commission, and will not be listed on any national securities exchange. The amount of public information available with respect to Senior Loans will generally be less
extensive than that available for registered or exchange-listed securities. In evaluating the creditworthiness of Borrowers, the Advisors will consider, and may rely in part, on analyses performed by others. Borrowers may have outstanding debt
obligations that are rated below investment grade by a rating agency. Many of the Senior Loans in which the Trust will invest will have been assigned below investment grade ratings by independent rating agencies. In the event Senior Loans are not
rated, they are likely to be the equivalent of below investment grade quality. Because of the protective features of Senior Loans, the Advisors believe that Senior Loans tend to have more favorable loss recovery rates as compared to more junior
types of below investment grade debt obligations. The Advisors do not view ratings as the determinative factor in their investment decisions and rely more upon their credit analysis abilities than upon ratings.
No active trading market may exist for some Senior Loans and some loans may be subject to restrictions on resale. A secondary
market may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods, which may impair the ability to realize full value and thus cause a material decline in the Trusts NAV. In addition, the Trust may
not be able to readily dispose of its Senior Loans at prices that approximate those at which the Trust could sell such loans if they were more widely traded and, as a result of such illiquidity, the Trust may have to sell other investments or engage
in borrowing transactions if necessary to raise cash to meet its obligations. During periods of limited supply and liquidity of Senior Loans, the Trusts yield may be lower.
When interest rates decline, the value of a fund invested in fixed rate obligations can be expected to rise. Conversely, when
interest rates rise, the value of a fund invested in fixed rate obligations can be expected to decline. Although changes in prevailing interest rates can be expected to cause some fluctuations in the value of Senior Loans (due to the fact that
floating rates on Senior Loans only reset periodically), the value of floating rate Senior Loans is substantially less sensitive to changes in market interest rates than fixed rate instruments. As a result, to the extent the Trust invests in
floating rate Senior Loans, the Trusts portfolio may be less volatile and less sensitive to changes in market interest rates than if the Trust invested in fixed rate obligations. Similarly, a sudden and significant increase in market interest
rates may cause a decline in the value of these investments and in the Trusts NAV. Other factors (including, but not limited to, rating downgrades, credit deterioration, a large downward movement in stock prices, a disparity in supply and
demand of certain securities or market conditions that reduce liquidity) can reduce the value of Senior Loans and other debt obligations, impairing the Trusts NAV.
The Trust may purchase and retain in its portfolio Senior Loans where the Borrower has experienced, or may be perceived to be
likely to experience, credit problems, including involvement in or recent emergence from bankruptcy reorganization proceedings or other forms of debt restructuring. Such investments may provide opportunities for enhanced income as well as capital
appreciation, although they also will be subject to greater risk of loss. At times, in connection with the restructuring of a Senior Loan either outside of bankruptcy court or in the context of bankruptcy court proceedings, the Trust may determine
or be required to accept equity securities or junior fixed income securities in exchange for all or a portion of a Senior Loan.
The Trust may purchase Senior Loans on a direct assignment basis. If the Trust purchases a Senior Loan on direct assignment,
it typically succeeds to all the rights and obligations under the loan agreement of the assigning lender and becomes a lender under the loan agreement with the same rights and obligations as the assigning lender. Investments in Senior Loans on a
direct assignment basis may involve additional risks to the Trust. For example, if such loan is foreclosed, the Trust could become part owner of any collateral and would bear the costs and liabilities associated with owning and disposing of the
collateral.
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The Trust may also purchase, without limitation, participations in Senior Loans.
The participation by the Trust in a lenders portion of a Senior Loan typically will result in the Trust having a contractual relationship only with such lender, not with the Borrower. As a result, the Trust may have the right to receive
payments of principal, interest and any fees to which it is entitled only from the lender selling the participation and only upon receipt by such lender of payments from the Borrower. Such indebtedness may be secured or unsecured. Loan
participations typically represent direct participations in a loan to a Borrower and generally are offered by banks or other financial institutions or lending syndicates. The Trust may participate in such syndications, or can buy part of a loan,
becoming a part lender. When purchasing loan participations, the Trust assumes the credit risk associated with the Borrower and may assume the credit risk associated with an interposed bank or other financial intermediary. The participation
interests in which the Trust intends to invest may not be rated by any nationally recognized rating service. Certain loan participations and assignments may be treated by the Trust as illiquid.
The Trust may obtain exposure to Senior Loans through the use of derivative instruments, which have recently become
increasingly available. The Advisors may utilize these instruments and similar instruments that may be available in the future. The Trust may invest in a derivative instrument known as a Select Aggregate Market Index (SAMI), which
provides investors with exposure to a reference basket of Senior Loans. SAMIs are structured as floating rate instruments. SAMIs consist of a basket of credit default swaps whose underlying reference securities are senior secured loans. While
investing in SAMIs will increase the universe of floating rate fixed income securities to which the Trust is exposed, such investments entail risks that are not typically associated with investments in other floating rate fixed income securities.
The liquidity of the market for SAMIs will be subject to liquidity in the secured loan and credit derivatives markets. Investment in SAMIs involves many of the risks associated with investments in derivative instruments discussed generally herein.
Second Lien Loans. The Trust may invest in second lien or other subordinated or unsecured floating rate and fixed
rate loans or debt. Second Lien Loans have the same characteristics as Senior Loans except that such loans are second in lien property rather than first. Second Lien Loans typically have adjustable floating rate interest payments. Accordingly, the
risks associated with Second Lien Loans are higher than the risk of loans with first priority over the collateral. In the event of default on a Second Lien Loan, the first priority lien holder has first claim to the underlying collateral of the
loan. It is possible that no collateral value would remain for the second priority lien holder, which may result in a loss of investment to the Trust.
Delayed Funding Loans and Revolving Credit Facilities. The Trust may enter into, or acquire participations in, delayed
funding loans and revolving credit facilities, in which a bank or other lender agrees to make loans up to a maximum amount upon demand by the borrower during a specified term. These commitments may have the effect of requiring the Trust to increase
its investment in a company at a time when it might not be desirable to do so (including at a time when the companys financial condition makes it unlikely that such amounts will be repaid). Delayed funding loans and revolving credit facilities
are subject to credit, interest rate and liquidity risk and the risks of being a lender.
Corporate
Bonds. Corporate bonds are debt obligations issued by corporations. Corporate bonds may be either secured or unsecured. Collateral used for secured debt includes real property, machinery, equipment, accounts receivable, stocks, bonds or
notes. If a bond is unsecured, it is known as a debenture. Bondholders, as creditors, have a prior legal claim over common and preferred stockholders as to both income and assets of the corporation for the principal and interest due them and may
have a prior claim over other creditors if liens or mortgages are involved. Interest on corporate bonds may be fixed or floating, or the bonds may be zero coupons. Interest on corporate bonds is typically paid semi-annually and is fully taxable to
the bondholder. Corporate bonds contain elements of both interest rate risk and credit risk. The market value of a corporate bond generally may be expected to rise and fall inversely with interest rates and may also be affected by the credit rating
of the corporation, the corporations performance and perceptions of the corporation in the marketplace. Corporate bonds usually yield more than government or agency bonds due to the presence of credit risk.
Preferred Securities. The Trust may invest in preferred securities. There are two basic types of preferred
securities. The first type, sometimes referred to as traditional preferred securities, consists of preferred stock issued by an entity taxable as a corporation. The second type, sometimes referred to as trust preferred securities, are usually issued
by a trust or limited partnership and represent preferred interests in deeply subordinated debt instruments issued by the corporation for whose benefit the trust or partnership was established.
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Traditional Preferred Securities. Traditional preferred securities
generally pay fixed or adjustable rate dividends to investors and generally have a preference over common stock in the payment of dividends and the liquidation of a companys assets. This means that a company must pay dividends on
preferred stock before paying any dividends on its common stock. In order to be payable, distributions on such preferred securities must be declared by the issuers board of directors. Income payments on typical preferred securities currently
outstanding are cumulative, causing dividends and distributions to accumulate even if not declared by the board of directors or otherwise made payable. In such a case all accumulated dividends must be paid before any dividend on the common stock can
be paid. However, some traditional preferred stocks are non-cumulative, in which case dividends do not accumulate and need not ever be paid. A portion of the portfolio may include investments in non-cumulative preferred securities, whereby the issuer does not have an obligation to make up any arrearages to its shareholders. Should an issuer of a non-cumulative
preferred stock held by the Trust determine not to pay dividends on such stock, the amount of dividends the Trust pays may be adversely affected. There is no assurance that dividends or distributions on the traditional preferred securities in which
the Trust invests will be declared or otherwise made payable.
Preferred stockholders usually have no right to vote for
corporate directors or on other matters. Shares of traditional preferred securities have a liquidation value that generally equals the original purchase price at the date of issuance. The market value of preferred securities may be affected by
favorable and unfavorable changes impacting companies in the utilities and financial services sectors, which are prominent issuers of preferred securities, and by actual and anticipated changes in tax laws, such as changes in corporate income tax
rates or the Dividends Received Deduction. Because the claim on an issuers earnings represented by traditional preferred securities may become onerous when interest rates fall below the rate payable on such securities, the issuer
may redeem the securities. Thus, in declining interest rate environments in particular, the Trusts holdings, if any, of higher rate-paying fixed rate preferred securities may be reduced and the Trust may be unable to acquire securities of
comparable credit quality paying comparable rates with the redemption proceeds.
Trust Preferred Securities. Trust
preferred securities are a comparatively new asset class. Trust preferred securities are typically issued by corporations, generally in the form of interest-bearing notes with preferred security characteristics, or by an affiliated business trust of
a corporation, generally in the form of beneficial interests in subordinated debentures or similarly structured securities. The trust preferred securities market consists of both fixed and adjustable coupon rate securities that are either perpetual
in nature or have stated maturity dates.
Trust preferred securities are typically junior and fully subordinated
liabilities of an issuer or the beneficiary of a guarantee that is junior and fully subordinated to the other liabilities of the guarantor. In addition, trust preferred securities typically permit an issuer to defer the payment of income for
eighteen months or more without triggering an event of default. Generally, the deferral period is five years or more. Because of their subordinated position in the capital structure of an issuer, the ability to defer payments for extended periods of
time without default consequences to the issuer, and certain other features (such as restrictions on common dividend payments by the issuer or ultimate guarantor when full cumulative payments on the trust preferred securities have not been made),
these trust preferred securities are often treated as close substitutes for traditional preferred securities, both by issuers and investors. Trust preferred securities have many of the key characteristics of equity due to their subordinated position
in an issuers capital structure and because their quality and value are heavily dependent on the profitability of the issuer rather than on any legal claims to specific assets or cash flows.
Convertible Securities. A convertible security is a bond, debenture, note, preferred stock or other security that may
be converted into or exchanged for a prescribed amount of common stock or other equity security of the same or a different issuer within a particular period of time at a specified price or formula. A convertible security entitles the holder to
receive interest paid or accrued on debt or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted or exchanged. Before conversion, convertible securities have characteristics similar to nonconvertible
income securities in that they ordinarily provide a stable stream of income with generally higher yields than those of common stocks of the same or similar issuers, but lower yields than comparable nonconvertible securities. The value of a
convertible security is influenced by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors also may have an effect on the
convertible securitys investment value. Convertible securities rank senior to common stock in a corporations capital structure but are usually subordinated to comparable nonconvertible securities. Convertible securities may be subject to
redemption at the option of the issuer at a price established in the convertible securitys governing instrument.
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A synthetic or manufactured convertible security may be
created by the Trust or by a third party by combining separate securities that possess the two principal characteristics of a traditional convertible security: an income producing component and a convertible component. The income-producing component
is achieved by investing in non-convertible, income-producing securities such as bonds, preferred stocks and money market instruments. The convertible component is achieved by investing in securities or
instruments such as warrants or options to buy common stock at a certain exercise price, or options on a stock index. Unlike a traditional convertible security, which is a single security having a single market value, a synthetic convertible
comprises two or more separate securities, each with its own market value. Because the market value of a synthetic convertible security is the sum of the values of its income-producing component and its convertible component, the value
of a synthetic convertible security may respond differently to market fluctuations than a traditional convertible security. The Trust also may purchase synthetic convertible securities created by other parties, including convertible structured
notes. Convertible structured notes are income-producing debentures linked to equity. Convertible structured notes have the attributes of a convertible security; however, the issuer of the convertible note (typically an investment bank), rather than
the issuer of the underlying common stock into which the note is convertible, assumes credit risk associated with the underlying investment and the Trust in turn assumes credit risk associated with the issuer of the convertible note.
REITs. The Trust may invest in equity interests and debt securities issued by REITs. REITs possess certain risks which
differ from an investment in common stocks. REITs are financial vehicles that pool investors capital to purchase or finance real estate. REITs may concentrate their investments in specific geographic areas or in specific property types (i.e.,
hotels, shopping malls, residential complexes and office buildings). The market value of REIT shares and the ability of REITs to distribute income may be adversely affected by several factors, including rising interest rates, changes in the
national, state and local economic climate and real estate conditions, perceptions of prospective tenants of the safety, convenience and attractiveness of the properties, the ability of the owners to provide adequate management, maintenance and
insurance, the cost of complying with the Americans with Disabilities Act, increased competition from new properties, the impact of present or future environmental legislation and compliance with environmental laws, changes in real estate taxes and
other operating expenses, adverse changes in governmental rules and fiscal policies, adverse changes in zoning laws and other factors beyond the control of the REIT issuers. In addition, distributions received by the Trust from REITs may consist of
dividends, capital gains and/or return of capital. As REITs generally pay a higher rate of dividends (on a pre-tax basis) than operating companies, to the extent application of the Trusts investment
strategy results in the Trust investing in REIT shares, the percentage of the Trusts dividend income received from REIT shares will likely exceed the percentage of the Trusts portfolio which is comprised of REIT shares. There are three
general categories of REITs: equity REITs, mortgage REITs and hybrid REITs. Equity REITs invest primarily in direct fee ownership or leasehold ownership of real property; they derive most of their income from rents. Mortgage REITs invest mostly in
mortgages on real estate, which may secure construction, development or long-term loans, and the main source of their income is mortgage interest payments. Hybrid REITs hold both ownership and mortgage interests in real estate.
Municipal Securities. The Trust may invest in municipal securities, which include debt obligations issued to obtain
funds for various public purposes, including the construction of a wide range of public facilities, refunding of outstanding obligations and obtaining funds for general operating expenses and loans to other public institutions and facilities. In
addition, certain types of private activity bonds (PABs) (or industrial development bonds, under pre-1986 law) are issued by or on behalf of public authorities to finance various privately owned or
operated facilities, including among other things, airports, public ports, mass commuting facilities, multi-family housing projects, as well as facilities for water supply, gas, electricity, sewage or solid waste disposal and other specialized
facilities. Other types of PABs, the proceeds of which are used for the construction, equipment or improvement of privately operated industrial or commercial facilities, may constitute municipal securities. The interest on municipal securities may
bear a fixed rate or be payable at a variable or floating rate. The two principal classifications of municipal securities are general obligation bonds and revenue bonds, which latter category includes PABs. Municipal
securities typically are issued to finance public projects, such as roads or public buildings, to pay general operating expenses or to refinance outstanding debt. Municipal securities may also be issued for private activities, such as housing,
medical and educational facility construction, or for privately owned industrial development and pollution control projects. General obligation bonds are backed by the full faith and credit, or taxing authority, of the issuer and may be repaid from
any revenue source. Revenue bonds may be repaid only from the revenues of a specific
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facility or source. Municipal securities may be issued on a long term basis to provide permanent financing. The repayment of such debt may be secured generally by a pledge of the full faith and
credit taxing power of the issuer, a limited or special tax, or any other revenue source, including project revenues, which may include tolls, fees and other user charges, lease payments and mortgage payments. Municipal securities may also be issued
to finance projects on a short-term interim basis, anticipating repayment with the proceeds of the later issuance of long-term debt. Obligations are included within the term municipal securities if the interest paid thereon is excluded from gross
income for U.S. federal income tax purposes in the opinion of bond counsel to the issuer. The Trust may invest in taxable municipal securities, including Build America Bonds. Additional information regarding municipal securities is set forth in the
SAI under Investment Policies and TechniquesMunicipal Securities.
High Yield Securities (Junk
Bonds). The Trust may invest in securities rated, at the time of investment, below investment grade quality such as those rated Ba or below by Moodys Investors Service Inc. (Moodys), BB or below by
S&P Global Ratings (S&P) or Fitch Ratings, Inc. (Fitch), or securities comparably rated by other rating agencies or in unrated securities determined by the Advisors to be of comparable quality. Such securities,
sometimes referred to as high yield or junk bonds, are predominantly speculative with respect to the capacity to pay interest and repay principal in accordance with the terms of the security and generally involve greater
price volatility than securities in higher rating categories. Often the protection of interest and principal payments with respect to such securities may be very moderate and issuers of such securities face major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments. Under normal market conditions, the Trust will not invest more than 20% of its Managed Assets in securities,
other than mortgage related and other asset-backed securities, that are, at the time of investment, rated CCC+ or lower by S&P or Fitch or Caa1 or lower by Moodys, or that are unrated but judged to be of comparable quality by the Advisors.
For purposes of applying the foregoing policy, in the case of securities with split ratings (i.e., a security receiving two different ratings from two different rating agencies), the Trust will apply the higher of the applicable ratings. The Trust
may invest in mortgage related and other asset backed securities of any quality, rated or unrated, without limitation.
Lower grade securities, though high yielding, are characterized by high risk. They may be subject to certain risks with
respect to the issuing entity and to greater market fluctuations than certain lower yielding, higher rated securities. The secondary market for lower grade securities may be less liquid than that of higher rated securities. Adverse conditions could
make it difficult at times for the Trust to sell certain high yield securities or could result in lower prices than those used in calculating the Trusts NAV.
The prices of fixed-income securities generally are inversely related to interest rate changes; however, the price volatility
caused by fluctuating interest rates of securities also is inversely related to the coupons of such securities. Accordingly, below investment grade securities may be relatively less sensitive to interest rate changes than higher quality securities
of comparable maturity because of their higher coupon. The investor receives this higher coupon in return for bearing greater credit risk. The higher credit risk associated with below investment grade securities potentially can have a greater effect
on the market value of such securities than may be the case with higher quality issues of comparable maturity.
Lower
grade securities may be particularly susceptible to economic downturns. It is likely that an economic recession could severely disrupt the market for such securities and may have an adverse impact on the value of such securities. In addition, it is
likely that any such economic downturn could adversely affect the ability of the issuers of such securities to repay principal and pay interest thereon and increase the incidence of default for such securities.
The ratings of Moodys, S&P, Fitch and other rating agencies represent their opinions as to the quality of the
obligations which they undertake to rate. Ratings are relative and subjective and, although ratings may be useful in evaluating the safety of interest and principal payments, they do not evaluate the market value risk of such obligations. Although
these ratings may be an initial criterion for selection of portfolio investments, the Advisors also will independently evaluate these securities and the ability of the issuers of such securities to pay interest and principal. To the extent that the
Trust invests in lower grade securities that have not been rated by a rating agency, the Trusts ability to achieve its investment objectives will be more dependent on the Advisors credit analysis than would be the case when the Trust
invests in rated securities.
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Distressed and Defaulted Securities. The Trust may invest in the
securities of financially distressed and bankrupt issuers, including debt obligations that are in covenant or payment default. Such investments generally trade significantly below par and are considered speculative. The repayment of defaulted
obligations is subject to significant uncertainties. Defaulted obligations might be repaid only after lengthy workout or bankruptcy proceedings, during which the issuer might not make any interest or other payments. Typically such workout or
bankruptcy proceedings result in only partial recovery of cash payments or an exchange of the defaulted obligation for other debt or equity securities of the issuer or its affiliates, which may in turn be illiquid or speculative.
Non-U.S. Securities. The Trust may invest without limit in securities of non-U.S. issuers (Non-U.S. Securities). These securities may be U.S. dollar-denominated or non-U.S. dollar-denominated and
include: (i) debt obligations issued or guaranteed by foreign national, provincial, state, municipal or other governments with taxing authority or by their agencies or instrumentalities, including securities created through the exchange of
existing commercial bank loans to sovereign entities for new obligations in connection with debt restructurings, commonly referred to as Brady Bonds; (ii) debt obligations of supranational entities; (iii) debt obligations and other
debt securities of foreign corporate issuers; (iv) fixed income securities issued by corporations that generate significant profits from non-U.S. countries; and (v) structured securities, including
but not limited to, warrants, options and other derivatives, whose price is directly linked to Non-U.S. Securities or indices of Non-U.S. Securities. Some Non-U.S. Securities may be less liquid and more volatile than securities of comparable U.S. issuers. Similarly, there is less volume and liquidity in most foreign securities markets than in the United States and, at
times, greater price volatility than in the United States. Because evidence of ownership of such securities usually is held outside the United States, the Trust will be subject to additional risks if it invests in
Non-U.S. Securities, which include adverse political and economic developments, seizure or nationalization of foreign deposits and adoption of governmental restrictions which might adversely affect or restrict
the payment of principal and interest or dividends on the foreign securities to investors located outside the country of the issuer, whether from currency blockage or otherwise. Non-U.S. Securities may trade
on days when the common shares are not priced or traded.
Emerging Markets Investments. The Trust may invest
without limitation in securities of issuers located in emerging market countries, including securities denominated in currencies of emerging market countries. Emerging market countries generally include every nation in the world (including countries
that may be considered frontier markets) except the United States, Canada, Japan, Australia, New Zealand and most countries located in Western Europe. There is no minimum rating criteria for the Trusts investments in such
securities. These issuers may be subject to risks that do not apply to issuers in larger, more developed countries. These risks are more pronounced to the extent the Trust invests significantly in one country. Less information about emerging market
issuers or markets may be available due to less rigorous disclosure and accounting standards or regulatory practices. Emerging markets are smaller, less liquid and more volatile than U.S. markets. In a changing market, the Advisors may not be able
to sell the Trusts portfolio securities in amounts and at prices they consider reasonable. The U.S. dollar may appreciate against non-U.S. currencies or an emerging market government may impose
restrictions on currency conversion or trading. The economies of emerging market countries may grow at a slower rate than expected or may experience a downturn or recession. Economic, political and social developments may adversely affect emerging
market countries and their securities markets.
Sovereign Governmental and Supranational Debt. The Trust may
invest in all types of debt securities of governmental issuers in all countries, including foreign countries. These sovereign debt securities may include: debt securities issued or guaranteed by governments, governmental agencies or
instrumentalities and political subdivisions located in foreign countries; debt securities issued by government owned, controlled or sponsored entities located in foreign countries; interests in entities organized and operated for the purpose of
restructuring the investment characteristics of instruments issued by any of the above issuers; Brady Bonds, which are debt securities issued under the framework of the Brady Plan as a means for debtor nations to restructure their outstanding
external indebtedness; participations in loans between emerging market governments and financial institutions; or debt securities issued by supranational entities such as the World Bank. A supranational entity is a bank, commission or company
established or financially supported by the national governments of one or more countries to promote reconstruction or development. Sovereign government and supranational debt involve all the risks described herein regarding foreign and emerging
markets investments as well as the risk of debt moratorium, repudiation or renegotiation. Additional information is set forth in the SAI under Investment Policies and TechniquesSovereign Governmental and Supranational Debt.
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Foreign Currency Transactions. The Trusts common shares are priced
in U.S. dollars and the distributions paid by the Trust to common shareholders are paid in U.S. dollars. However, a portion of the Trusts assets may be denominated in non-U.S. currencies and the income
received by the Trust from such securities will be paid in non-U.S. currencies. The Trust also may invest in or gain exposure to non-U.S. currencies for investment or
hedging purposes. The Trusts investments in securities that trade in, or receive revenues in, non-U.S. currencies will be subject to currency risk, which is the risk that fluctuations in the exchange
rates between the U.S. dollar and foreign currencies may negatively affect an investment. The Trust may (but is not required to) hedge some or all of its exposure to non-U.S. currencies through the use of
derivative strategies, including forward foreign currency exchange contracts, foreign currency futures contracts and options on foreign currencies and foreign currency futures. Suitable hedging transactions may not be available in all circumstances
and there can be no assurance that the Trust will engage in such transactions at any given time or from time to time when they would be beneficial. Although the Trust has the flexibility to engage in such transactions, the Advisors may determine not
to do so or to do so only in unusual circumstances or market conditions. These transactions may not be successful and may eliminate any chance for the Trust to benefit from favorable fluctuations in relevant foreign currencies. The Trust may also
use derivatives contracts for purposes of increasing exposure to a foreign currency or to shift exposure to foreign currency fluctuations from one currency to another.
Equity Securities. The Trust may invest in other equity securities, including common stocks, warrants and
depositary receipts. Common stock represents an equity ownership interest in a company. The Trust may hold or have exposure to common stocks of issuers of any size, including small and medium capitalization stocks.
Warrants. Warrants are privileges issued by corporations enabling the owners to subscribe to and purchase a specified
number of shares of the corporation at a specified price during a specified period of time. Subscription rights normally have a short life span to expiration. The purchase of warrants involves the risk that the Trust could lose the purchase value of
a right or warrant if the right to subscribe to additional shares is not exercised prior to the warrants expiration. Also, the purchase of warrants involves the risk that the effective price paid for the warrant added to the subscription price
of the related security may exceed the value of the subscribed securitys market price such as when there is no movement in the level of the underlying security.
Depositary Receipts. The Trust may invest in sponsored and unsponsored American Depositary Receipts (ADRs),
European Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) and other similar global instruments. ADRs typically are issued by a U.S. bank or trust company and evidence ownership of underlying securities issued by
a non-U.S. corporation. EDRs, which are sometimes referred to as Continental Depositary Receipts, are receipts issued in Europe, typically by non-U.S. banks and trust
companies, that evidence ownership of either non-U.S. or domestic underlying securities. GDRs are depositary receipts structured like global debt issues to facilitate trading on an international basis.
Restricted and Illiquid Investments. The Trust may invest without limitation in illiquid or less liquid investments or
investments in which no secondary market is readily available or which are otherwise illiquid, including private placement securities. Liquidity of an investment relates to the ability to dispose easily of the investment and the price to be obtained
upon disposition of the investment, which may be less than would be obtained for a comparable more liquid investment. Illiquid investments are investments which cannot be sold within seven days in the ordinary course of business at
approximately the value used by the Trust in determining its NAV. Illiquid investments may trade at a discount from comparable, more liquid investments. Illiquid investments are subject to legal or contractual restrictions on disposition or lack an
established secondary trading market. Investment of the Trusts assets in illiquid investments may restrict the ability of the Trust to dispose of its investments in a timely fashion and for a fair price as well as its ability to take advantage
of market opportunities.
Inflation-Indexed Bonds. Inflation-indexed bonds (other than municipal
inflation-indexed bonds and certain corporate inflation-indexed bonds) are fixed income securities the principal value of which is periodically adjusted according to the rate of inflation. If the index measuring inflation falls, the principal value
of inflation-indexed bonds (other than municipal inflation-indexed bonds and certain corporate inflation-indexed bonds) will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller
principal amount) will be reduced. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds (TIPs). For bonds that do not provide a similar
guarantee, the adjusted principal value of the bond repaid at maturity may be less than the original principal. With
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regard to municipal inflation-indexed bonds and certain corporate inflation-indexed bonds, the inflation adjustment is typically reflected in the semi-annual coupon payment. As a result, the
principal value of municipal inflation-indexed bonds and such corporate inflation-indexed bonds does not adjust according to the rate of inflation.
Zero-Coupon Bonds, Step-Ups and Payment-In-Kind Securities. Zero-coupon bonds pay interest only at maturity rather than at intervals during the life of the security. Like zero-coupon bonds,
step up bonds pay no interest initially but eventually begin to pay a coupon rate prior to maturity, which rate may increase at stated intervals during the life of the security. Payment-in-kind securities (PIKs) are debt obligations that pay interest in the form of other debt obligations, instead of in cash. Each of these instruments is normally issued and
traded at a deep discount from face value. Zero-coupon bonds, step-ups and PIKs allow an issuer to avoid or delay the need to generate cash to meet current interest payments and, as a result, may involve
greater credit risk than bonds that pay interest currently or in cash. The Trust would be required to distribute the income on these instruments as it accrues, even though the Trust will not receive the income on a current basis or in cash. Thus,
the Trust may have to sell other investments, including when it may not be advisable to do so, to make income distributions to its shareholders.
Inverse Floating Rate Securities. An inverse floating rate security (or inverse floater) is a type of
debt instrument that bears a floating or variable interest rate that moves in the opposite direction to interest rates generally or the interest rate on another security or index. Changes in interest rates generally, or the interest rate of the
other security or index, inversely affect the interest rate paid on the inverse floater, with the result that the inverse floaters price will be considerably more volatile than that of a fixed rate bond. The Trust may invest without limitation
in inverse floaters, which brokers typically create by depositing an income-producing instrument, including a mortgage related security, in a trust. The trust in turn issues a variable rate security and inverse floaters. The interest rate for the
variable rate security is typically determined by an index or an auction process, while the inverse floater holder receives the balance of the income from the underlying income-producing instrument less an auction fee. The market prices of inverse
floaters may be highly sensitive to changes in interest rates and prepayment rates on the underlying securities, and may decrease significantly when interest rates increase or prepayment rates change. In a transaction in which the Trust purchases an
inverse floater from a trust, and the underlying security was held by the Trust prior to being deposited into the trust, the Trust typically treats the transaction as a secured borrowing for financial reporting purposes. As a result, for financial
reporting purposes, the Trust will generally incur a non-cash interest expense with respect to interest paid by the trust on the variable rate securities and will recognize additional interest income in an
amount directly corresponding to the non-cash interest expense. Therefore, the Trusts net asset value (NAV) per common share and performance are not affected by the non-cash interest expense. This accounting treatment does not apply to inverse floaters acquired by the Trust when the Trust did not previously own the underlying bond.
Strategic Transactions and Other Management Techniques. In addition to the MBS derivatives discussed herein, the Trust
may use a variety of other investment management techniques and instruments. The Trust may purchase and sell futures contracts, enter into various interest rate transactions such as swaps, caps, floors or collars, currency transactions such as
currency forward contracts, currency futures contracts, currency swaps or options on currency or currency futures and swap contracts (including, but not limited to, credit default swaps) and may purchase and sell exchange-listed and OTC put and call
options on securities and swap contracts, financial indices and futures contracts and use other derivative instruments or management techniques (collectively, Strategic Transactions). These Strategic Transactions may be used for duration
management and other risk management purposes, including to attempt to protect against possible changes in the market value of the Trusts portfolio resulting from trends in the fixed-income securities markets and changes in interest rates or
to protect the Trusts unrealized gains in the value of its portfolio securities, to facilitate the sale of portfolio securities for investment purposes, to establish a position in the securities markets as a temporary substitute for purchasing
particular securities or to enhance income or gain. There is no particular strategy that requires use of one technique rather than another as the decision to use any particular strategy or instrument is a function of market conditions and the
composition of the portfolio. The use of Strategic Transactions to enhance current income may be speculative. The ability of the Trust to use Strategic Transactions successfully will depend on the Advisors ability to predict pertinent market
movements as well as sufficient correlation among the instruments, which cannot be assured. The use of Strategic Transactions may result in losses greater than if they had not been used, may require the Trust to sell or purchase portfolio securities
at inopportune times or for prices other than current market values, may limit the amount of appreciation the Trust can realize on an investment or may cause the Trust to hold a security that it might otherwise sell. Inasmuch as any obligations of
the Trust that arise from the use of Strategic Transactions will be covered by segregated or earmarked
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liquid assets or offsetting transactions, the Trust and the Advisors believe such obligations do not constitute senior securities and, accordingly, will not treat such transactions as being
subject to restrictions on senior securities under the Investment Company Act. Additionally, segregated or earmarked liquid assets, amounts paid by the Trust as premiums and cash or other assets held in margin accounts with respect to Strategic
Transactions are not otherwise available to the Trust for investment purposes. The SAI contains further information about the characteristics, risks and possible benefits of Strategic Transactions and the Trusts other policies and limitations
(which are not fundamental policies) relating to Strategic Transactions. Certain provisions of the Code may restrict or affect the ability of the Trust to engage in Strategic Transactions. In addition, the use of certain Strategic Transactions may
give rise to taxable income and have certain other consequences. See RisksStrategic Transactions and Derivatives Risk.
Credit Default Swaps. The Trust may enter into credit default swap agreements for hedging purposes or to seek to
increase income or gain. The credit default swap agreement may have as reference obligations one or more securities that are not currently held by the Trust. The protection buyer in a credit default contract may be obligated to pay the
protection seller an upfront or a periodic stream of payments over the term of the contract, provided that no credit event on the reference obligation occurs. If a credit event occurs, the seller generally must pay the buyer the
par value (full notional amount) of the swap in exchange for an equal face amount of deliverable obligations of the reference entity described in the swap, or if the swap is cash settled the seller may be required to deliver the related
net cash amount (the difference between the market value of the reference obligation and its par value). The Trust may be either the buyer or seller in the transaction. If the Trust is a buyer and no credit event occurs, the Trust will generally
receive no payments from its counterparty under the swap if the swap is held through its termination date. However, if a credit event occurs, the buyer generally may elect to receive the full notional amount of the swap in exchange for an equal face
amount of deliverable obligations of the reference entity, the value of which may have significantly decreased. As a seller, the Trust generally receives an upfront payment or a fixed rate of income throughout the term of the swap, which typically
is between six months and three years, provided that there is no credit event. If a credit event occurs, generally the seller must pay the buyer the full notional amount of the swap in exchange for an equal face amount of deliverable obligations of
the reference entity, the value of which may have significantly decreased. As the seller, the Trust would effectively add leverage to its portfolio because, in addition to its Managed Assets, the Trust would be subject to investment exposure on the
notional amount of the swap in excess of any premium and margin required to establish and maintain the position.
Credit
default swap agreements involve greater risks than if the Trust had taken a position in the reference obligation directly (either by purchasing or selling) since, in addition to general market risks, credit default swaps are subject to illiquidity
risk, counterparty risk and credit risks. A buyer generally will also lose its upfront payment or any periodic payments it makes to the seller counterparty and receive no payments from its counterparty should no credit event occur and the swap is
held to its termination date. If a credit event were to occur, the value of any deliverable obligation received by the seller, coupled with the upfront or periodic payments previously received, may be less than the full notional amount it pays to
the buyer, resulting in a loss of value to the seller. A seller of a credit default swap or similar instrument is exposed to many of the same risks of leverage since, if a credit event occurs, the seller generally will be required to pay the buyer
the full notional amount of the contract net of any amounts owed by the buyer related to its delivery of deliverable obligations. The Trusts obligations under a credit default swap agreement will be accrued daily (offset against any amounts
owed to the Trust). The Trust will at all times segregate or designate on its books and records in connection with each such transaction liquid assets or cash with a value at least equal to the Trusts exposure (any accrued but unpaid net
amounts owed by the Trust to any counterparty) on a marked-to-market basis (as required by the clearing organization with respect to cleared swaps or as calculated
pursuant to requirements of the SEC). If the Trust is a seller of protection in a credit default swap transaction, it will designate on its books and records in connection with such transaction liquid assets or cash with a value at least equal to
the full notional amount of the contract. Such designation will ensure that the Trust has assets available to satisfy its obligations with respect to the transaction and will avoid any potential leveraging of the Trusts portfolio. Such
designation will not limit the Trusts exposure to loss.
In addition, the credit derivatives market is subject to a
changing regulatory environment. It is possible that regulatory or other developments in the credit derivatives market could adversely affect the Trusts ability to successfully use credit derivatives.
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Structured Instruments. The Trust may use structured instruments for
investment purposes, for risk management purposes, such as to reduce the duration and interest rate sensitivity of the Trusts portfolio, and for leveraging purposes. While structured instruments may offer the potential for a favorable rate of
return from time to time, they also entail certain risks. Structured instruments may be less liquid than other fixed-income securities and the price of structured instruments may be more volatile. In some cases, depending on the terms of the
embedded index, a structured instrument may provide that the principal and/or interest payments may be adjusted below zero. Structured instruments also may involve significant credit risk and risk of default by the counterparty. Structured
instruments may also be illiquid. Like other sophisticated strategies, the Trusts use of structured instruments may not work as intended.
Structured Notes. The Trust may invest in structured notes and other related instruments, which are
privately negotiated debt obligations in which the principal and/or interest is determined by reference to the performance of a benchmark asset, market or interest rate (an embedded index), such as selected securities, an index of
securities or specified interest rates, or the differential performance of two assets or markets. Structured instruments may be issued by corporations, including banks, as well as by governmental agencies. Structured instruments frequently are
assembled in the form of medium-term notes, but a variety of forms are available and may be used in particular circumstances. The terms of such structured instruments normally provide that their principal and/or interest payments are to be adjusted
upwards or downwards (but ordinarily not below zero) to reflect changes in the embedded index while the structured instruments are outstanding. As a result, the interest and/or principal payments that may be made on a structured product may vary
widely, depending on a variety of factors, including the volatility of the embedded index and the effect of changes in the embedded index on principal and/or interest payments. The rate of return on structured notes may be determined by applying a
multiplier to the performance or differential performance of the referenced index(es) or other asset(s). Application of a multiplier involves leverage that will serve to magnify the potential for gain and the risk of loss.
Event-Linked Securities. The Trust may obtain event-linked exposure by investing in event-linked bonds or
event-linked swaps or by implementing event-linked strategies. Event-linked exposure results in gains or losses that typically are contingent upon, or formulaically related to, defined trigger events. Examples of trigger
events include hurricanes, earthquakes, weather-related phenomena or statistics relating to such events. Some event-linked bonds are commonly referred to as catastrophe bonds. If a trigger event occurs, the Trust may lose a portion of or
its entire principal invested in the bond or the entire notional amount of a swap. Event-linked exposure often provides for an extension of maturity to process and audit loss claims when a trigger event has, or possibly has, occurred. An extension
of maturity may increase volatility. Event-linked exposure may also expose the Trust to certain other risks including credit risk, counterparty risk, adverse regulatory or jurisdictional interpretations and adverse tax consequences. Event-linked
exposures may also be subject to illiquidity risk.
Equity-Linked Notes. Equity-linked notes (ELNs) are
hybrid securities with characteristics of both fixed-income and equity securities. An ELN is a debt instrument, usually a bond, that pays interest based upon the performance of an underlying equity, which can be a single stock, basket of stocks or
an equity index. Instead of paying a predetermined coupon, ELNs link the interest payment to the performance of a particular equity market index or basket of stocks or commodities. The interest payment is typically based on the percentage increase
in an index from a predetermined level, but alternatively may be based on a decrease in the index. The interest payment may in some cases be leveraged so that, in percentage terms, it exceeds the relative performance of the market. ELNs generally
are subject to the risks associated with the securities of equity issuers, default risk and counterparty risk.
Credit
Linked Notes. The Trust may invest in credit-linked notes (CLNs) for risk management purposes, including diversification. A CLN is a derivative instrument. It is a synthetic obligation between two or more parties where the payment of
principal and/or interest is based on the performance of some obligation (a reference obligation). In addition to the credit risk of the reference obligations and interest rate risk, the buyer/seller of the CLN is subject to counterparty risk.
Hybrid Instruments. A hybrid instrument is a type of potentially high-risk derivative that combines a traditional
bond, stock or commodity with an option or forward contract. Generally, the principal amount, amount payable upon maturity or redemption, or interest rate of a hybrid is tied (positively or negatively) to the price of some commodity, currency or
securities index or another interest rate or some other economic factor (each a
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benchmark). The interest rate or (unlike most fixed-income securities) the principal amount payable at maturity of a hybrid security may be increased or decreased, depending on
changes in the value of the benchmark. An example of a hybrid could be a bond issued by an oil company that pays a small base level of interest with additional interest that accrues in correlation to the extent to which oil prices exceed a certain
predetermined level. Such a hybrid instrument would be a combination of a bond and a call option on oil. Hybrids can be used as an efficient means of pursuing a variety of investment goals, including currency hedging, duration management and
increased total return. Hybrids may not bear interest or pay dividends. The value of a hybrid or its interest rate may be a multiple of a benchmark and, as a result, may be leveraged and move (up or down) more steeply and rapidly than the benchmark.
These benchmarks may be sensitive to economic and political events, such as commodity shortages and currency devaluations, which cannot be readily foreseen by the purchaser of a hybrid. Under certain conditions, the redemption value of a hybrid
could be zero. Thus, an investment in a hybrid may entail significant market risks that are not associated with a similar investment in a traditional, U.S. dollar-denominated bond that has a fixed principal amount and pays a fixed rate or floating
rate of interest. The purchase of hybrids also exposes the Trust to the credit risk of the issuer of the hybrids. These risks may cause significant fluctuations in the NAV of the Trusts common shares if the Trust invests in hybrid instruments.
Interest Rate Transactions. The Trust may enter into interest rate swaps and purchase or sell interest rate
caps and floors. The Trust expects to enter into these transactions primarily to preserve a return or spread on a particular investment or portion of its portfolio, as a duration management technique, to protect against any increase in the price of
securities the Trust anticipates purchasing at a later date and/or to hedge against increases in the Trusts costs associated with any leverage strategy. The Trust will ordinarily use these transactions as a hedge or for duration and risk
management although it is permitted to enter into them to enhance income or gain. Interest rate swaps involve the exchange by the Trust with another party of their respective commitments to pay or receive interest (e.g., an exchange of floating rate
payments for fixed rate payments with respect to a notional amount of principal). The purchase of an interest rate cap entitles the purchaser, to the extent that the level of a specified interest rate exceeds a predetermined interest rate (i.e., the
strike price), to receive payments of interest on a notional principal amount from the party selling such interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that the level of a specified interest rate
falls below a predetermined interest rate (i.e., the strike price), to receive payments of interest on a notional principal amount from the party selling such interest rate floor.
For example, if the Trust holds a debt instrument with an interest rate that is reset only once each year, it may swap the
right to receive interest at this fixed rate for the right to receive interest at a rate that is reset every week. This would enable the Trust to offset a decline in the value of the debt instrument due to rising interest rates but would also limit
its ability to benefit from falling interest rates. Conversely, if the Trust holds a debt instrument with an interest rate that is reset every week and it would like to lock in what it believes to be a high interest rate for one year, it may swap
the right to receive interest at this variable weekly rate for the right to receive interest at a rate that is fixed for one year. Such a swap would protect the Trust from a reduction in yield due to falling interest rates and may permit the Trust
to enhance its income through the positive differential between one week and one year interest rates, but would preclude it from taking full advantage of rising interest rates.
The Trust may hedge both its assets and liabilities through interest rate swaps, caps and floors. Usually, payments with
respect to interest rate swaps will be made on a net basis (i.e., the two payment streams are netted out) with the Trust receiving or paying, as the case may be, only the net amount of the two payments on the payment dates. The Trust will accrue the
net amount of the excess, if any, of the Trusts obligations over its entitlements with respect to each interest rate swap on a daily basis and will segregate with a custodian or designate on its books and records an amount of cash or liquid
assets having an aggregate NAV at all times at least equal to the accrued excess. If there is a default by the other party to an uncleared interest rate swap transaction, generally the Trust will have contractual remedies pursuant to the agreements
related to the transaction. With respect to interest rate swap transactions cleared through a central clearing counterparty, a clearing organization will be substituted for the counterparty and will guaranty the parties performance under the
swap agreement. However, there can be no assurance that the clearing organization will satisfy its obligation to the Trust or that the Trust would be able to recover the full amount of assets deposited on its behalf with the clearing organization in
the event of the default by the clearing organization or the Trusts clearing broker. [Certain U.S. federal income tax requirements may limit the Trusts ability to engage in interest rate swaps. Distributions attributable to transactions
in interest rate swaps generally will be taxable as ordinary income to shareholders.]
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Repurchase Agreements. The Trust may enter into
repurchase agreements. A repurchase agreement is a contractual agreement whereby the seller of securities agrees to repurchase the same security at a specified price on a future date agreed upon by the parties. The agreed upon repurchase price
determines the yield during the Trusts holding period. Repurchase agreements are considered to be loans collateralized by the underlying security that is the subject of the repurchase contract. Income generated from transactions in repurchase
agreements will be taxable. The Trust will only enter into repurchase agreements with registered securities dealers or domestic banks that, in the opinion of the Advisors, present minimal credit risk. The risk to the Trust is limited to the ability
of the issuer to pay the agreed upon repurchase price on the delivery date; however, although the value of the underlying collateral at the time the transaction is entered into always equals or exceeds the agreed upon repurchase price, if the value
of the collateral declines there is a risk of loss of both principal and interest. In the event of default, the collateral may be sold but the Trust might incur a loss if the value of the collateral declines, and might incur disposition costs or
experience delays in connection with liquidating the collateral. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, realization upon the collateral by the Trust may be delayed or limited. The Advisors
will monitor the value of the collateral at the time the transaction is entered into and at all times subsequent during the term of the repurchase agreement in an effort to determine that such value always equals or exceeds the agreed upon
repurchase price. In the event the value of the collateral declines below the repurchase price, the Advisors will demand additional collateral from the issuer to increase the value of the collateral to at least that of the repurchase price,
including interest.
Reverse Repurchase Agreements. The Trust may enter into reverse repurchase agreements
with respect to its portfolio investments subject to the investment restrictions set forth herein. Reverse repurchase agreements involve the sale of securities held by the Trust with an agreement by the Trust to repurchase the securities at an
agreed upon price, date and interest payment. At the time the Trust enters into a reverse repurchase agreement, it may establish and maintain a segregated account with the custodian containing, or designate on its books and records, cash and/or
liquid assets having a value not less than the repurchase price (including accrued interest). If the Trust establishes and maintains such a segregated account, or earmarks such assets as described, a reverse repurchase agreement will not be
considered a senior security under the Investment Company Act but will constitute leverage; however, under certain circumstances in which the Trust does not establish and maintain such a segregated account, or earmark such assets on its books and
records, such reverse repurchase agreement will be considered a senior security for the purpose of the limitation under the Investment Company Act on issuing senior securities discussed above. Reverse repurchase agreements involve the risk that the
market value of the securities acquired in connection with the reverse repurchase agreement may decline below the price of the securities the Trust has sold but is obligated to repurchase. Also, reverse repurchase agreements involve the risk that
the market value of the securities retained in lieu of sale by the Trust in connection with the reverse repurchase agreement may decline in price. Effective August 19, 2022, certain asset segregation requirements will be replaced by the
requirements under the newly adopted Rule 18f-4 as described in this prospectus. See RisksStrategic Transactions and Derivatives.
If the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its
trustee or receiver may receive an extension of time to determine whether to enforce the Trusts obligation to repurchase the securities and the Trusts use of the proceeds of the reverse repurchase agreement may effectively be restricted
pending such decision. Also, the Trust would bear the risk of loss to the extent that the proceeds of the reverse repurchase agreement are less than the value of the securities subject to such agreement.
The Trust also may effect simultaneous purchase and sale transactions that are known as sale-buybacks. A
sale-buyback is similar to a reverse repurchase agreement, except that in a sale-buyback, the counterparty that purchases the security is entitled to receive any principal or interest payments made on the underlying security pending settlement of
the Trusts repurchase of the underlying security.
Dollar Rolls. The Trust may enter into dollar
roll transactions. In a dollar roll transaction, the Trust sells a mortgage related or other security to a dealer and simultaneously agrees to repurchase a similar security (but not the same security) in the future at a pre-determined price. A dollar roll transaction can be viewed, like a reverse repurchase agreement, as a collateralized borrowing in which the Trust pledges a mortgage related security to a dealer to obtain cash.
However, unlike reverse repurchase agreements, the dealer with which the Trust enters into a dollar roll transaction is not obligated to return the same securities as those originally sold by the Trust, but rather only securities which are
substantially identical, which generally means that the securities repurchased will bear the same interest rate and a similar maturity as those sold, but the pools of mortgages collateralizing those securities may have different
prepayment histories than those sold.
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During the period between the sale and repurchase, the Trust will not be entitled
to receive interest and principal payments on the securities sold. Proceeds of the sale will be invested in additional instruments for the Trust and the income from these investments will generate income for the Trust. If such income does not exceed
the income, capital appreciation and gain that would have been realized on the securities sold as part of the dollar roll, the use of this technique will diminish the investment performance of the Trust compared with what the performance would have
been without the use of dollar rolls.
At the time the Trust enters into a dollar roll transaction, it may establish and
maintain a segregated account with the custodian containing, or designate on its books and records, cash and/or liquid assets having a value not less than the repurchase price (including accrued interest). If the Trust establishes and maintains such
a segregated account, or earmarks such assets as described, a dollar roll transaction will not be considered a senior security under the Investment Company Act but will constitute leverage; however, under certain circumstances in which the Trust
does not establish and maintain such a segregated account, or earmark such assets on its books and records, such dollar roll transaction will be considered a borrowing for the purpose of the limitation under the Investment Company Act on issuing
senior securities discussed above.
Dollar roll transactions involve the risk that the market value of the securities the
Trust is required to purchase may decline below the agreed upon repurchase price of those securities. The Trusts right to purchase or repurchase securities may be restricted. Successful use of mortgage dollar rolls may depend upon the
investment managers ability to correctly predict interest rates and prepayments. There is no assurance that dollar rolls can be successfully employed.
Other Investment Companies. The Trust may invest in securities of other investment companies (including ETFs, BDCs and
money market funds, including other investment companies managed by the Advisor or its affiliates), subject to applicable regulatory limits, that invest primarily securities of the types in which the Trust may invest directly. The Trust generally
expects to invest in other investment companies either during periods when it has large amounts of uninvested cash, such as the period shortly after the Trust receives the proceeds of the offering of its common shares (or preferred shares, should
the Trust determine to issue preferred shares in the future), or during periods when there is a shortage of attractive fixed income securities available in the market. As a shareholder in an investment company, the Trust will bear its ratable share
of that investment companys expenses and will remain subject to payment of the Trusts advisory and other fees and expenses with respect to assets so invested. Holders of common shares will therefore be subject to duplicative expenses to
the extent the Trust invests in other investment companies (except that it will not be subject to duplicate advisory fees with respect to other investment companies managed by the Advisor or its affiliates). The Advisors will take expenses into
account when evaluating the investment merits of an investment in an investment company relative to available equity and/or fixed-income securities investments. In addition, the securities of other investment companies may be leveraged and will
therefore be subject to the same leverage risks to which the Trust may be subject to the extent it employs a leverage strategy. As described in the sections entitled Risks and Leverage, the NAV and market value of leveraged
shares will be more volatile and the yield to shareholders will tend to fluctuate more than the yield generated by unleveraged shares.
Investment companies may have investment policies that differ from those of the Trust. In addition, to the extent the Trust
invests in other investment companies that are not managed by the Advisor or its affiliates, the Trust will be dependent upon the investment and research abilities of persons other than the Advisors.
The Trust may invest in ETFs, which are investment companies that typically aim to track or replicate a desired index, such as
a sector, market or global segment. ETFs are typically passively managed and their shares are traded on a national exchange or The NASDAQ Stock Market, Inc. ETFs do not sell individual shares directly to investors and only issue their shares in
large blocks known as creation units. The investor purchasing a creation unit may sell the individual shares on a secondary market. Therefore, the liquidity of ETFs depends on the adequacy of the secondary market. There can be no
assurance that an ETFs investment objective will be achieved, as ETFs based on an index may not replicate and maintain exactly the composition and relative weightings of securities in the index. ETFs are subject to the risks of investing in
the underlying securities. The Trust, as a holder of the securities of the
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ETF, will bear its pro rata portion of the ETFs expenses, including advisory fees (except that it will not be subject to duplicate advisory fees with respect to ETFs managed by the Advisor
or its affiliates). These expenses are in addition to the direct expenses of the Trusts own operations.
The Trust
treats its investments in other investment companies that invest substantially all of their assets in fixed income securities as investments in fixed income securities.
Short-Term Debt Securities; Temporary Defensive Positions; Invest-Up
Period. During temporary defensive periods (e.g., times when, in the Advisors opinion, temporary imbalances of supply and demand or other temporary dislocations in the market adversely affect the price at which fixed income securities
are available, or in connection with the termination of the Trust) and in order to keep cash on hand fully invested, including the period during which the net proceeds of this offering of common shares (or preferred shares, should the Trust
determine to issue preferred shares in the future) are being invested, the Trust may invest any percentage of its assets in liquid, short-term investments including high quality, short-term securities and securities of other open- or closed-end investment companies that invest primarily in securities of the type in which the Trust may invest directly. See Investment Policies and TechniquesCash Equivalents and Short-Term Debt
Securities in the SAI. The Advisors determination that they are temporarily unable to follow the Trusts investment strategy or that it is impractical to do so will generally occur only in situations in which a market disruption
event has occurred and where trading in the securities selected through application of the Trusts investment strategy is extremely limited or absent or in connection with the termination of the Trust.
Securities Lending. The Trust may lend portfolio securities to certain borrowers determined to be creditworthy by
the Advisors, including to borrowers affiliated with the Advisors. The borrowers provide collateral that is maintained in an amount at least equal to the current market value of the securities loaned. No securities loan will be made on behalf of the
Trust if, as a result, the aggregate value of all securities loans of the Trust exceeds one-third of the value of the Trusts total assets (including the value of the collateral received). The Trust may
terminate a loan at any time and obtain the return of the securities loaned. The Trust receives the value of any interest or cash or non-cash distributions paid on the loaned securities.
With respect to loans that are collateralized by cash, the borrower may be entitled to receive a fee based on the amount of
cash collateral. The Trust is compensated by the difference between the amount earned on the reinvestment of cash collateral and the fee paid to the borrower. In the case of collateral other than cash, the Trust is compensated by a fee paid by the
borrower equal to a percentage of the market value of the loaned securities. Any cash collateral received by the Trust for such loans, and uninvested cash, may be invested, among other things, in a private investment company managed by an affiliate
of the Advisors or in registered money market funds advised by the Advisors or their affiliates; such investments are subject to investment risk.
The Trust conducts its securities lending pursuant to an exemptive order from the SEC permitting it to lend portfolio
securities to borrowers affiliated with the Trust and to retain an affiliate of the Trust as lending agent. To the extent that the Trust engages in securities lending, BlackRock Investment Management, LLC (BIM), an affiliate of the
Advisors, acts as securities lending agent for the Trust, subject to the overall supervision of the Advisors. BIM administers the lending program in accordance with guidelines approved by the Board. Pursuant to the current securities lending
agreement, BIM may lend securities only when the difference between the borrower rebate rate and the risk free rate exceeds a certain level.
To the extent that the Trust engages in securities lending, the Trust retains a portion of securities lending income and
remits a remaining portion to BIM as compensation for its services as securities lending agent. Securities lending income is equal to the total of income earned from the reinvestment of cash collateral (and excludes collateral investment expenses as
defined below), and any fees or other payments to and from borrowers of securities. As securities lending agent, BIM bears all operational costs directly related to securities lending. The Trust is responsible for expenses in connection with the
investment of cash collateral received for securities on loan in a private investment company managed by an affiliate of the Advisors (the collateral investment expenses); however, BIM has agreed to cap the collateral investment expenses
the Trust bears to an annual rate of 0.04% of the daily net assets of such private investment company. In addition, in accordance with the exemptive order, the investment adviser to the private investment company will not charge any advisory fees
with respect to shares purchased by the Trust. Such shares also will not be subject to a sales load, redemption fee, distribution fee or service fee.
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Pursuant to the current securities lending agreement, the Trust retains 82% of
securities lending income (which excludes collateral investment expenses).
In addition, commencing the business day
following the date that the aggregate securities lending income earned across the BlackRock Fixed-Income Complex (as defined in the SAI) in a calendar year exceeds the breakpoint dollar threshold applicable in the given year, the Trust, pursuant to
the current securities lending agreement, will receive for the remainder of that calendar year securities lending income in an amount equal to 85% of securities lending income (which excludes collateral investment expenses).
Short Sales. The Trust may make short sales of securities. A short sale is a transaction in which the Trust sells a
security it does not own in anticipation that the market price of that security will decline. The Trust may make short sales to hedge positions, for duration and risk management, in order to maintain portfolio flexibility or to enhance income or
gain. When the Trust makes a short sale, it must borrow the security sold short and deliver it to the broker-dealer through which it made the short sale as collateral for its obligation to deliver the security upon conclusion of the sale. The Trust
may have to pay a fee to borrow particular securities and is often obligated to pay over any payments received on such borrowed securities. The Trusts obligation to replace the borrowed security will be secured by collateral deposited with the
broker-dealer, usually cash, U.S. Government securities or other liquid securities. The Trust will also be required to designate on its books and records similar collateral with its custodian to the extent, if any, necessary so that the
aggregate collateral value is at all times at least equal to the current market value of the security sold short. Depending on arrangements made with the broker-dealer from which it borrowed the security regarding payment over of any payments
received by the Trust on such security, the Trust may not receive any payments (including interest) on its collateral deposited with such broker-dealer. If the price of the security sold short increases between the time of the short sale and the
time the Trust replaces the borrowed security, the Trust will incur a loss; conversely, if the price declines, the Trust will realize a gain. Any gain will be decreased, and any loss increased, by the transaction costs described above. Although the
Trusts gain is limited to the price at which it sold the security short, its potential loss is theoretically unlimited. The Trust will not make a short sale if, after giving effect to such sale, the market value of all securities sold short
exceeds 25% of the value of its Managed Assets or the Trusts aggregate short sales of a particular class of securities exceeds 25% of the outstanding securities of that class. The Trust may also make short sales against the box
without respect to such limitations. In this type of short sale, at the time of the sale, the Trust owns or has the immediate and unconditional right to acquire at no additional cost the identical security.
When-Issued, Delayed Delivery Securities and Forward Commitment Securities. The Trust may
purchase securities on a when-issued basis and may purchase or sell securities on a forward commitment basis (including on a TBA (to be announced) basis) or on a delayed delivery basis. When such
transactions are negotiated, the price, which is generally expressed in yield terms, is fixed at the time the commitment is made, but delivery and payment for the securities take place at a later date. When-issued securities and forward commitments
may be sold prior to the settlement date. If the Trust disposes of the right to acquire a when-issued security prior to its acquisition or disposes of its right to deliver or receive against a forward commitment, it might incur a gain or loss. At
the time the Trust enters into a transaction on a when-issued or forward commitment basis, it will designate on its books and records cash or liquid assets with a value not less than the value of the when-issued or forward commitment securities. The
value of these assets will be monitored daily to ensure that their marked to market value will at all times equal or exceed the corresponding obligations of the Trust. Pursuant to recommendations of the Treasury Market Practices Group, which is
sponsored by the Federal Reserve Board of New York, the Trust or its counterparty generally is required to post collateral when entering into certain forward-settling transactions, including without limitation TBA transactions.
There is always a risk that the securities may not be delivered and that the Trust may incur a loss. A default by a
counterparty may result in the Trust missing the opportunity of obtaining a price considered to be advantageous. The value of securities in these transactions on the delivery date may be more or less than the Trusts purchase price. The Trust
may bear the risk of a decline in the value of the security in these transactions and may not benefit from an appreciation in the value of the security during the commitment period. Settlements in the ordinary course are not treated by the Trust as
when-issued or forward commitment transactions and accordingly are not subject to the foregoing restrictions.
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The market value of the securities underlying a commitment to purchase
securities, and any subsequent fluctuations in their market value, is taken into account when determining the NAV of the Trust starting on the day the Trust agrees to purchase the securities. The Trust does not earn interest on the securities it has
committed to purchase until they are paid for and delivered on the settlement date.
LEVERAGE
The Trust currently leverages its assets through the use of reverse
repurchase agreements and/or dollar rolls. The Trust currently does not intend to borrow money or issue debt securities or preferred shares. Although it has no present intention to do so, the Trust reserves the right to borrow money from banks or
other financial institutions or issue debt securities or preferred shares in the future if it believes that market conditions would be conducive to the successful implementation of a leveraging strategy through borrowing money or issuing debt
securities or preferred shares. The Trust is permitted to use leverage of up to 50% of its Managed Assets.
The use of
leverage, if employed, can create risks. When leverage is employed, the NAV and market price of the common shares and the yield to holders of common shares will be more volatile than if leverage were not used. Changes in the value of the
Trusts portfolio, including securities bought with the proceeds of leverage, will be borne entirely by the holders of common shares. If there is a net decrease or increase in the value of the Trusts investment portfolio, leverage will
decrease or increase, as the case may be, the NAV per common share to a greater extent than if the Trust did not utilize leverage. A reduction in the Trusts NAV may cause a reduction in the market price of its shares. During periods in which
the Trust is using leverage, the fees paid to the Advisors for advisory and sub-advisory services will be higher than if the Trust did not use leverage, because the fees paid will be calculated on the basis of
the Trusts Managed Assets, which includes the proceeds from leverage. Any leveraging strategy the Trust employs may not be successful. See RisksLeverage Risk.
Certain types of leverage the Trust may use may result in the Trust being subject to covenants relating to asset coverage and
portfolio composition requirements. The Trust may be subject to certain restrictions on investments imposed by one or more lenders or by guidelines of one or more rating agencies, which may issue ratings for any short-term debt securities or
preferred shares issued by the Trust. The terms of any borrowings or rating agency guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed by the Investment Company Act. The Advisor does
not believe that these covenants or guidelines will impede it from managing the Trusts portfolio in accordance with its investment objectives and policies if the Trust were to utilize leverage.
Under the Investment Company Act, the Trust is not permitted to issue senior securities if, immediately after the issuance of
such senior securities, the Trust would have an asset coverage ratio (as defined in the Investment Company Act) of less than 300% with respect to senior securities representing indebtedness (i.e., for every dollar of indebtedness outstanding, the
Trust is required to have at least three dollars of assets) or less than 200% with respect to senior securities representing preferred stock (i.e., for every dollar of preferred stock outstanding, the Trust is required to have at least two dollars
of assets). The Investment Company Act also provides that the Trust may not declare distributions or purchase its stock (including through tender offers) if, immediately after doing so, it will have an asset coverage ratio of less than 300% or 200%,
as applicable. Under the Investment Company Act, certain short-term borrowings (such as for cash management purposes) are not subject to these limitations if (i) repaid within 60 days, (ii) not extended or renewed and (iii) not in
excess of 5% of the total assets of the Trust.
Reverse Repurchase Agreements
Borrowings may be made by the Trust through reverse repurchase agreements under which the Trust sells portfolio securities to
financial institutions, such as banks and broker-dealers, and agrees to repurchase them at an agreed upon date and price. Such agreements are considered to be borrowings under the Investment Company Act. The Trust may utilize reverse repurchase
agreements when it is anticipated that the interest income to be earned from the investment of the proceeds of the transaction is greater than the interest expense of the transaction.
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Dollar Roll Transactions
The Trust may enter into dollar roll transactions. In a dollar roll transaction, the Trust sells a mortgage related
or other security to a dealer and simultaneously agrees to repurchase a similar security (but not the same security) in the future at a pre-determined price. A dollar roll transaction can be viewed, like a
reverse repurchase agreement, as a collateralized borrowing in which the Trust pledges a mortgage related security to a dealer to obtain cash. However, unlike reverse repurchase agreements, the dealer with which the Trust enters into a dollar roll
transaction is not obligated to return the same securities as those originally sold by the Trust, but rather only securities which are substantially identical, which generally means that the securities repurchased will bear the same
interest rate and a similar maturity as those sold, but the pools of mortgages collateralizing those securities may have different prepayment histories than those sold.
During the period between the sale and repurchase, the Trust will not be entitled to receive interest and principal payments
on the securities sold. Proceeds of the sale will be invested in additional instruments for the Trust and the income from these investments will generate income for the Trust. If such income does not exceed the income, capital appreciation and gain
that would have been realized on the securities sold as part of the dollar roll, the use of this technique will diminish the investment performance of the Trust compared with what the performance would have been without the use of dollar rolls.
At the time the Trust enters into a dollar roll transaction, it may establish and maintain a segregated account with the
custodian containing, or designate on its books and records, cash and/or liquid assets having a value not less than the repurchase price (including accrued interest). If the Trust establishes and maintains such a segregated account, or earmarks such
assets as described, a dollar roll transaction will not be considered a senior security under the Investment Company Act but will constitute leverage; however, under certain circumstances in which the Trust does not establish and maintain such a
segregated account, or earmark such assets on its books and records, such dollar roll transaction will be considered a borrowing for the purpose of the limitation under the Investment Company Act on issuing senior securities discussed above.
Dollar roll transactions involve the risk that the market value of the securities the Trust is required to purchase may
decline below the agreed upon repurchase price of those securities. The Trusts right to purchase or repurchase securities may be restricted. Successful use of mortgage dollar rolls may depend upon the investment managers ability to
correctly predict interest rates and prepayments. There is no assurance that dollar rolls can be successfully employed.
Credit Facility
The Trust may borrow through a credit facility. If the Trust enters into a credit facility, the Trust may be required to prepay
outstanding amounts or incur a penalty rate of interest upon the occurrence of certain events of default. The Trust would also likely have to indemnify the lenders under the credit facility against liabilities they may incur in connection therewith.
In addition, the Trust expects that any credit facility would contain covenants that, among other things, likely would limit the Trusts ability to pay distributions in certain circumstances, incur additional debt, change certain of its
investment policies and engage in certain transactions, including mergers and consolidations, and require asset coverage ratios in addition to those required by the Investment Company Act. The Trust may be required to pledge its assets and to
maintain a portion of its assets in cash or high-grade securities as a reserve against interest or principal payments and expenses. The Trust expects that any credit facility would have customary covenant, negative covenant and default provisions.
There can be no assurance that the Trust will enter into an agreement for a credit facility or one on terms and conditions representative of the foregoing, or that additional material terms will not apply. In addition, if entered into, a credit
facility may in the future be replaced or refinanced by one or more credit facilities having substantially different terms or by the issuance of preferred shares.
Preferred Shares
The
Trust is permitted to leverage its portfolio by issuing preferred shares. Under the Investment Company Act, the Trust is not permitted to issue preferred shares if, immediately after such issuance, the liquidation value of the Trusts
outstanding preferred shares exceeds 50% of its assets (including the proceeds from the issuance) less liabilities other than borrowings (i.e., the value of the Trusts assets must be at least 200% of the liquidation value of
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its outstanding preferred shares). In addition, the Trust would not be permitted to declare any cash dividend or other distribution on its common shares unless, at the time of such declaration,
the value of the Trusts assets less liabilities other than borrowings is at least 200% of such liquidation value.
The Trust expects that preferred shares, if issued, will pay adjustable rate dividends based on shorter-term interest rates,
which would be redetermined periodically by a fixed spread or remarketing process, subject to a maximum rate which would increase over time in the event of an extended period of unsuccessful remarketing. The adjustment period for preferred share
dividends could be as short as one day or as long as a year or more. Preferred shares, if issued, could include a liquidity feature that allows holders of preferred shares to have their shares purchased by a liquidity provider in the event that sell
orders have not been matched with purchase orders and successfully settled in a remarketing. The Trust expects that it would pay a fee to the provider of this liquidity feature, which would be borne by common shareholders of the Trust. The terms of
such liquidity feature could require the Trust to redeem preferred shares still owned by the liquidity provider following a certain period of continuous, unsuccessful remarketing, which may adversely impact the Trust.
If preferred shares are issued, the Trust may, to the extent possible, purchase or redeem preferred shares from time to time
to the extent necessary in order to maintain asset coverage of any preferred shares of at least 200%. In addition, as a condition to obtaining ratings on the preferred shares, the terms of any preferred shares issued are expected to include asset
coverage maintenance provisions which will require the redemption of the preferred shares in the event of non-compliance by the Trust and may also prohibit dividends and other distributions on the
common shares in such circumstances. In order to meet redemption requirements, the Trust may have to liquidate portfolio securities. Such liquidations and redemptions would cause the Trust to incur related transaction costs and could result in
capital losses to the Trust. Prohibitions on dividends and other distributions on the common shares could impair the Trusts ability to qualify as a regulated investment company (RIC) under the Code. If the Trust has preferred
shares outstanding, two of the Trustees will be elected by the holders of preferred shares voting separately as a class. The remaining Trustees will be elected by holders of common shares and preferred shares voting together as a single class. In
the event the Trust failed to pay dividends on preferred shares for two years, holders of preferred shares would be entitled to elect a majority of the Trustees.
If the Trust issues preferred shares, the Trust expects that it will be subject to certain restrictions imposed by guidelines
of one or more rating agencies that may issue ratings for preferred shares issued by the Trust. These guidelines are expected to impose asset coverage or portfolio composition requirements that are more stringent than those imposed on the Trust by
the Investment Company Act. It is not anticipated that these covenants or guidelines would impede the Advisors from managing the Trusts portfolio in accordance with the Trusts investment objectives and policies.
Derivatives
The Trust
may enter into derivative transactions that have economic leverage embedded in them. Derivative transactions that the Trust may enter into and the risks associated with them are described elsewhere in this Prospectus and are also referred to as
Strategic Transactions. The Trust cannot assure you that investments in derivative transactions that have economic leverage embedded in them will result in a higher return on its common shares.
To the extent the terms of such transactions obligate the Trust to make payments, the Trust may earmark or segregate cash or
liquid assets in an amount at least equal to the current value of the amount then payable by the Trust under the terms of such transactions or otherwise cover such transactions in accordance with applicable interpretations of the staff of the SEC.
If the current value of the amount then payable by the Trust under the terms of such transactions is represented by the notional amounts of such investments, the Trust would segregate or earmark cash or liquid assets having a market value at least
equal to such notional amounts, and if the current value of the amount then payable by the Trust under the terms of such transactions is represented by the market value of the Trusts current obligations, the Trust would segregate or earmark
cash or liquid assets having a market value at least equal to such current obligations. To the extent the terms of such transactions obligate the Trust to deliver particular securities to extinguish the Trusts obligations under such
transactions the Trust may cover its obligations under such transactions by either (i) owning the securities or collateral underlying such transactions or (ii) having an absolute and immediate right to acquire such securities
or collateral without additional cash
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consideration (or, if additional cash consideration is required, having earmarked or segregated an appropriate amount of cash or liquid assets). Such earmarking, segregation or cover is intended
to provide the Trust with available assets to satisfy its obligations under such transactions. As a result of such earmarking, segregation or cover, the Trusts obligations under such transactions will not be considered senior securities
representing indebtedness for purposes of the Investment Company Act, or considered borrowings subject to the Trusts limitations on borrowings discussed above, but may create leverage for the Trust. To the extent that the Trusts
obligations under such transactions are not so earmarked, segregated or covered, such obligations may be considered senior securities representing indebtedness under the Investment Company Act and therefore subject to the 300% asset
coverage requirement.
These earmarking, segregation or cover requirements can result in the Trust maintaining securities
positions it would otherwise liquidate, segregating or earmarking assets at a time when it might be disadvantageous to do so or otherwise restrict portfolio management.
On October 28, 2020, the SEC adopted new regulations governing the use of derivatives by registered investment companies (Rule 18f-4). The Trust will be required to implement and comply with Rule 18f-4 by August 19, 2022. Once implemented, Rule 18f-4 will impose limits on the amount of derivatives a fund can enter into, eliminate the asset segregation framework currently used by funds to comply with Section 18 of the Investment Company
Act, treat derivatives as senior securities and require funds whose use of derivatives is more than a limited specified exposure amount to establish and maintain a comprehensive derivatives risk management program and appoint a derivatives risk
manager.
Temporary Borrowings
The Trust may also borrow money as a temporary measure for extraordinary or emergency purposes, including the payment of
dividends and the settlement of securities transactions which otherwise might require untimely dispositions of Trust securities.
RISKS
The NAV and market price of, and dividends
paid on, the common shares will fluctuate with and be affected by, among other things, the risks of investing in the Trust.
General Risks
Please refer to the section
of the Trusts most recent annual report on Form N-CSR entitled Investment Objectives, Policies and RisksRisk Factors, which is incorporated by reference herein, for a discussion of
the general risks of investing in the Trust.
Other Risks
Risk Associated with Recent Market Events
In response to the financial crisis and recent market events , the United States and other governments and the Federal Reserve
and certain foreign central banks have taken steps to support financial markets. Policy and legislative changes by the U.S. government and the Federal Reserve to assist in the ongoing support of financial markets, both domestically and in other
countries, are changing many aspects of financial regulation. The impact of these changes on the markets, and the practical implications for market participants, may not be fully known for some time. In some countries where economic conditions are
recovering, such countries are nevertheless perceived as still fragile. Withdrawal of government support, failure of efforts in response to the crisis, or investor perception that such efforts are not succeeding, could adversely impact the value and
liquidity of certain investments. The severity or duration of adverse economic conditions may also be affected by policy changes made by governments or quasi-governmental organizations, including changes in tax laws and the imposition of trade
barriers. The impact of new financial regulation legislation on the markets and the practical implications for market participants may not be fully known for some time. Changes to the Federal Reserve policy, including with respect to certain
interest rates, may affect the value, volatility and liquidity of dividend and interest paying securities. Regulatory changes are causing some financial services companies to exit long-standing lines of business, resulting in dislocations for other
market participants.
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In addition, the current contentious domestic political environment, as well as
political and diplomatic events in the United States and abroad, such as presidential elections in the United States or the U.S. governments inability at times to agree on a long-term budget and deficit reduction plan, has in the past
resulted, and may in the future result, in adverse consequences (including a government shutdown) to the U.S. regulatory landscape, the general market environment and/or investment sentiment, which could negatively impact the Trusts
investments and operations. Such adverse consequences may affect investor and/or consumer confidence and may adversely impact financial markets and the broader economy, potentially to a significant degree. In recent years, some countries, including
the United States, have adopted and/or are considering the adoption of more protectionist trade policies and/or a move away from tight financial industry regulations, including but not limited to, direct capital infusions into companies, new
monetary programs and dramatically lower interest rates, that were previously adopted in response to serious economic disruptions. The exact shape of these policies is still being considered, but the equity and debt markets may react strongly to
expectations of change, which could increase volatility, especially if the markets expectations are not borne out and an unexpected or sudden reversal of these policies, could increase volatility in securities markets, which could adversely
affect the Trusts investments or prevent the Trust from executing on advantageous investment opportunities in a timely manner. A rise in protectionist trade policies, and the possibility of changes to some international trade agreements, could
affect the economies of many nations in ways that cannot necessarily be foreseen at the present time. In addition, geopolitical and other risks, including environmental and public health, may add to instability in world economies and markets
generally. Economies and financial markets throughout the world are becoming increasingly interconnected. As a result, whether or not the Trust invests in securities of issuers located in or with significant exposure to countries experiencing
economic, political and/or financial difficulties, the value and liquidity of the Trusts investments may be negatively affected by such events.
An outbreak of respiratory disease caused by a novel coronavirus was first detected in China in December 2019 and developed
into a global pandemic. This pandemic has resulted in closing borders, enhanced health screenings, healthcare service preparation and delivery, quarantines, cancellations, disruptions to supply chains and customer activity, as well as general
concern and uncertainty. Disruptions in markets can adversely impact the Trust and its investments. Further, certain local markets have been or may be subject to closures, and there can be no certainty regarding whether trading will continue in any
local markets in which the Trust may invest, when any resumption of trading will occur or, once such markets resume trading, whether they will face further closures. Any suspension of trading in markets in which the Trust invests will have an impact
on the Trust and its investments and will impact the Trusts ability to purchase or sell securities in such market. The impact of this pandemic has adversely affected the economies of many nations and the entire global economy and may impact
individual issuers and capital markets in ways that cannot be foreseen. Public health crises caused by the pandemic may exacerbate other preexisting political, social and economic risks in certain countries or globally. Other infectious illness
outbreaks that may arise in the future could have similar or other unforeseen effects. The duration of this pandemic or others and their effects cannot be determined with certainty.
LIBOR Risk
The Trust may
be exposed to financial instruments that are tied to LIBOR to determine payment obligations, financing terms, hedging strategies or investment value. The Trusts investments may pay interest at floating rates based on LIBOR or may be subject to
interest caps or floors based on LIBOR. The Trust may also obtain financing at floating rates based on LIBOR. Derivative instruments utilized by the Trust may also reference LIBOR.
The United Kingdoms Financial Conduct Authority announced a phase out of LIBOR such that after June 30, 2023, the
overnight, 1-month, 3-month, 6-month and 12-month U.S. dollar LIBOR settings will cease
to be published or will no longer be representative. All other LIBOR settings and certain other interbank offered rates, such as the Euro Overnight Index Average (EONIA), ceased to be published or representative after December 31,
2021. The Trust may have investments linked to other interbank offered rates that may also cease to be published in the future. Various financial industry groups have been planning for the transition away from LIBOR, but there remain challenges to
converting certain securities and transactions to a new reference rate (e.g., the Secured Overnight Financing Rate (SOFR), which is intended to replace the U.S. dollar LIBOR).
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Neither the effect of the LIBOR transition process nor its ultimate success can
yet be known. The transition process might lead to increased volatility and illiquidity in markets for, and reduce the effectiveness of new hedges placed against, instruments whose terms currently include LIBOR. While some existing LIBOR-based
instruments may contemplate a scenario where LIBOR is no longer available by providing for an alternative rate-setting methodology, there may be significant uncertainty regarding the effectiveness of any such alternative methodologies to replicate
LIBOR. Not all existing LIBOR-based instruments may have alternative rate-setting provisions and there remains uncertainty regarding the willingness and ability of issuers to add alternative rate-setting provisions in certain existing instruments.
Global regulators have advised market participants to cease entering into new contracts using LIBOR as a reference rate, and it is possible that investments in LIBOR-based instruments could invite regulatory scrutiny. In addition, a liquid market
for newly issued instruments that use a reference rate other than LIBOR still may be developing. There may also be challenges for the Trust to enter into hedging transactions against such newly issued instruments until a market for such hedging
transactions develops. All of the aforementioned may adversely affect the Trusts performance or NAV.
Market Disruption and Geopolitical Risk
The occurrence of events similar to those in recent years, such as the aftermath of the war in Iraq, instability in
Afghanistan, Pakistan, Egypt, Libya, Syria, Russia, Ukraine and the Middle East, new and ongoing epidemics and pandemics of infectious diseases and other global health events, natural/environmental disasters, terrorist attacks in the United States
and around the world, social and political discord, debt crises (such as the Greek crisis), sovereign debt downgrades, increasingly strained relations between the United States and a number of foreign countries, including traditional allies, such as
certain European countries, and historical adversaries, such as North Korea, Iran, China and Russia, and the international community generally, new and continued political unrest in various countries, such as Venezuela and Spain, the exit or
potential exit of one or more countries from the EU or the EMU, and continued changes in the balance of political power among and within the branches of the U.S. government, among others, may result in market volatility, may have long term effects
on the U.S. and worldwide financial markets, and may cause further economic uncertainties in the United States and worldwide. The coronavirus pandemic initially led to illiquidity and volatility in the municipal bond markets and may lead to
downgrades in the credit quality of certain municipal issuers.
China and the United States have each recently imposed
tariffs on the other countrys products. These actions may trigger a significant reduction in international trade, the oversupply of certain manufactured goods, substantial price reductions of goods and possible failure of individual companies
and/or large segments of Chinas export industry, which could have a negative impact on the Trusts performance. U.S. companies that source material and goods from China and those that make large amounts of sales in China would be
particularly vulnerable to an escalation of trade tensions. Uncertainty regarding the outcome of the trade tensions and the potential for a trade war could cause the U.S. dollar to decline against safe haven currencies, such as the Japanese yen and
the euro. Events such as these and their consequences are difficult to predict and it is unclear whether further tariffs may be imposed or other escalating actions may be taken in the future.
On January 31, 2020, the United Kingdom (UK) officially withdrew from the EU (commonly known as
Brexit). The UK and EU reached a preliminary trade agreement, which became effective on January 1, 2021, regarding the terms of their future trading relationship relating principally to the trading of goods; however, negotiations
are ongoing for matters not covered by the agreement, such as the trade of financial services. Due to uncertainty of the current political environment, it is not possible to foresee the form or nature of the future trading relationship between the
UK and the EU. The longer term economic, legal, political and social framework to be put in place between the UK and the EU remains unclear and the ongoing political and economic uncertainty and periods of exacerbated volatility in both the UK and
in wider European markets may continue for some time. In particular, Brexit may lead to a call for similar referendums in other European jurisdictions which may cause increased economic volatility in the European and global markets and may
destabilize some or all of the other EU member countries. This uncertainty may have an adverse effect on the economy generally and on the ability of the Trust and its investments to execute their respective strategies, to receive attractive returns
and/r to exit certain investments at an advantageous time or price. In particular, currency volatility may mean that the returns of the Trust and its investments are adversely affected by market movements and may make it more difficult, or more
expensive, if the Trust elects to execute currency hedges. Potential decline in the value of the British Pound and/or the Euro against other currencies, along with the potential downgrading of the UKs sovereign credit rating, may also have an
impact
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on the performance of portfolio companies or investments located in the UK or Europe. In light of the above, no definitive assessment can currently be made regarding the impact that Brexit will
have on the Trust, its investments or its organization more generally.
Cybersecurity incidents affecting particular
companies or industries may adversely affect the economies of particular countries, regions or parts of the world in which the Trust invests.
The occurrence of any of these above events could have a significant adverse impact on the value and risk profile of the
Trusts portfolio. The Trust does not know how long the securities markets may be affected by similar events and cannot predict the effects of similar events in the future on the U.S. economy and securities markets. There can be no assurance
that similar events and other market disruptions will not have other material and adverse implications.
Regulation and Government Intervention Risk
In recent years, the U.S. Government and the Federal Reserve, as well as foreign governments throughout the world,
have taken unprecedented actions designed to support certain financial institutions and segments of the financial markets that experienced extreme volatility, such as implementing stimulus packages, providing liquidity in fixed income, commercial
paper and other markets, providing tax breaks, direct capital infusions into companies and dramatically lowering interest rates, among other actions. Such actions may have unintended and adverse consequences, such as causing or contributing to an
increased risk of inflation and an unexpected or sudden reversal of these policies, or the ineffectiveness of such policies, may increase volatility in securities markets or prevent the Trust from executing on advantageous investment opportunities
in a timely manner and negatively impact the Trusts investments. See Inflation Risk. The reduction or withdrawal of Federal Reserve or other U.S. or non-U.S. governmental support could
negatively affect financial markets generally and reduce the value and liquidity of certain securities. Additionally, with the cessation of certain other market support activities, such as those mentioned above, the Trust may face a heightened level
of interest rate risk as a result of a rise or increased volatility in interest rates.
Federal, state, and other
governments, their regulatory agencies or self-regulatory organizations may take actions that affect the regulation of the issuers in which the Trust invests in ways that are unforeseeable. Legislation or regulation may also change the way in which
the Trust is regulated. Such legislation or regulation could limit or preclude the Trusts ability to achieve its investment objectives.
In the aftermath of the global financial crisis, there appears to be a renewed popular, political and judicial focus on
finance related consumer protection. Financial institution practices are also subject to greater scrutiny and criticism generally. In the case of transactions between financial institutions and the general public, there may be a greater tendency
toward strict interpretation of terms and legal rights in favor of the consuming public, particularly where there is a real or perceived disparity in risk allocation and/or where consumers are perceived as not having had an opportunity to exercise
informed consent to the transaction. In the event of conflicting interests between retail investors holding common shares of a closed-end investment company such as the Trust and a large financial institution,
a court may similarly seek to strictly interpret terms and legal rights in favor of retail investors.
The Trust may be
affected by governmental action in ways that are not foreseeable, and there is a possibility that such actions could have a significant adverse effect on the Trust and its ability to achieve its investment objectives.
Investment Company Act Regulations
The Trust is a registered closed-end management investment company and as such is
subject to regulations under the Investment Company Act. Generally speaking, any contract or provision thereof that is made, or where performance involves a violation of the Investment Company Act or any rule or regulation thereunder is
unenforceable by either party unless a court finds otherwise.
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Regulation as a Commodity Pool
The CFTC subjects advisers to registered investment companies to regulation by the CFTC if a fund that is advised by the
investment adviser either (i) invests, directly or indirectly, more than a prescribed level of its liquidation value in CFTC-regulated futures, options and swaps (CFTC Derivatives), or (ii) markets itself as providing
investment exposure to such instruments. To the extent the Trust uses CFTC Derivatives, it intends to do so below such prescribed levels and will not market itself as a commodity pool or a vehicle for trading such instruments.
Accordingly, the Advisor has claimed an exclusion from the definition of the term commodity pool operator under the Commodity Exchange Act (CEA) pursuant to Rule 4.5 under the CEA. The Advisor is not, therefore, subject to
registration or regulation as a commodity pool operator under the CEA in respect of the Trust.
Failures of Futures Commission Merchants
and Clearing Organizations Risk
The Trust is required to deposit funds to margin open positions in cleared derivative
instruments (both futures and swaps) with a clearing broker registered as a futures commission merchant (FCM). The CEA requires an FCM to segregate all funds received from customers with respect to any orders for the purchase
or sale of U.S. domestic futures contracts and cleared swaps from the FCMs proprietary assets. Similarly, the CEA requires each FCM to hold in a separate secure account all funds received from customers with respect to any orders for the
purchase or sale of foreign futures contracts and segregate any such funds from the funds received with respect to domestic futures contracts. However, all funds and other property received by an FCM from its customers are held by an FCM on a
commingled basis in an omnibus account and amounts in excess of assets posted to the clearing organization may be invested by an FCM in certain instruments permitted under the applicable regulation. There is a risk that assets deposited by the Trust
with any FCM as margin for futures contracts or commodity options may, in certain circumstances, be used to satisfy losses of other clients of the Trusts FCM. In addition, the assets of the Trust posted as margin against both swaps and futures
contracts may not be fully protected in the event of the FCMs bankruptcy.
Legal, Tax and Regulatory Risks
Legal, tax and regulatory changes could occur that may have material adverse effects on the Trust. For example, the regulatory
and tax environment for derivative instruments in which the Trust may participate is evolving, and such changes in the regulation or taxation of derivative instruments may have material adverse effects on the value of derivative instruments held by
the Trust and the ability of the Trust to pursue its investment strategies.
To qualify for the favorable U.S. federal
income tax treatment generally accorded to RICs, the Trust must, among other things, derive in each taxable year at least 90% of its gross income from certain prescribed sources and distribute for each taxable year at least 90% of its
investment company taxable income (generally, ordinary income plus the excess, if any, of net short-term capital gain over net long-term capital loss). If for any taxable year the Trust does not qualify as a RIC, all of its taxable
income for that year (including its net capital gain) would be subject to tax at regular corporate rates without any deduction for distributions to shareholders, and such distributions would be taxable as ordinary dividends to the extent of the
Trusts current and accumulated earnings and profits.
The Biden presidential administration has called for
significant changes to U.S. fiscal, tax, trade, healthcare, immigration, foreign, and government regulatory policy. In this regard, there is significant uncertainty with respect to legislation, regulation and government policy at the federal level,
as well as the state and local levels. Recent events have created a climate of heightened uncertainty and introduced new and difficult-to-quantify macroeconomic and
political risks with potentially far-reaching implications. There has been a corresponding meaningful increase in the uncertainty surrounding interest rates, inflation, foreign exchange rates, trade volumes
and fiscal and monetary policy. To the extent the U.S. Congress or the current presidential administration implements changes to U.S. policy, those changes may impact, among other things, the U.S. and global economy, international trade and
relations, unemployment, immigration, corporate taxes, healthcare, the U.S. regulatory environment, inflation and other areas. Although the Trust cannot predict the impact, if any, of these changes to the Trusts business, they could adversely
affect the Trusts business, financial condition, operating results and cash flows. Until the Trust knows what policy changes are made and how those changes impact the Trusts business and the business of the Trusts competitors over
the long term, the Trust will not know if, overall, the Trust will benefit from them or be negatively affected by them.
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The rules dealing with U.S. federal income taxation are constantly under review
by persons involved in the legislative process and by the Internal Revenue Service and the U.S. Treasury Department. Revisions in U.S. federal tax laws and interpretations of these laws could adversely affect the tax consequences of your
investment.
Potential Conflicts of Interest of the Advisor, Sub-Advisors and Others
The investment activities of BlackRock, the ultimate parent company of the Advisors, and its Affiliates in the management of,
or their interest in, their own accounts and other accounts they manage, may present conflicts of interest that could disadvantage the Trust and its shareholders. BlackRock and its Affiliates provide investment management services to other funds and
discretionary managed accounts that may follow investment programs similar to that of the Trust. Subject to the requirements of the Investment Company Act, BlackRock and its Affiliates intend to engage in such activities and may receive compensation
from third parties for their services. None of BlackRock or its Affiliates are under any obligation to share any investment opportunity, idea or strategy with the Trust. As a result, BlackRock and its Affiliates may compete with the Trust for
appropriate investment opportunities. The results of the Trusts investment activities, therefore, may differ from those of an Affiliate or another account managed by an Affiliate and it is possible that the Trust could sustain losses during
periods in which one or more Affiliates and other accounts achieve profits on their trading for proprietary or other accounts. BlackRock has adopted policies and procedures designed to address potential conflicts of interest. For additional
information about potential conflicts of interest and the way in which BlackRock addresses such conflicts, please see Conflicts of Interest and Management of the TrustPortfolio ManagementPotential Material Conflicts of
Interest in the SAI.
Defensive Investing Risk
For defensive purposes, the Trust may allocate assets into cash or short-term fixed-income securities without limitation. In
doing so, the Trust may succeed in avoiding losses but may otherwise fail to achieve its investment objectives. Further, the value of short-term fixed-income securities may be affected by changing interest rates and by changes in credit ratings of
the investments. If the Trust holds cash uninvested it will be subject to the credit risk of the depository institution holding the cash.
Decision-Making Authority Risk
Investors have no authority to make decisions or to exercise business discretion on behalf of the Trust, except as set forth in
the Trusts governing documents. The authority for all such decisions is generally delegated to the Board, which in turn, has delegated the day-to-day management of
the Trusts investment activities to the Advisors, subject to oversight by the Board.
Management Risk
The Trust is subject to management risk because it is an actively managed investment portfolio. The Advisors and the individual
portfolio managers will apply investment techniques and risk analyses in making investment decisions for the Trust, but there can be no guarantee that these will produce the desired results. The Trust may be subject to a relatively high level of
management risk because the Trust may invest in derivative instruments, which may be highly specialized instruments that require investment techniques and risk analyses different from those associated with equities and bonds.
Valuation Risk
The Trust
is subject to valuation risk, which is the risk that one or more of the securities in which the Trust invests are valued at prices that the Trust is unable to obtain upon sale due to factors such as incomplete data, market instability or human
error. The Advisor may use an independent pricing service or prices provided by dealers to value securities at their market value. Because the secondary markets for certain investments may be limited, such
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instruments may be difficult to value. See Net Asset Value. When market quotations are not available, the Advisor may price such investments pursuant to a number of methodologies,
such as computer-based analytical modeling or individual security evaluations. These methodologies generate approximations of market values, and there may be significant professional disagreement about the best methodology for a particular type of
financial instrument or different methodologies that might be used under different circumstances. In the absence of an actual market transaction, reliance on such methodologies is essential, but may introduce significant variances in the ultimate
valuation of the Trusts investments. Technological issues and/or errors by pricing services or other third-party service providers may also impact the Trusts ability to value its investments and the calculation of the Trusts NAV.
When market quotations are not readily available or are deemed to be inaccurate or unreliable, the Trust values its
investments at fair value as determined in good faith pursuant to policies and procedures approved by the Board. Fair value is defined as the amount for which assets could be sold in an orderly disposition over a reasonable period of time, taking
into account the nature of the asset. Fair value pricing may require determinations that are inherently subjective and inexact about the value of a security or other asset. As a result, there can be no assurance that fair value priced assets will
not result in future adjustments to the prices of securities or other assets, or that fair value pricing will reflect a price that the Trust is able to obtain upon sale, and it is possible that the fair value determined for a security or other asset
will be materially different from quoted or published prices, from the prices used by others for the same security or other asset and/or from the value that actually could be or is realized upon the sale of that security or other asset. For example,
the Trusts NAV could be adversely affected if the Trusts determinations regarding the fair value of the Trusts investments were materially higher than the values that the Trust ultimately realizes upon the disposal of such
investments. Where market quotations are not readily available, valuation may require more research than for more liquid investments. In addition, elements of judgment may play a greater role in valuation in such cases than for investments with a
more active secondary market because there is less reliable objective data available.
Because of overall size, duration
and maturities of positions held by the Trust, the value at which its investments can be liquidated may differ, sometimes significantly, from the interim valuations obtained by the Trust. In addition, the timing of liquidations may also affect the
values obtained on liquidation. Securities held by the Trust may routinely trade with bid-offer spreads that may be significant. There can be no guarantee that the Trusts investments could
ultimately be realized at the Trusts valuation of such investments. In addition, the Trusts compliance with the asset diversification tests applicable to regulated investment companies depends on the fair market values of the
Trusts assets, and, accordingly, a challenge to the valuations ascribed by the Trust could affect its ability to comply with those tests or require it to pay penalty taxes in order to cure a violation thereof.
The Trusts NAV per share is a critical component in several operational matters including computation of advisory and
services fees and determination of the price at which a tender offer will be made. Consequently, variance in the valuation of the Trusts investments will impact, positively or negatively, the fees and expenses shareholders will pay.
Reliance on the Advisor and Sub-Advisors
The Trust is dependent upon services and resources provided by the Advisors, and therefore the Advisors parent,
BlackRock. The Advisors are not required to devote their full time to the business of the Trust and there is no guarantee or requirement that any investment professional or other employee of the Advisors will allocate a substantial portion of his or
her time to the Trust. The loss of one or more individuals involved with the Advisors could have a material adverse effect on the performance or the continued operation of the Trust. For additional information on the Advisor, the Sub-Advisors and BlackRock, see Management of the TrustInvestment Advisor and Sub-Advisors.
Reliance on Service Providers Risk
The Trust must rely upon the performance of service providers to perform certain functions, which may include functions that
are integral to the Trusts operations and financial performance. Failure by any service provider to carry out its obligations to the Trust in accordance with the terms of its appointment, to exercise due care and skill or to perform its
obligations to the Trust at all as a result of insolvency, bankruptcy or other causes could have a material adverse effect on the Trusts performance and returns to shareholders. The termination of the Trusts
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relationship with any service provider, or any delay in appointing a replacement for such service provider, could materially disrupt the business of the Trust and could have a material adverse
effect on the Trusts performance and returns to shareholders.
Information Technology Systems Risk
The Trust is dependent on the Advisors for certain management services as well as back-office functions. The Advisors depend on
information technology systems in order to assess investment opportunities, strategies and markets and to monitor and control risks for the Trust. It is possible that a failure of some kind which causes disruptions to these information technology
systems could materially limit the Advisors ability to adequately assess and adjust investments, formulate strategies and provide adequate risk control. Any such information technology-related difficulty could harm the performance of the
Trust. Further, failure of the back-office functions of the Advisors to process trades in a timely fashion could prejudice the investment performance of the Trust.
Cyber Security Risk
With
the increased use of technologies such as the Internet to conduct business, the Trust is susceptible to operational, information security and related risks. In general, cyber incidents can result from deliberate attacks or unintentional events.
Cyber-attacks include, but are not limited to, gaining unauthorized access to digital systems (e.g., through hacking or malicious software coding) for purposes of misappropriating assets or sensitive information, corrupting data, or
causing operational disruption. Cyber-attacks may also be carried out in a manner that does not require gaining unauthorized access, such as causing denial-of-service
attacks on websites (i.e., efforts to make network services unavailable to intended users). Cyber security failures by or breaches of the Advisors and other service providers (including, but not limited to, fund accountants, custodians, transfer
agents and administrators), and the issuers of securities in which the Trust invests, have the ability to cause disruptions and impact business operations, potentially resulting in financial losses, interference with the Trusts ability to
calculate its NAV, impediments to trading, the inability of shareholders to transact business, violations of applicable privacy and other laws, regulatory fines, penalties, reputational damage, reimbursement or other compensation costs, or
additional compliance costs. In addition, substantial costs may be incurred in order to prevent any cyber incidents in the future. While the Trust has established business continuity plans in the event of, and risk management systems to prevent,
such cyber-attacks, there are inherent limitations in such plans and systems including the possibility that certain risks have not been identified. Furthermore, the Trust cannot control the cyber security plans and systems put in place by service
providers to the Trust and issuers in which the Trust invests. As a result, the Trust or its shareholders could be negatively impacted.
Misconduct of
Employees and of Service Providers Risk
Misconduct or misrepresentations by employees of the Advisor, the Sub-Advisors or the Trusts service providers could cause significant losses to the Trust. Employee misconduct may include binding the Trust to transactions that exceed authorized limits or present unacceptable
risks and unauthorized trading activities, concealing unsuccessful trading activities (which, in any case, may result in unknown and unmanaged risks or losses) or making misrepresentations regarding any of the foregoing. Losses could also result
from actions by the Trusts service providers, including, without limitation, failing to recognize trades and misappropriating assets. In addition, employees and service providers may improperly use or disclose confidential information, which
could result in litigation or serious financial harm, including limiting the Trusts business prospects or future marketing activities. Despite the Advisors due diligence efforts, misconduct and intentional misrepresentations may be
undetected or not fully comprehended, thereby potentially undermining the Advisors due diligence efforts. As a result, no assurances can be given that the due diligence performed by the Advisors will identify or prevent any such misconduct.
Special Risks for Holders of Rights
There is a risk that performance of the Trust may result in the common shares purchasable upon exercise of the rights being
less attractive to investors at the conclusion of the subscription period. This may reduce or eliminate the value of the rights. Investors who receive rights may find that there is no market to sell rights they do not wish to exercise. If investors
exercise only a portion of the rights, common shares may trade at less favorable prices than larger offerings for similar securities.
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Portfolio Turnover Risk
The Trusts annual portfolio turnover rate may vary greatly from year to year, as well as within a given year. Portfolio
turnover rate is not considered a limiting factor in the execution of investment decisions for the Trust. A higher portfolio turnover rate results in correspondingly greater brokerage commissions and other transactional expenses that are borne by
the Trust. High portfolio turnover may result in an increased realization of net short-term capital gains by the Trust which, when distributed to common shareholders, will be taxable as ordinary income. Additionally, in a declining market, portfolio
turnover may create realized capital losses.
Anti-Takeover Provisions Risk
The Trusts Agreement and Declaration of Trust and Bylaws include provisions that could limit the ability of other
entities or persons to acquire control of the Trust or convert the Trust to open-end status or to change the composition of the Board. Such provisions could limit the ability of shareholders to sell their
shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control of the Trust. See Certain Provisions in the Agreement and Declaration of Trust and Bylaws.
HOW THE TRUST MANAGES RISK
Investment Limitations
The Trust has adopted certain investment limitations designed to limit investment risk. Some of these limitations are
fundamental and thus may not be changed without the approval of the holders of a majority of the outstanding common shares. See Investment Objectives and PoliciesInvestment Restrictions in the SAI.
The restrictions and other limitations set forth throughout this Prospectus and in the SAI apply only at the time of purchase
of securities and will not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of the acquisition of securities.
Management of Investment Portfolio and Capital Structure to Limit Leverage Risk
The Trust may take certain actions if short-term interest rates increase or market conditions otherwise change (or the Trust
anticipates such an increase or change) and any leverage the Trust may have outstanding begins (or is expected) to adversely affect common shareholders. In order to attempt to offset such a negative impact of any outstanding leverage on common
shareholders, the Trust may shorten the average maturity of its investment portfolio (by investing in short-term securities) or may reduce any indebtedness that it may have incurred. The success of any such attempt to limit leverage risk depends on
the Advisors ability to accurately predict interest rate or other market changes. Because of the difficulty of making such predictions, the Trust may never attempt to manage its capital structure in the manner described in this paragraph.
If market conditions suggest that employing additional leverage would be beneficial, the Trust may enter into one or more
credit facilities, sell preferred shares or engage in additional leverage transactions, subject to the restrictions of the Investment Company Act.
Strategic Transactions
The Trust may use certain Strategic Transactions designed to limit the risk of price fluctuations of securities and to preserve
capital. These Strategic Transactions include using swaps, financial futures contracts, options on financial futures or options based on either an index of long-term securities, or on securities whose prices, in the opinion of the Advisors,
correlate with the prices of the Trusts investments. There can be no assurance that Strategic Transactions will be used or used effectively to limit risk, and Strategic Transactions may be subject to their own risks.
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MANAGEMENT OF THE TRUST
Trustees and Officers
The Board is responsible for the overall management of the Trust, including supervision of the duties performed by the
Advisors. There are eleven Trustees. A majority of the Trustees are Independent Trustees of the Trust. The name and business address of the Trustees and officers of the Trust and their principal occupations and other affiliations during the past
five years are set forth under Management of the Trust in the SAI.
Investment Advisor and
Sub-Advisors
The Advisor is responsible for the management of the Trusts
portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operation of the Trust. BIL and BSL serve as the Trusts Sub-Advisors and perform certain
of the day-to-day investment management of the Trust. The Advisor, located at 100 Bellevue Parkway, Wilmington, Delaware 19809, BIL, located at Edinburgh, EH3 8BL,
United Kingdom, and BSL, located at 20 Anson Road #18-01, 079912 Singapore, are wholly owned subsidiaries of BlackRock.
BlackRock is one of the worlds largest publicly-traded investment management firms. As of September 30, 2021,
BlackRocks assets under management were approximately $9.5 trillion. BlackRock has over 30 years of experience managing closed-end products and, as of October 31, 2021, advised a registered closed-end family of 55 exchange-listed active funds with approximately $63 billion in assets.
BlackRock is independent in ownership and governance, with no single majority shareholder and a majority of independent
directors.
Investment Philosophy
The distinguishing feature of BlackRocks investment management style has been to seek to generate alpha (i.e. risk
adjusted returns in excess of market returns) within a risk-controlled framework. Real-time analysis of a vast array of risk measures allows BlackRock to assess the potential impact of various sector and security strategies on total return. As a
result, BlackRock seeks to add consistent value and limit performance volatility.
BlackRocks philosophy has not
changed since the inception of the firm. The basis of successful investment performance is research and analysis of sectors and securities, not interest rate speculation. BlackRock believes that market-timing strategies are volatile and can produce
inconsistent results.
Portfolio Managers
The members of the portfolio management team who are primarily responsible for the day-to-day management of the Trusts portfolio are as follows:
Scott
MacLellan, CFA, Director. Mr. MacLellan is a portfolio manager in BlackRocks Americas Fixed Income Group. He focuses on The BlackRock Obsidian Fund and short duration portfolios. Prior to assuming his current responsibilities in 2008,
Mr. MacLellan was a member of the Global Client Group, covering Japanese clients. He also served as a product specialist for short duration and LIBOR-benchmarked fixed income products. Previously, Mr. MacLellan spent four years with Nomura
BlackRock Asset Management (NBAM), a former joint venture between BlackRock and Nomura Asset Management Co., Ltd, in Tokyo as an account manager. Prior to joining NBAM in 2001, Mr. MacLellan spent a year in the Global Finance and Investment
Department of IBJ Leasing in Tokyo.
Akiva Dickstein, Managing Director. Mr. Dickstein is Head of Customized
Core Portfolios within BlackRocks Americas Fixed Income Alpha Strategies and a member of the Americas Fixed Income Executive Team. Prior to his current role, he was the lead manager for the firms mortgage portfolios. Before joining
BlackRock in 2009, Mr. Dickstein spent eight years at Merrill Lynch, where he served as Managing Director and head of the U.S. Rates & Structured Credit Research Group. He was responsible for the team that produced MBS, ABS, CMBS,
Treasuries,
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swaps, and interest rate derivatives research. Mr. Dicksteins publications on MBS strategy included the weekly Mortgage Investor as well as numerous lengthier articles on topics such
as optimal loan modifications, the valuation of credit-sensitive MBS and ABS, and the pricing of mortgage derivatives, options, and pass-throughs. In addition, he developed Merrills prepayment models for fixed rate and hybrid MBS. From 1993 to
2001, Mr. Dickstein was with Lehman Brothers, most recently as a Senior Vice President in Mortgage Derivatives Trading. In this role, he traded mortgage derivatives and developed Lehmans credit default model.
Samir Lakhani, Managing Director. Mr. Lakhani is Co-Head of the
Securitized Assets Team in Global Fixed Income. From 2012 to 2020, Mr. Lakhani was co-head of the CMBS and Senior CRE Debt business, and continues to act as a Lead CMBS Portfolio Manager within Global
Fixed Income in addition to his other responsibilities. Mr. Lakhani is Chair of the Commercial Mortgage Loan Committee within Global Fixed Income, and a member of the BlackRock Real Estate Debt Investment Committee within BlackRocks Real
Assets Group. Prior to joining BlackRock in 2009, Mr. Lakhani was a Vice President at R3 Capital Partners, where he invested in securitized assets including ABS, CMBS, CLOs and Specialty Finance transactions. Mr. Lakhani held similar
roles at Lehman Brothers in their Global Principal Strategies group. Mr. Lakhani joined Lehman Brothers in 2006 initially in Structured Credit Products. Previously, Mr. Lakhani held positions at JP Morgan Partners, in their Private Equity
and Mezzanine Debt group, from 2001 to 2004. Mr. Lakhani served on the Board of Governors for the Commercial Real Estate Finance Council (CREFC) from 20122018. Mr. Lakhani earned a BS Degree in Economics and a BS degree
in Engineering, summa cum laude, from the University of Pennsylvania, and an MBA degree from Harvard Business School.
The
SAI provides additional information about each portfolio managers compensation, other accounts managed by the portfolio management team and the ownership of the Trusts securities by each portfolio manager.
Investment Management Agreement
Pursuant to an investment management agreement between the Advisor and the Trust (the Investment Management
Agreement), the Trust has agreed to pay the Advisor a monthly management fee at an annual rate equal to 0.80% of the average daily value of the Trusts Managed Assets. Managed Assets means the total assets of the Trust
(including any assets attributable to money borrowed for investment purposes) minus the sum of the Trusts accrued liabilities (other than money borrowed for investment purposes). The Advisor, and not the Trust, pays BIL and BSL, for services
they provide for that portion of the Trust for which BIL and BSL, as applicable, acts as sub-adviser, a monthly fee that is equal to a percentage of the investment advisory fees paid by the Trust to the
Advisor.
A discussion regarding the basis for the approval of the Investment Management Agreement and the sub-advisory agreements by the Board is available in the Trusts annual report to shareholders for the fiscal year ended October 31, 2021.
Except as otherwise described in this Prospectus, the Trust pays, in addition to the fees paid to the Advisor, all other costs
and expenses of its operations, including compensation of its Trustees (other than those affiliated with the Advisor), custodian, leveraging expenses, transfer and dividend disbursing agent expenses, legal fees, rating agency fees, listing fees and
expenses, expenses of independent auditors, expenses of repurchasing shares, expenses of preparing, printing and distributing shareholder reports, notices, proxy statements and reports to governmental agencies and taxes, if any.
The Trust and the Advisor have entered into the Fee Waiver Agreement, pursuant to which the Advisor has contractually agreed
to waive the management fee with respect to any portion of the Trusts assets attributable to investments in any equity and fixed-income mutual funds and ETFs managed by the Advisor or its affiliates that have a contractual management fee,
through June 30, 2023. In addition, effective December 1, 2019, pursuant to the Fee Waiver Agreement, the Advisor has contractually agreed to waive its management fees by the amount of investment advisory fees the Trust pays to the Advisor
indirectly through its investment in money market funds advised by the Advisor or its affiliates, through June 30, 2023. The Fee Waiver Agreement may be continued from year to year thereafter, provided that such continuance is specifically
approved by the Advisor and the Trust (including by a majority of the Trusts Independent Trustees). Neither the Advisor nor the Trust is obligated to extend the Fee Waiver Agreement. The Fee Waiver Agreement may be terminated at any time,
without the payment of any penalty, only by the Trust (upon the vote of a majority of the Independent Trustees or a majority of the outstanding voting securities of the Trust), upon 90 days written notice by the Trust to the Advisor.
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Administration and Accounting Services
State Street Bank and Trust Company provides certain administration and accounting services to the Trust pursuant to an
Administration and Fund Accounting Services Agreement (the Administration Agreement). Pursuant to the Administration Agreement, State Street Bank and Trust Company provides the Trust with, among other things, customary fund accounting
services, including computing the Trusts NAV and maintaining books, records and other documents relating to the Trusts financial and portfolio transactions, and customary fund administration services, including assisting the Trust with
regulatory filings, tax compliance and other oversight activities. For these and other services it provides to the Trust, State Street Bank and Trust Company is paid a monthly fee from the Trust at an annual rate ranging from 0.0075% to 0.015% of
the Trusts Managed Assets, along with an annual fixed fee ranging from $3,000 to $10,000 for the services it provides to the Trust.
Custodian
and Transfer Agent
The custodian of the assets of the Trust is State Street Bank and Trust Company, whose principal
business address is One Lincoln Street, Boston, Massachusetts 02111. The custodian is responsible for, among other things, receipt of and disbursement of funds from the Trusts accounts, establishment of segregated accounts as necessary, and
transfer, exchange and delivery of Trust portfolio securities.
Computershare Trust Company, N.A., whose principal
business address is 150 Royall Street, Canton, Massachusetts 02021, serves as the Trusts transfer agent with respect to the common shares.
Independent Registered Public Accounting Firm
[ ], whose principal business address is
[ ], is the independent registered public accounting firm of the Trust and is expected to render an opinion annually on the financial statements of the Trust.
NET ASSET VALUE
The NAV of the Trusts common shares will be computed based upon the value of the Trusts portfolio securities and
other assets. NAV per common share will be determined as of the close of the regular trading session on the NYSE on each business day on which the NYSE is open for trading. The Trust calculates NAV per common share by subtracting the Trusts
liabilities (including accrued expenses, dividends payable and any borrowings of the Trust), and the liquidation value of any outstanding preferred shares of the Trust from the Trusts total assets (the value of the securities the Trust holds
plus cash or other assets, including interest accrued but not yet received) and dividing the result by the total number of common shares of the Trust outstanding.
Valuation of securities held by the Trust is as follows:
Equity Investments. Equity securities traded on a recognized securities exchange (e.g., NYSE), on separate trading
boards of a securities exchange or through a market system that provides contemporaneous transaction pricing information (each, an Exchange) are valued using information obtained via independent pricing services generally at the Exchange
closing price or if an Exchange closing price is not available, the last traded price on that Exchange prior to the time as of which the assets or liabilities are valued. However, under certain circumstances, other means of determining current
market value may be used. If an equity security is traded on more than one Exchange, the current market value of the security where it is primarily traded generally will be used. In the event that there are no sales involving an equity security held
by the Trust on a day on which the Trust values such security, the last bid (long positions) or ask (short positions) price, if available, will be used as the value of such security. If the Trust holds both long and short positions in the same
security, the last bid price will be applied to securities held long and the last ask price will be applied to securities sold short. If no bid or ask price is available on a day on which the Trust values such security, the prior days price
will be used, unless the Advisor determines that such prior days price no longer reflects the fair value of the security, in which case such asset would be treated as a Fair Value Asset (as defined below).
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Fixed-Income Investments. Fixed-income securities for which market
quotations are readily available are generally valued using such securities current market value. The Trust values fixed-income portfolio securities using the last available bid prices or current market quotations provided by dealers or
prices (including evaluated prices) supplied by the Trusts approved independent third-party pricing services, each in accordance with the policies and procedures approved by the Trusts Board (the Valuation
Procedures). The pricing services may use matrix pricing or valuation models that utilize certain inputs and assumptions to derive values, including transaction data (e.g., recent representative bids and offers), credit quality
information, perceived market movements, news, and other relevant information and by other methods, which may include consideration of: yields or prices of securities of comparable quality, coupon, maturity and type; indications as to values from
dealers; general market conditions; and/or other factors and assumptions. Pricing services generally value fixed-income securities assuming orderly transactions of an institutional round lot size, but the Trust may hold or transact in such
securities in smaller, odd lot sizes. Odd lots often trade at lower prices than institutional round lots. The amortized cost method of valuation may be used with respect to debt obligations with 60 days or less remaining to maturity unless
such method does not represent fair value. Certain fixed-income investments including asset-backed and mortgage related securities may be valued based on valuation models that consider the estimated cash flows of each tranche of the issuer,
establish a benchmark yield and develop an estimated tranche specific spread to the benchmark yield based on the unique attributes of the tranche.
Options, Futures, Swaps and Other Derivatives. Exchange-traded equity options for which market quotations are readily
available are valued at the mean of the last bid and ask prices as quoted on the Exchange or the board of trade on which such options are traded. In the event that there is no mean price available for an exchange traded equity option held by the
Trust on a day on which the Trust values such option, the last bid (long positions) or ask (short positions) price, if available, will be used as the value of such option. If no bid or ask price is available on a day on which the Trust values such
option, the prior days price will be used, unless the Advisor determines that such prior days price no longer reflects the fair value of the option in which case such option will be treated as a fair value asset. OTC derivatives may be
valued using a mathematical model which may incorporate a number of market data factors. Financial futures contracts and options thereon, which are traded on exchanges, are valued at their last sale price or settle price as of the close of such
exchanges. Swap agreements and other derivatives are generally valued daily based upon quotations from market makers or by a pricing service in accordance with the Valuation Procedures.
Underlying Funds. Shares of underlying open-end funds are valued at NAV. Shares
of underlying exchange-traded closed-end funds or other ETFs will be valued at their most recent closing price.
General Valuation Information. In determining the market value of portfolio investments, the Trust may employ
independent third party pricing services, which may use, without limitation, a matrix or formula method that takes into consideration market indexes, matrices, yield curves and other specific adjustments. This may result in the assets being valued
at a price different from the price that would have been determined had the matrix or formula method not been used. All cash, receivables and current payables are carried on the Trusts books at their face value. The price the Trust could
receive upon the sale of any particular portfolio investment may differ from the Trusts valuation of the investment, particularly for assets that trade in thin or volatile markets or that are valued using a fair valuation methodology or a
price provided by an independent pricing service. As a result, the price received upon the sale of an investment may be less than the value ascribed by the Trust, and the Trust could realize a greater than expected loss or lesser than expected
gain upon the sale of the investment. The Trusts ability to value its investment may also be impacted by technological issues and/or errors by pricing services or other third party service providers.
All cash, receivables and current payables are carried on the Trusts books at their fair value.
Prices obtained from independent third party pricing services, broker-dealers or market makers to value the Trusts
securities and other assets and liabilities are based on information available at the time the Trust values its assets and liabilities. In the event that a pricing service quotation is revised or updated subsequent to the day on which the Trust
valued such security, the revised pricing service quotation generally will be applied prospectively. Such determination will be made considering pertinent facts and circumstances surrounding the revision.
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In the event that application of the methods of valuation discussed above result
in a price for a security which is deemed not to be representative of the fair market value of such security, the security will be valued by, under the direction of or in accordance with a method specified by the Board as reflecting fair value. All
other assets and liabilities (including securities for which market quotations are not readily available) held by the Trust (including restricted securities) are valued at fair value as determined in good faith by the Board or BlackRocks
Valuation Committee (the Valuation Committee) (its delegate) pursuant to the Valuation Procedures. Any assets and liabilities which are denominated in a foreign currency are translated into U.S. dollars at the prevailing market
rates.
Certain of the securities acquired by the Trust may be traded on foreign exchanges or OTC markets on days on which
the Trusts NAV is not calculated and common shares are not traded. In such cases, the NAV of the Trusts common shares may be significantly affected on days when investors can neither purchase nor sell shares of the Trust.
Fair Value. When market quotations are not readily available or are believed by the Advisor to be unreliable, the
Trusts investments are valued at fair value (Fair Value Assets). Fair Value Assets are valued by the Advisor in accordance with the Valuation Procedures. The Advisor may reasonably conclude that a market quotation is not readily
available or is unreliable if, among other things, a security or other asset or liability does not have a price source due to its complete lack of trading, if the Advisor believes a market quotation from a broker-dealer or other source is unreliable
(e.g., where it varies significantly from a recent trade, or no longer reflects the fair value of the security or other asset or liability subsequent to the most recent market quotation), where the security or other asset or liability is only thinly
traded or due to the occurrence of a significant event subsequent to the most recent market quotation. For this purpose, a significant event is deemed to occur if the Advisor determines, in its business judgment, that an event has
occurred after the close of trading for an asset or liability but prior to or at the time of pricing the Trusts assets or liabilities, that is likely to cause a material change to the last exchange closing price or closing market price of one
or more assets or liabilities held by the Trust. On any day the NYSE is open and a foreign market or the primary exchange on which a foreign asset or liability is traded is closed, such asset or liability will be valued using the prior days
price, provided that the Advisor is not aware of any significant event or other information that would cause such price to no longer reflect the fair value of the asset or liability, in which case such asset or liability would be treated as a Fair
Value Asset. For certain foreign assets, a third-party vendor supplies evaluated, systematic fair value pricing based upon the movement of a proprietary multi-factor model after the relevant foreign markets have closed. This systematic fair value
pricing methodology is designed to correlate the prices of foreign assets following the close of the local markets to the price that might have prevailed as of the Trusts pricing time.
The Advisor, with input from portfolio management, will submit its recommendations regarding the valuation and/or valuation
methodologies for Fair Value Assets to the Valuation Committee. The Valuation Committee may accept, modify or reject any recommendations. In addition, the Trusts accounting agent periodically endeavors to confirm the prices it receives from
all third party pricing services, index providers and broker-dealers, and, with the assistance of the Advisor, to regularly evaluate the values assigned to the securities and other assets and liabilities of the Trust. The pricing of all Fair Value
Assets is subsequently reported to the Board or a Committee thereof.
When determining the price for a Fair Value Asset,
the Valuation Committee shall seek to determine the price that the Trust might reasonably expect to receive from the current sale of that asset or liability in an arms-length transaction on the date on
which the asset or liability is being valued, and does not seek to determine the price the Trust might reasonably expect to receive for selling an asset or liability at a later time or if it holds the asset or liability to maturity. Fair value
determinations will be based upon all available factors that the BlackRock Valuation Committee deems relevant at the time of the determination, and may be based on analytical values determined by the Advisor using proprietary or third party
valuation models.
Fair value represents a good faith approximation of the value of an asset or liability. When
determining the fair value of an investment, one or more fair value methodologies may be used (depending on certain factors, including the asset type). For example, the investment may be initially priced based on the original cost of the investment
or, alternatively, using proprietary or third-party models that may rely upon one or more unobservable inputs. Prices of actual, executed or historical transactions in the relevant investment (or comparable instruments) or, where appropriate, an
appraisal by a third-party experienced in the valuation of similar instruments, may also be used as a basis for establishing the fair value of an investment.
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The fair value of one or more assets or liabilities may not, in retrospect, be
the price at which those assets or liabilities could have been sold during the period in which the particular fair values were used in determining the Trusts NAV. As a result, the Trusts sale or repurchase of its shares at NAV, at a time
when a holding or holdings are valued at fair value, may have the effect of diluting or increasing the economic interest of existing shareholders.
The Trusts annual audited financial statements, which are prepared in accordance with accounting principles generally
accepted in the United States of America (US GAAP), follow the requirements for valuation set forth in Financial Accounting Standards Board Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures
(ASC 820), which defines and establishes a framework for measuring fair value under US GAAP and expands financial statement disclosure requirements relating to fair value measurements.
Generally, ASC 820 and other accounting rules applicable to investment companies and various assets in which they invest are
evolving. Such changes may adversely affect the Trust. For example, the evolution of rules governing the determination of the fair market value of assets or liabilities to the extent such rules become more stringent would tend to increase the cost
and/or reduce the availability of third-party determinations of fair market value. This may in turn increase the costs associated with selling assets or affect their liquidity due to the Trusts inability to obtain a third-party determination
of fair market value. The SEC recently adopted new Rule 2a-5 under the Investment Company Act, which will establish an updated regulatory framework for registered investment company valuation practices and may
impact the Trusts valuation policies. The Trust will not be required to comply with the new rule until September
8, 2022.
DISTRIBUTIONS
The Trust intends to make regular monthly cash distributions of all or a portion of its net investment income, including
current gains, to common shareholders. The Trust will pay common shareholders at least annually all or substantially all of its investment company taxable income. The Investment Company Act generally limits the Trust to one capital gain distribution
per year, subject to certain exceptions, including as discussed below in connection with the Distribution Plan.
The Trust
has, pursuant to an SEC exemptive order granted to certain of BlackRocks closed-end funds, adopted a plan to support a level distribution of income, capital gains and/or return of capital. The
Distribution Plan has been approved by the Board and is consistent with the Trusts investment objectives and policies. Under the Distribution Plan, the Trust will distribute all available investment income, including current gains, to its
shareholders, consistent with its investment objectives and as required by the Code. If sufficient investment income, including current gains, is not available on a monthly basis, the Trust will distribute long-term capital gains and/or return of
capital to shareholders in order to maintain a level distribution. A return of capital distribution may involve a return of the shareholders original investment. Though not currently taxable, such a distribution may lower a shareholders
basis in the Trust, thus potentially subjecting the shareholder to future tax consequences in connection with the sale of Trust shares, even if sold at a loss to the shareholders original investment. Each monthly distribution to shareholders
is expected to be at a fixed amount established by the Board, except for extraordinary distributions and potential distribution rate increases or decreases to enable the Trust to comply with the distribution requirements imposed by the Code.
Shareholders should not draw any conclusions about the Trusts investment performance from the amount of these distributions or from the terms of the Distribution Plan. The Trusts total return performance on NAV will be presented in its
financial highlights table, which will be available in the Trusts shareholder reports, every six-months. The Board may amend, suspend or terminate the Distribution Plan without prior notice if it deems
such actions to be in the best interests of the Trust or its shareholders. The suspension or termination of the Distribution Plan could have the effect of creating a trading discount (if the Trusts stock is trading at or above NAV) or widening
an existing trading discount. The Trust is subject to risks that could have an adverse impact on its ability to maintain level distributions. Examples of potential risks include, but are not limited to, economic downturns impacting the markets,
decreased market volatility, companies suspending or decreasing corporate dividend distributions and changes in the Code. Please see Risks for a more complete description of the Trusts risks.
The tax treatment and characterization of the Trusts distributions may vary significantly from time to time because of
the varied nature of the Trusts investments. The ultimate tax characterization of the Trusts distributions made in a fiscal year cannot finally be determined until after the end of that fiscal year. As a result, there is a possibility
that
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the Trust may make total distributions during a fiscal year in an amount that exceeds the Trusts earnings and profits for U.S. federal income tax purposes. In such situations, the amount by
which the Trusts total distributions exceed earnings and profits would generally be treated as a return of capital reducing the amount of a shareholders tax basis in such shareholders shares, with any amounts exceeding such basis
treated as gain from the sale of shares.
Various factors will affect the level of the Trusts income, including the
asset mix and the Trusts use of hedging. To permit the Trust to maintain a more stable monthly distribution, the Trust may from time to time distribute less than the entire amount of income earned in a particular period. The undistributed
income would be available to supplement future distributions. As a result, the distributions paid by the Trust for any particular monthly period may be more or less than the amount of income actually earned by the Trust during that period.
Undistributed income will add to the Trusts NAV and, correspondingly, distributions from undistributed income will deduct from the Trusts NAV. The Trust intends to distribute any long-term capital gains not distributed under the
Distribution Plan annually.
Under normal market conditions, the Advisor seeks to manage the Trust in a manner such that
the Trusts distributions are reflective of the Trusts current and projected earnings levels. The distribution level of the Trust is subject to change based upon a number of factors, including the current and projected level of the
Trusts earnings, and may fluctuate over time.
The Trust reserves the right to change its distribution policy and
the basis for establishing the rate of its monthly distributions at any time and may do so without prior notice to common shareholders.
Shareholders will automatically have all dividends and distributions reinvested in common shares of the Trust issued by the
Trust or purchased in the open market in accordance with the Trusts dividend reinvestment plan unless an election is made to receive cash. See Dividend Reinvestment Plan.
DIVIDEND REINVESTMENT PLAN
Please refer to the section
of the Trusts most recent annual report on Form N-CSR entitled Automatic Dividend Reinvestment Plan, which is incorporated by reference herein, for a discussion of the Trusts
dividend reinvestment plan.
RIGHTS OFFERINGS
The Trust may in the future, and at its discretion, choose to make offerings of rights to its shareholders to
purchase common shares. Rights may be issued independently or together with any other offered security and may or may not be transferable by the person purchasing or receiving the rights. In connection with a rights offering to shareholders, we
would distribute certificates or other documentation (i.e., rights cards distributed in lieu of certificates) evidencing the rights and a Prospectus Supplement to our shareholders as of the record date that we set for determining the
shareholders eligible to receive rights in such rights offering. Any such future rights offering will be made in accordance with the Investment Company Act. Under the laws of Delaware, the Board is authorized to approve rights offerings without
obtaining shareholder approval.
The staff of the SEC has interpreted the Investment Company Act as not requiring
shareholder approval of a transferable rights offering to purchase common shares at a price below the then current NAV so long as certain conditions are met, including: (i) a good faith determination by a funds board that such offering
would result in a net benefit to existing shareholders; (ii) the offering fully protects shareholders preemptive rights and does not discriminate among shareholders (except for the possible effect of not offering fractional rights); (iii)
management uses its best efforts to ensure an adequate trading market in the rights for use by shareholders who do not exercise such rights; and (iv) the ratio of a transferable rights offering does not exceed one new share for each three
rights held.
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The applicable Prospectus Supplement would describe the following terms of the
rights in respect of which this Prospectus is being delivered:
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the period of time the offering would remain open;
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the underwriter or distributor, if any, of the rights and any associated underwriting fees or discounts
applicable to purchases of the rights;
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the title of such rights;
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the exercise price for such rights (or method of calculation thereof);
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the number of such rights issued in respect of each share;
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the number of rights required to purchase a single share;
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the extent to which such rights are transferable and the market on which they may be traded if they are
transferable;
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if applicable, a discussion of the material U.S. federal income tax considerations applicable to the issuance
or exercise of such rights;
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the date on which the right to exercise such rights will commence, and the date on which such right will
expire (subject to any extension);
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the extent to which such rights include an over-subscription privilege with respect to unsubscribed securities
and the terms of such over-subscription privilege; and
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termination rights we may have in connection with such rights offering.
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A certain number of rights would entitle the holder of the right(s) to purchase for cash such number of common shares at such
exercise price as in each case is set forth in, or be determinable as set forth in, the Prospectus Supplement relating to the rights offered thereby. Rights would be exercisable at any time up to the close of business on the expiration date for such
rights set forth in the Prospectus Supplement. After the close of business on the expiration date, all unexercised rights would become void. Upon expiration of the rights offering and the receipt of payment and the rights certificate or other
appropriate documentation properly executed and completed and duly executed at the corporate trust office of the rights agent, or any other office indicated in the Prospectus Supplement, the common shares purchased as a result of such exercise will
be issued as soon as practicable. To the extent permissible under applicable law, we may determine to offer any unsubscribed offered securities directly to persons other than shareholders, to or through agents, underwriters or dealers or through a
combination of such methods, as set forth in the applicable Prospectus Supplement.
TAX MATTERS
The following discussion is a brief summary of certain U.S. federal
income tax considerations affecting the Trust and the purchase, ownership and disposition of the Trusts common shares. A more detailed discussion of the tax rules applicable to the Trust and its common shareholders can be found in the SAI that
is incorporated by reference into this Prospectus. Except as otherwise noted, this discussion assumes you are a taxable U.S. holder (as defined below) and that you hold your common shares as capital assets for U.S. federal income tax purposes
(generally, assets held for investment). This discussion is based upon current provisions of the Code, the regulations promulgated thereunder and judicial and administrative authorities, all of which are subject to change or differing
interpretations by the courts or the Internal Revenue Service, possibly with retroactive effect. No attempt is made to present a detailed explanation of all U.S. federal tax concerns affecting the Trust and its common shareholders. The
Trust has not sought and will not seek any ruling from the Internal Revenue Service regarding any matters discussed herein. No assurance can be given that the Internal Revenue Service would not assert, or that a court would not sustain, a position
contrary to those set forth below. This summary does not discuss any aspects of non-U.S., state or local tax. The discussion set forth herein does not constitute tax advice and potential investors are urged
to consult their own tax advisers to determine the specific U.S. federal, state, local and foreign tax consequences to them of investing in the Trust.
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In addition, no attempt is made to address tax considerations applicable to an
investor with a special tax status, such as without limitation, a financial institution, REIT, insurance company, regulated investment company, individual retirement account, other tax-exempt organization,
dealer in securities or currencies, person holding shares of the Trust as part of a hedging, integrated, conversion or straddle transaction, trader in securities that has elected the
mark-to-market method of accounting for its securities, U.S. holder (as defined below) whose functional currency is not the U.S. dollar, investor with applicable
financial statements within the meaning of Section 451(b) of the Code, or non-U.S. investor. Furthermore, this discussion does not reflect possible application of the alternative minimum tax.
A U.S. holder is a beneficial owner that is for U.S. federal income tax purposes:
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a citizen or individual resident of the United States (including certain former citizens and
former long-term residents);
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a corporation or other entity treated as a corporation for U.S. federal income tax purposes, created or
organized in or under the laws of the United States or any state thereof or the District of Columbia;
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an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
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a trust with respect to which a court within the United States is able to exercise primary supervision over
its administration and one or more U.S. persons have the authority to control all of its substantial decisions or the trust has made a valid election in effect under applicable Treasury regulations to be treated as a U.S. person for U.S. federal
income tax purposes, whose status as a U.S. person is not overridden by an applicable tax treaty.
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Taxation of the Trust
The Trust has elected to be treated as a RIC under Subchapter M of the Code. In order to qualify as a RIC, the Trust must,
among other things, satisfy certain requirements relating to the sources of its income, diversification of its assets, and distribution of its income to its shareholders. First, the Trust must derive at least 90% of its annual gross income from
dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock or securities or foreign currencies, or other income (including but not limited to gains from options, futures and forward contracts)
derived with respect to its business of investing in such stock, securities or currencies, or net income derived from interests in qualified publicly traded partnerships (as defined in the Code) (the 90% gross income test).
Second, the Trust must diversify its holdings so that, at the close of each quarter of its taxable year, (i) at least 50% of the value of its total assets consists of cash, cash items, U.S. Government securities, securities of other RICs and
other securities, with such other securities limited in respect of any one issuer to an amount not greater in value than 5% of the value of the Trusts total assets and to not more than 10% of the outstanding voting securities of such issuer,
and (ii) not more than 25% of the market value of the total assets is invested in the securities (other than U.S. Government securities and securities of other RICs) of any one issuer, any two or more issuers controlled by the Trust and engaged
in the same, similar or related trades or businesses, or any one or more qualified publicly traded partnerships.
As long as the Trust qualifies as a RIC, the Trust will generally not be subject to corporate-level U.S. federal income tax on
income and gains that it distributes each taxable year to its shareholders, provided that in such taxable year it distributes at least 90% of the sum of (i) its net tax-exempt interest income, if any, and
(ii) its investment company taxable income (which includes, among other items, dividends, taxable interest, taxable original issue discount and market discount income, income from securities lending, net short-term capital gain in
excess of net long-term capital loss, and any other taxable income other than net capital gain (as defined below) and is reduced by deductible expenses) determined without regard to the deduction for dividends paid. The Trust may retain
for investment its net capital gain (which consists of the excess of its net long-term capital gain over its net short-term capital loss). However, if the Trust retains any net capital gain or any investment company taxable income, it will be
subject to tax at regular corporate rates on the amount retained.
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The Code imposes a 4% nondeductible excise tax on the Trust to the extent the
Trust does not distribute by the end of any calendar year at least the sum of (i) 98% of its ordinary income (not taking into account any capital gain or loss) for the calendar year and (ii) 98.2% of its capital gain in excess of its
capital loss (adjusted for certain ordinary losses) for a one-year period generally ending on October 31 of the calendar year (unless an election is made to use the Trusts fiscal year). In addition,
the minimum amounts that must be distributed in any year to avoid the excise tax will be increased or decreased to reflect any under-distribution or over-distribution, as the case may be, from the previous year. For purposes of the excise tax, the
Trust will be deemed to have distributed any income on which it paid U.S. federal income tax. While the Trust intends to distribute any income and capital gain in the manner necessary to minimize imposition of the 4% nondeductible excise tax, there
can be no assurance that sufficient amounts of the Trusts taxable income and capital gain will be distributed to entirely avoid the imposition of the excise tax. In that event, the Trust will be liable for the excise tax only on the
amount by which it does not meet the foregoing distribution requirement.
If in any taxable year the Trust should fail to
qualify under Subchapter M of the Code for tax treatment as a RIC, the Trust would incur a regular corporate U.S. federal income tax upon all of its taxable income for that year, and all distributions to its shareholders (including distributions of
net capital gain) would be taxable to shareholders as ordinary dividend income for U.S. federal income tax purposes to the extent of the Trusts earnings and profits. Provided that certain holding period and other requirements were met, such
dividends would be eligible (i) to be treated as qualified dividend income in the case of shareholders taxed as individuals and (ii) for the dividends received deduction in the case of corporate shareholders. In addition, to qualify
again to be taxed as a RIC in a subsequent year, the Trust would be required to distribute to shareholders its earnings and profits attributable to non-RIC years. In addition, if the Trust failed to qualify as
a RIC for a period greater than two taxable years, then, in order to qualify as a RIC in a subsequent year, the Trust would be required to elect to recognize and pay tax on any net built-in gain (the excess of
aggregate gain, including items of income, over aggregate loss that would have been realized if the Trust had been liquidated) or, alternatively, be subject to taxation on such built-in gain recognized for a
period of five years.
The remainder of this discussion assumes that the Trust qualifies for taxation as a RIC.
The Trusts Investments. Certain of the Trusts investment practices are subject to special and complex U.S.
federal income tax provisions (including mark-to-market, constructive sale, straddle, wash sale, short sale and other rules) that may, among other things,
(i) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (ii) convert lower taxed long-term capital gains or qualified dividend income into higher taxed short-term capital gains or ordinary income,
(iii) convert ordinary loss or a deduction into capital loss (the deductibility of which is more limited), (iv) cause the Trust to recognize income or gain without a corresponding receipt of cash, (v) adversely affect the time as to
when a purchase or sale of stock or securities is deemed to occur, (vi) adversely alter the characterization of certain complex financial transactions and (vii) produce income that will not be qualified income for purposes of
the 90% annual gross income requirement described above. These U.S. federal income tax provisions could therefore affect the amount, timing and character of distributions to common shareholders. The Trust intends to monitor its transactions and may
make certain tax elections and may be required to dispose of securities to mitigate the effect of these provisions and prevent disqualification of the Trust as a RIC. Additionally, the Trust may be required to limit its activities in derivative
instruments in order to enable it to maintain its RIC status.
The Trust may invest a portion of its net assets in below
investment grade securities. Investments in these types of securities may present special tax issues for the Trust. U.S. federal income tax rules are not entirely clear about issues such as when the Trust may cease to accrue interest, original issue
discount or market discount, when and to what extent deductions may be taken for bad debts or worthless securities, how payments received on obligations in default should be allocated between principal and income and whether modifications or
exchanges of debt obligations in a bankruptcy or workout context are taxable. These and other issues could affect the Trusts ability to distribute sufficient income to preserve its status as a RIC or to avoid the imposition of U.S. federal
income or excise tax.
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Certain debt securities acquired by the Trust may be treated as debt securities
that were originally issued at a discount. Generally, the amount of the original issue discount is treated as interest income and is included in taxable income (and required to be distributed by the Trust in order to qualify as a RIC and avoid U.S.
federal income tax or the 4% excise tax on undistributed income) over the term of the security, even though payment of that amount is not received until a later time, usually when the debt security matures.
If the Trust purchases a debt security on a secondary market at a price lower than its adjusted issue price, the excess of the
adjusted issue price over the purchase price is market discount. Unless the Trust makes an election to accrue market discount on a current basis, generally, any gain realized on the disposition of, and any partial payment of principal
on, a debt security having market discount is treated as ordinary income to the extent the gain, or principal payment, does not exceed the accrued market discount on the debt security. Market discount generally accrues in equal daily
installments. If the Trust ultimately collects less on the debt instrument than its purchase price plus the market discount previously included in income, the Trust may not be able to benefit from any offsetting loss deductions.
The Trust may invest in preferred securities or other securities the U.S. federal income tax treatment of which may not be
clear or may be subject to recharacterization by the Internal Revenue Service. To the extent the tax treatment of such securities or the income from such securities differs from the tax treatment expected by the Trust, it could affect the timing or
character of income recognized by the Trust, potentially requiring the Trust to purchase or sell securities, or otherwise change its portfolio, in order to comply with the tax rules applicable to RICs under the Code.
Gain or loss on the sale of securities by the Trust will generally be long-term capital gain or loss if the securities have
been held by the Trust for more than one year. Gain or loss on the sale of securities held for one year or less will be short-term capital gain or loss.
Because the Trust may invest in foreign securities, its income from such securities may be subject to non-U.S. taxes.
Foreign currency gain or loss on foreign currency exchange contracts, non-U.S. dollar-denominated securities contracts, and non-U.S. dollar-denominated futures contracts, options and forward contracts that are not section 1256 contracts (as
defined below) generally will be treated as ordinary income and loss.
Income from options on individual securities
written by the Trust will generally not be recognized by the Trust for tax purposes until an option is exercised, lapses or is subject to a closing transaction (as defined by applicable regulations) pursuant to which the Trusts
obligations with respect to the option are otherwise terminated. If the option lapses without exercise, the premiums received by the Trust from the writing of such options will generally be characterized as short-term capital gain. If the Trust
enters into a closing transaction, the difference between the premiums received and the amount paid by the Trust to close out its position will generally be treated as short-term capital gain or loss. If an option written by the Trust is exercised,
thereby requiring the Trust to sell the underlying security, the premium will increase the amount realized upon the sale of the security, and the character of any gain on such sale of the underlying security as short-term or long-term capital gain
will depend on the holding period of the Trust in the underlying security. Because the Trust will not have control over the exercise of the options it writes, such exercises or other required sales of the underlying securities may cause the Trust to
realize gains or losses at inopportune times.
Index options that qualify as section 1256 contracts will
generally be marked-to-market for U.S. federal income tax purposes. As a result, the Trust will generally recognize gain or loss on the last day of each
taxable year equal to the difference between the value of the option on that date and the adjusted basis of the option. The adjusted basis of the option will consequently be increased by such gain or decreased by such loss. Any gain or loss with
respect to options on indices and sectors that qualify as section 1256 contracts will be treated as short-term capital gain or loss to the extent of 40% of such gain or loss and long-term capital gain or loss to the extent of 60% of such
gain or loss. Because the mark-to-market rules may cause the Trust to recognize gain in advance of the receipt of cash, the Trust may be required to dispose of
investments in order to meet its distribution requirements. Mark-to-market losses may be suspended or otherwise limited if such losses are part of a straddle
or similar transaction.
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Taxation of Common Shareholders
Trust distributions of its tax-exempt interest on municipal securities, if properly
reported by the Trust to its shareholders (exempt-interest dividends), will generally be exempt from regular federal income tax. In order for the Trust to pay exempt-interest dividends, at least 50% of the value of the Trusts total
assets must consist of tax-exempt obligations on a quarterly basis. If the Trust does not meet this requirement, it would not be able to pay tax-exempt dividends, and
your distributions attributable to interest received by the Trust from any source (including distributions of tax-exempt interest income) would be taxable as ordinary income to the extent of the Trusts
earnings and profits.
The Trust will either distribute or retain for reinvestment all or part of its net capital gain. If
any such gain is retained, the Trust will be subject to a corporate income tax on such retained amount. In that event, the Trust expects to report the retained amount as undistributed capital gain in a notice to its common shareholders, each of
whom, if subject to U.S. federal income tax on long-term capital gains, (i) will be required to include in income for U.S. federal income tax purposes as long-term capital gain its share of such undistributed amounts, (ii) will be entitled
to credit its proportionate share of the tax paid by the Trust against its U.S. federal income tax liability and to claim refunds to the extent that the credit exceeds such liability and (iii) will increase its basis in its common shares by the
amount of undistributed capital gains included in the shareholders income less the tax deemed paid by the shareholder under clause (ii).
Distributions paid to you by the Trust from its net capital gain, if any, that the Trust properly reports as capital gain
dividends (capital gain dividends) are taxable as long-term capital gains, regardless of how long you have held your common shares. All other dividends paid to you by the Trust (including dividends from net short-term capital gains) from
its current or accumulated earnings and profits, other than exempt-interest dividends (ordinary income dividends) are generally subject to tax as ordinary income. Provided that certain holding period and other requirements are met,
ordinary income dividends (if properly reported by the Trust) may qualify (i) for the dividends received deduction in the case of corporate shareholders to the extent that the Trusts income consists of dividend income from U.S.
corporations, and (ii) in the case of individual shareholders, as qualified dividend income eligible to be taxed at long-term capital gains rates to the extent that the Trust receives qualified dividend income. Qualified dividend
income is, in general, dividend income from taxable domestic corporations and certain qualified foreign corporations (e.g., generally, foreign corporations incorporated in a possession of the United States or in certain countries with a qualifying
comprehensive tax treaty with the United States, or whose stock with respect to which such dividend is paid is readily tradable on an established securities market in the United States). There can be no assurance as to what portion, if
any, of the Trusts distributions will constitute qualified dividend income or be eligible for the dividends received deduction.
Any distributions you receive that are in excess of the Trusts current and accumulated earnings and profits will be
treated as a return of capital to the extent of your adjusted tax basis in your common shares, and thereafter as capital gain from the sale of common shares. The amount of any Trust distribution that is treated as a return of capital will reduce
your adjusted tax basis in your common shares, thereby increasing your potential gain or reducing your potential loss on any subsequent sale or other disposition of your common shares.
Common shareholders may be entitled to offset their capital gain dividends with capital losses. The Code contains a number of
statutory provisions affecting when capital losses may be offset against capital gain, and limiting the use of losses from certain investments and activities. Accordingly, common shareholders that have capital losses are urged to consult their tax
advisers.
Dividends and other taxable distributions are taxable to you even though they are reinvested in additional
common shares of the Trust. Dividends and other distributions paid by the Trust are generally treated under the Code as received by you at the time the dividend or distribution is made. If, however, the Trust pays you a dividend in January that was
declared in the previous October, November or December to common shareholders of record on a specified date in one of such months, then such dividend will be treated for U.S. federal income tax purposes as being paid by the Trust and received by you
on December 31 of the year in which the dividend was declared. In addition, certain other distributions made after the close of the Trusts taxable year may be spilled back and treated as paid by the Trust (except for purposes
of the 4% nondeductible excise tax) during such taxable year. In such case, you will be treated as having received such dividends in the taxable year in which the distributions were actually made.
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Interest on certain private activity bonds is an item of tax
preference subject to the alternative minimum tax on individuals. The Trust may invest a portion of its assets in municipal bonds subject to this provision so that a portion of its exempt-interest dividends is an item of tax preference to the extent
such dividends represent interest received from these private activity bonds. Accordingly, investment in the Trust could cause a holder of common shares to be subject to, or result in an increased liability under, the alternative minimum tax.
Exempt-interest dividends are included in determining what portion, if any, of a persons Social Security and railroad
retirement benefits will be includable in gross income subject to federal income tax.
The price of common shares
purchased at any time may reflect the amount of a forthcoming distribution. Those purchasing common shares just prior to the record date of a distribution will receive a distribution which will be taxable to them even though it represents,
economically, a return of invested capital.
The Trust will send you information after the end of each year setting forth
the amount and tax status of any distributions paid to you by the Trust.
The sale or other disposition of common shares
will generally result in capital gain or loss to you and will be long-term capital gain or loss if you have held such common shares for more than one year at the time of sale. Any loss upon the sale or other disposition of common shares held for six
months or less will be treated as long-term capital loss to the extent of any capital gain dividends received (including amounts credited as an undistributed capital gain dividend) by you with respect to such common shares. Any loss you recognize on
a sale or other disposition of common shares will be disallowed if you acquire other common shares (whether through the automatic reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after your sale or exchange of the common shares. In such case, your tax basis in the common shares acquired will be adjusted to reflect the disallowed loss.
If the Trust liquidates, shareholders generally will realize capital gain or loss upon such liquidation in an amount equal to
the difference between the amount of cash or other property received by the shareholder (including any property deemed received by reason of its being placed in a liquidating trust) and the shareholders adjusted tax basis in its common shares.
Any such gain or loss will be long-term if the shareholder is treated as having a holding period in the Trust shares of greater than one year, and otherwise will be short-term.
Current U.S. federal income tax law taxes both long-term and short-term capital gain of corporations at the rates applicable
to ordinary income. For non-corporate taxpayers, short-term capital gain is currently taxed at rates applicable to ordinary income while long-term capital gain generally is taxed at a reduced maximum rate. The
deductibility of capital losses is subject to limitations under the Code.
Certain U.S. holders who are individuals,
estates or trusts and whose income exceeds certain thresholds will be required to pay a 3.8% Medicare tax on all or a portion of their net investment income, which includes dividends received from the Trust and capital gains from the
sale or other disposition of the Trusts common shares.
A common shareholder that is a nonresident alien individual
or a foreign corporation (a foreign investor) generally will be subject to U.S. federal withholding tax at the rate of 30% (or possibly a lower rate provided by an applicable tax treaty) on ordinary income dividends (except as discussed
below). In general, U.S. federal withholding tax and U.S. federal income tax will not apply to any gain or income realized by a foreign investor in respect of any distribution of exempt-interest dividends or net capital gain (including amounts
credited as an undistributed capital gain dividend) or upon the sale or other disposition of common shares of the Trust. Different tax consequences may result if the foreign investor is engaged in a trade or business in the United States or, in the
case of an individual, is present in the United States for 183 days or more during a taxable year and certain other conditions are met. Foreign investors should consult their tax advisers regarding the tax consequences of investing in the
Trusts common shares.
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Ordinary income dividends properly reported by a RIC are generally exempt from
U.S. federal withholding tax where they (i) are paid in respect of the RICs qualified net interest income (generally, its U.S.-source interest income, other than certain contingent interest and interest from obligations of a
corporation or partnership in which the RIC is at least a 10% shareholder, reduced by expenses that are allocable to such income) or (ii) are paid in respect of the RICs qualified short-term capital gains (generally, the
excess of the RICs net short-term capital gain over its long-term capital loss for such taxable year). Depending on its circumstances, the Trust may report all, some or none of its potentially eligible dividends as such qualified net interest
income or as qualified short-term capital gains, and/or treat such dividends, in whole or in part, as ineligible for this exemption from withholding. In order to qualify for this exemption from withholding, a foreign investor needs to comply with
applicable certification requirements relating to its non-U.S. status (including, in general, furnishing an IRS Form W-8BEN, W-8BEN-E or substitute Form). In the case of common shares held through an intermediary, the intermediary may have withheld tax even if the Trust reported the payment as qualified net interest income or
qualified short-term capital gain. Foreign investors should contact their intermediaries with respect to the application of these rules to their accounts. There can be no assurance as to what portion of the Trusts distributions would
qualify for favorable treatment as qualified net interest income or qualified short-term capital gains.
In
addition, withholding at a rate of 30% will apply to dividends paid in respect of common shares of the Trust held by or through certain foreign financial institutions (including investment funds), unless such institution enters into an
agreement with the Treasury to report, on an annual basis, information with respect to shares in, and accounts maintained by, the institution to the extent such shares or accounts are held by certain U.S. persons and by certain non-U.S. entities that are wholly or partially owned by U.S. persons and to withhold on certain payments. Accordingly, the entity through which common shares of the Trust are held will affect the determination of
whether such withholding is required. Similarly, dividends paid in respect of common shares of the Trust held by an investor that is a non-financial foreign entity that does not qualify under certain
exemptions will be subject to withholding at a rate of 30%, unless such entity either (i) certifies that such entity does not have any substantial United States owners or (ii) provides certain information regarding the
entitys substantial United States owners, which the Trust or applicable withholding agent will in turn provide to the Secretary of the Treasury. An intergovernmental agreement between the United States and an applicable foreign
country, or future Treasury regulations or other guidance, may modify these requirements. The Trust will not pay any additional amounts to common shareholders in respect of any amounts withheld. Foreign investors are encouraged to consult with their
tax advisers regarding the possible implications of these rules on their investment in the Trusts common shares.
U.S. federal backup withholding tax may be required on dividends, distributions and sale proceeds payable to certain non-exempt common shareholders who fail to supply their correct taxpayer identification number (in the case of individuals, generally, their social security number) or to make required certifications, or who are
otherwise subject to backup withholding. Backup withholding is not an additional tax and any amount withheld may be refunded or credited against your U.S. federal income tax liability, if any, provided that you timely furnish the required
information to the Internal Revenue Service.
Ordinary income dividends, capital gain dividends, and gain from the sale or
other disposition of common shares of the Trust also may be subject to state, local, and/or foreign taxes. Common shareholders are urged to consult their own tax advisers regarding specific questions about U.S. federal, state, local or foreign tax
consequences to them of investing in the Trust.
The foregoing is a general and abbreviated summary of certain
provisions of the Code and the Treasury regulations currently in effect as they directly govern the taxation of the Trust and its common shareholders. These provisions are subject to change by legislative or administrative action, and any such
change may be retroactive. A more detailed discussion of the tax rules applicable to the Trust and its common shareholders can be found in the SAI that is incorporated by reference into this Prospectus. Common shareholders are urged to consult their
tax advisers regarding specific questions as to U.S. federal, state, local and foreign income or other taxes.
Please
refer to the SAI for more detailed information. You are urged to consult your tax adviser.
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TAXATION OF HOLDERS OF RIGHTS
The value of a right will not be includible in the income of a common shareholder at the time the right is issued.
The basis of a right issued to a common shareholder will be zero, and the basis of the share with respect to which the
subscription right was issued (the old share) will remain unchanged, unless either (a) the fair market value of the right on the date of distribution is at least 15% of the fair market value of the old share, or (b) such shareholder
affirmatively elects (in the manner set out in Treasury regulations under the Code) to allocate to the subscription right a portion of the basis of the old share. If either (a) or (b) applies, then except as described below such
shareholder must allocate basis between the old share and the right in proportion to their fair market values on the date of distribution.
The basis of a right purchased in the market will generally be its purchase price.
The holding period of a right issued to a common shareholder will include the holding period of the old share. No gain or loss
will be recognized by a common shareholder upon the exercise of a right.
No loss will be recognized by a common
shareholder if a right distributed to such common shareholder expires unexercised because the basis of the old share may be allocated to a right only if the right is exercised. If a right that has been purchased in the market expires unexercised,
there will be a recognized loss equal to the basis of the right.
Any gain or loss on the sale of a right will be a
capital gain or loss if the right is held as a capital asset (which in the case of rights issued to common shareholders will depend on whether the old share of beneficial interest is held as a capital asset), and will be a long-term capital gain or
loss if the holding period is deemed to exceed one year.
CERTAIN PROVISIONS IN THE AGREEMENT AND DECLARATION OF TRUST AND BYLAWS
The Agreement and Declaration of Trust
includes provisions that could have the effect of limiting the ability of other entities or persons to acquire control of the Trust or to change the composition of the Board. This could have the effect of depriving shareholders of an opportunity to
sell their shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control over the Trust. Such attempts could have the effect of increasing the expenses of the Trust and disrupting the normal operation
of the Trust. The Board is divided into three classes, with the terms of one class expiring at each annual meeting of shareholders. At each annual meeting, one class of Trustees is elected to a three-year term. This provision could delay for up to
two years the replacement of a majority of the Board. A Trustee may be removed from office for cause only, and only by the action of a majority of the remaining Trustees followed by a vote of the holders of at least 75% of the shares then entitled
to vote for the election of the respective Trustee.
In addition, the Trusts Agreement and Declaration of Trust
requires the favorable vote of a majority of the Board followed by the favorable vote of the holders of at least 75% of the outstanding shares of each affected class or series of the Trust, voting separately as a class or series, to approve, adopt
or authorize certain transactions with 5% or greater holders of a class or series of shares and their associates, unless the transaction has been approved by at least 80% of the Trustees, in which case a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Trust shall be required. For purposes of these provisions, a 5% or greater holder of a class or series of shares (a Principal Shareholder) refers to any person who,
whether directly or indirectly and whether alone or together with its affiliates and associates, beneficially owns 5% or more of the outstanding shares of all outstanding classes or series of shares of beneficial interest of the Trust. The 5% holder
transactions subject to these special approval requirements are:
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the merger or consolidation of the Trust or any subsidiary of the Trust with or into any Principal
Shareholder;
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the issuance of any securities of the Trust to any Principal Shareholder for cash (other than pursuant to any
automatic dividend reinvestment plan);
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the sale, lease or exchange of all or any substantial part of the assets of the Trust to any Principal
Shareholder, except assets having an aggregate fair market value of less than 2% of the total assets of the Trust, aggregating for the purpose of such computation all assets sold, leased or exchanged in any series of similar transactions within a
twelve-month period; or
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the sale, lease or exchange to the Trust or any subsidiary of the Trust, in exchange for securities of the
Trust, of any assets of any Principal Shareholder, except assets having an aggregate fair market value of less than 2% of the total assets of the Trust, aggregating for purposes of such computation all assets sold, leased or exchanged in any series
of similar transactions within a twelve-month period.
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To convert the Trust to an open-end investment company, the Trusts Agreement and Declaration of Trust requires the favorable vote of a majority of the Board followed by the favorable vote of the holders of at least 75% of the
outstanding shares of each affected class or series of shares of the Trust, voting separately as a class or series, unless such conversion has been approved by at least 80% of the Trustees, in which case a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Trust shall be required. The foregoing vote would satisfy a separate requirement in the Investment Company Act that any conversion of the Trust to an
open-end investment company be approved by the shareholders. If approved in the foregoing manner, we anticipate conversion of the Trust to an open-end investment company
might not occur until 90 days after the shareholders meeting at which such conversion was approved and would also require at least 10 days prior notice to all shareholders. Conversion of the Trust to an open-end investment company would require the redemption of any outstanding preferred shares, which could eliminate or alter the leveraged capital structure of the Trust with respect to the common shares. Following
any such conversion, it is also possible that certain of the Trusts investment policies and strategies would have to be modified to assure sufficient portfolio liquidity. In the event of conversion, the common shares would cease to be listed
on the NYSE or other national securities exchanges or market systems. Shareholders of an open-end investment company may require the company to redeem their shares at any time, except in certain circumstances
as authorized by or under the Investment Company Act, at their net asset value, less such redemption charge, if any, as might be in effect at the time of a redemption. The Trust expects to pay all such redemption requests in cash, but reserves the
right to pay redemption requests in a combination of cash or securities. If such partial payment in securities were made, investors may incur brokerage costs in converting such securities to cash. If the Trust were converted to an open-end fund, it is likely that new shares would be sold at net asset value plus a sales load. The Board believes, however, that the closed-end structure is desirable in
light of the Trusts investment objectives and policies. Therefore, you should assume that it is not likely that the Board would vote to convert the Trust to an open-end fund.
To liquidate the Trust, the Trusts Agreement and Declaration of Trust requires the favorable vote of at least 80% of
Trustees.
For the purposes of calculating a majority of the outstanding voting securities under the
Trusts Agreement and Declaration of Trust, each class and series of the Trust shall vote together as a single class, except to the extent required by the Investment Company Act or the Trusts Agreement and Declaration of Trust with
respect to any class or series of shares. If a separate vote is required, the applicable proportion of shares of the class or series, voting as a separate class or series, also will be required.
The Board has determined that provisions with respect to the Board and the shareholder voting requirements described above,
which voting requirements are greater than the minimum requirements under Delaware law or the Investment Company Act, are in the best interests of shareholders generally. Reference should be made to the Agreement and Declaration of Trust on file
with the SEC for the full text of these provisions.
The Trusts Bylaws generally require that advance notice be
given to the Trust in the event a shareholder desires to nominate a person for election to the Board or to transact any other business at an annual meeting of shareholders. Notice of any such nomination or business must be delivered to or received
at the principal executive offices of the Trust not less than 120 calendar days nor more than 150 calendar days prior to the anniversary date of the prior years annual meeting (subject to certain exceptions). Any notice by a shareholder must
be accompanied by certain information as provided in the Bylaws. Reference should be made to the Bylaws on file with the SEC for the full text of these provisions.
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CLOSED-END FUND STRUCTURE
The Trust is a diversified, closed-end management investment company (commonly referred to as a closed-end fund). Closed-end funds differ from open-end funds (which are generally referred to as mutual funds) in that closed-end funds generally list their shares for trading on a stock exchange and do not redeem their
shares at the request of the shareholder. This means that if you wish to sell your shares of a closed-end fund you must trade them on the stock exchange like any other stock at the prevailing market price at
that time. In a mutual fund, if the shareholder wishes to sell shares of the fund, the mutual fund will redeem or buy back the shares at NAV. Also, mutual funds generally offer new shares on a continuous basis to new investors and closed-end funds generally do not. The continuous inflows and outflows of assets in a mutual fund can make it difficult to manage the funds investments. By comparison,
closed-end funds are generally able to stay more fully invested in securities that are consistent with their investment objective and also have greater flexibility to make certain types of investments and to
use certain investment strategies, such as financial leverage and investments in illiquid securities.
Shares of closed-end funds frequently trade at a discount to their NAV. Because of this possibility and the recognition that any such discount may not be in the interest of shareholders, the Board might consider from time to
time engaging in open-market repurchases, tender offers for shares or other programs intended to reduce the discount. We cannot guarantee or assure, however, that the Board will decide to engage in any of these actions. Nor is there any guarantee or
assurance that such actions, if undertaken, would result in the shares trading at a price equal or close to the NAV. See Repurchase of Common Shares below and Repurchase of Common Shares in the SAI. The Board might also
consider converting the Trust to an open-end mutual fund, which would also require a vote of the shareholders of the Trust.
REPURCHASE OF COMMON SHARES
Shares of closed-end investment companies often trade at a discount to their NAVs and
the Trusts common shares may also trade at a discount to their NAV, although it is possible that they may trade at a premium above NAV. The market price of the Trusts common shares will be determined by such factors as relative demand
for and supply of such common shares in the market, the Trusts NAV, general market and economic conditions and other factors beyond the control of the Trust. See Net Asset Value and Description of SharesCommon
Shares. Although the Trusts common shareholders will not have the right to redeem their common shares, the Trust may take action to repurchase common shares in the open market or make tender offers for its common shares. This may have
the effect of reducing any market discount from NAV.
There is no assurance that, if action is undertaken to repurchase or
tender for common shares, such action will result in the common shares trading at a price which approximates their NAV. Although share repurchases and tender offers could have a favorable effect on the market price of the Trusts common
shares, you should be aware that the acquisition of common shares by the Trust will decrease the capital of the Trust and, therefore, may have the effect of increasing the Trusts expense ratio and decreasing the asset coverage with respect to
any borrowings or preferred shares outstanding. Any share repurchases or tender offers will be made in accordance with the requirements of the Securities Exchange Act of 1934, as amended, the Investment Company Act and the principal stock exchange
on which the common shares are traded. For additional information, see Repurchase of Common Shares in the SAI.
PLAN OF DISTRIBUTION
We may sell common shares,
including to existing shareholders in a rights offering, through underwriters or dealers, directly to one or more purchasers (including existing shareholders in a rights offering), through agents, to or through underwriters or dealers, or through a
combination of any such methods of sale. The applicable Prospectus Supplement will identify any underwriter or agent involved in the offer and sale of our common shares, any sales loads, discounts, commissions, fees or other compensation paid to any
underwriter, dealer or agent, the offering price, net proceeds and use of proceeds and the terms of any sale. In the case of a rights offering, the applicable Prospectus Supplement will set forth the number of our common shares issuable upon the
exercise of each right and the other terms of such rights offering.
The distribution of our common shares may be effected
from time to time in one or more transactions at a fixed price or prices, which may be changed, at prevailing market prices at the time of sale, at prices related to such
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prevailing market prices, or at negotiated prices. Sales of our common shares may be made in transactions that are deemed to be at the market as defined in Rule 415 under the
Securities Act, including sales made directly on the NYSE or sales made to or through a market maker other than on an exchange.
We may sell our common shares directly to, and solicit offers from, institutional investors or others who may be deemed to be
underwriters as defined in the Securities Act for any resales of the securities. In this case, no underwriters or agents would be involved. We may use electronic media, including the Internet, to sell offered securities directly.
In connection with the sale of our common shares, underwriters or agents may receive compensation from us in the form of
discounts, concessions or commissions. Underwriters may sell our common shares to or through dealers, and such dealers may receive compensation in the form of discounts, concessions or commissions from the underwriters and/or commissions from the
purchasers for whom they may act as agents. Underwriters, dealers and agents that participate in the distribution of our common shares may be deemed to be underwriters under the Securities Act, and any discounts and commissions they receive from us
and any profit realized by them on the resale of our common shares may be deemed to be underwriting discounts and commissions under the Securities Act. Any such underwriter or agent will be identified and any such compensation received from us will
be described in the applicable Prospectus Supplement. The maximum amount of compensation to be received by any Financial Industry Regulatory Authority member or independent broker-dealer will not exceed eight percent for the sale of any securities
being offered pursuant to Rule 415 under the Securities Act. We will not pay any compensation to any underwriter or agent in the form of warrants, options, consulting or structuring fees or similar arrangements. In connection with any rights
offering to existing shareholders, we may enter into a standby underwriting arrangement with one or more underwriters pursuant to which the underwriter(s) will purchase common shares remaining unsubscribed after the rights offering.
If a Prospectus Supplement so indicates, we may grant the underwriters an option to purchase additional common shares at the
public offering price, less the underwriting discounts and commissions, within 45 days from the date of the Prospectus Supplement, to cover any over-allotments.
Under agreements into which we may enter, underwriters, dealers and agents who participate in the distribution of our common
shares may be entitled to indemnification by us against certain liabilities, including liabilities under the Securities Act. Underwriters, dealers and agents may engage in transactions with us, or perform services for us, in the ordinary course of
business.
If so indicated in the applicable Prospectus Supplement, we will ourselves, or will authorize underwriters or
other persons acting as our agents to solicit offers by certain institutions to purchase our common shares from us pursuant to contracts providing for payment and delivery on a future date. Institutions with which such contacts may be made include
commercial and savings banks, insurance companies, pension funds, investment companies, educational and charitable institutions and others, but in all cases such institutions must be approved by us. The obligation of any purchaser under any such
contract will be subject to the condition that the purchase of the common shares shall not at the time of delivery be prohibited under the laws of the jurisdiction to which such purchaser is subject. The underwriters and such other agents will not
have any responsibility in respect of the validity or performance of such contracts. Such contracts will be subject only to those conditions set forth in the Prospectus Supplement, and the Prospectus Supplement will set forth the commission payable
for solicitation of such contracts.
To the extent permitted under the Investment Company Act and the rules and
regulations promulgated thereunder, the underwriters may from time to time act as brokers or dealers and receive fees in connection with the execution of our portfolio transactions after the underwriters have ceased to be underwriters and, subject
to certain restrictions, each may act as a broker while it is an underwriter.
A Prospectus and accompanying Prospectus
Supplement in electronic form may be made available on the websites maintained by underwriters. The underwriters may agree to allocate a number of securities for sale to their online brokerage account holders. Such allocations of securities for
Internet distributions will be made on the same basis as other allocations. In addition, securities may be sold by the underwriters to securities dealers who resell securities to online brokerage account holders.
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In order to comply with the securities laws of certain states, if applicable, our
common shares offered hereby will be sold in such jurisdictions only through registered or licensed brokers or dealers.
INCORPORATION BY REFERENCE
This Prospectus is part
of a registration statement that we have filed with the SEC. We are allowed to incorporate by reference the information that we file with the SEC, which means that we can disclose important information to you by referring you to those
documents. We incorporate by reference into this Prospectus the documents listed below and any future filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, including any filings on or after the date of this
Prospectus from the date of filing (excluding any information furnished, rather than filed), until we have sold all of the offered securities to which this Prospectus and any accompanying prospectus supplement relates or the offering is otherwise
terminated. The information incorporated by reference is an important part of this Prospectus. Any statement in a document incorporated by reference into this Prospectus will be deemed to be automatically modified or superseded to the extent a
statement contained in (1) this Prospectus or (2) any other subsequently filed document that is incorporated by reference into this Prospectus modifies or supersedes such statement. The documents incorporated by reference herein include:
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the Trusts SAI, dated [●], 2022, filed with this Prospectus;
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the description
of the Trusts common shares contained in our Registration Statement on Form 8-A (File No. 001-35819) filed with the SEC on February 20, 2013,
including any amendment or report filed for the purpose of updating such description prior to the termination of the offering registered hereby.
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The Trust will provide without charge to each person, including any beneficial owner, to whom this Prospectus is delivered,
upon written or oral request, a copy of any and all of the documents that have been or may be incorporated by reference in this Prospectus or the accompanying prospectus supplement. You should direct requests for documents by calling:
Client Services Desk
(800) 882-0052
The Trust makes available this Prospectus, SAI and the Trusts annual and
semi-annual reports, free of charge, at http://www.blackrock.com. You may also obtain this Prospectus, the SAI, other documents incorporated by reference and other information the Trust files electronically, including reports and proxy statements,
on the SEC website (http://www.sec.gov) or with the payment of a duplication fee, by electronic request at publicinfo@sec.gov. Information contained in, or that can be accessed through, the Trusts website is not incorporated by reference into
this Prospectus and should not be considered to be part of this Prospectus or the accompanying prospectus supplement.
PRIVACY PRINCIPLES OF THE TRUST
The Trust is
committed to maintaining the privacy of shareholders and to safeguarding their non-public personal information. The following information is provided to help you understand what personal information the Trust
collects, how we protect that information, and why in certain cases we may share such information with select other parties.
The Trust does not receive any non-public personal information relating to its
shareholders who purchase shares through their broker-dealers. In the case of shareholders who are record holders of the Trust, the Trust receives personal non-public information on account applications or
other forms. With respect to these shareholders, the Trust also has access to specific information regarding their transactions in the Trust.
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The Trust does not disclose any
non-public personal information about its shareholders or former shareholders to anyone, except as permitted by law or as is necessary in order to service our shareholders accounts (for example, to a
transfer agent).
The Trust restricts access to non-public personal information
about its shareholders to BlackRock employees with a legitimate business need for the information. The Trust maintains physical, electronic and procedural safeguards designed to protect the non-public personal
information of our shareholders.
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[15,000,000 Shares]
BLACKROCK MULTI-SECTOR INCOME TRUST
Common Shares of Beneficial Interest
Rights to Purchase Common Shares of Beneficial Interest
PROSPECTUS
[●], 2022
The information in this Prospectus Supplement is not complete and may be
changed. BlackRock Multi-Sector Income Trust may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Prospectus Supplement is not an offer to sell these securities and is
not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED [●], 2022
PROSPECTUS SUPPLEMENT
(To Prospectus dated [●], 2022)
Filed
Pursuant to Rule 424(b)([●])
Registration Statement No. 333-[●]
BLACKROCK MULTI-SECTOR INCOME TRUST
Up to [●] Common Shares of Beneficial Interest
BlackRock Multi-Sector Income Trust (the Trust, we, us or our) is offering for
sale [●] of our common shares of beneficial interest (common shares). Our common shares are listed on the New York Stock Exchange (NYSE) under the symbol BIT. As of the close of business on [●], 2022,
the last reported net asset value per share of our common shares was $[●] and the last reported sales price per share of our common shares on the NYSE was $[●].
The Trust is a diversified, closed-end management investment company registered under
the Investment Company Act of 1940, as amended (the Investment Company Act). The Trusts investment objective is to seek high current income, with a secondary objective of capital appreciation. The Trusts investment adviser is
BlackRock Advisors, LLC (the Advisor). BlackRock International Limited and BlackRock (Singapore) Limited serve as sub-advisers to the Trust (each, a
Sub-Advisor).
Sales of our common shares, if any, under this
Prospectus Supplement and the accompanying Prospectus may be made in negotiated transactions or transactions that are deemed to be at the market as defined in Rule 415 under the Securities Act of 1933, as amended (the
Securities Act), including sales made directly on the NYSE or sales made to or through a market maker other than on an exchange.
Investing in the Trusts common shares involves certain risks that are described in the Risks section
beginning on page [26] of the accompanying Prospectus.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS
APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS SUPPLEMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[●], 2022
S-1
This Prospectus Supplement, together with the accompanying Prospectus, sets forth
concisely the information about the Trust that a prospective investor should know before investing. You should read this Prospectus Supplement and the accompanying Prospectus, which contain important information, before deciding whether to invest in
the common shares. You should retain the accompanying Prospectus and this Prospectus Supplement for future reference. A Statement of Additional Information (SAI), dated [●], 2022, containing additional information about the Trust,
has been filed with the Securities and Exchange Commission (SEC) and, as amended from time to time, is incorporated by reference in its entirety into this Prospectus Supplement and the accompanying Prospectus. This Prospectus Supplement,
the accompanying Prospectus and the SAI are part of a shelf registration statement filed with the SEC. This Prospectus Supplement describes the specific details regarding this offering, including the method of distribution. If
information in this Prospectus Supplement is inconsistent with the accompanying Prospectus or the SAI, you should rely on this Prospectus Supplement. You may call (800) 882-0052, visit the Trusts website
(http://www.blackrock.com) or write to the Trust to obtain, free of charge, copies of the SAI and the Trusts semi-annual and annual reports, as well as to obtain other information about the Trust or to make shareholder inquiries. The SAI, as
well as the Trusts semi-annual and annual reports, are also available for free on the SECs website (http://www.sec.gov). You may also e-mail requests for these documents to publicinfo@sec.gov.
Information contained in, or that can be accessed through, the Trusts website is not part of this Prospectus Supplement or the accompanying Prospectus.
You should not construe the contents of this Prospectus Supplement and the accompanying Prospectus as legal, tax or financial
advice. You should consult with your own professional advisors as to the legal, tax, financial or other matters relevant to the suitability of an investment in the Trust.
The common shares do not represent a deposit or an obligation of, and are not guaranteed or endorsed by, any bank or other
insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.
S-2
You should rely only on the information contained or incorporated by reference
in this Prospectus Supplement and the accompanying Prospectus. Neither the Trust nor the underwriters have authorized anyone to provide you with different information. The Trust is not making an offer to sell these securities in any jurisdiction
where the offer or sale is not permitted. You should not assume that the information contained in this Prospectus Supplement and the accompanying Prospectus is accurate as of any date other than the date of this Prospectus Supplement and the
accompanying Prospectus, respectively. Our business, financial condition, results of operations and prospects may have changed since those dates. In this Prospectus Supplement and in the accompanying Prospectus, unless otherwise indicated,
Trust, us, our and we refer to BlackRock Multi-Sector Income Trust, a Delaware statutory trust.
TABLE OF CONTENTS
Prospectus Supplement
TABLE OF CONTENTS
Prospectus
S-3
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus Supplement, the accompanying Prospectus and the SAI contain forward-looking statements.
Forward-looking statements can be identified by the words may, will, intend, expect, estimate, continue, plan, anticipate, and similar terms and the
negative of such terms. Such forward-looking statements may be contained in this Prospectus Supplement as well as in the accompanying Prospectus. By their nature, all forward-looking statements involve risks and uncertainties, and actual results
could differ materially from those contemplated by the forward-looking statements. Several factors that could materially affect our actual results are the performance of the portfolio of securities we hold, the price at which our shares will trade
in the public markets and other factors discussed in our periodic filings with the SEC.
Although we believe that the
expectations expressed in our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in our forward-looking statements. Our future financial condition and results of operations, as well as
any forward-looking statements, are subject to change and are subject to inherent risks and uncertainties, such as those disclosed in the Risks section of the accompanying Prospectus. All forward-looking statements contained or
incorporated by reference in this Prospectus Supplement or the accompanying Prospectus are made as of the date of this Prospectus Supplement or the accompanying Prospectus, as the case may be. Except for our ongoing obligations under the federal
securities laws, we do not intend, and we undertake no obligation, to update any forward-looking statement. The forward-looking statements contained in this Prospectus Supplement, the accompanying Prospectus and the SAI are excluded from the safe
harbor protection provided by Section 27A of the Securities Act.
Currently known risk factors that could cause
actual results to differ materially from our expectations include, but are not limited to, the factors described in the Risks section of the accompanying Prospectus. We urge you to review carefully those sections for a more detailed
discussion of the risks of an investment in our common shares.
S-4
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by reference to the more detailed information included elsewhere in this Prospectus
Supplement and in the accompanying Prospectus and in the SAI.
The Trust
The Trust is a diversified, closed-end management investment company. The Trusts investment
objective is to seek high current income, with a secondary objective of capital appreciation. There can be no assurance that the Trusts investment objectives will be achieved or that the Trusts investment program will be successful. The
Trusts common shares are listed for trading on the NYSE under the symbol BIT.
Investment Advisor and
Sub-Advisors
BlackRock Advisors, LLC (previously defined as the Advisor) is the
Trusts investment adviser. BlackRock International Limited (BIL) and BlackRock (Singapore) Limited (BSL) serve as sub-advisers to the Trust (each, previously defined as a Sub-Advisor).The Advisor receives an annual fee, payable monthly, in an amount equal to 0.80% of the average daily value of the Trusts Managed Assets. Managed Assets means the total
assets of the Trust (including any assets attributable to money borrowed for investment purposes) minus the sum of the Trusts accrued liabilities (other than money borrowed for investment purposes). The Advisor, and not the Trust, pays BIL and
BSL, for services they provide for that portion of the Trust for which BIL and BSL, as applicable, acts as sub-adviser, a monthly fee that is equal to a percentage of the investment advisory fees paid by the
Trust to the Advisor.
The Offering
[The provisions of the Investment Company Act generally require that the public offering price of common shares (less any underwriting
commissions and discounts) must equal or exceed the net asset value per share of a companys common shares (calculated within 48 hours of pricing).
Sales of our common shares, if any, under this Prospectus Supplement and the accompanying Prospectus may be made in negotiated transactions or
transactions that are deemed to be at the market as defined in Rule 415 under the Securities Act, including sales made directly on the NYSE or sales made to or through a market maker other than on an exchange.]
Use of Proceeds
We currently anticipate
that we will be able to invest all of the net proceeds of any sales of common shares pursuant to this Prospectus Supplement in accordance with our investment objectives and policies as described in the accompanying Prospectus under The
Trusts Investments within approximately three months of the receipt of such proceeds. Pending such investment, it is anticipated that the proceeds will be invested in short-term, tax-exempt or
taxable investment grade securities or in high quality, short-term money market instruments. Depending on market conditions and operations, a portion of the cash held by the Trust, including any proceeds raised from the offering, may be used to pay
distributions in accordance with the Trusts distribution policy and may be a return of capital.
SUMMARY OF TRUST EXPENSES
The following table and example are intended to assist you in understanding the various costs and expenses directly or
indirectly associated with investing in our common shares.
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Shareholder Transaction Expenses
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Sales load paid by you (as a percentage of offering price)(1)
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[●]%
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Offering expenses borne by the Trust (as a percentage of offering price)(1)
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[●]%
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Dividend reinvestment plan fees
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$[●] per share for open-market
purchases of common shares(2)
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S-5
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Estimated Annual Expenses (as a percentage of net assets attributable to common
shares)
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Management fees(4)(5)
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[●]%
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Other Expenses(3)
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[●]%
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Miscellaneous Other Expenses
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[●]%
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Interest Expense
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[●]%
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Total Annual Trust Operating Expenses
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[●]%
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Fee Waivers and/or Expense
Reimbursements(5)
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Total Annual Trust Operating Expenses after Fee Waivers and/or Expense Reimbursements (5)
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[●]%
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(1)
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Trust shareholders will pay all offering expenses involved with this offering.
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(2)
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Computershare Trust Company, N.A.s (the Reinvestment Plan Agent) fees for the handling of
the reinvestment of dividends will be paid by the Trust. However, you will pay a $0.02 per share fee incurred in connection with open-market purchases, which will be deducted from the value of the dividend. You will also be charged a $2.50 sales fee
and pay a $0.15 per share fee if you direct the Reinvestment Plan Agent to sell your common shares held in a dividend reinvestment account. Per share fees include any applicable brokerage commissions the Reinvestment Plan Agent is required to pay.
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(3)
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Other expenses have been restated to reflect current fees.
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(4)
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The Trust currently pays the Advisor a monthly fee at an annual contractual investment management fee rate
of 0.80% of the average daily value of the Trusts managed assets. For purposes of calculating these fees, managed assets means the total assets of the Trust (including any assets attributable to money borrowed) minus the sum of its
accrued liabilities (other than money borrowed for investment purposes).
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(5)
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The Trust and the Advisor have entered into a fee waiver agreement (the Fee Waiver Agreement),
pursuant to which the Advisor has contractually agreed to waive the management fee with respect to any portion of the Trusts assets attributable to investments in any equity and fixed-income mutual funds and exchange-traded funds managed by
the Advisor or its affiliates that have a contractual management fee, through June 30, 2023. In addition, pursuant to the Fee Waiver Agreement, the Advisor has contractually agreed to waive its management fees by the amount of investment
advisory fees the Trust pays to the Advisor indirectly through its investment in money market funds managed by the Advisor or its affiliates, through June 30, 2023. The Fee Waiver Agreement may be terminated at any time, without the payment of
any penalty, only by the Trust (upon the vote of a majority of the Trustees who are not interested persons (as defined in the Investment Company Act) of the Trust or a majority of the outstanding voting securities of the Trust), upon 90
days written notice by the Trust to the Advisor.
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Example
The following example illustrates the expenses (including the sales load of $[●] and offering costs of $[●]) that you would pay on
a $1,000 investment in common shares, assuming (i) total net annual expenses of [●]% of net assets attributable to common shares and (ii) a 5% annual return:
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1 Year
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3 Years
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5 Years
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10 Years
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Total expenses incurred
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$
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[●]
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$
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[●]
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$
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[●]
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$
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[●]
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The example should not be considered a representation of future expenses. The example
assumes that the estimated Other expenses set forth in the Estimated Annual Expenses table are accurate and that all dividends and distributions are reinvested at net asset value. Actual expenses may be greater or less than those
assumed. Moreover, the Trusts actual rate of return may be greater or less than the hypothetical 5% return shown in the example.
USE OF PROCEEDS
We estimate the total net proceeds of the offering to be $[●] based on the public offering price of $[] per share
and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
The net
proceeds from the issuance of common shares hereunder will be invested in accordance with the Trusts investment objectives and policies as set forth in this Prospectus Supplement and the accompanying Prospectus. We
S-6
currently anticipate that we will be able to invest all of the net proceeds in accordance with our investment objectives and policies within approximately three months of the receipt of such
proceeds. Such investments may be delayed if suitable investments are unavailable at the time or for other reasons, such as market volatility and lack of liquidity in the markets of suitable investments. Pending such investment, it is anticipated
that the proceeds will be invested in short-term, tax-exempt or taxable investment grade securities or in high quality, short-term money market instruments. Depending on market conditions and operations, a
portion of the cash held by the Trust, including any proceeds raised from the offering, may be used to pay distributions in accordance with the Trusts distribution policy and may be a return of capital. A return of capital is a return to
investors of a portion of their original investment in the Trust. In general terms, a return of capital would involve a situation in which a Trust distribution (or a portion thereof) represents a return of a portion of a shareholders
investment in the Trust, rather than making a distribution that is funded from the Trusts earned income or other profits. Although return of capital distributions may not be currently taxable, such distributions would decrease the basis of a
shareholders shares, and therefore, may increase a shareholders tax liability for capital gains upon a sale of shares, even if sold at a loss to the shareholders original investments.
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Trust as of [●], 2022 and its adjusted capitalization
assuming the common shares available in the offering discussed in this Prospectus Supplement had been issued.
[To be provided.]
PLAN OF DISTRIBUTION
[To be provided.]
LEGAL MATTERS
Certain legal matters in connection with the common shares will be passed upon for the Trust by
Willkie Farr & Gallagher LLP, New York, New York, counsel to the Trust. Willkie Farr & Gallagher LLP may rely as to certain matters of Delaware law on the opinion of Morris, Nichols, Arsht & Tunnell LLP, Wilmington,
Delaware. [Certain legal matters will be passed on by [●] as special counsel to the Underwriters in connection with the offering.]
ADDITIONAL INFORMATION
This Prospectus Supplement and the accompanying Prospectus constitute part of a Registration Statement filed by the Trust with
the SEC under the Securities Act and the Investment Company Act. This Prospectus Supplement and the accompanying Prospectus omit certain of the information contained in the Registration Statement, and reference is hereby made to the Registration
Statement and related exhibits for further information with respect to the Trust and the common shares offered hereby. Any statements contained herein concerning the provisions of any document are not necessarily complete, and, in each instance,
reference is made to the copy of such document filed as an exhibit to the Registration Statement or otherwise filed with the SEC. Each such statement is qualified in its entirety by such reference. The complete Registration Statement may be obtained
from the SEC upon payment of the fee prescribed by its rules and regulations or free of charge through the SECs website (http://www.sec.gov).
S-7
BLACKROCK MULTI-SECTOR
INCOME TRUST
[●] Common Shares of
Beneficial Interest
PROSPECTUS SUPPLEMENT
[●], 2022
Until [ ], 2022 (25 days after the date of this Prospectus Supplement), all dealers that buy, sell or trade the
common shares, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers obligation to deliver a prospectus when acting as underwriters.
The information in this Prospectus Supplement is not complete and may be
changed. BlackRock Multi-Sector Income Trust may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Prospectus Supplement is not an offer to sell these securities and is
not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED [●], 2022
Filed Pursuant to Rule 424
Registration Statement No. 333-[●]
PROSPECTUS SUPPLEMENT
(To Prospectus
dated [●], 2022)
BLACKROCK MULTI-SECTOR INCOME TRUST
[●] Rights for [●] Shares of Beneficial Interest
Issuable Upon the Exercise of
Transferrable Subscription Rights to Acquire Shares of Beneficial Interest
BlackRock Multi-Sector Income Trust (the Trust, we, us or our) is issuing
transferrable subscription rights (the Rights) to our common shareholders (the Common Shareholders) to subscribe for an aggregate of [●] common shares of beneficial interest (each, a Common Share and
collectively, the Common Shares).
The Trust is a diversified,
closed-end management investment company registered under the Investment Company Act of 1940, as amended. The Trusts investment objective is to seek high current income, with a secondary objective of
capital appreciation. The Trusts investment adviser is BlackRock Advisors, LLC (the Advisor). BlackRock International Limited and BlackRock (Singapore) Limited serve as sub-advisers to the
Trust (each, a Sub-Advisor).
The Common Shares are listed on the New
York Stock Exchange (NYSE) under the symbol BIT. Common Shareholders of record on [●], 2022 (the Record Date) will receive [●] Right for each Common Share held. These Rights are transferable and will
allow the holders thereof to purchase additional Common Shares. The Rights will be listed for trading on the [●] under the symbol [●] during the course of the Rights offering.
The Rights entitle their holders to purchase [●] new Common Share for every [●] Rights held. Any Common
Shareholder who owns fewer than [●] Common Shares as of the close of business on the Record Date may subscribe for [●] full Common Share. Common Shareholders as of the close of business on the Record Date who fully exercise all Rights
initially issued to them (other than those Rights that cannot be exercised because they represent the right to acquire less than one Common Share) will be entitled to subscribe for additional Common Shares that remain unsubscribed as a result of any
unexercised Rights. This over-subscription privilege is subject to a number of limitations and subject to allotment.
The
subscription price per Common Share (the Subscription Price) will be determined based upon a formula equal to [●]% of the average of the last reported sales price of a Common Share on the NYSE on the date on which the Rights
offering expires, as such date may be extended from time to time, and each of the [● (●)] preceding trading days (the Formula Price). If, however, the Formula Price is less than [●]% of the net asset value
(NAV) per Common Share at the close of trading on the NYSE on the Expiration Date (as defined below), then the Subscription Price will be [●]% of the Trusts NAV per Common Share at the close of trading on the NYSE on the
Expiration Date. All offering expenses, including sales commissions, will be borne by the Advisor, and not the Trust or any Common Shareholders. The Rights offering will expire at 5:00 p.m., Eastern time, on [●], 2022, unless extended as
described in this Prospectus Supplement (the Expiration Date).
R-1
On [●], 2022 (the last trading date prior to the Common Shares trading ex-Rights), the last reported net asset value per share of the Common Shares was $[●] and the last reported sales price per share of Common Shares on the NYSE was $[●], representing a [premium] to net
asset value of [●]%.
This Prospectus Supplement, together with the accompanying Prospectus, sets forth concisely
the information about the Trust that a prospective investor should know before investing. You should read this Prospectus Supplement and the accompanying Prospectus, which contain important information, before deciding whether to invest in the
Common Shares. You should retain the accompanying Prospectus and this Prospectus Supplement for future reference. A Statement of Additional Information (SAI), dated [●], 2022, containing additional information about the Trust, has
been filed with the Securities and Exchange Commission (SEC) and, as amended from time to time, is incorporated by reference in its entirety into this Prospectus Supplement and the accompanying Prospectus. This Prospectus Supplement, the
accompanying Prospectus and the SAI are part of a shelf registration statement filed with the SEC. This Prospectus Supplement describes the specific details regarding this offering, including the method of distribution. If information in
this Prospectus Supplement is inconsistent with the accompanying Prospectus or the SAI, you should rely on this Prospectus Supplement. You may call (800) 882-0052, visit the Trusts website
(http://www.blackrock.com) or write to the Trust to obtain, free of charge, copies of the SAI and the Trusts semi-annual and annual reports, as well as to obtain other information about the Trust or to make shareholder inquiries. The SAI, as
well as the Trusts semi-annual and annual reports, are also available for free on the SECs website (http://www.sec.gov). You may also e-mail requests for these documents to publicinfo@sec.gov.
Information contained in, or that can be accessed through, the Trusts website is not part of this Prospectus Supplement or the accompanying Prospectus. Common Shareholders please call toll-free at [●] (banks and brokers please call
[●]) or please send written requests to [●].
Investing in Common Shares through Rights involves certain
risks that are described in the Special Characteristics and Risks of the Rights Offering section of this Prospectus Supplement.
SHAREHOLDERS WHO DO NOT FULLY EXERCISE THEIR RIGHTS MAY, AT THE COMPLETION OF THE RIGHTS OFFERING, OWN A SMALLER
PROPORTIONAL INTEREST IN THE TRUST THAN IF THEY EXERCISED THEIR RIGHTS. AS A RESULT OF THE RIGHTS OFFERING YOU MAY EXPERIENCE SUBSTANTIAL DILUTION OF THE AGGREGATE NET ASSET VALUE OF YOUR COMMON SHARES DEPENDING UPON WHETHER THE TRUSTS NET
ASSET VALUE PER COMMON SHARE IS ABOVE OR BELOW THE SUBSCRIPTION PRICE ON THE EXPIRATION DATE. RIGHTS EXERCISED BY A SHAREHOLDER ARE IRREVOCABLE.
THE TRUST HAS DECLARED MONTHLY DISTRIBUTIONS PAYABLE ON [●], 2022 WITH A RECORD DATE OF
[●], 2022. ANY COMMON SHARES ISSUED AS A RESULT OF THE RIGHTS OFFERING WILL NOT BE RECORD DATE SHARES FOR THE TRUSTS MONTHLY DISTRIBUTION TO BE PAID ON [●], 2022 AND WILL NOT BE ENTITLED TO RECEIVE SUCH
DISTRIBUTION.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS SUPPLEMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Per Common
Share
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Total(1)
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Estimated subscription price of Common Shares to shareholders exercising Rights(2)
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$
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[
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●]
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$
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[
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●]
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Underwriting discounts and commissions
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$
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[
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●]
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$
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[
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●]
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Estimated proceeds, before expenses, to the
Trust(3) (4)
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$
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[
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●]
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$
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[
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(1)
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Assumes that all Rights are exercised at the estimated Subscription Price (as described below). All of the
Rights may not be exercised, and the estimated Subscription Price may be higher or lower than the actual Subscription Price.
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R-2
(2)
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The estimated Subscription Price to the public is based upon [●]% of the last reported sales price of
the Trusts Common Shares on the NYSE on [●], 2022 and each of the [● (●)] preceding trading days. See Terms of the Rights OfferingSubscription Price.
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(3)
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Before deduction of expenses related to the Rights offering, which are estimated approximately at $[●].
Any offering expenses are paid indirectly by shareholders. Such fees and expenses will immediately reduce the net asset value per share of each Common Share purchased by an investor in the Rights offering. The indirect expenses of the offering that
shareholders will pay are estimated to be $[●] in the aggregate and $[●] per share. The amount of proceeds to the Trust net of any fees and expenses of the offering are estimated to be $[●] in the aggregate and $[●] per
share. Shareholders will not directly bear any offering expenses.
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(4)
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Funds received by check prior to the final due date of the Rights offering will be deposited into a
segregated account pending proration and distribution of Common Shares. The Subscription Agent (as defined in this Prospectus Supplement) may receive investment earnings on the funds deposited into such account.
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The Common Shares are expected to be ready for delivery in book-entry form through the [insert depository name] on or about [●], 2022 [,
unless extended. If the offering is extended, the Common Shares are expected to be ready for delivery in book-entry form through the [●] on or about [●], 2022.]
You should not construe the contents of this Prospectus Supplement and the accompanying Prospectus as legal, tax or financial
advice. You should consult with your own professional advisors as to the legal, tax, financial or other matters relevant to the suitability of an investment in the Trust.
The Trusts Common Shares do not represent a deposit or an obligation of, and are not guaranteed or endorsed by, any
bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.
The date of this Prospectus Supplement is [●], 2022.
R-3
You should rely only on the information contained or incorporated by reference
in this Prospectus Supplement and the accompanying Prospectus. The Trust has not authorized anyone to provide you with different information. The Trust is not making an offer to sell these securities in any jurisdiction where the offer or sale is
not permitted. You should not assume that the information contained in this Prospectus Supplement and the accompanying Prospectus is accurate as of any date other than the date of this Prospectus Supplement and the accompanying Prospectus,
respectively. This Prospectus Supplement will be amended to reflect material changes to the information contained herein and will be delivered to shareholders. Our business, financial condition, results of operations and prospects may have changed
since those dates. In this Prospectus Supplement and in the accompanying Prospectus, unless otherwise indicated, Trust, us, our and we refer to BlackRock Multi-Sector Income Trust, a Delaware statutory
trust.
TABLE OF CONTENTS
Prospectus Supplement
Prospectus
R-4
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus Supplement, the accompanying Prospectus and the SAI contain forward-looking statements.
Forward-looking statements can be identified by the words may, will, intend, expect, estimate, continue, plan, anticipate, and similar terms and the
negative of such terms. Such forward-looking statements may be contained in this Prospectus Supplement as well as in the accompanying Prospectus and in the SAI. By their nature, all forward-looking statements involve risks and uncertainties, and
actual results could differ materially from those contemplated by the forward-looking statements. Several factors that could materially affect our actual results are the performance of the portfolio of securities we hold, the price at which our
shares will trade in the public markets and other factors discussed in our periodic filings with the SEC.
Although we
believe that the expectations expressed in our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in our forward-looking statements. Our future financial condition and results of
operations, as well as any forward-looking statements, are subject to change and are subject to inherent risks and uncertainties, such as those disclosed in the Risks section of the accompanying Prospectus and Special
Characteristics and Risks of the Rights Offering in this Prospectus Supplement. All forward-looking statements contained or incorporated by reference in this Prospectus Supplement or the accompanying Prospectus, or in the SAI, are made as of
the date of this Prospectus Supplement or the accompanying Prospectus or SAI, as the case may be. Except for our ongoing obligations under the federal securities laws, we do not intend, and we undertake no obligation, to update any forward-looking
statement. The forward-looking statements contained in this Prospectus Supplement, the accompanying Prospectus and the SAI are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended (the
Securities Act).
Currently known risk factors that could cause actual results to differ materially from our
expectations include, but are not limited to, the factors described in the Risks section of the accompanying Prospectus as well as in the Special Characteristics and Risks of the Rights Offering section of this Prospectus
Supplement. We urge you to review carefully those sections for a more detailed discussion of the risks of an investment in the Common Shares.
SUMMARY OF THE TERMS OF THE RIGHTS OFFERING
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Purpose of the Rights Offering
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[To come.]
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Terms of the Rights Offering
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[●] transferable subscription right (a Right) will be issued for each common share of the Trust (each, a
Common Share, and collectively, the Common Shares) held on the Record Date (as defined below). Rights are expected to trade on the [●] under the symbol [●]. The Rights will allow Common Shareholders to
subscribe for new Common Shares of the Trust. [●] Common Shares of the Trust are outstanding as of [●], 2022. [●] Rights will be required to purchase one Common Share. Shares of the Trust, as a
closed-end fund, can trade at a discount to net asset value (NAV). Upon exercise of the Rights offering, Trust shares are expected to be issued at a price below NAV per Common Share. [An
over-subscription privilege will be offered, [subject to the right of the Board of Trustees of the Trust (the Board) to eliminate the over-subscription privilege.] [●] Common Shares of the Trust will be issued if all Rights are
exercised. See Terms of the Rights Offering.
The Trust has declared monthly distributions payable on [●], 2022 with a record date of [●], 2022. Any Common Shares issued as a
result of the Rights offering will not be record date shares for the Trusts monthly distribution to be paid on [●], 2022 and will not be entitled to receive such distribution.
The exercise of Rights by a Rights holder is
irrevocable.
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R-5
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Title
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Subscription Rights to Acquire Common Shares of Beneficial Interest
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Subscription Price
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The final subscription price per Common Share (the Subscription Price) will be determined based upon a formula
equal to [●]% of the average of the last reported sales price of the Trusts Common Shares on the New York Stock Exchange (NYSE ) on the Expiration Date (as defined below) and each of the [●] preceding trading days (the
Formula Price). If, however, the Formula Price is less than [●]% of the NAV per Common Share of the Trusts Common Shares at the close of trading on the NYSE on the Expiration Date, then the Subscription Price will be
[●]% of the Trusts NAV per Common Share at the close of trading on the NYSE on that day. See Terms of the Rights Offering.
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Record Date
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Rights will be issued to Common Shareholders of record as of the close of business on [●], 2022 (the Record
Date). See Terms of the Rights Offering.
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Number of Rights Issued
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[●] Right will be issued in respect of each Common Share of the Trust outstanding as of the close of business on the
Record Date. See Terms of the Rights Offering.
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Number of Rights Required to Purchase One Common Share
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A holder of Rights may purchase [●] Common Share of the Trust for every [●] Rights exercised. The number of
Rights to be issued to a shareholder as of the close of business on the Record Date will be rounded up to the nearest number of Rights evenly divisible by [●]. See Terms of the Rights Offering.
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Over-Subscription Privilege
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Common Shareholders as of the close of business on the Record Date (Record Date Shareholders) who fully
exercise all Rights initially issued to them (other than those Rights that cannot be exercised because they represent the right to acquire less than one Common Share) generally are entitled, subject to the limitations described herein, to buy those
Common Shares, referred to as primary over-subscription shares, that were not purchased by other Rights holders at the same Subscription Price. If enough primary over-subscription shares are available, all such requests will be honored
in full. If the requests for primary over-subscription shares exceed the primary over-subscription shares available, the available primary over-subscription shares will be allocated pro rata among those fully exercising Record Date Shareholders who
over-subscribe based on the number of Rights originally issued to them by the Trust. Common Shares acquired pursuant to the primary over-subscription privilege are subject to allotment. Holders of Rights acquired in the secondary market
may not participate in the primary over-subscription privilege.
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[In addition, the Trust, in its sole discretion, may determine to issue additional Common Shares at the same Subscription
Price in an amount of up to [●]% of the shares issued pursuant to the primary subscription, referred to as secondary over-subscription shares. Should the Trust determine to issue some or all of the secondary over-subscription
shares, they will be allocated only among Record Date Shareholders who submitted over-subscription requests. Secondary over-subscription shares will be allocated pro rata among those fully exercising Record Date Shareholders who over-subscribe based
on the number of Rights originally issued to them by the Trust. Rights acquired in the secondary market may not participate in the secondary over-subscription privilege.]
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R-6
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Notwithstanding the above, the Board has the right in its absolute discretion to eliminate the primary over-subscription
privilege and/or secondary over-subscription privilege (together, the over-subscription privilege) if it considers it to be in the best interest of the Trust to do so. The Board may make that determination at any time, without prior
notice to Rights holders or others, up to and including the fifth day following the Expiration Date (as defined below). See Over-Subscription Privilege.
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Any Common Shares issued pursuant to the over-subscription privilege will be shares registered under the
Prospectus.
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Transfer of Rights
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The Rights will be transferable. See Terms of the Rights Offering, Sale of Rights and Method
of Transferring Rights.
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Subscription Period
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The Rights may be exercised at any time after issuance and prior to expiration of the Rights (the Subscription
Period), which will be [5:00 PM Eastern Time] on [●], 2022 (the Expiration Date), unless otherwise extended. See Terms of the Rights Offering and Method of Exercise of Rights. The Rights offering may
be terminated [or extended] by the Trust at any time for any reason before the Expiration Date. If the Trust terminates the Rights offering, the Trust will issue a press release announcing such termination and will direct the Subscription Agent
(defined below) to return, without interest, all subscription proceeds received to such shareholders who had elected to purchase Common Shares.
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Distribution Arrangements
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[●]
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Offering Expenses
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The expenses of the Rights offering are expected to be approximately $[●] and will be borne by holders of the
Trusts Common Shares. See Use of Proceeds.
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Sale of Rights
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The Rights are transferable until the completion of the Subscription Period and will be admitted for trading on the
[●] under the symbol [●]. Although no assurance can be given that a market for the Rights will develop, trading in the Rights on the [●] is expected to begin two Business Days prior to the Record Date and may be
conducted until the close of trading on the last [●] trading day prior to the Expiration Date. For purposes of this Prospectus Supplement, a Business Day shall mean any day on which trading is conducted on the
[●].
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The value of the Rights, if any, will be reflected by their market price on the [●]. Rights may be sold by individual
holders through their broker or financial advisor or may be submitted to the Subscription Agent (defined below) for sale. Any Rights submitted to the Subscription Agent for sale must be received by the Subscription Agent prior to [5:00 PM, Eastern
Time], on or before [●], 2022, [●] Business Days prior to the Expiration Date (or, if the Subscription Period is extended, prior to [5:00 PM, Eastern Time], on the [●] Business Day prior to the extended Expiration
Date).
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R-7
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Rights that are sold will not confer any right to acquire any Common Shares in any over-subscription, and any Record Date
Shareholder who sells any Rights will not be eligible to participate in the over-subscription privilege, if any.
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Trading of the Rights on the [●] will be conducted on a when-issued basis until and including the date on which the
Subscription Certificates (as defined below) are mailed to Record Date Shareholders of record and thereafter will be conducted on a regular-way basis until and including the last [●] trading day prior to
the completion of the Subscription Period. The shares are expected to begin trading ex-Rights one Business Day prior to the Record Date.
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If the Subscription Agent receives Rights for sale in a timely manner, the Subscription Agent will use its best efforts to
sell the Rights on the [●]. The Subscription Agent will also attempt to sell any Rights attributable to shareholders of record whose addresses are outside the United States, or who have an APO or FPO address. See Foreign
Restrictions. The Subscription Agent will attempt to sell such Rights, including by first offering such Rights to the Dealer Manager (defined below) for purchase by the Dealer Manager at the then-current market price on the [●]. The
Subscription Agent will offer Rights to the Dealer Manager before attempting to sell them on the [●].
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Any commissions will be paid by the selling Rights holders. Neither the Trust nor the Subscription Agent will be
responsible if Rights cannot be sold and neither has guaranteed any minimum sales price for the Rights. If the Rights can be sold, sales of these Rights will be deemed to have been effected at the weighted average price received by the Subscription
Agent on the day such Rights are sold, less any applicable brokerage commissions, taxes and other expenses (i.e., costs incidental to the sale of Rights).
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For a discussion of actions that may be taken by [●] (the Dealer Manager) to seek to facilitate the
trading market for Rights and the placement of Common Shares pursuant to the exercise of Rights, including the purchase of Rights and the sale during the Subscription Period by the Dealer Manager of Common Shares acquired through the exercise of
Rights and the terms on which such sales will be made, see Plan of Distribution.
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Shareholders are urged to obtain a recent trading price for the Rights on the [●] from their broker, bank, financial
advisor or the financial press.
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Banks, broker-dealers and trust companies that hold shares for the accounts of others are advised to notify those persons
that purchase Rights in the secondary market that such Rights will not participate in any over-subscription privilege. See Terms of the Rights Offering.
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Use of Proceeds
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The Trust estimates the net proceeds of the Rights offering to be approximately $[●]. This figure is based on the
Subscription Price per Common Share of $[●] ([●]% of the last reported sales price of the Trusts Common Shares on the NYSE on [●], 2022 and each of the [● (●)] preceding trading days) and assumes all new Common
Shares offered are sold and that the expenses related to the Rights offering estimated at approximately $[●] are paid.
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R-8
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The Advisor anticipates that investment of the proceeds will be made in accordance with the Trusts investment
objectives and policies as appropriate investment opportunities are identified, which is expected to be substantially completed in approximately [three] months; however, the identification of appropriate investment opportunities pursuant to the
Trusts investment style or changes in market conditions may cause the investment period to extend as long as [six] months. Pending such investment, the proceeds will be held in short-term, tax-exempt or
taxable investment grade securities or in high quality, short-term money market instruments.
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Depending on market conditions and operations, a portion of the cash held by the Trust, including any proceeds raised from
the offering, may be used to pay distributions in accordance with the Trusts distribution policy and may be a return of capital. A return of capital is a return to investors of a portion of their original investment in the Trust. In general
terms, a return of capital would involve a situation in which a Trust distribution (or a portion thereof) represents a return of a portion of a shareholders investment in the Trust, rather than making a distribution that is funded from the
Trusts earned income or other profits. Although return of capital distributions may not be currently taxable, such distributions would decrease the basis of a shareholders shares, and therefore, may increase a shareholders tax
liability for capital gains upon a sale of shares, even if sold at a loss to the shareholders original investments. See Use of Proceeds.
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Taxation/ERISA
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See Taxation and Employee Benefit Plan and IRA Considerations.
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Subscription Agent
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[●]. See Subscription Agent.
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Information Agent
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[●]. See Information Agent.
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DESCRIPTION OF THE RIGHTS OFFERING
Terms of the Rights Offering
The Trust is issuing to Record Date Shareholders Rights to subscribe for Common Shares of the Trust. Each Record Date
Shareholder is being issued one transferable Right for each Common Share owned on the Record Date. The Rights entitle the holder to acquire, at a subscription price per Common Share (the Subscription Price) determined based upon a
formula equal to [●]% of the average of the last reported sales price of the Trusts Common Shares on the NYSE on the Expiration Date (as defined below) and each of the [●] preceding trading days (the Formula Price),
[●] new Common Shares for each [●] Rights held. If, however, the Formula Price is less than [●]% of the NAV per share of the Trusts Common Shares at the close of trading on the NYSE on the Expiration Date, then the
Subscription Price will be [●]% of the Trusts NAV per Common Share at the close of trading on the NYSE on that day.
The estimated Subscription Price to the public of $[●] is based upon [●]% of the last reported sales price of the
Trusts Common Shares on the NYSE on [●], 2022. Fractional shares will not be issued upon the exercise of the Rights. Accordingly, Common Shares may be purchased only pursuant to the exercise of Rights in integral multiples of [●].
The number of Rights to be issued to a Record Date Shareholder will be rounded up to the nearest number of Rights evenly divisible by [●]. In the case of Common Shares held of record by Cede & Co. (Cede), as nominee
R-9
for the Depository Trust Company (DTC)], or any other depository or nominee, the number of Rights issued to Cede or such other depository or nominee will be adjusted to permit
rounding up (to the nearest number of Rights evenly divisible by [●]) of the Rights to be received by beneficial owners for whom it is the holder of record only if [insert nominee name] or such other depository or nominee provides to the Trust
on or before the close of business on [●], 2022 written representation of the number of Rights required for such rounding. Rights may be exercised at any time during the period (the Subscription Period) which commences on
[●], 2022, and ends at [5:00 PM Eastern Time] on [●], 2022 (the Expiration Date), unless otherwise extended. Shares of the Trust, as a closed-end fund, can trade at a discount to NAV.
Upon exercise of the Rights offering, Trust shares may be issued at a price below NAV per Common Share. The right to acquire one Common Share for each [●] Rights held during the Subscription Period (or any extension of the Subscription Period)
at the Subscription Price will be referred to in the remainder of this Prospectus Supplement as the Rights offering. Rights will expire on the Expiration Date and thereafter may not be exercised.
The Trust has declared monthly distributions payable on [●], 2022 with a record date of [●], 2022. Any
Common Shares issued as a result of the Rights offering will not be Record Date shares for the Trusts monthly distribution to be paid on [●], 2022 and will not be entitled to receive such distribution.
The Trust has entered into a dealer manager agreement with [●] (the Dealer Manager) that allows the
Dealer Manager to take actions to seek to facilitate the trading market for Rights and the placement of Common Shares pursuant to the exercise of Rights. Those actions are expected to involve the Dealer Manager purchasing and exercising Rights
during the Subscription Period at prices determined at the time of such exercise, which are expected to vary from the Subscription Price. See Plan of Distribution for additional information.
Rights may be evidenced by subscription certificates or may be uncertificated and evidenced by other appropriate documentation
(i.e., a rights card distributed to registered shareholders in lieu of a subscription certificate) (Subscription Certificates). The number of Rights issued to each holder will be stated on the Subscription Certificate delivered to
the holder. The method by which Rights may be exercised and Common Shares paid for is set forth below in Method of Exercise of Rights, Payment for Shares and Plan of Distribution. A holder of Rights will have no
right to rescind a purchase after [●] (the Subscription Agent) has received payment. See Payment for Shares below. It is anticipated that the Common Shares issued pursuant to an exercise of Rights will be listed on the
[●].
[Holders of Rights [who are Record Date Shareholders] are entitled to subscribe for additional Common Shares
at the same Subscription Price pursuant to the over-subscription privilege, subject to certain limitations, allotment and the right of the Board to eliminate the primary over-subscription privilege [or secondary] over-subscription privilege. See
Over-Subscription Privilege below.]
For purposes of determining the maximum number of Common Shares that may
be acquired pursuant to the Rights offering, broker-dealers, trust companies, banks or others whose shares are held of record by Cede or by any other depository or nominee will be deemed to be the holders of the Rights that are held by Cede or such
other depository or nominee on their behalf.
The Rights are transferable until the completion of the Subscription Period
and will be admitted for trading on the [●] under the symbol [●]. Assuming a market exists for the Rights, the Rights may be purchased and sold through usual brokerage channels and also sold through the Subscription Agent.
Although no assurance can be given that a market for the Rights will develop, trading in the Rights on the [●] is expected to begin two Business Days prior to the Record Date and may be conducted until the close of trading on the last
[●] trading day prior to the Expiration Date. Trading of the Rights on the [●] is expected to be conducted on a when-issued basis until and including the date on which the Subscription Certificates are mailed to Record Date Shareholders
of record and thereafter is expected to be conducted on a regular way basis until and including the last [●] trading day prior to the Expiration Date. The method by which Rights may be transferred is set forth below under Method of
Transferring Rights. The Common Shares are expected to begin trading ex-Rights one Business Day prior to the Record Date as determined and announced by the [●]. The Rights offering may be
terminated or extended by the Trust at any time for any reason before the Expiration Date. If the Trust terminates the Rights offering, the Trust will issue a press release announcing such termination and will direct the Subscription Agent to
return, without interest, all subscription proceeds received to such shareholders who had elected to purchase Common Shares.
R-10
Nominees who hold the Trusts Common Shares for the account of others, such
as banks, broker-dealers, trustees or depositories for securities, should notify the respective beneficial owners of such shares as soon as possible to ascertain such beneficial owners intentions and to obtain instructions with respect to the
Rights. If the beneficial owner so instructs, the nominee should complete the Subscription Certificate and submit it to the Subscription Agent with proper payment. In addition, beneficial owners of the Common Shares or Rights held through such a
nominee should contact the nominee and request the nominee to effect transactions in accordance with such beneficial owners instructions.
[Participants in the Trusts Dividend Reinvestment Plan (the Plan) will be issued Rights in respect of the
Common Shares held in their accounts in the Plan. Participants wishing to exercise these Rights must exercise the Rights in accordance with the procedures set forth in Method of Exercise of Rights and Payment for Shares.]
Conditions of the Rights Offering
The Rights offering is being made in accordance with the Investment Company Act of 1940, as amended (the Investment
Company Act), without shareholder approval. The staff of the SEC has interpreted the Investment Company Act as not requiring shareholder approval of a transferable rights offering to purchase common shares at a price below the then current NAV
so long as certain conditions are met, including: (i) a good faith determination by a funds board that such offering would result in a net benefit to existing shareholders; (ii) the offering fully protects shareholders
preemptive rights and does not discriminate among shareholders (except for the possible effect of not offering fractional rights); (iii) management uses its best efforts to ensure an adequate trading market in the rights for use by shareholders who
do not exercise such rights; and (iv) the ratio of a transferable rights offering does not exceed one new share for each three rights held.
Important Dates to Remember
[Please note that the dates in the table below may change if the Rights offering is extended.]
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Event
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Date
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Record Date
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[●], 2022
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Subscription Period
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[●], 2022 through [●], 2022
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Final Date Rights Will Trade
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Expiration Date*
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[●], 2022
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Payment for Common Shares and Subscription Certificate or Notice of Guaranteed Delivery
Due*
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[●], 2022
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Issuance Date
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[●], 2022
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Confirmation Date
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[●], 2022
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*
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A shareholder exercising Rights must deliver to the Subscription Agent by [5:00 PM Eastern Time] on
[●], 2022 (unless the Rights offering is extended) either (a) a Subscription Certificate and payment for Common Shares or (b) a notice of guaranteed delivery and payment for Common Shares.
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Unless the Rights offering is extended.
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[Over-Subscription Privilege
Rights holders [who are Record Date Shareholders and who fully exercise all Rights initially issued to them (other than those
Rights that cannot be exercised because they represent the right to acquire less than one Common Share)] are entitled to subscribe for additional Common Shares at the same Subscription Price pursuant to the over-subscription privilege, subject to
certain limitations and subject to allotment. The Board has the right in its absolute discretion to eliminate the over-subscription privilege with respect to primary over-subscription shares and secondary over-subscription shares if it considers it
to be in the best interest of the Trust to do so. The Board may make that determination at any time, without prior notice to Rights holders or others, up to and including the fifth day following the Expiration Date. If the primary over-subscription
privilege is not eliminated, it will operate as set forth below.
R-11
[Record Date Shareholders who fully exercise all Rights initially issued to them
(other than those Rights that cannot be exercised because they represent the right to acquire less than one Common Share)] are entitled to buy those Common Shares, referred to as primary over-subscription shares, that were not purchased
by other holders of Rights at the same Subscription Price. If enough primary over-subscription shares are available, all such requests will be honored in full. If the requests for primary over-subscription shares exceed the primary over-subscription
shares available, the available primary over-subscription shares will be allocated pro rata among those fully exercising [Record Date Shareholders] who over-subscribe based on the number of Rights originally issued to them by the Trust. Common
Shares acquired pursuant to the over-subscription privilege are subject to allotment.
[In addition, the Trust, in
its sole discretion, may determine to issue additional Common Shares at the same Subscription Price in an amount of up to [ ]% of the shares issued pursuant to the primary subscription, referred to as secondary
over-subscription shares. Should the Trust determine to issue some or all of the secondary over-subscription shares, they will be allocated only among Record Date Shareholders who submitted over-subscription requests. Secondary
over-subscription shares will be allocated pro rata among those fully exercising Record Date Shareholders who over-subscribe based on the number of Rights originally issued to them by the Trust. Holders of Rights acquired in the secondary
market may not participate in the over-subscription privilege.]
Record Date Shareholders who are fully
exercising their Rights during the Subscription Period should indicate, on the Subscription Certificate that they submit with respect to the exercise of the Rights issued to them, how many Common Shares they are willing to acquire pursuant to the
over-subscription privilege.
To the extent sufficient Common Shares are not available to fulfill all over-subscription
requests, unsubscribed Common Shares (the Excess Shares) will be allocated pro rata among those Record Date Shareholders who over-subscribe based on the number of Rights issued to them by the Trust. The allocation process may involve a
series of allocations in order to assure that the total number of Common Shares available for over-subscriptions is distributed on a pro rata basis.
The formula to be used in allocating the Excess Shares is as follows:
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Shareholders Record Date Position
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X
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Excess Shares Remaining
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Total Record Date Position of All Over-Subscribers
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Banks, broker-dealers, trustees and other nominee holders of Rights will be required to
certify to the Subscription Agent, before any over-subscription privilege may be exercised with respect to any particular beneficial owner, as to the aggregate number of Rights exercised during the Subscription Period and the number of Common Shares
subscribed for pursuant to the over-subscription privilege by such beneficial owner and that such beneficial owners subscription was exercised in full. Nominee holder over-subscription forms and beneficial owner certification forms will be
distributed to banks, broker-dealers, trustees and other nominee holders of Rights with the Subscription Certificates. [Nominees should also notify holders purchasing Rights in the secondary market that such Rights may not participate in the
over-subscription privilege.]
The Trust will not otherwise offer or sell any Common Shares that are not subscribed for
pursuant to the primary subscription, the primary over-subscription privilege or the secondary over-subscription privilege pursuant to the Rights offering.]
[Dealer Manager
[●] (previously defined as the Dealer Manager), a registered broker-dealer, may also act on behalf of its
clients to purchase or sell Rights in the open market and may receive commissions from its clients for such services. Holders of Rights attempting to sell any unexercised Rights in the open market through a broker-dealer other than the Dealer
Manager may be charged a different commission and should consider the commissions and fees charged by the broker-dealer prior to selling their Rights on the open market. The Dealer Manager is not expected to purchase Rights as principal for its own
account in order to seek to facilitate the trading market for Rights or otherwise. See Plan of Distribution for additional information.]
R-12
Sale of Rights
The Rights are transferable and will be admitted for trading on the [●] under the symbol [●]. Although
no assurance can be given that a market for the Rights will develop, trading in the Rights on the [●] is expected to begin two Business Days prior to the Record Date and may be conducted until the close of trading on the last [●] trading
day prior to the Expiration Date.
The value of the Rights, if any, will be reflected by the market price. Rights may be
sold by individual holders through their broker or other financial intermediary. Holders of Rights attempting to sell any unexercised Rights in the open market through their broker or financial advisor may be charged a commission or incur other
transaction expenses and should consider the commissions and fees charged prior to selling their Rights on the open market.
[Rights that are sold will not confer any right to acquire any Common Shares in any primary over-subscription privilege or
secondary over-subscription privilege, if any, and any Record Date Shareholder who sells any Rights will not be eligible to participate in the primary over-subscription privilege or secondary over-subscription privilege, if any.]
Trading of the Rights on the [●] will be conducted on a when-issued basis until and including the date on which the
Subscription Certificates are mailed to Record Date Shareholders of record and thereafter will be conducted on a regular-way basis until and including the last [●] trading day prior to the Expiration
Date. The Common Shares are expected to begin trading ex-Rights one Business Day prior to the Record Date.
Shareholders are urged to obtain a recent trading price for the Rights on the [●] from their broker, bank, financial
advisor or the financial press.
Holders of Rights who are unable or do not wish to exercise any or all of their Rights
may contact the Subscription Agent to facilitate the sale of any unexercised Rights. The Subscription Agent will contact the Dealer Manager or other brokers in order to assist Rights holders whose Rights are not currently held at a broker-dealer or
other applicable financial intermediary to facilitate the sale of the Rights. Shareholders of record whose addresses are outside the United States, or who have an APO or FPO address, are encouraged to contact the Subscription Agent to facilitate the
sale of their Rights if they are otherwise unable or unwilling to exercise the Rights. The selling Rights holder will pay all applicable brokerage commissions incurred. There can be no assurance that the Subscription Agent will be able to facilitate
the sale of any of Rights and neither the Trust nor the Subscription Agent has guaranteed any minimum sales price for the Rights.
Method of
Transferring Rights
The Rights evidenced by a single Subscription Certificate may be transferred in whole by endorsing
the Subscription Certificate for transfer in accordance with the accompanying instructions. A portion of the Rights evidenced by a single Subscription Certificate (but not fractional Rights) may be transferred by delivering to the Subscription Agent
a Subscription Certificate properly endorsed for transfer, with instructions to register the portion of the Rights evidenced thereby in the name of the transferee (and to issue a new Subscription Certificate to the transferee evidencing the
transferred Rights). In this event, a new Subscription Certificate evidencing the balance of the Rights will be issued to the Rights holder or, if the Rights holder so instructs, to an additional transferee.
Holders wishing to transfer all or a portion of their Rights (but not fractional Rights) should promptly transfer such Rights
to ensure that: (i) the transfer instructions will be received and processed by the Subscription Agent, (ii) a new Subscription Certificate will be issued and transmitted to the transferee or transferees with respect to transferred Rights,
and to the holder with respect to retained Rights, if any, and (iii) the Rights evidenced by the new Subscription Certificates may be exercised or sold by the recipients thereof prior to the Expiration Date. Neither the Trust nor the
Subscription Agent shall have any liability to a transferee or holder of Rights if Subscription Certificates are not received in time for exercise or sale prior to the Expiration Date.
Except for the fees charged by the Subscription Agent (which will be paid by the Trust as described below), all commissions,
fees and other expenses (including brokerage commissions and transfer taxes) incurred in connection with the purchase, sale, transfer or exercise of Rights will be for the account of the holder of the Rights, and none of these commissions, fees or
expenses will be borne by the Trust or the Subscription Agent.
R-13
The Trust anticipates that the Rights will be eligible for transfer through, and
that the exercise of the Rights may be effected through, the facilities of [insert depository] (Rights exercised through [insert depository] are referred to as [insert depository] Exercised Rights).
Subscription Agent
The
Subscription Agent is [●]. The Subscription Agent will receive from the Trust an amount estimated to be $[●], comprised of the fee for its services and the reimbursement for certain expenses related to the Rights offering. The
shareholders of the Trust will indirectly pay such amount.
Information Agent
INQUIRIES BY ALL HOLDERS OF RIGHTS SHOULD BE DIRECTED TO: THE INFORMATION AGENT, [●]; HOLDERS PLEASE CALL TOLL-FREE AT
[●]; BANKS AND BROKERS PLEASE CALL [●].
Method of Exercise of Rights
Rights may be exercised by completing and signing the Subscription Certificate and delivering the completed and signed
Subscription Certificate to the Subscription Agent, together with payment for the Common Shares as described below under Payment for Shares. Rights may also be exercised through the broker of a holder of Rights, who may charge the holder
of Rights a servicing fee in connection with such exercise. See Plan of Distribution for additional information regarding the purchase and exercise of Rights by the Dealer Manager.
Completed Subscription Certificates and payment must be received by the Subscription Agent prior to [5:00 PM Eastern Time], on
the Expiration Date (unless payment is effected by means of a notice of guaranteed delivery as described below under Payment for Shares). Your broker, bank, trust company or other intermediary may impose a deadline for exercising Rights
earlier than [5:00 PM, Eastern Time], on the Expiration Date. The Subscription Certificate and payment should be delivered to the Subscription Agent at the following address:
If By Mail:
BlackRock Multi-Sector Income Trust
[●]
If By Overnight Courier:
BlackRock Multi-Sector Income Trust
[●]
Payment for
Shares
Holders of Rights who acquire Common Shares in the Rights offering may choose between the following methods of
payment:
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(1)
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A holder of Rights can send the Subscription Certificate, together with payment in the form of a check
(which must include the name of the shareholder on the check) for the Common Shares subscribed for in the Rights offering and, if eligible, for any additional Common Shares subscribed for pursuant to the over-subscription privilege, to the
Subscription Agent based on the Subscription Price. To be accepted, the payment, together with the executed Subscription Certificate, must be received by the Subscription Agent at one of the addresses noted above prior to [5:00 PM Eastern Time] on
the Expiration Date. The
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R-14
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Subscription Agent will deposit all share purchase checks received by it prior to the final due date into a segregated account pending proration and distribution of Common Shares. The
Subscription Agent will not accept cash as a means of payment for Common Shares.
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(2)
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Alternatively, a subscription will be accepted by the Subscription Agent if, prior to [5:00 PM Eastern Time]
on the Expiration Date, the Subscription Agent has received a written notice of guaranteed delivery by mail or email from a bank, trust company, or a NYSE member, guaranteeing delivery of a properly completed and executed Subscription Certificate.
In order for the notice of guarantee to be valid, full payment for the Common Shares at the Subscription Price must be received with the notice. The Subscription Agent will not honor a notice of guaranteed delivery unless a properly completed and
executed Subscription Certificate is received by the Subscription Agent by the close of business on the [second] Business Day after the Expiration Date. The notice of guaranteed delivery must be emailed to the Subscription Agent at [●] or
delivered to the Subscription Agent at one of the addresses noted above.
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A PAYMENT PURSUANT TO THIS
METHOD MUST BE IN UNITED STATES DOLLARS BY CHECK (WHICH MUST INCLUDE THE NAME OF THE SHAREHOLDER ON THE CHECK) DRAWN ON A BANK LOCATED IN THE CONTINENTAL UNITED STATES, MUST BE PAYABLE TO BLACKROCK MULTI-SECTOR INCOME TRUST AND MUST ACCOMPANY AN
EXECUTED SUBSCRIPTION CERTIFICATE TO BE ACCEPTED.
The method and timing of payment for Common Shares acquired by the
Dealer Manager through the exercise of Rights is described under Plan of Distribution.
If a holder of Rights
who acquires Common Shares pursuant to the Rights offering does not make payment of all amounts due, the Trust reserves the right to take any or all of the following actions: (i) find other purchasers for such
subscribed-for and unpaid-for Common Shares; (ii) apply any payment actually received by it toward the purchase of the greatest whole number of Common Shares which
could be acquired by such holder upon exercise of the Rights or any over-subscription privilege; (iii) sell all or a portion of the Common Shares purchased by the holder, in the open market, and apply the proceeds to the amounts owed; and
(iv) exercise any and all other rights or remedies to which it may be entitled, including, without limitation, the right to set off against payments actually received by it with respect to such subscribed Common Shares and to enforce the
relevant guarantee of payment.
Any payment required from a holder of Rights must be received by the Subscription Agent
prior to [5:00 PM Eastern Time] on the Expiration Date. Issuance and delivery of the Common Shares purchased are subject to collection of checks.
Within [●] Business Days following the Expiration Date (the Confirmation Date), a confirmation will be sent
by the Subscription Agent to each holder of Rights (or, if the Common Shares are held by [insert nominee name] or any other depository or nominee, to [insert nominee name] or such other depository or nominee), showing (i) the number of Common
Shares acquired pursuant to the subscription, (ii) the number of Common Shares, if any, acquired pursuant to the over-subscription privilege, and (iii) the per share and total purchase price for the Common Shares. Any payment required from
a holder of Rights must be received by the Subscription Agent on or prior to the Expiration Date. Any excess payment to be refunded by the Trust to a holder of Rights, or to be paid to a holder of Rights as a result of sales of Rights on its behalf
by the Subscription Agent, will be mailed by the Subscription Agent to the holder within [●] Business Days after the Expiration Date.
A holder of Rights will have no right to rescind a purchase after the Subscription Agent has received payment either by means
of a notice of guaranteed delivery or a check, which must include the name of the shareholder on the check.
Upon
acceptance of a subscription, all funds received by the Subscription Agent shall be held by the Subscription Agent as agent for the Trust and deposited in one or more bank accounts. Such funds may be invested by the Subscription Agent in: bank
accounts, short-term certificates of deposit, bank repurchase agreements, and disbursement accounts with commercial banks meeting certain standards. The Subscription Agent may receive interest, dividends or other earnings in connection with such
deposits or investments.
R-15
Holders, such as broker-dealers, trustees or depositories for securities, who
hold Common Shares for the account of others, should notify the respective beneficial owners of the Common Shares as soon as possible to ascertain such beneficial owners intentions and to obtain instructions with respect to the Rights. If the
beneficial owner so instructs, the record holder of the Rights should complete Subscription Certificates and submit them to the Subscription Agent with the proper payment. In addition, beneficial owners of Common Shares or Rights held through such a
holder should contact the holder and request that the holder effect transactions in accordance with the beneficial owners instructions. [Banks, broker-dealers, trustees and other nominee holders that hold Common Shares of the Trust for the
accounts of others are advised to notify those persons that purchase Rights in the secondary market that such Rights may not participate in any over-subscription privilege offered.]
THE INSTRUCTIONS ACCOMPANYING THE SUBSCRIPTION CERTIFICATES SHOULD BE READ CAREFULLY AND FOLLOWED IN DETAIL. DO NOT SEND
SUBSCRIPTION CERTIFICATES TO THE TRUST.
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT WILL BE AT THE ELECTION AND RISK OF THE RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT THE CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO [5:00 PM EASTERN TIME], ON THE EXPIRATION DATE BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT LEAST FIVE
BUSINESS DAYS TO CLEAR.
All questions concerning the timeliness, validity, form and eligibility of any exercise of Rights
will be determined by the Trust, whose determinations will be final and binding. The Trust in its sole discretion may waive any defect or irregularity, or permit a defect or irregularity to be corrected within such time as it may determine, or
reject the purported exercise of any Right. Subscriptions will not be deemed to have been received or accepted until all irregularities have been waived or cured within such time as the Trust determines in its sole discretion. Neither the Trust nor
the Subscription Agent will be under any duty to give notification of any defect or irregularity in connection with the submission of Subscription Certificates or incur any liability for failure to give such notification.
Foreign Restrictions
Subscription Certificates will only be mailed to Record Date Shareholders of record whose addresses are within the United
States (other than an APO or FPO address). Because the Rights offering will not be registered in any jurisdiction other than the United States, the Subscription Agent will attempt to sell all of the Rights issued to shareholders of record outside of
these jurisdictions and remit the net proceeds, if any, to such shareholders of record. If the Rights can be sold, sales of these Rights will be deemed to have been effected at the weighted average price received by the Subscription Agent on the day
the Rights are sold, less any applicable brokerage commissions, taxes and other expenses.
Notice of Net Asset Value Decline
The Trust has, pursuant to the SECs regulatory requirements, undertaken to suspend the Rights offering until the Trust
amends this Prospectus Supplement if, after [●], 2022 (the date of this Prospectus Supplement), the Trusts NAV declines more than 10% from the Trusts NAV as of that date. In that event, the Expiration Date will be extended and the
Trust will notify Record Date Shareholders of record of any such decline and permit Rights holders to cancel their exercise of Rights.
Employee
Benefit Plan and IRA Considerations
[Holders of Rights that are employee benefit plans subject to limitations imposed
by the Internal Revenue Code of 1986, as amended (the Code), such as employee plans subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA), Keogh Plans and Individual Retirement Accounts
(IRA) (each a Benefit Plan and collectively, Benefit Plans), should be aware that the use of additional contributions of cash outside of the Benefit
R-16
Plan to exercise Rights may be treated as additional contributions to the Benefit Plan. When taken together with contributions previously made, such deemed additional contributions may be in
excess of tax limitations and subject the Rights holder to excise taxes for excess or nondeductible contributions. In the case of Benefit Plans qualified under Section 401(a) of the Code, additional contributions could cause the maximum
contribution limitations of Section 415 of the Code or other qualification rules to be violated. Benefit Plans contemplating making additional contributions to exercise Rights should consult with their legal and tax counsel prior to making such
contributions.
Benefit Plans and other tax exempt entities, including governmental plans, should also be aware that if
they borrow to finance their exercise of Rights, they may become subject to the tax on unrelated business taxable income (UBTI) under Section 511 of the Code. If any portion of an IRA is used as security for a loan, the portion so
used may also be treated as distributed to the IRA depositor.
A Benefit Plan may also be subject to laws, such as ERISA,
that impose certain requirements on the Benefit Plan and on those persons who are fiduciaries with respect to the Benefit Plans. Such requirements may include prudence and diversification requirements and require that investments be made in
accordance with the documents governing the fiduciary. The exercise of Rights by a fiduciary for a Benefit Plan should be considered in light of such fiduciary requirements.
In addition, ERISA and the Code prohibit certain transactions involving the assets of a Benefit Plan and certain persons
(referred to as parties in interest for purposes of ERISA and disqualified persons for purposes of the Code) having certain relationships to such Benefit Plans, unless a statutory or administrative exemption is applicable to
the transaction. A party in interest or disqualified person who engages in a nonexempt prohibited transaction may be subject to excise taxes and other penalties and liabilities under ERISA and the Code (or with respect to certain Benefit Plans, such
as IRAs, a prohibited transaction may cause the Benefit Plan to lose its tax-exempt status). In this regard, the U.S. Department of Labor has issued prohibited transaction class exemptions (PTCEs)
that may apply to the exercise of the Rights and holding of the Common Shares. These class exemptions include, without limitation, PTCE 84-14 respecting transactions determined by independent qualified
professional asset managers, PTCE 90-1 respecting insurance company pooled separate accounts, PTCE 91-38 respecting bank collective investment funds, PTCE 95-60 respecting life insurance company general accounts and PTCE 96-23 respecting transactions determined by in-house asset managers,
PTCE 84-24 governing purchases of shares in investment companies) and PTCE 75-1 respecting sales of securities. In addition, Section 408(b)(17) of ERISA and
Section 4975(d)(20) of the Code each provides a limited exemption, commonly referred to as the service provider exemption, from the prohibited transaction provisions of ERISA and Section 4975 of the Code for certain
transactions between a Benefit Plan and a person that is a party in interest and/or a disqualified person (other than a fiduciary or an affiliate that, directly or indirectly, has or exercises any discretionary authority or control or renders any
investment advice with respect to the assets of any Benefit Plan involved in the transaction) solely by reason of providing services to the Benefit Plan or by relationship to a service provider, provided that the Benefit Plan receives no less, nor
pays no more, than adequate consideration. There can be no assurance that all of the conditions of any such exemptions or any other exemption will be satisfied at the time that the Rights are exercised, or thereafter while the Common Shares are
held, if the facts relied upon for utilizing a prohibited transaction exemption change.
Due to the complexity of these
rules and the penalties for noncompliance, fiduciaries of Benefit Plans should consult with their legal and tax counsel regarding the consequences of their exercise of Rights under ERISA, the Code and other similar laws.]
SUMMARY OF TRUST EXPENSES
The following table and example are intended to assist you in understanding the various costs and expenses directly or
indirectly associated with investing in our Common Shares as a percentage of net assets attributable to Common Shares. Amounts are for the current fiscal year after giving effect to anticipated net proceeds of the Rights offering..
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Shareholder Transaction Expenses
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Sales load paid by you (as a percentage of offering price)(1)
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[●]%
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Offering expenses borne by the Trust (as a percentage of offering price)(1)
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[●]%
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R-17
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Dividend reinvestment plan fees
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$[●] per share for open-market
purchases of common shares(2)
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Estimated Annual Expenses (as a percentage of net assets attributable to common
shares)
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Management fees(3) (4)
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[●]%
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Other Expenses(5)
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[●]%
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Miscellaneous Other Expenses
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[●]%
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Interest Expense
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[●]%
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Total Annual Trust Operating Expenses
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[●]%
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Fee Waivers and/or Expense
Reimbursements(4)
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Total Annual Trust Operating Expenses after Fee Waivers and/or Expense Reimbursements(4)
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[●]%
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(1)
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Trust shareholders will pay all offering expenses involved with this offering.
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(2)
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Computershare Trust Company, N.A.s (in such capacity, the Reinvestment Plan Agent) fees
for the handling of the reinvestment of dividends will be paid by the Trust. However, you will pay a $0.02 per share fee incurred in connection with open-market purchases, which will be deducted from the value of the dividend. You will also be
charged a $2.50 sales fee and pay a $0.15 per share fee if you direct the Reinvestment Plan Agent to sell your Common Shares held in a dividend reinvestment account. Per share fees include any applicable brokerage commissions the Reinvestment Plan
Agent is required to pay.
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(3)
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The Trust currently pays the Advisor a monthly fee at an annual contractual investment management fee rate
of 0.80% of the average daily value of the Trusts managed assets. For purposes of calculating these fees, managed assets means the total assets of the Trust (including any assets attributable to money borrowed) minus the sum of its
accrued liabilities (other than money borrowed for investment purposes).
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(4)
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The Trust and the Advisor have entered into a fee waiver agreement (the Fee Waiver Agreement),
pursuant to which the Advisor has contractually agreed to waive the management fee with respect to any portion of the Trusts assets attributable to investments in any equity and fixed-income mutual funds and exchange-traded funds managed by
the Advisor or its affiliates that have a contractual management fee, through June 30, 2023. In addition, pursuant to the Fee Waiver Agreement, the Advisor has contractually agreed to waive its management fees by the amount of investment
advisory fees the Trust pays to the Advisor indirectly through its investment in money market funds managed by the Advisor or its affiliates, through June 30, 2023. The Fee Waiver Agreement may be terminated at any time, without the payment of
any penalty, only by the Trust (upon the vote of a majority of the Trustees who are not interested persons (as defined in the Investment Company Act) of the Trust) or a majority of the outstanding voting securities of the Trust), upon 90
days written notice by the Trust to the Advisor.
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(5)
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Other expenses are estimated assuming net proceeds of the Rights offering to be approximately $[●],
based on the estimated Subscription Price per Common Share of $[●] ([●]% of the average of the last reported sales price of the Trusts Common Shares on the NYSE on [●], 2022 and each of the [● (●)] preceding
trading days), assuming all new Common Shares offered are sold and that the expenses related to the Rights offering estimated at approximately $[●] are paid.
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The purpose of the table above and the examples below is to help you understand all fees and expenses that you, as a holder of
Common Shares, would bear directly or indirectly.
Example
The following example illustrates the expenses (including the sales load of $[●] and offering costs of $[●]) that
you would pay on a $1,000 investment in common shares, assuming (i) total net annual expenses of [●]% of net assets attributable to common shares, and (ii) a 5% annual return:
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1 Year
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3 Years
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5 Years
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10 Years
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Total expenses incurred
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$
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[
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●]
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$
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[
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●]
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$
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[
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●]
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$
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[
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●]
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*
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The example should not be considered a representation of future expenses. The example assumes that the
estimated Other expenses set forth in the Estimated Annual Expenses table are accurate and that all dividends and distributions are reinvested at NAV. Actual expenses may be greater or less than those assumed. Moreover, the Trusts
actual rate of return may be greater or less than the hypothetical 5% return shown in the example.
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R-18
USE OF PROCEEDS
The Trust estimates the net proceeds of the Rights offering to be approximately $[●] based on the estimated Subscription
Price per Common Share of $[●] ([●]% of the last reported sales price of the Trusts Common Shares on the NYSE on [●], 2022 and each of the [● (●)] preceding trading days), assuming all new Common Shares
offered are sold and that the expenses related to the Rights offering estimated at approximately $[●] are paid.
The
net proceeds from the Rights offering hereunder will be invested in accordance with the Trusts investment objectives and policies as set forth in this Prospectus Supplement and the accompanying Prospectus. We currently anticipate that we will
be able to invest all of the net proceeds in accordance with our investment objectives and policies within approximately three months of the receipt of such proceeds. Such investments may be delayed if suitable investments are unavailable at the
time or for other reasons, such as market volatility and lack of liquidity in the markets of suitable investments. Pending such investment, it is anticipated that the proceeds will be invested in short-term,
tax-exempt or taxable investment grade securities or in high quality, short-term money market instruments. Depending on market conditions and operations, a portion of the cash held by the Trust, including any
proceeds raised from the offering, may be used to pay distributions in accordance with the Trusts distribution policy and may be a return of capital. A return of capital is a return to investors of a portion of their original investment in the
Trust. In general terms, a return of capital would involve a situation in which a Trust distribution (or a portion thereof) represents a return of a portion of a shareholders investment in the Trust, rather than making a distribution that is
funded from the Trusts earned income or other profits. Although return of capital distributions may not be currently taxable, such distributions would decrease the basis of a shareholders shares, and therefore, may increase a
shareholders tax liability for capital gains upon a sale of shares, even if sold at a loss to the shareholders original investments.
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Trust as of [], 2022 and its adjusted capitalization
assuming the Common Shares available in the Rights offering discussed in this Prospectus Supplement had been issued.
[To
be provided.]
SPECIAL CHARACTERISTICS AND RISKS OF THE RIGHTS OFFERING
Risk is inherent in all investing. Therefore, before investing in the Common Shares you should consider the risks associated
with such an investment carefully. See Risks in the Prospectus. The following summarizes some of the matters that you should consider before investing in the Trust through the Rights offering:
Dilution. Record Date Shareholders who do not fully exercise their Rights will, at the completion of the Rights
offering, own a smaller proportional interest in the Trust than owned prior to the Rights offering. The completion of the Rights offering will result in immediate voting dilution for such shareholders. [Further, both the sales load and the expenses
associated with the Rights offering will immediately reduce the NAV of each outstanding Common Share.] In addition, if the Subscription Price is less than the NAV per Common Share as of the Expiration Date, the completion of this Rights offering
will result in an immediate dilution of the NAV per Common Share for all existing Common Shareholders (i.e., will cause the NAV per Common Share to decrease). As a result, existing Common Shareholders may experience immediate dilution even if
they fully exercise their Rights. Such dilution, if any, is not currently determinable because it is not known how many Common Shares will be subscribed for, what the NAV per Common Share or market price of the Common Shares will be on the
Expiration Date or what the Subscription Price per Common Share will be. If the Subscription Price is substantially less than the current NAV per Common Share, this dilution could be substantial. The Trust will pay expenses associated with the
Rights offering, estimated at approximately $[●]. In addition, the Trust has agreed to pay a dealer manager fee (sales load) equal to [●]% of the Subscription Price per Common Share issued pursuant to the exercise of Rights (including
pursuant to the Over-Subscription Privilege). The Trust, not investors, pays the sales load, which is ultimately borne by all Common Shareholders. All of the costs of the Rights offering will be borne by the Trusts Common Shareholders. See
Table of Fees and Expenses in this Prospectus Supplement and Summary of Trust Expenses in the accompanying Prospectus for more information.
R-19
You will experience an immediate dilution of the aggregate NAV per Common Share
if you do not participate in the Rights offering and will experience a reduction in the NAV per Common Share whether or not you exercise your Rights, if the Subscription Price is below the Trusts NAV per Common Share on the Expiration Date,
because:
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the offered Common Shares are being sold at less than their current NAV;
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you will indirectly bear the expenses of the Rights offering; and
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the number of Common Shares outstanding after the Rights offering will have increased proportionately more
than the increase in the amount of the Trusts net assets.
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On the other hand, if the Subscription
Price is above the Trusts NAV per Common Share on the Expiration Date, you may experience an immediate accretion of the aggregate NAV per share of your Common Shares even if you do not exercise your Rights and an immediate increase in the NAV
per Common Share whether or not you participate in the Rights offering, because:
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the offered Common Shares are being sold at more than their current NAV after deducting the expenses of the
Rights offering; and
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the number of Common Shares outstanding after the Rights offering will have increased proportionately less
than the increase in the amount of the Trusts net assets.
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[Furthermore, if you do not participate
in the secondary over-subscription, if it is available, your percentage ownership will also be diluted.] The Trust cannot state precisely the amount of any dilution because it is not known at this time what the NAV per Common Share will be on the
Expiration Date or what proportion of the Rights will be exercised or what the Subscription Price per Common Share will be. The impact of the Rights offering on NAV per Common Share is shown by the following examples, assuming the Rights offering is
fully subscribed and the estimated Subscription Price of $[●]:
[Scenario 1: (assumes NAV per share is above
Subscription Price)(1)
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NAV(2)
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[●]
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Subscription Price(3)
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[●]
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Reduction in NAV ($)(4)
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[●]
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Reduction in NAV (%)
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[●]]
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[Scenario 2: (assumes NAV per share is below Subscription Price)(1)
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NAV(2)
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[●]
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Subscription Price(3)
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[●]
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Increase in NAV ($)(4)
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[●]
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Increase in NAV (%)
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[●]]
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(1)
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Both examples assume the full primary subscription [and secondary over-subscription privilege] are
exercised. Actual amounts may vary due to rounding.
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(2)
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For illustrative purposes only. It is not known at this time what the NAV per Common Share will be on the
Expiration Date.
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(3)
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For illustrative purposes only; reflects an estimated Subscription Price of $[●] based upon [●]%
of the last reported sales price of the Trusts Common Shares on the NYSE on [●], 2022 and each of the [● (●)] preceding trading days. It is not known at this time what the Subscription Price will be on the Expiration Date.
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(4)
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Assumes $[●] in estimated offering expenses.
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If you do not wish to exercise your Rights, you should consider selling them as set forth in this Prospectus Supplement. Any
cash you receive from selling your Rights may serve as partial compensation for any possible dilution of your interest in the Trust. The Trust cannot give assurance, however, that a market for the Rights will develop or that the Rights will have any
marketable value.
R-20
[The Trusts largest shareholders could increase their percentage ownership
in the Trust through the exercise of the primary subscription and over-subscription privilege.]
Risks of Investing in
Rights. Shares of closed-end funds such as the Trust frequently trade at a discount to NAV. The Subscription Price may be greater than the market price of a Common Share on the Expiration Date. If that is
the case, the Rights will have no value, and a person who exercises Rights will experience an immediate loss of value.
Leverage. Leverage creates a greater risk of loss, as well as a potential for more gain, for the Common Shares than if
leverage were not used. Following the completion of the Rights offering, the Trusts amount of leverage outstanding will decrease. The leverage of the Trust as of [●], 2022 was approximately [●]% of the Trusts Managed Assets.
After the completion of the Rights offering, the amount of leverage outstanding is expected to decrease to approximately [●]% of the Trusts Managed Assets. The use of leverage for investment purposes creates opportunities for greater
total returns but at the same time increases risk. When leverage is employed, the NAV and market price of the Common Shares and the yield to holders of Common Shares may be more volatile. Any investment income or gains earned with respect to the
amounts borrowed in excess of the interest due on the borrowing will augment the Trusts income. Conversely, if the investment performance with respect to the amounts borrowed fails to cover the interest on such borrowings, the value of the
Trusts Common Shares may decrease more quickly than would otherwise be the case, and distributions on the Common Shares could be reduced or eliminated. Interest payments and fees incurred in connection with such borrowings will reduce the
amount of net income available for distribution to holders of the Common Shares.
Because the fee paid to the Advisor is
calculated on the basis of the Trusts Managed Assets, which include the proceeds of leverage, the dollar amount of the management fee paid by the Trust to the Advisor will be higher (and the Advisor will be benefited to that extent) when
leverage is used. The Advisor will use leverage only if it believes such action would result in a net benefit to the Trusts shareholders after taking into account the higher fees and expenses associated with leverage (including higher
management fees).
The Trusts leveraging strategy may not be successful.
Increase in Share Price Volatility; Decrease in Share Price. The Rights offering may result in an increase in trading
of the Common Shares, which may increase volatility in the market price of the Common Shares. The Rights offering may result in an increase in the number of shareholders wishing to sell their Common Shares, which would exert downward price pressure
on the price of Common Shares.
Under-Subscription. It is possible that the Rights offering will not be fully
subscribed. Under-subscription of the Rights offering would have an impact on the net proceeds of the Rights offering and whether the Trust achieves any benefits.
TAXATION
The following is a general summary of the U.S. federal income tax consequences of the Rights offering to Record Date
Shareholders who are U.S. persons for U.S. federal income tax purposes. The following summary supplements the discussion set forth in the accompanying Prospectus and SAI and is subject to the qualifications and assumptions set forth therein. The
discussion set forth herein does not constitute tax advice and potential investors are urged to consult their own tax advisers to determine the tax consequences of investing in the Trust.
Please refer to the Tax Matters sections in the Trusts Prospectus and SAI for a description of the
consequences of investing in the Trusts Common Shares. Special tax considerations relating to this Rights offering are summarized below:
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The value of a Right will not be includible in the income of a Common Shareholder at the time the subscription
Right is issued.
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R-21
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The basis of a Right issued to a Common Shareholder will be zero, and the basis of the share with respect to
which the Right was issued (the old share) will remain unchanged, unless either (a) the fair market value of the Right on the date of distribution is at least 15% of the fair market value of the old share, or (b) such Common Shareholder
affirmatively elects (in the manner set out in Treasury regulations under the Code) to allocate to the Right a portion of the basis of the old share. If either (a) or (b) applies, such Common Shareholder must allocate basis between the old
share and the Right in proportion to their fair market values on the date of distribution.
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The basis of a Right purchased in the market will generally be its purchase price.
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The holding period of a Right issued to a Common Shareholder will include the holding period of the old share.
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No loss will be recognized by a Common Shareholder if a Right distributed to such Common Shareholder expires
unexercised because the basis of the old share may be allocated to a Right only if the Right is exercised. If a Right that has been purchased in the market expires unexercised, there will be a recognized loss equal to the basis of the Right.
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Any gain or loss on the sale of a Right will be a capital gain or loss if the Right is held as a capital asset
(which in the case of a Right issued to Record Date Shareholders will depend on whether the old share is held as a capital asset), and will be a long term capital gain or loss if the holding period is deemed to exceed one year.
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No gain or loss will be recognized by a Common Shareholder upon the exercise of a Right, and the basis of any
Common Share acquired upon exercise (the new Common Share) will equal the sum of the basis, if any, of the Right and the subscription price for the new Common Share. The holding period for the new Common Share will begin on the date when the Right
is exercised (or, in the case of a Right purchased in the market, potentially the day after the date of exercise).
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The foregoing is a general and abbreviated summary of the provisions of the Code and the Treasury regulations in effect as
they directly govern the taxation of the Trust and holders of its Common Shares, with respect to U.S. federal income taxation only. Other tax issues such as state and local taxation may apply. Investors are urged to consult their own tax advisers to
determine the tax consequences of investing in the Trust. These provisions are subject to change by legislative or administrative action, and any such change may be retroactive.
PLAN OF DISTRIBUTION
[Distribution Arrangements
[●] will act as Dealer Manager for this Rights offering. Under the terms and subject to the conditions contained in the
Dealer Manager Agreement among the Dealer Manager, the Trust and the Advisor, the Dealer Manager will provide financial structuring and solicitation services in connection with the Rights offering and will solicit the exercise of Rights and
participation in the over-subscription privilege. The Rights offering is not contingent upon any number of Rights being exercised. The Dealer Manager will also be responsible for forming and managing a group of selling broker-dealers (each, a
Selling Group Member and collectively, the Selling Group Members), whereby each Selling Group Member will enter into a Selling Group Agreement with the Dealer Manager to solicit the exercise of Rights and to sell Common
Shares purchased by the Selling Group Member from the Dealer Manager. In addition, the Dealer Manager will enter into a Soliciting Dealer Agreement with other soliciting broker-dealers (each, a Soliciting Dealer and collectively, the
Soliciting Dealers) to solicit the exercise of Rights. See Compensation to Dealer Manager for a discussion of fees and other compensation to be paid to the Dealer Manager, Selling Group Members and Soliciting Dealers in
connection with the Rights offering.
The Trust and the Advisor have each agreed to indemnify the Dealer Manager for
losses arising out of certain liabilities, including liabilities under the Securities Act. The Dealer Manager Agreement also provides that the Dealer Manager will not be subject to any liability to the Trust in rendering the services contemplated by
the Dealer Manager Agreement except for any act of willful misfeasance, bad faith or gross negligence of the Dealer Manager or reckless disregard by the Dealer Manager of its obligations and duties under the Dealer Manager Agreement.
R-22
In order to seek to facilitate the trading market in the Rights for the benefit
of non-exercising shareholders, and the placement of the Common Shares to new or existing investors pursuant to the exercise of the Rights, the Dealer Manager Agreement provides for special arrangements with
the Dealer Manager. Under these arrangements, the Dealer Manager is expected to purchase Rights on the [●], as well as Rights received by the Subscription Agent for sale by Record Date Shareholders and offered to the Dealer Manager and
unexercised Rights of Record Date Shareholders whose record addresses are outside the United States that are held by the Subscription Agent and for which no instructions are received. The number of rights, if any, purchased by the Dealer Manager
will be determined by the Dealer Manager in its sole discretion. The Dealer Manager is not obligated to purchase Rights or Common Shares as principal for its own account to facilitate the trading market for Rights or for investment purposes. Rather,
its purchases are expected to be closely related to interest in acquiring Common Shares generated by the Dealer Manager through its marketing and soliciting activities. The Dealer Manager intends to exercise Rights purchased by it during the
Subscription Period but prior to the Expiration Date. The Dealer Manager may exercise those Rights at its option on one or more dates, which are expected to be prior to the Expiration Date. The Subscription Price for the Common Shares issued through
the exercise of Rights by the Dealer Manager prior to the Expiration Date will be the greater of [●]% of the last reported sale price of a Common Share on the NYSE on the date of exercise or [●]% of the last reported NAV of a Common
Share on the date prior to the date of exercise. The price and timing of these exercises are expected to differ from those described herein for the Rights offering. The Subscription Price will be paid to the Trust and the dealer manager fee with
respect to such proceeds will be paid by the Trust on the applicable settlement date(s) of such exercise(s).
In
connection with the exercise of Rights and receipt of Common Shares, the Dealer Manager intends to offer those Common Shares for sale to the public and/or through a group of selling members it has established. The Dealer Manager may set the price
for those Common Shares at any price that it determines, in its sole discretion. The Dealer Manager has advised that the price at which such Common Shares are offered is expected to be at or slightly below the closing price of the Common Shares on
the NYSE on the date the Dealer Manager exercises Rights. No portion of the amount paid to the Dealer Manager or to a Selling Group Member from the sale of Common Shares in this manner will be paid to the Trust. If the sales price of the Common
Shares is greater than the Subscription Price paid by the Dealer Manager for such Common Shares plus the costs to purchase Rights for the purpose of acquiring those Common Shares, the Dealer Manager will receive a gain. Alternatively, if the sales
price of the Common Shares is less than the Subscription Price for such Common Shares plus the costs to purchase Rights for the purpose of acquiring those Common Shares, the Dealer Manager will incur a loss. The Dealer Manager will pay a concession
to Selling Group Members in an amount equal to approximately [2.50]% of the aggregate price of the Common Shares sold by the respective Selling Group Member. Neither the Trust nor the Advisor has a role in setting the terms, including the sales
price, on which the Dealer Manager offers for sale and sells Common Shares it has acquired through purchasing and exercising Rights or the timing of the exercise of Rights or sales of Common Shares by the Dealer Manager. Persons who purchase Common
Shares from the Dealer Manager or the selling group will purchase shares at a price set by the Dealer Manager, which may be more or less than the Subscription Price, and at a time set by the Dealer Manager, which is expected to be prior to the
Expiration Date.
The Dealer Manager may purchase Rights as principal or act as agent on behalf of its clients for the
resale of such Rights. The Dealer Manager may realize gains (or losses) in connection with the purchase and sale of Rights and the sale of Common Shares, although such transactions are intended by the Dealer Manager to facilitate the trading market
in the Rights and the placement of the Common Shares to new or existing investors pursuant to the exercise of the Rights. Any gains (or losses) realized by the Dealer Manager from the purchase and sale of Rights and the sale of Common Shares is
independent of and in addition to its fee as Dealer Manager. The Dealer Manager has advised that any such gains (or losses) are expected to be immaterial relative to its fee as Dealer Manager.
Since neither the Dealer Manager nor persons who purchase Common Shares from the Dealer Manager or members of the selling
group were Record Date Shareholders, they would not be able to participate in the over-subscription privilege.
Persons
who purchase Common Shares from the Dealer Manager or the selling group will not purchase shares at the Subscription Price based on the formula price mechanism through which Common Shares will be sold in the Rights
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offering. Instead, those persons will purchase Common Shares at a price set by the Dealer Manager, which may be more or less than the Subscription Price, and will not have the uncertainty of
waiting for the determination of the Subscription Price on the Expiration Date.
There is no limit on the number of Rights
the Dealer Manager can purchase or exercise. Common Shares acquired by the Dealer Manager pursuant to the exercise of Rights acquired by it will reduce the number of Common Shares available pursuant to the over-subscription privilege, perhaps
materially, depending on the number of Rights purchased and exercised by the Dealer Manager.
Although the Dealer Manager
can seek to facilitate the trading market for Rights as described above, investors can acquire Common Shares at the Subscription Price by acquiring Rights on the [●] and exercising them in the method described above under Description of
the RightsMethod of Exercise of Rights and Description of the RightsPayment for Shares.
In
the ordinary course of their businesses, the Dealer Manager and/or its affiliates may engage in investment banking or financial transactions with the Trust, the Advisor and their affiliates. In addition, in the ordinary course of their businesses,
the Dealer Manager and/or its affiliates may, from time to time, own securities of the Trust or its affiliates.
The
principal business address of the Dealer Manager is [●].
Compensation to Dealer Manager
Pursuant to the Dealer Manager Agreement, the Trust has agreed to pay the Dealer Manager a fee for its financial structuring
and solicitation services equal to [●]% of the Subscription Price per Common Share for each Common Share issued pursuant to the exercise of Rights, including the over-subscription privilege.
The Dealer Manager will reallow to Selling Group Members in the selling group to be formed and managed by the Dealer Manager
selling fees equal to [●]% of the Subscription Price for each Common Share issued pursuant to the Rights offering or the over-subscription privilege as a result of their selling efforts. In addition, the Dealer Manager will reallow to
Soliciting Dealers that have executed and delivered a Soliciting Dealer Agreement and have solicited the exercise of Rights, solicitation fees equal to [●]% of the Subscription Price for each Common Share issued pursuant to the exercise of
Rights as a result of their soliciting efforts, subject to a maximum fee based on the number of Common Shares held by such Soliciting Dealer through [insert depository] on the Record Date. Fees will be paid to the broker-dealer designated on the
applicable portion of the subscription certificates or, in the absence of such designation, to the Dealer Manager.
In
addition, the Trust, has agreed to pay the Dealer Manager an amount up to $[●] as a partial reimbursement of its expenses incurred in connection with the Rights offering, including reasonable out-of-pocket fees and expenses, if any and not to exceed $[●], incurred by the Dealer Manager, Selling Group Members, Soliciting Dealers and other brokers, dealers and financial institutions in
connection with their customary mailing and handling of materials related to the Rights offering to their customers. No other fees will be payable by the Trust or the Advisor to the Dealer Manager in connection with the Rights offering.
LEGAL MATTERS
Certain legal matters in connection with the Common Shares will be passed upon for the Trust by Willkie Farr &
Gallagher LLP, New York, New York, counsel to the Trust. Willkie Farr & Gallagher LLP may rely as to certain matters of Delaware law on the opinion of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware. [Certain legal
matters will be passed on by [●] as special counsel to the Dealer Manager in connection with the Rights offering.]
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FINANCIAL STATEMENTS
The audited annual financial statements of the Trust for the fiscal year ended October 31, 202[●] [and the
unaudited financial statements for the six months ended April 30, 202[●]] are incorporated by reference into this Prospectus Supplement, the accompanying Prospectus and the SAI.
ADDITIONAL INFORMATION
This Prospectus Supplement and the accompanying Prospectus constitute part of a Registration Statement filed by the Trust with
the SEC under the Securities Act and the Investment Company Act. This Prospectus Supplement and the accompanying Prospectus omit certain of the information contained in the Registration Statement, and reference is hereby made to the Registration
Statement and related exhibits for further information with respect to the Trust and the common shares offered hereby. Any statements contained herein concerning the provisions of any document are not necessarily complete, and, in each instance,
reference is made to the copy of such document filed as an exhibit to the Registration Statement or otherwise filed with the SEC. Each such statement is qualified in its entirety by such reference. The complete Registration Statement may be obtained
from the SEC upon payment of the fee prescribed by its rules and regulations or free of charge through the SECs website (http://www.sec.gov).
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BLACKROCK MULTI-SECTOR INCOME TRUST
[●] Rights for [●] Common Shares of Beneficial Interest
Subscription Rights to Acquire Common Shares of Beneficial Interest
Issuable Upon Exercise of Rights to Subscribe for
Such Common Shares of Beneficial Interest
PROSPECTUS SUPPLEMENT
[●], 2022
Until [ ], 2022 (25 days after the date of this Prospectus Supplement), all dealers
that buy, sell or trade the common shares, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers obligation to deliver a prospectus when acting as underwriters.
Subject to Completion
Dated January 12, 2022
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES
UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
BlackRock Multi-Sector Income Trust
STATEMENT OF ADDITIONAL INFORMATION
BlackRock Multi-Sector Income Trust (the Trust) is a diversified, closed-end management
investment company. This Statement of Additional Information (SAI) relating to the Trusts common shares of beneficial interest (common shares) does not constitute a prospectus, but should be read in conjunction with the
prospectus relating thereto dated [●], 2022 and any related prospectus supplement. This SAI, which is not a prospectus, does not include all information that a prospective investor should consider before purchasing common shares, and investors
should obtain and read the Prospectus and any related prospectus supplement prior to purchasing such shares. A copy of the Prospectus and any related prospectus supplement may be obtained without charge by calling (800) 882-0052. You may also obtain a copy of the Prospectus on the Securities and Exchange Commissions (the SEC) website (http://www.sec.gov). Capitalized terms used but not defined in this SAI have the
meanings ascribed to them in the Prospectus.
References to the Investment Company Act of 1940, as amended (the Investment Company
Act), or other applicable law, will include any rules promulgated thereunder and any guidance, interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, including court interpretations, and
exemptive, no-action or other relief or permission from the SEC, SEC staff or other authority.
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TABLE OF CONTENTS
This Statement of Additional Information is dated [●], 2022.
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THE TRUST
The Trust is a diversified, closed-end management investment company registered under the Investment
Company Act. The Trust was formed as a Delaware statutory trust on November 13, 2012 pursuant to an Agreement and Declaration of Trust of the Trust and the Certificate of Trust filed with the Secretary of State of the State of Delaware and is
governed by pursuant to the Trusts Agreement and Declaration of Trust which is governed by the laws of the State of Delaware. The Trusts investment adviser is BlackRock Advisors, LLC (the Advisor). BlackRock International
Limited (BIL) and BlackRock (Singapore) Limited (BSL) serve as sub-advisers to the Trust (each, a Sub-Advisor and, together with the
Advisor, the Advisors).
The common shares of the Trust are listed on the New York Stock Exchange (NYSE) under the
symbol BIT. As of December 31, 2021, the Trust has outstanding 37,635,253 common shares.
INVESTMENT OBJECTIVES AND POLICIES
Investment Restrictions
The Trust has
adopted restrictions and policies relating to the investment of the Trusts assets and its activities. Certain of the restrictions are fundamental policies of the Trust and may not be changed without the approval of the holders of a majority of
the Trusts outstanding voting securities (which for this purpose and under the Investment Company Act means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or
(ii) more than 50% of the outstanding shares), including class approval by a majority of the Trusts outstanding preferred shares, if any (which for this purpose and under the Investment Company Act means the lesser of (i) 67% of the
preferred shares, as a single class, represented at a meeting at which more than 50% of the Trusts outstanding preferred shares are represented or (ii) more than 50% of the outstanding preferred shares).
Fundamental Investment Restrictions. Under these fundamental investment restrictions, the Trust may not:
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1.
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Concentrate its investments in a particular industry, as that term is used in the Investment Company Act;
provided, that the Trust will invest at least 25% of its total assets in mortgage related securities, which for purposes of this investment restriction the Trust will treat as an industry or group of industries.
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2.
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Borrow money, except as permitted under the Investment Company Act.
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Issue senior securities to the extent such issuance would violate the Investment Company Act.
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Purchase or hold real estate, except the Trust may purchase and hold securities or other instruments that are
secured by, or linked to, real estate or interests therein, securities of real estate investment trusts, mortgage related securities and securities of issuers engaged in the real estate business, and the Trust may purchase and hold real estate as a
result of the ownership of securities or other instruments.
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5.
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Underwrite securities issued by others, except to the extent that the sale of portfolio securities by the Trust
may be deemed to be an underwriting or as otherwise permitted by applicable law.
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Purchase or sell commodities or commodity contracts, except as permitted by the Investment Company Act.
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Make loans to the extent prohibited by the Investment Company Act.
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Notations Regarding the Trusts Fundamental Investment Restrictions. The following notations are not considered to be part of the
Trusts fundamental investment restrictions and are subject to change without shareholder approval.
With respect to the fundamental
policy relating to concentration set forth in (1) above, the Investment Company Act does not define what constitutes concentration in an industry. The SEC staff has taken the position that investment of 25% or more of a funds
total assets in one or more issuers conducting their principal activities in the same
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industry or group of industries constitutes concentration. It is possible that interpretations of concentration could change in the future. The policy in (1) above will be interpreted to
refer to concentration as that term may be interpreted from time to time. The policy also will be interpreted to permit investment without limit in the following: securities of the U.S. Government and its agencies or instrumentalities; tax exempt
securities of state, territory, possession or municipal governments and their authorities, agencies, instrumentalities or political subdivisions; and repurchase agreements collateralized by any such obligations. Accordingly, issuers of the foregoing
securities will not be considered to be members of any industry (except that mortgage related securities will be treated by the Trust as an industry or group of industries as set forth in (1) above). There also will be no limit on investment in
issuers domiciled in a single jurisdiction or country. Finance companies will be considered to be in the industries of their parents if their activities are primarily related to financing the activities of the parents. Each foreign government will
be considered to be a member of a separate industry. With respect to the Trusts industry classifications, the Trust currently utilizes any one or more of the industry sub-classifications used by one or
more widely recognized market indexes or rating group indexes, and/or as defined by Trust management. The policy also will be interpreted to give broad authority to the Trust as to how to classify issuers within or among industries.
With respect to the fundamental policy relating to borrowing money set forth in (2) above, the Investment Company Act permits the Trust
to borrow money in amounts of up to one-third of the Trusts total assets from banks for any purpose, and to borrow up to 5% of the Trusts total assets from banks or other lenders for temporary
purposes. The Trusts total assets include the amounts being borrowed. To limit the risks attendant to borrowing, the Investment Company Act requires the Trust to maintain at all times an asset coverage of at least 300% of the
amount of its borrowings. Asset coverage means the ratio that the value of the Trusts total assets (including amounts borrowed), minus liabilities other than borrowings, bears to the aggregate amount of all borrowings. Borrowing money to
increase portfolio holdings is known as leveraging. Certain trading practices and investments, such as reverse repurchase agreements, may be considered to be borrowings or involve leverage and thus are subject to the Investment Company
Act restrictions. In accordance with SEC staff guidance and interpretations, when the Trust engages in such transactions, the Trust instead of maintaining asset coverage of at least 300%, may segregate or earmark liquid assets, or enter into an
offsetting position, in an amount at least equal to the Trusts exposure, on a mark-to-market basis, to the transaction (as calculated pursuant to requirements of
the SEC). The policy in (2) above will be interpreted to permit the Trust to engage in trading practices and investments that may be considered to be borrowing or to involve leverage to the extent permitted by the Investment Company Act and to
permit the Trust to segregate or earmark liquid assets or enter into offsetting positions in accordance with the Investment Company Act. Short-term credits necessary for the settlement of securities transactions and arrangements with respect to
securities lending will not be considered to be borrowings under the policy. Practices and investments that may involve leverage but are not considered to be borrowings are not subject to the policy.
With respect to the fundamental policy relating to underwriting set forth in (5) above, the Investment Company Act does not prohibit the
Trust from engaging in the underwriting business or from underwriting the securities of other issuers; in fact, in the case of diversified funds, the Investment Company Act permits the Trust to have underwriting commitments of up to 25% of its
assets under certain circumstances. Those circumstances currently are that the amount of the Trusts underwriting commitments, when added to the value of the Trusts investments in issuers where the Trust owns more than 10% of the
outstanding voting securities of those issuers, cannot exceed the 25% cap. A fund engaging in transactions involving the acquisition or disposition of portfolio securities may be considered to be an underwriter under the Securities Act of 1933, as
amended (the Securities Act). Although it is not believed that the application of the Securities Act provisions described above would cause the Trust to be engaged in the business of underwriting, the policy in (5) above will be
interpreted not to prevent the Trust from engaging in transactions involving the acquisition or disposition of portfolio securities, regardless of whether the Trust may be considered to be an underwriter under the Securities Act or is otherwise
engaged in the underwriting business to the extent permitted by applicable law.
With respect to the fundamental policy relating to
lending set forth in (7) above, the Investment Company Act does not prohibit the Trust from making loans (including lending its securities); however, SEC staff interpretations currently prohibit funds from lending more than one-third of their total assets (including lending its securities), except through the purchase of debt obligations or the use of repurchase agreements. In addition, collateral arrangements with respect to options,
forward currency and futures transactions and other derivative instruments (as applicable), as well as delays in the settlement of securities transactions, will not be considered loans.
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Non-Fundamental Investment Restrictions. Under its
non-fundamental investment restrictions, which may be changed by the Board without shareholder approval, the Trust may not make short sales of securities or maintain a short position, except to the extent
permitted by the Trusts Prospectus and SAI, as amended from time to time, and applicable law.
Unless otherwise indicated, all
limitations under the Trusts fundamental or non-fundamental investment restrictions apply only at the time that a transaction is undertaken. Any change in the percentage of the Trusts assets
invested in certain securities or other instruments resulting from market fluctuations or other changes in the Trusts total assets will not require the Trust to dispose of an investment until the Advisors determine that it is practicable to
sell or close out the investment without undue market or tax consequences.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Trusts investment objectives, policies and techniques that are
described in the Prospectus.
Mortgage Related Securities
Under normal market conditions, the Trust will invest at least 25% of its total assets in mortgage related securities.
MBS. Mortgage-backed securities (MBS) include structured debt obligations collateralized by pools of commercial or
residential mortgages. Pools of mortgage loans and mortgage-backed loans, such as mezzanine loans, are assembled as securities for sale to investors by various governmental, government-related and private organizations. MBS include complex
instruments such as CMOs, stripped MBS, mortgage pass-through securities and interests in REMICs. The MBS in which the Trust may invest include those with fixed, floating or variable interest rates, those with interest rates that change based on
multiples of changes in a specified reference interest rate or index of interest rates and those with interest rates that change inversely to changes in interest rates, as well as those that do not bear interest. The Trust may invest in RMBS and
CMBS issued by governmental entities and private issuers, including subordinated MBS and residual interests. The Trust may invest in sub-prime mortgages or MBS that are backed by
sub-prime mortgages. Certain MBS in which the Trust may invest are described below.
Mortgage
Pass-Through Securities. Mortgage pass-through securities differ from other forms of fixed income securities, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of both interest and principal payments. In effect, these payments are a pass through of the monthly payments made by the individual borrowers on their residential
or commercial mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Additional payments are caused by repayments of principal resulting from the sale of the underlying property, refinancing or foreclosure, net of fees
or costs that may be incurred. Some mortgage related securities (such as securities issued by GNMA) are described as modified pass-through. These securities entitle the holder to receive all interest and principal payments owed on the
mortgage pool, net of certain fees, at the scheduled payment dates regardless of whether or not the mortgagor actually makes the payment.
RMBS. RMBS are securities the payments on which depend, except for rights or other assets designed to assure the servicing or
timely distribution of proceeds to holders of such securities, primarily on the cash flow from residential mortgage loans made to borrowers that are secured on a first priority basis or second priority basis, subject to permitted liens, easements
and other encumbrances by residential real estate (one- to four-family properties), the proceeds of which are used to purchase real estate and purchase or construct dwellings thereon or to refinance
indebtedness previously used for such purposes. Residential mortgage loans are obligations of the borrowers thereunder only and are not typically insured or guaranteed by any other person or entity. The ability of a borrower to repay a loan secured
by residential property is dependent upon the income or assets of the borrower. A number of factors, including a general economic downturn, acts of God, terrorism, social unrest and civil disturbances, may impair a borrowers ability to repay
its loans.
Agency RMBS. The principal U.S. Governmental guarantor of mortgage related securities is GNMA, which is a wholly
owned U.S. Government corporation. GNMA is authorized to guarantee, with the full faith and credit of the U.S. Government, the timely payment of principal and interest on securities issued by institutions approved by
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GNMA (such as savings and loan institutions, commercial banks and mortgage bankers) and backed by pools of mortgages insured by the Federal Housing Administration (FHA), or guaranteed
by the Department of Veterans Affairs (VA). MBS issued by GNMA include GNMA Mortgage Pass-Through Certificates (also known as Ginnie Maes) which are guaranteed as to the timely payment of principal and interest by GNMA and
such guarantees are backed by the full faith and credit of the United States. GNMA certificates also are supported by the authority of GNMA to borrow funds from the U.S. Treasury to make payments under its guarantee.
Government-related guarantors (i.e., not backed by the full faith and credit of the U.S. Government) include the Federal National Mortgage
Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). FNMA is a government-sponsored corporation the common stock of which is owned entirely by private stockholders. FNMA purchases conventional (i.e., not
insured or guaranteed by any government agency) residential mortgages from a list of approved seller/servicers which include state and federally chartered savings and loan associations, mutual savings banks, commercial banks and credit unions and
mortgage bankers. Pass-through securities issued by FNMA (also known as Fannie Maes) are guaranteed as to timely payment of principal and interest by FNMA, but are not backed by the full faith and credit of the U.S. Government. FHLMC was
created by Congress in 1970 for the purpose of increasing the availability of mortgage credit for residential housing. It is a government-sponsored corporation that issues FHLMC Guaranteed Mortgage Pass-Through Certificates (also known as
Freddie Macs or PCs), which are pass-through securities, each representing an undivided interest in a pool of residential mortgages. FHLMC guarantees the timely payment of interest and ultimate collection of principal, but
PCs are not backed by the full faith and credit of the U.S. Government.
In 2008, the Federal Housing Finance Agency (FHFA)
placed FNMA and FHLMC into conservatorship. FNMA and FHLMC are continuing to operate as going concerns while in conservatorship and each remains liable for all of its obligations, including its guaranty obligations, associated with its MBS.
As the conservator, FHFA succeeded to all rights, titles, powers and privileges of FNMA and FHLMC and of any stockholder, officer or director
of FNMA and FHLMC with respect to FNMA and FHLMC and the assets of FNMA and FHLMC. In connection with the conservatorship, the U.S. Treasury entered into a Senior Preferred Stock Purchase Agreement with each of FNMA and FHLMC pursuant to which the
U.S. Treasury would purchase up to an aggregate of $100 billion of each of FNMA and FHLMC to maintain a positive net worth in each enterprise. This agreement contains various covenants that severely limit each enterprises operations. In
exchange for entering into these agreements, the U.S. Treasury received $1 billion of each enterprises senior preferred stock and warrants to purchase 79.9% of each enterprises common stock. In February 2009, the U.S. Treasury
doubled the size of its commitment to each enterprise under the Senior Preferred Stock Program to $200 billion. The U.S. Treasurys obligations under the Senior Preferred Stock Program are for an indefinite period of time for a maximum
amount of $200 billion per enterprise. In December 2009, the U.S. Treasury announced further amendments to the Senior Preferred Stock Purchase Agreements which included additional financial support to certain governmentally supported entities,
including the Federal Home Loan Banks (FHLBs), FNMA and FHLMC. It is difficult, if not impossible, to predict the future political, regulatory or economic changes that could impact FNMA, FHLMC and the FHLBs, and the values of their
related securities or obligations. There is no assurance that the obligations of such entities will be satisfied in full, or that such obligations will not decrease in value or default.
Under the Federal Housing Finance Regulatory Reform Act of 2008 (the Reform Act), which was included as part of the Housing and
Economic Recovery Act of 2008, FHFA, as conservator or receiver, has the power to repudiate any contract entered into by FNMA or FHLMC prior to FHFAs appointment as conservator or receiver, as applicable, if FHFA determines, in its sole
discretion, that performance of the contract is burdensome and that repudiation of the contract promotes the orderly administration of FNMAs or FHLMCs affairs. The Reform Act requires FHFA to exercise its right to repudiate any contract
within a reasonable period of time after its appointment as conservator or receiver. FHFA, in its capacity as conservator, has indicated that it has no intention to repudiate the guaranty obligations of FNMA or FHLMC because FHFA views repudiation
as incompatible with the goals of the conservatorship. However, in the event that FHFA, as conservator or if it is later appointed as receiver for FNMA or FHLMC, were to repudiate any such guaranty obligation, the conservatorship or receivership
estate, as applicable, would be liable for actual direct compensatory damages in accordance with the provisions of the Reform Act. Any such liability could be satisfied only to the extent of FNMAs or FHLMCs assets available therefor. In
the event of repudiation, the payments of interest to holders of FNMA or FHLMC MBS would be reduced if payments on the mortgage loans represented in the mortgage loan groups related to such MBS are not made by the borrowers or advanced by the
servicer. Any actual direct compensatory damages for repudiating these guaranty obligations
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may not be sufficient to offset any shortfalls experienced by such mortgage-backed security holders. Further, in its capacity as conservator or receiver, FHFA has the right to transfer or sell
any asset or liability of FNMA or FHLMC without any approval, assignment or consent. Although FHFA has stated that it has no present intention to do so, if FHFA, as conservator or receiver, were to transfer any such guaranty obligation to another
party, holders of FNMA or FHLMC MBS would have to rely on that party for satisfaction of the guaranty obligation and would be exposed to the credit risk of that party. In addition, certain rights provided to holders of MBS issued by FNMA and FHLMC
under the operative documents related to such securities may not be enforced against FHFA, or enforcement of such rights may be delayed, during the conservatorship or any future receivership. The operative documents for FNMA and FHLMC MBS may
provide (or with respect to securities issued prior to the date of the appointment of the conservator may have provided) that upon the occurrence of an event of default on the part of FNMA or FHLMC, in its capacity as guarantor, which includes the
appointment of a conservator or receiver, holders of such MBS have the right to replace FNMA or FHLMC as trustee if the requisite percentage of MBS holders consent. The Reform Act prevents mortgage-backed security holders from enforcing such rights
if the event of default arises solely because a conservator or receiver has been appointed.
Non-Agency RMBS. Non-Agency RMBS
are issued by commercial banks, savings and loan institutions, mortgage bankers, private mortgage insurance companies and other non-governmental issuers. Timely payment of principal and interest on RMBS backed
by pools created by non-governmental issuers often is supported partially by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance. The insurance and guarantees
are issued by government entities, private insurers and the mortgage poolers. There can be no assurance that the private insurers or mortgage poolers can meet their obligations under the policies, so that if the issuers default on their obligations,
the holders of the security could sustain a loss. No insurance or guarantee covers the Trust or the price of the Trusts shares. RMBS issued by non-governmental issuers generally offer a higher rate of
interest than government agency and government-related securities because there are no direct or indirect government guarantees of payment.
CMBS. CMBS generally are multi-class debt or pass-through certificates secured or backed by mortgage loans on
commercial properties. CMBS generally are structured to provide protection to the senior class investors against potential losses on the underlying mortgage loans. This protection generally is provided by having the holders of subordinated classes
of securities (Subordinated CMBS) take the first loss if there are defaults on the underlying commercial mortgage loans. Other protection, which may benefit all of the classes or particular classes, may include issuer guarantees, reserve
funds, additional Subordinated CMBS, cross-collateralization and over-collateralization.
The Trust may invest in Subordinated CMBS issued
or sponsored by commercial banks, savings and loan institutions, mortgage bankers, private mortgage insurance companies and other non-governmental issuers.
Subordinated CMBS have no governmental guarantee and are subordinated in some manner as to the payment of principal and/or interest to the
holders of more senior CMBS arising out of the same pool of mortgages. The holders of Subordinated CMBS typically are compensated with a higher stated yield than are the holders of more senior CMBS. On the other hand, Subordinated CMBS typically
subject the holder to greater risk than senior CMBS and tend to be rated in a lower rating category (frequently a substantially lower rating category) than the senior CMBS issued in respect of the same mortgage pool. Subordinated CMBS generally are
likely to be more sensitive to changes in prepayment and interest rates and the market for such securities may be less liquid than is the case for traditional income securities and senior CMBS.
CMOs. A CMO is a multi-class bond backed by a pool of mortgage pass-through certificates or mortgage loans. CMOs
may be collateralized by (i) Ginnie Mae, Fannie Mae or Freddie Mac pass-through certificates, (ii) unsecuritized mortgage loans insured by the FHA or guaranteed by the VA, (iii) unsecuritized conventional mortgages, (iv) other
MBS or (v) any combination thereof. Each class of a CMO, often referred to as a tranche, is issued at a specific coupon rate and has a stated maturity or final distribution date. Principal prepayments on collateral underlying a CMO
may cause it to be retired substantially earlier than its stated maturity or final distribution date. The principal and interest on the underlying mortgages may be allocated among the several classes of a series of a CMO in many ways. One or more
tranches of a CMO may have coupon rates which reset periodically at a specified increment over an index, such as the London Interbank Offered Rate (LIBOR) (or sometimes more than one index). These floating rate CMOs typically are issued
with lifetime caps on the coupon rate thereon. The Trust does not intend to invest in CMO residuals, which represent the interest in any excess cash flow remaining after making the payments of interest and principal on the tranches issued by the CMO
and the payment of administrative expenses and management fees.
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The Trust may invest in inverse floating rate CMOs. Inverse floating rate CMOs constitute a
tranche of a CMO with a coupon rate that moves in the reverse direction relative to an applicable index such as LIBOR. Accordingly, the coupon rate thereon will increase as interest rates decrease. Inverse floating rate CMOs are typically more
volatile than fixed or floating rate tranches of CMOs. Many inverse floating rate CMOs have coupons that move inversely to a multiple of an index. The effect of the coupon varying inversely to a multiple of an applicable index creates a leverage
factor. Inverse floaters based on multiples of a stated index are designed to be highly sensitive to changes in interest rates and can subject the holders thereof to extreme reductions of yield and loss of principal. The markets for inverse floating
rate CMOs with highly leveraged characteristics at times may be very thin. The Trusts ability to dispose of its positions in such securities will depend on the degree of liquidity in the markets for such securities. It is impossible to predict
the amount of trading interest that may exist in such securities, and therefore the future degree of liquidity.
Stripped
MBS. Stripped MBS are created by segregating the cash flows from underlying mortgage loans or mortgage securities to create two or more new securities, each receiving a specified percentage of the underlying
securitys principal or interest payments. Mortgage securities may be partially stripped so that each investor class receives some interest and some principal. When securities are completely stripped, however, all of the interest is distributed
to holders of one type of security, known as an interest-only security (or IO), and all of the principal is distributed to holders of another type of security, known as a principal-only security (or PO). Strips can be created
in a pass-through structure or as tranches of a CMO. The yields to maturity on IOs and POs are very sensitive to the rate of principal payments (including prepayments) on the related underlying mortgage assets. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, the Trust may not fully recoup its initial investment in IOs. Conversely, if the underlying mortgage assets experience less than anticipated prepayments of principal, the yield on POs
could be materially and adversely affected.
Adjustable Rate Mortgage Securities. ARMs have interest rates
that reset at periodic intervals. Acquiring ARMs permits the Trust to participate in increases in prevailing current interest rates through periodic adjustments in the coupons of mortgages underlying the pool on which ARMs are based. Such ARMs
generally have higher current yield and lower price fluctuations than is the case with more traditional fixed income securities of comparable rating and maturity. In addition, when prepayments of principal are made on the underlying mortgages during
periods of rising interest rates, the Trust can reinvest the proceeds of such prepayments at rates higher than those at which they were previously invested. Mortgages underlying most ARMs, however, have limits on the allowable annual or lifetime
increases that can be made in the interest rate that the mortgagor pays. Therefore, if current interest rates rise above such limits over the period of the limitation, the Trust, when holding an ARM, does not benefit from further increases in
interest rates. Moreover, when interest rates are in excess of coupon rates (i.e., the rates being paid by mortgagors) of the mortgages, ARMs behave more like fixed income securities and less like adjustable-rate securities and are subject to the
risks associated with fixed income securities. In addition, during periods of rising interest rates, increases in the coupon rate of ARMs generally lag current market interest rates slightly, thereby creating the potential for capital depreciation
on such securities.
Sub-Prime
Mortgages. Sub-prime mortgages are mortgages rated below A by S&P, Moodys or Fitch. Historically, sub-prime mortgage
loans have been made to borrowers with blemished (or non-existent) credit records, and the borrower is charged a higher interest rate to compensate for the greater risk of delinquency and the higher costs of
loan servicing and collection. Sub-prime mortgages are subject to both state and federal anti-predatory lending statutes that carry potential liability to secondary market purchasers such as the Trust. Sub-prime mortgages have certain characteristics and associated risks similar to below investment grade securities, including a higher degree of credit risk, and certain characteristics and associated risks similar
to MBS, including prepayment risk.
Mortgage Related ABS. ABS are bonds backed by pools of loans or other receivables. ABS are
created from many types of assets, including in some cases mortgage related asset classes, such as home equity loan ABS. Home equity loan ABS are subject to many of the same risks as RMBS, including interest rate risk and prepayment risk.
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Other Mortgage Related Securities. Other mortgage related securities include
securities other than those described above that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans on real property. Other mortgage related securities may be equity or debt securities issued by
agencies or instrumentalities of the U.S. Government or by private originators of, or investors in, mortgage loans, including savings and loan associations, homebuilders, mortgage banks, commercial banks, investment banks, partnerships, trusts and
special purpose entities of the foregoing.
Municipal Securities
The Trust may invest in debt obligations issued by or on behalf of states, territories and possessions of the United States, including the
District of Columbia, and their political subdivisions, agencies or instrumentalities. The Trust may invest in various municipal securities, including municipal bonds and notes, other securities issued to finance and refinance public projects, and
other related securities and derivative instruments creating exposure to municipal bonds, notes and securities that provide for the payment of interest income that is exempt from regular U.S. federal income tax. Municipal securities are either
general obligation bonds or revenue bonds and typically are issued to finance public projects, such as roads or public buildings, to pay general operating expenses or to refinance outstanding debt. Municipal securities may also be issued for private
activities, such as housing, medical and educational facility construction, or for privately owned industrial development and pollution control projects. General obligation bonds are backed by the full faith and credit, or taxing authority, of the
issuer and may be repaid from any revenue source. Revenue bonds may be repaid only from the revenues of a specific facility or source. Municipal securities may be issued on a long term basis to provide permanent financing. The repayment of such debt
may be secured generally by a pledge of the full faith and credit taxing power of the issuer, a limited or special tax, or any other revenue source, including project revenues, which may include tolls, fees and other user charges, lease payments and
mortgage payments. Municipal securities may also be issued to finance projects on a short-term interim basis, anticipating repayment with the proceeds of the later issuance of long-term debt.
General Obligation Bonds. General obligation bonds are secured by the issuers pledge of its faith, credit
and taxing power for the payment of principal and interest. The taxing power of any governmental entity may be limited, however, by provisions of its state constitution or laws, and an entitys creditworthiness will depend on many factors,
including potential erosion of its tax base due to population declines, natural disasters, declines in the states industrial base or inability to attract new industries, economic limits on the ability to tax without eroding the tax base, state
legislative proposals or voter initiatives to limit ad valorem real property taxes and the extent to which the entity relies on federal or state aid, access to capital markets or other factors beyond the states or entitys control.
Accordingly, the capacity of the issuer of a general obligation bond as to the timely payment of interest and the repayment of principal when due is affected by the issuers maintenance of its tax base.
Revenue Bonds. Revenue bonds are payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or other specific revenue sources such as payments from the user of the facility being financed. Accordingly, the timely payment of interest and the repayment of principal in
accordance with the terms of the revenue or special obligation bond is a function of the economic viability of such facility or such revenue source. Revenue bonds issued by state or local agencies to finance the development of low-income, multi-family housing involve special risks in addition to those associated with municipal securities generally, including that the underlying properties may not generate sufficient income to pay expenses
and interest costs. Such bonds are generally non-recourse against the property owner, may be junior to the rights of others with an interest in the properties, may pay interest that changes based in part on
the financial performance of the property, may be prepayable without penalty and may be used to finance the construction of housing developments which, until completed and rented, do not generate income to pay interest. Increases in interest rates
payable on senior obligations may make it more difficult for issuers to meet payment obligations on subordinated bonds.
Moral
Obligation Bonds. The Trust also may invest in moral obligation bonds, which are normally issued by special purpose public authorities. If an issuer of moral obligation bonds is unable to meet its obligations,
the repayment of such bonds becomes a moral commitment but not a legal obligation of the state or municipality in question.
Municipal
Lease Obligations. The Trust may invest in participations in lease obligations or installment purchase contract obligations (hereinafter collectively called Municipal Lease Obligations) of municipal authorities
or entities. Although a Municipal Lease Obligation does not constitute a general obligation of the municipality for which the municipalitys taxing power is pledged, a Municipal Lease Obligation is ordinarily backed by the
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municipalitys covenant to budget for, appropriate and make the payments due under the Municipal Lease Obligation. However, certain Municipal Lease Obligations contain non-appropriation clauses, which provide that the municipality has no obligation to make lease or installment purchase payments in future years unless money is appropriated for such purpose on a yearly
basis. In the case of a non-appropriation lease, the Trusts ability to recover under the lease in the event of non-appropriation or default will be
limited solely to the repossession of the leased property, without recourse to the general credit of the lessee, and the disposition or re-leasing of the property might prove difficult.
Certificates of Participation. A certificate of participation represents an undivided interest in an unmanaged
pool of municipal leases, installment purchase agreements or other instruments. The certificates are typically issued by a municipal agency, a trust or other entity that has received an assignment of the payments to be made by the state or political
subdivision under such leases or installment purchase agreements. Such certificates provide the Trust with the right to a pro rata undivided interest in the underlying municipal securities. In addition, such participations generally provide the
Trust with the right to demand payment, on not more than seven days notice, of all or any part of the Trusts participation interest in the underlying municipal securities, plus accrued interest.
Pre-Refunded Municipal Securities. The principal of, and interest on, pre-refunded municipal securities are no longer paid from the original revenue source for the securities. Instead, the source of such payments is typically an escrow fund consisting of U.S. Government securities.
The assets in the escrow fund are derived from the proceeds of refunding bonds issued by the same issuer as the pre-refunded municipal securities. Issuers of municipal securities use this advance refunding
technique to obtain more favorable terms with respect to securities that are not yet subject to call or redemption by the issuer. For example, advance refunding enables an issuer to refinance debt at lower market interest rates, restructure debt to
improve cash flow or eliminate restrictive covenants in the indenture or other governing instrument for the pre-refunded municipal securities. However, except for a change in the revenue source from which
principal and interest payments are made, the pre-refunded municipal securities remain outstanding on their original terms until they mature or are redeemed by the issuer.
Private Activity Bonds. Private activity bonds, formerly referred to as industrial development bonds, are issued
by or on behalf of public authorities to obtain funds to provide privately operated housing facilities, airports, mass transit or port facilities, sewage disposal, solid waste disposal or hazardous waste treatment or disposal facilities, and certain
local facilities for water supply, gas or electricity. Other types of private activity bonds, the proceeds of which are used for the construction, equipment, repair or improvement of privately operated industrial or commercial facilities, may
constitute municipal securities, although the current federal tax laws place substantial limitations on the size of such issues. Such bonds are secured primarily by revenues derived from loan repayments or lease payments due from the entity, which
may or may not be guaranteed by a parent company or otherwise secured. Private activity bonds generally are not secured by a pledge of the taxing power of the issuer of such bonds. Therefore, an investor should be aware that repayment of such bonds
generally depends on the revenues of a private entity and be aware of the risks that such an investment may entail. Continued ability of an entity to generate sufficient revenues for the payment of principal and interest on such bonds will be
affected by many factors, including the size of the entity, capital structure, demand for its products or services, competition, general economic conditions, government regulation and the entitys dependence on revenues for the operation of the
particular facility being financed.
Special Taxing Districts. Special taxing districts are organized to
plan and finance infrastructure developments to induce residential, commercial and industrial growth and redevelopment. Bonds issued pursuant to financing methods such as tax increment finance, tax assessment, special services district and
Mello-Roos bonds (a type of municipal security established by the Mello-Roos Community Facilities District Act of 1982), are generally payable solely from taxes or other revenues attributable to the specific projects financed by the bonds without
recourse to the credit or taxing power of related or overlapping municipalities. They often are exposed to real estate development-related risks and can have more taxpayer concentration risk than general
tax-supported bonds, such as general obligation bonds. Further, the fees, special taxes, or tax allocations and other revenues that are established to secure such financings are generally limited as to the
rate or amount that may be levied or assessed and are not subject to increase pursuant to rate covenants or municipal or corporate guarantees. The bonds could default if development failed to progress as anticipated or if larger taxpayers failed to
pay the assessments, fees and taxes as provided in the financing plans of the districts.
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VRDOs. Variable rate demand obligations (VRDOs) are tax-exempt obligations that contain a floating or variable interest rate adjustment formula and right of demand on the part of the holder thereof to receive payment of the unpaid principal balance plus accrued
interest upon a short notice period not to exceed seven days. There is, however, the possibility that because of default or insolvency the demand feature of VRDOs may not be honored. The interest rates are adjustable at intervals (ranging from daily
to up to one year) to some prevailing market rate for similar investments, such adjustment formula being calculated to maintain the market value of the VRDOs, at approximately the par value of the VRDOs on the adjustment date. The adjustments
typically are based upon SIFMA or some other appropriate interest rate adjustment index. The Trust may invest in all types of tax-exempt instruments currently outstanding or to be issued in the future. VRDOs
that contain an unconditional right of demand to receive payment of the unpaid principal balance plus accrued interest on a notice period exceeding seven days may be deemed to be illiquid securities.
Taxable Municipal Securities. The Trust may invest in taxable municipal securities, including Build America
Bonds (BABs). BABs are taxable municipal obligations issued pursuant to legislation providing for the issuance of taxable municipal debt on which the issuer receives federal support of the interest paid. Enacted in February 2009, the
American Recovery and Reinvestment Act of 2009 (the ARRA) authorizes state and local governments to issue taxable bonds on which, assuming certain specified conditions are satisfied, issuers may either (i) receive payments from the
U.S. Treasury with respect to the bonds interest payments (direct pay BABs) or (ii) provide tax credits to investors in the bonds (tax credit BABs). BABs offer an alternative form of financing to state and local
governments whose primary means for accessing the capital markets has been through issuance of tax-free municipal bonds. BABs may appeal to a broader array of investors than the high income U.S. taxpayers that
have traditionally provided the market for municipal bonds. Unlike most other municipal obligations, interest received on BABs is subject to federal and state income tax. Under the terms of the ARRA, issuers of direct pay BABs are entitled to
receive payments from the U.S. Treasury over the life of the bond equal to 35% (or 45% in the case of Recovery Zone Economic Development Bonds) of the interest paid and investors in tax credit BABs can receive a federal tax credit of 35% of the
coupon interest received. The federal interest subsidy or tax credit continues for the life of the bonds. The Trust may invest in direct pay BABs or tax credit BABs. Pursuant to the ARRA, the issuance of BABs was discontinued on December 31,
2010.
Sovereign Government and Supranational Debt
The Trust may invest in all types of debt securities of governmental issuers in all countries, including foreign countries. These sovereign
debt securities may include: debt securities issued or guaranteed by governments, governmental agencies or instrumentalities and political subdivisions located in foreign countries; debt securities issued by government owned, controlled or sponsored
entities located in foreign countries; interests in entities organized and operated for the purpose of restructuring the investment characteristics of instruments issued by any of the above issuers; Brady Bonds, which are debt securities issued
under the framework of the Brady Plan as a means for debtor nations to restructure their outstanding external indebtedness; participations in loans between emerging market governments and financial institutions; or debt securities issued by
supranational entities such as the World Bank. A supranational entity is a bank, commission or company established or financially supported by the national governments of one or more countries to promote reconstruction or development. Sovereign
government and supranational debt involve all the risks described herein regarding foreign and emerging markets investments as well as the risk of debt moratorium, repudiation or renegotiation.
Brady Bonds are not considered to be U.S. Government securities. U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed rate
par bonds or floating rate discount bonds, are generally collateralized in full as to principal by U.S. Treasury zero-coupon bonds having the same maturity as the Brady Bonds. Interest payments on these Brady
Bonds generally are collateralized on a one-year or longer rolling-forward basis by cash or securities in an amount that, in the case of fixed rate bonds, is equal to at least one year of interest payments or,
in the case of floating rate bonds, initially is equal to at least one years interest payments based on the applicable interest rate at that time and is adjusted at regular intervals thereafter. Certain Brady Bonds are entitled to value
recovery payments in certain circumstances, which in effect constitute supplemental interest payments but generally are not collateralized. For example, some Mexican and Venezuelan Brady Bonds include attached value recovery options, which
increase interest payments if oil revenues rise. Brady Bonds are often viewed as having three or four valuation components: (i) the collateralized repayment of principal at final maturity; (ii) the collateralized interest payments;
(iii) the uncollateralized interest payments; and (iv) any uncollateralized repayment of principal at maturity (the uncollateralized amounts constitute the residual risk).
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Brady Bonds involve various risk factors described elsewhere associated with investing in foreign
securities, including the history of defaults with respect to commercial bank loans by public and private entities of countries issuing Brady Bonds. In light of the residual risk of Brady Bonds and, among other factors, the history of defaults,
investments in Brady Bonds are considered speculative. There can be no assurances that Brady Bonds in which the Trust may invest will not be subject to restructuring arrangements or to requests for new credit, which may cause the Trust to suffer a
loss of interest or principal on any of its holdings.
Bank Obligations
Bank obligations may include certificates of deposit, bankers acceptances and fixed time deposits. Certificates of deposit are negotiable
certificates issued against funds deposited in a commercial bank for a definite period of time and earning a specified return. Bankers acceptances are negotiable drafts or bills of exchange, normally drawn by an importer or exporter to pay for
specific merchandise, which are accepted by a bank, meaning, in effect, that the bank unconditionally agrees to pay the face value of the instrument on maturity. Fixed time deposits are bank obligations payable at a stated maturity date
and bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand by the investor, but may be subject to early withdrawal penalties, which vary depending upon market conditions and the remaining maturity of the obligation. There
are no contractual restrictions on the right to transfer a beneficial interest in a fixed time deposit to a third party, although there is no market for such deposits.
Obligations of foreign banks involve somewhat different investment risks than those affecting obligations of U.S. banks, including the
possibilities that their liquidity could be impaired because of future political and economic developments, that their obligations may be less marketable than comparable obligations of U.S. banks, that a foreign jurisdiction might impose withholding
taxes on interest income payable on those obligations, that foreign deposits may be seized or nationalized, that foreign governmental restrictions such as exchange controls may be adopted which might adversely affect the payment of principal and
interest on those obligations and that the selection of those obligations may be more difficult because there may be less publicly available information concerning foreign banks or the accounting, auditing and financial reporting standards,
practices and requirements applicable to foreign banks may differ from those applicable to U.S. banks. Foreign banks are not generally subject to examination by any U.S. Government agency or instrumentality.
Cash Equivalents and Short-Term Debt Securities
For temporary defensive purposes or to keep cash on hand, the Trust may invest up to 100% of its assets in cash equivalents and short-term debt
securities. Short-term debt securities are defined to include, without limitation, the following:
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U.S. Government securities, including bills, notes and bonds differing as to maturity and rates of interest
that are either issued or guaranteed by the U.S. Treasury or by U.S. Government agencies or instrumentalities. U.S. Government securities include securities issued by (a) the FHA, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration and GNMA, whose securities are supported by the full faith and credit of the United States; (b) the FHLBs, Federal Intermediate Credit Banks, and Tennessee Valley Authority, whose securities are supported
by the right of the agency to borrow from the U.S. Treasury; (c) FNMA, whose securities are supported by the discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and (d) the
Student Loan Marketing Association, whose securities are supported only by its credit. While the U.S. Government provides financial support to such U.S. Government- sponsored agencies or instrumentalities, no assurance can be given that it always
will do so since it is not so obligated by law. The U.S. Government, its agencies and instrumentalities do not guarantee the market value of their securities. Consequently, the value of such securities may fluctuate.
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ii.
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Certificates of deposit issued against funds deposited in a bank or a savings and loan association. Such
certificates are for a definite period of time, earn a specified rate of return, and are normally negotiable. The issuer of a certificate of deposit agrees to pay the amount deposited plus interest to the bearer of the certificate on the date
specified thereon. Certificates of deposit purchased by the Trust may not be fully insured by the Federal Deposit Insurance Corporation.
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Repurchase agreements, which involve purchases of debt securities. At the time the Trust purchases securities
pursuant to a repurchase agreement, it simultaneously agrees to resell and redeliver such securities to the seller, who also simultaneously agrees to buy back the securities at a fixed price and time.
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This assures a predetermined yield for the Trust during its holding period, since the resale price is always greater than the purchase price and reflects an agreed upon market rate. Such actions
afford an opportunity for the Trust to invest temporarily available cash. The Trust may enter into repurchase agreements only with respect to obligations of the U.S. Government, its agencies or instrumentalities; certificates of deposit; or
bankers acceptances in which the Trust may invest. Repurchase agreements may be considered loans to the seller, collateralized by the underlying securities. The risk to the Trust is limited to the ability of the seller to pay the agreed upon
sum on the repurchase date; in the event of default, the repurchase agreement provides that the Trust is entitled to sell the underlying collateral. If the value of the collateral declines after the agreement is entered into, and if the seller
defaults under a repurchase agreement when the value of the underlying collateral is less than the repurchase price, the Trust could incur a loss of both principal and interest. The Advisors monitor the value of the collateral at the time the action
is entered into and at all times during the term of the repurchase agreement. The Advisors do so in an effort to determine that the value of the collateral always equals or exceeds the agreed upon repurchase price to be paid to the Trust. If the
seller were to be subject to a federal bankruptcy proceeding, the ability of the Trust to liquidate the collateral could be delayed or impaired because of certain provisions of the bankruptcy laws.
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Commercial paper, which consists of short-term unsecured promissory notes, including variable rate master
demand notes issued by corporations to finance their current operations. Master demand notes are direct lending arrangements between the Trust and a corporation. There is no secondary market for such notes. However, they are redeemable by the Trust
at any time. The Advisors will consider the financial condition of the corporation (e.g., earning power, cash flow and other liquidity ratios) and will continuously monitor the corporations ability to meet all of its financial obligations,
because the Trusts liquidity might be impaired if the corporation were unable to pay principal and interest on demand. Investments in commercial paper will be limited to commercial paper rated in the highest categories by a major rating agency
and which mature within one year of the date of purchase or carry a variable or floating rate of interest.
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Strategic Transactions
and Other Management Techniques
As described in the Prospectus, the Trust may use Strategic Transactions. This section contains
various additional information about the type of Strategic Transactions in which the Trust may engage.
Interest Rate Transactions.
The Trust may enter into interest rate swaps and purchase or sell interest rate caps and floors. The Trust expects to enter into these transactions primarily to preserve a return or spread on a particular investment or portion of its portfolio
as a duration management technique, to protect against any increase in the price of securities the Trust anticipates purchasing at a later date and/or to hedge against increases in the Trusts costs associated with its leverage strategy. The
Trust will ordinarily use these transactions as a hedge or for duration and risk management, although it is permitted to enter into them to enhance income or gain. The Trust may not sell interest rate caps or floors, except for interest rate caps or
floors it has previously purchased. Interest rate swaps involve the exchange by the Trust with another party of their respective commitments to pay or receive interest (e.g., an exchange of floating rate payments for fixed rate payments with respect
to a notional amount of principal). The purchase of an interest rate cap entitles the purchaser, to the extent that the level of a specified interest rate exceeds a predetermined interest rate (i.e., the strike price), to receive payments of
interest on a notional principal amount from the party selling such interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that the level of a specified interest rate falls below a predetermined interest rate
(i.e., the strike price), to receive payments of interest on a notional principal amount from the party selling such interest rate floor.
The Trust may hedge both its assets and liabilities through interest rate swaps, caps and floors. Usually, payments with respect to interest
rate swaps will be made on a net basis (i.e., the two payment streams are netted out) with the Trust receiving or paying, as the case may be, only the net amount of the two payments on the payment dates. In as much as these Strategic Transactions
are entered into for good faith risk management purposes, the Advisor and the Trust believe such obligations do not constitute senior securities and, accordingly, will not treat them as being subject to its borrowing restrictions. The Trust will
accrue the net amount of the excess, if any, of the Trusts obligations over its entitlements with respect to each interest rate swap on a daily basis and will designate on its books and records with a custodian an amount of cash or liquid
assets having an aggregate net asset value at all times at least equal to the accrued excess. If there is a default by the other party to such a transaction, generally the Trust will have contractual remedies pursuant to the agreements related to
the transaction. The swap market has
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grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. Caps and floors
are more recent innovations for which standardized documentation has not yet been developed and, accordingly, they are less liquid than swaps.
Credit Default Swap Agreements. The Trust may enter into credit default swap agreements for hedging purposes or
to seek to increase income or gain. The credit default swap agreement may have as reference obligations one or more securities that are not currently held by the Trust. The protection buyer in a credit default contract may be obligated
to pay the protection seller an upfront or a periodic stream of payments over the term of the contract, provided that no credit event on the reference obligation has occurred. If a credit event occurs, the seller generally must pay the
buyer the par value (full notional amount) of the swap in exchange for an equal face amount of deliverable obligations of the reference entity described in the swap, or if the swap is cash settled the seller may be required to deliver
the related net cash amount (the difference between the market value of the reference obligation and its par value). The Trust may be either the buyer or seller in the transaction. If the Trust is a buyer and no credit event occurs, the Trust will
generally receive no payments from its counterparty under the swap if the swap is held through its termination date. However, if a credit event occurs, the buyer generally may elect to receive the full notional amount of the swap in exchange for an
equal face amount of deliverable obligations of the reference entity, the value of which may have significantly decreased. As a seller, the Trust generally receives an upfront payment or a fixed rate of income throughout the term of the swap, which
typically is between six months and three years, provided that there is no credit event. If a credit event occurs, generally the seller must pay the buyer the full notional amount of the swap in exchange for an equal face amount of deliverable
obligations of the reference entity, the value of which may have significantly decreased. As the seller, the Trust would effectively add leverage to its portfolio because, in addition to its Managed Assets, the Trust would be subject to investment
exposure on the notional amount of the swap.
Credit default swap agreements involve greater risks than if the Trust had taken a position
in the reference obligation directly (either by purchasing or selling) since, in addition to general market risks, credit default swaps are subject to illiquidity risk, counterparty risk and credit risks. A buyer generally will also lose its upfront
payment or any periodic payments it makes to the seller counterparty and receive no payments from its counterparty should no credit event occur and the swap is held to its termination date. If a credit event were to occur, the value of any
deliverable obligation received by the seller, coupled with the upfront or periodic payments previously received, may be less than the full notional amount it pays to the buyer, resulting in a loss of value to the seller. A seller of a credit
default swap or similar instrument is exposed to many of the same risks of leverage since, if a credit event occurs, the seller generally will be required to pay the buyer the full notional amount of the contract net of any amounts owed by the buyer
related to its delivery of deliverable obligations. The Trusts obligations under a credit default swap agreement will be accrued daily (offset against any amounts owed to the Trust). The Trust will at all times segregate with its custodian in
connection with each such transaction liquid assets or cash with a value at least equal to the Trusts exposure (any accrued but unpaid net amounts owed by the Trust to any counterparty) on a marked-to-market basis (as calculated pursuant to requirements of the SEC). If the Trust is a seller of protection in a credit default swap transaction, it will segregate with its custodian in connection with
such transaction liquid assets or cash with a value at least equal to the full notional amount of the contract. Such segregation will ensure that the Trust has assets available to satisfy its obligations with respect to the transaction and will
avoid any potential leveraging of the Trusts portfolio. Such segregation will not limit the Trusts exposure to loss.
In
addition, the credit derivatives market is subject to a changing regulatory environment. It is possible that regulatory or other developments in the credit derivatives market could adversely affect the Trusts ability to successfully use credit
derivatives.
Total Return Swaps. Total return swap agreements are contracts in which one party agrees to
make periodic payments to another party based on the change in market value of the assets underlying the contract, which may include a specified security, basket of securities or securities indices during the specified period, in return for periodic
payments based on a fixed or variable interest rate or the total return from other underlying assets. Total return swap agreements may be used to obtain exposure to a security or market without owning or taking physical custody of such security or
investing directly in such market. Total return swap agreements may effectively add leverage to the Trusts portfolio because, in addition to its Managed Assets (as defined in the prospectus), the Trust would be subject to investment exposure
on the notional amount of the swap in excess of any premium and margin required to establish and maintain the position.
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Total return swap agreements are subject to market risk as well as the risk that a counterparty
will default on its payment obligations to the Trust thereunder. Swap agreements also bear the risk that the Trust will not be able to meet its obligation to the counterparty. Generally, the Trust will enter into total return swaps on a net basis
(i.e., the two payment streams are netted against one another with the Trust receiving or paying, as the case may be, only the net amount of the two payments). The net amount of the excess, if any, of the Trusts obligations over its
entitlements with respect to each total return swap will be accrued on a daily basis, and an amount of liquid assets having an aggregate NAV at least equal to the accrued excess will be segregated by the Trust or earmarked on its books and records.
If the total return swap transaction is entered into on other than a net basis, the full amount of the Trusts obligations will be accrued on a daily basis, and the full amount of the Trusts obligations will be segregated or earmarked by
the Trust in an amount equal to or greater than the market value of the liabilities under the total return swap agreement or the amount it would have cost the Trust initially to make an equivalent direct investment, plus or minus any amount the
Trust is obligated to pay or is to receive under the total return swap agreement.
Futures Contracts and Options on Futures
Contracts. In connection with its hedging and other risk management strategies, the Trust may also enter into contracts for the purchase or sale for future delivery (futures contracts) of debt securities,
aggregates of debt securities or indices or prices thereof, other financial indices and U.S. Government debt securities or options on the above. The Trust primarily intends to engage in such transactions for bona fide hedging or risk management and
other portfolio management purposes.
Forward Foreign Currency Contracts. The Trust may enter into forward
currency contracts to purchase or sell foreign currencies for a fixed amount of U.S. dollars or another foreign currency. A forward currency contract involves an obligation to purchase or sell a specific currency at a future date, which may be any
fixed number of days (term) from the date of the forward currency contract agreed upon by the parties, at a price set at the time the forward currency contract is entered into. Forward currency contracts are traded directly between currency traders
(usually large commercial banks) and their customers. The Trust may purchase a forward currency contract to lock in the U.S. dollar price of a security denominated in a foreign currency that the Trust intends to acquire. The Trust may sell a forward
currency contract to lock in the U.S. dollar equivalent of the proceeds from the anticipated sale of a security or a dividend or interest payment denominated in a foreign currency. The Trust may also use forward currency contracts to shift the
Trusts exposure to foreign currency exchange rate changes from one currency to another. For example, if the Trust owns securities denominated in a foreign currency and the Advisors believe that currency will decline relative to another
currency, the Trust might enter into a forward currency contract to sell the appropriate amount of the first foreign currency with payment to be made in the second currency. The Trust may also purchase forward currency contracts to enhance income
when the Advisors anticipate that the foreign currency will appreciate in value but securities denominated in that currency do not present attractive investment opportunities. The Trust may also use forward currency contracts to hedge against a
decline in the value of existing investments denominated in a foreign currency. Such a hedge would tend to offset both positive and negative currency fluctuations, but would not offset changes in security values caused by other factors. The Trust
could also hedge the position by entering into a forward currency contract to sell another currency expected to perform similarly to the currency in which the Trusts existing investments are denominated. This type of transaction could offer
advantages in terms of cost, yield or efficiency, but may not hedge currency exposure as effectively as a simple forward currency transaction to sell U.S. dollars. This type of transaction may result in losses if the currency used to hedge does not
perform similarly to the currency in which the hedged securities are denominated. The Trust may also use forward currency contracts in one currency or a basket of currencies to attempt to hedge against fluctuations in the value of securities
denominated in a different currency if the Advisors anticipate that there will be a correlation between the two currencies.
The cost to
the Trust of engaging in forward currency contracts varies with factors such as the currency involved, the length of the contract period and the market conditions then prevailing. Because forward currency contracts are usually entered into on a
principal basis, no fees or commissions are usually involved. When the Trust enters into a forward currency contract, it relies on the counterparty to make or take delivery of the underlying currency at the maturity of the contract. Failure by the
counterparty to do so would result in the loss of some or all of any expected benefit of the transaction. Secondary markets generally do not exist for forward currency contracts, with the result that closing transactions generally can be made for
forward currency contracts only by negotiating directly with the counterparty. Thus, there can be no assurance that the Trust will in fact be able to close out a forward currency contract at a favorable price prior to maturity. In addition, in the
event of insolvency of the counterparty, the Trust might be unable to close out a forward currency contract. In either event, the Trust would continue to be subject to market risk with respect to the position, and would continue to be required to
maintain a position in securities
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denominated in the foreign currency or to maintain cash or liquid assets in a segregated account or earmark such cash or liquid assets on its books and records. The precise matching of forward
currency contract amounts and the value of the securities involved generally will not be possible because the value of such securities, measured in the foreign currency, will change after the forward currency contract has been established. Thus, the
Trust might need to purchase or sell foreign currencies in the spot (cash) market to the extent such foreign currencies are not covered by forward currency contracts. The projection of short-term currency market movements is extremely difficult and
the successful execution of a short-term hedging strategy is highly uncertain.
Calls on Securities, Indices and Futures
Contracts. In order to enhance income or reduce fluctuations on net asset value, the Trust may sell or purchase call options (calls) on municipal securities and indices based upon the prices of futures
contracts and debt securities that are traded on U.S. and foreign securities exchanges and in the over-the-counter markets. A call option gives the purchaser of the
option the right to buy, and obligates the seller to sell, the underlying security, futures contract or index at the exercise price at any time or at a specified time during the option period. All such calls sold by the Trust must be
covered as long as the call is outstanding (i.e., the Trust must own the instrument subject to the call or other securities or assets acceptable for applicable segregation and coverage requirements). A call sold by the Trust exposes the
Trust during the term of the option to possible loss of opportunity to realize appreciation in the market price of the underlying security, index or futures contract and may require the Trust to hold an instrument which it might otherwise have sold.
The purchase of a call gives the Trust the right to buy a security, futures contract or index at a fixed price. Calls on futures on municipal securities must also be covered by assets or instruments acceptable under applicable segregation and
coverage requirements.
Puts on Securities, Indices and Futures Contracts. As with calls, the
Trust may purchase put options (puts) that relate to municipal securities (whether or not it holds such securities in its portfolio), indices or futures contracts. For the same purposes, the Trust may also sell puts on municipal
securities, indices or futures contracts on such securities if the Trusts contingent obligations on such puts are secured by segregated assets consisting of cash or liquid high grade debt securities having a value not less than the exercise
price. The Trust will not sell puts if, as a result, more than 50% of the Trusts total assets would be required to cover its potential obligations under its hedging and other investment transactions. In selling puts, there is a risk that the
Trust may be required to buy the underlying security at a price higher than the current market price.
New
Products. The financial markets continue to evolve and financial products continue to be developed. The Trust reserves the right to invest in new financial products as they are developed or become more widely accepted. As
with any new financial product, these products will entail risks, including risks to which the Trust currently is not subject.
The
principal risks relating to the use of futures contracts and other Strategic Transactions are: (i) less than perfect correlation between the prices of the instrument and the market value of the securities in the Trusts portfolio;
(ii) possible lack of a liquid secondary market for closing out a position in such instruments; (iii) losses resulting from interest rate or other market movements not anticipated by the Advisors; and (iv) the obligation to meet
additional variation margin or other payment requirements, all of which could result in the Trust being in a worse position than if such transactions had not been used.
Certain provisions of the Code may restrict or affect the ability of the Trust to engage in Strategic Transactions. See Tax
Matters.
Special Purpose Acquisition Companies
The Trust may invest stock, warrants, rights and other interests issued by special purpose acquisition companies (SPACs) or similar
special purpose entities that pool funds to seek potential acquisition opportunities, including the founders shares and warrants described below. A SPAC is a publicly traded company that raises investment capital via an initial
public offering (IPO) for the purpose of identifying and acquiring one or more operating businesses or assets. In connection with forming a SPAC, the SPACs sponsors acquire founders shares, generally for nominal
consideration, and warrants that will result in the sponsors owning a specified percentage (typically 20%) of the SPACs outstanding common stock upon completion of the IPO. At the time a SPAC conducts an IPO, it has selected a management team
but has not yet identified a specific acquisition opportunity. Unless and until an acquisition is completed, a SPAC generally invests its assets in U.S. government securities, money market securities and cash. If an acquisition that meets the
requirements for the SPAC is not completed
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within a pre-established period of time, the invested funds are returned to the SPACs public shareholders, the warrants expire, and the
founders shares and such warrants become worthless. Because SPACs and similar entities are in essence blank check companies without operating histories or ongoing business operations (other than identifying and pursuing
acquisitions), the potential for the long term capital appreciation of their securities is particularly dependent on the ability of the SPACs management to identify and complete a profitable acquisition. There is no guarantee that the SPACs in
which the Trust invests will complete an acquisition or that any acquisitions completed by the SPACs in which the Trust invests will be profitable. Some SPACs may pursue acquisitions only within certain industries or regions, which may ultimately
lead to an increase in the volatility of their prices following the acquisition. In addition, some of these securities may be considered illiquid and/or subject to restrictions on resale.
Short Sales
The Trust may make short
sales of securities. A short sale is a transaction in which the Trust sells a security it does not own in anticipation that the market price of that security will decline. The Trust may make short sales to hedge positions, for duration and risk
management, in order to maintain portfolio flexibility or to enhance income or gain. When the Trust makes a short sale, it must borrow the security sold short and deliver it to the broker-dealer through which it made the short sale as collateral for
its obligation to deliver the security upon conclusion of the sale. The Trust may have to pay a fee to borrow particular securities and is often obligated to pay over to the securities lender any income, distributions or dividends received on such
borrowed securities until it returns the security to the securities lender. The Trusts obligation to replace the borrowed security will be secured by collateral deposited with the securities lender, usually cash, U.S. Government securities or
other liquid assets. The Trust will also be required to segregate or earmark similar collateral with its custodian to the extent, if any, necessary so that the aggregate collateral value is at all times at least equal to the current market value of
the security sold short. Depending on arrangements made with the securities lender regarding payment over of any income, distributions or dividends received by the Trust on such security, the Trust may not receive any payments (including interest)
on its collateral deposited with such securities lender. If the price of the security sold short increases between the time of the short sale and the time the Trust replaces the borrowed security, the Trust will incur a loss; conversely, if the
price declines, the Trust will realize a gain. Any gain will be decreased, and any loss increased, by the transaction costs described above. Although the Trusts gain is limited to the price at which it sold the security short, its potential
loss is theoretically unlimited. Short sales, even if covered, may represent a form of economic leverage and will create risks.
The Trust
will not make a short sale if, after giving effect to such sale, the market value of all securities sold short exceeds 25% of the value of its Managed Assets or the Trusts aggregate short sales of a particular class of securities exceeds 25%
of the outstanding securities of that class. The Trust may also make short sales against the box without respect to such limitations. In this type of short sale, at the time of the sale the Trust owns or has the immediate and
unconditional right to acquire at no additional cost the identical security.
Environmental, Social and Governance (ESG) Integration
Although the Trust does not seek to implement a specific ESG, impact or sustainability strategy, Trust management will consider ESG
characteristics as part of the investment process for actively managed funds such as the Trust. These considerations will vary depending on a funds particular investment strategies and may include consideration of third-party research as well
as consideration of proprietary research of the Advisor across the ESG risks and opportunities regarding an issuer. Trust management will consider those ESG characteristics it deems relevant or additive when making investment decisions for the
Trust. The ESG characteristics utilized in the Trusts investment process are anticipated to evolve over time and one or more characteristics may not be relevant with respect to all issuers that are eligible for investment.
ESG characteristics are not the sole considerations when making investment decisions for the Trust. Further, investors can differ in their
views of what constitutes positive or negative ESG characteristics. As a result, the Trust may invest in issuers that do not reflect the beliefs and values with respect to ESG of any particular investor. ESG considerations may affect the
Trusts exposure to certain companies or industries and the Trust may forego certain investment opportunities. While Trust management views ESG considerations as having the potential to contribute to the Trusts long-term performance,
there is no guarantee that such results will be achieved.
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OTHER INVESTMENT POLICIES AND TECHNIQUES
Reverse Repurchase Agreements
The Trust
may enter into reverse repurchase agreements with respect to its portfolio investments subject to the investment restrictions set forth herein and in the Prospectus. Reverse repurchase agreements involve the sale of securities held by the Trust with
an agreement by the Trust to repurchase the securities at an agreed upon price, date and interest payment. At the time the Trust enters into a reverse repurchase agreement, it may designate on its books and records liquid instruments having a value
not less than the repurchase price (including accrued interest). If the Trust establishes and maintains such a segregated account, a reverse repurchase agreement will not be considered a borrowing by the Trust; however, under certain circumstances
in which the Trust does not establish and maintain such a segregated account, such reverse repurchase agreement will be considered a borrowing for the purpose of the Trusts limitation on borrowings. The use by the Trust of reverse repurchase
agreements involves many of the same risks of leverage since the proceeds derived from such reverse repurchase agreements may be invested in additional securities. Reverse repurchase agreements involve the risk that the market value of the
securities acquired in connection with the reverse repurchase agreement may decline below the price of the securities the Trust has sold but is obligated to repurchase. Also, reverse repurchase agreements involve the risk that the market value of
the securities retained in lieu of sale by the Trust in connection with the reverse repurchase agreement may decline in price.
If the
buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce the Trusts obligation to repurchase the
securities, and the Trusts use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such decision. Also, the Trust would bear the risk of loss to the extent that the proceeds of the reverse repurchase
agreement are less than the value of the securities subject to such agreement.
Repurchase Agreements
As temporary investments, the Trust may invest in repurchase agreements. A repurchase agreement is a contractual agreement whereby the seller
of securities agrees to repurchase the same security at a specified price on a future date agreed upon by the parties. The agreed-upon repurchase price determines the yield during the Trusts holding period. Repurchase agreements are considered
to be loans collateralized by the underlying security that is the subject of the repurchase contract. The Trust will only enter into repurchase agreements with registered securities dealers or domestic banks that, in the opinion of the Advisor,
present minimal credit risk. The risk to the Trust is limited to the ability of the issuer to pay the agreed-upon repurchase price on the delivery date; however, although the value of the underlying collateral at the time the transaction is entered
into always equals or exceeds the agreed-upon repurchase price, if the value of the collateral declines there is a risk of loss of both principal and interest. In the event of default, the collateral may be sold but the Trust might incur a loss if
the value of the collateral declines, and might incur disposition costs or experience delays in connection with liquidating the collateral. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, realization
upon the collateral by the Trust may be delayed or limited. The Advisors will monitor the value of the collateral at the time the transaction is entered into and at all times subsequent during the term of the repurchase agreement in an effort to
determine that such value always equals or exceeds the agreed-upon repurchase price. In the event the value of the collateral declines below the repurchase price, the Advisors will demand additional collateral from the issuer to increase the value
of the collateral to at least that of the repurchase price, including interest.
Lending of Securities
The Trust may lend portfolio securities with a value not exceeding 33 1/3% of its total assets or the limit prescribed by applicable law to
banks, brokers and other financial institutions. In return, the Trust receives collateral in cash or securities issued or guaranteed by the U.S. Government or irrevocable letters of credit issued by a bank (other than a borrower of the Trusts
portfolio securities or any affiliate of such borrower), which qualifies as a custodian bank for an investment company under the Investment Company Act, which collateral will be maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. The Advisors may instruct the lending agent (as defined below) to terminate loans and recall securities so that the securities may be voted by the Trust if required by the Advisors proxy voting
guidelines. See Management of the TrustProxy Voting Policies below. Such notice shall be provided in advance such that a period of time equal to no less than the normal settlement period for the securities in question prior to the
record date for the proxy vote or other corporate entitlement is provided.
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The Trust receives the equivalent of any income it would have received on the loaned securities.
Where the Trust receives securities as collateral, the Trust receives a fee for its loans from the borrower and does not receive the income on the collateral. Where the Trust receives cash collateral, it may invest such collateral and retain the
amount earned, net of any amount rebated to the borrower. As a result, the Trusts yield may increase. Loans of securities are terminable at any time and the borrower, after notice, is required to return borrowed securities within the standard
time period for settlement of securities transactions. The Trust is obligated to return the collateral to the borrower upon the return of the loaned securities. The Trust could suffer a loss in the event the Trust must return the cash collateral and
there are losses on investments made with the cash collateral. In the event the borrower defaults on any of its obligations with respect to a securities loan, the Trust could suffer a loss where the value of the collateral is below the market value
of the borrowed securities plus any other receivables from the borrower along with any transaction costs to repurchase the securities. The Trust could also experience delays and costs in gaining access to the collateral. The Trust may pay reasonable
finders, lending agent, administrative and custodial fees in connection with its loans.
The Trust has received an exemptive order
from the SEC permitting it to lend portfolio securities to affiliates of the Trust and to retain an affiliate of the Trust as lending agent. Pursuant to that order, the Trust has retained an affiliated entity of the Advisor as the securities lending
agent (the lending agent) for a fee, including a fee based on a share of the returns on investment of cash collateral. In connection with securities lending activities, the lending agent may, upon the advice of the Advisor and on behalf
of the Trust, invest cash collateral received by the Trust for such loans, among other things, in a private investment company managed by the lending agent or in registered money market funds advised by the Advisor or its affiliates. Pursuant to the
same order, the Trust may invest its uninvested cash in registered money market funds advised by the Advisor or its affiliates, or in a private investment company managed by the lending agent. If the Trust acquires shares in either the private
investment company or an affiliated money market fund, shareholders would bear both their proportionate share of the Trusts expenses and, indirectly, the expenses of such other entities. However, in accordance with the exemptive order, the
investment adviser to the private investment company will not charge any advisory fees with respect to shares purchased by the Trust. Such shares also will not be subject to a sales load, redemption fee, distribution fee or service fee, or in the
case of the shares of an affiliated money market fund, the payment of any such sales load, redemption fee, distribution fee or service fee will be offset by the Advisors waiver of a portion of its management fee.
The Trust would continue to accrue the equivalent of the same interest or other income on loaned securities that it would have received had
the securities not been on loan, and would also earn income on investments made with any cash collateral for such loans. Any cash collateral received by the Trust in connection with such loans may be invested in a broad range of high quality, U.S.
dollar-denominated money market instruments that meet Rule 2a-7 restrictions for money market funds.
BlackRock Investment Management, LLC, an affiliate of the Advisor, acts as securities lending agent for the Trust and will be paid a fee for
the provision of these services, including advisory services with respect to the collateral of the Trusts securities lending program.
ADDITIONAL RISK FACTORS
Mortgage Related Securities Risks
Investing in MBS entails various risks. MBS represent an interest in a pool of mortgages. The risks associated with MBS include: credit risk
associated with the performance of the underlying mortgage properties and of the borrowers owning these properties; risks associated with their structure and execution (including the collateral, the process by which principal and interest payments
are allocated and distributed to investors and how credit losses affect issuing vehicles and the return to investors in such MBS); whether the collateral represents a fixed set of specific assets or accounts, whether the underlying collateral assets
are revolving or closed-end, under what terms (including maturity of the MBS) any remaining balance in the accounts may revert to the issuing entity and the extent to which the entity that is the actual source
of the collateral assets is obligated to provide support to the issuing vehicle or to the investors in such MBS; risks associated with the servicer of the underlying mortgages;
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adverse changes in economic conditions and circumstances, which are more likely to have an adverse impact on MBS secured by loans on certain types of commercial properties than on those secured
by loans on residential properties; prepayment risk, which can lead to significant fluctuations in the value of the mortgage-backed security; loss of all or part of the premium, if any, paid; and decline in the market value of the security, whether
resulting from changes in interest rates, prepayments on the underlying mortgage collateral or perceptions of the credit risk associated with the underlying mortgage collateral. In addition, the Trusts level of investment in MBS of a
particular type or in MBS issued or guaranteed by affiliated obligors, serviced by the same servicer or backed by underlying collateral located in a specific geographic region, may subject the Trust to additional risk.
When market interest rates decline, more mortgages are refinanced and the securities are paid off earlier than expected. Prepayments may also
occur on a scheduled basis or due to foreclosure. During such periods, the reinvestment of prepayment proceeds by the Trust will generally be at lower rates than the rates that were carried by the obligations that have been prepaid. When market
interest rates increase, the market values of MBS decline. At the same time, however, mortgage refinancings and prepayments slow, lengthening the effective maturities of these securities. As a result, the negative effect of the rate increase on the
market value of MBS is usually more pronounced than it is for other types of fixed-income securities. Moreover, the relationship between borrower prepayments and changes in interest rates may mean some high-yielding mortgage related and other
asset-backed securities have less potential for increases in value if market interest rates were to fall than conventional bonds with comparable maturities.
In general, losses on a mortgaged property securing a mortgage loan included in a securitization will be borne first by the equity holder of
the property, then by a cash reserve fund or letter of credit, if any, then by the holder of a mezzanine loan or B-Note, if any, then by the first loss subordinated security holder (generally, the B-Piece buyer) and then by the holder of a higher rated security. The Trust could invest in any class of security included in a securitization. In the event of default and the exhaustion of any equity
support, reserve fund, letter of credit, mezzanine loans or B-Notes, and any classes of securities junior to those in which the Trust invests, the Trust will not be able to recover all of its investment in the
MBS it purchases. MBS in which the Trust invests may not contain reserve funds, letters of credit, mezzanine loans and/or junior classes of securities. The prices of lower credit quality securities are generally less sensitive to interest rate
changes than more highly rated investments, but more sensitive to adverse economic downturns or individual issuer developments.
MBS
generally are classified as either RMBS or CMBS, each of which are subject to certain specific risks as further described below.
RMBS
Risks. RMBS are securities the payments on which depend primarily on the cash flow from residential mortgage loans made to borrowers that are secured by residential real estate.
Non-agency residential mortgage loans are obligations of the borrowers thereunder only and are not typically insured or guaranteed by any other person or entity. The ability of a borrower to repay a loan
secured by residential property is dependent upon the income or assets of the borrower. A number of factors, including a general economic downturn, acts of God, terrorism, social unrest and civil disturbances, may impair a borrowers ability to
repay its loans.
Agency RMBS Risk. MBS issued by FNMA or FHLMC are guaranteed as to timely payment of principal and interest by
FNMA or FHLMC, but are not backed by the full faith and credit of the U.S. Government. In 2008, the FHFA placed FNMA and FHLMC into conservatorship. FNMA and FHLMC are continuing to operate as going concerns while in conservatorship and each remains
liable for all of its obligations, including its guaranty obligations, associated with its MBS. As the conservator, FHFA succeeded to all rights, titles, powers and privileges of FNMA and FHLMC and of any stockholder, officer or director of FNMA and
FHLMC with respect to FNMA and FHLMC and the assets of FNMA and FHLMC. In connection with the conservatorship, the U.S. Treasury entered into an agreement with each of FNMA and FHLMC that contains various covenants that severely limit each
enterprises operations. There is no assurance that the obligations of such entities will be satisfied in full, or that such obligations will not decrease in value or default.
Under the Reform Act, FHFA, as conservator or receiver, has the power to repudiate any contract entered into by FNMA or FHLMC prior to
FHFAs appointment as conservator or receiver, as applicable, if FHFA determines, in its sole discretion, that performance of the contract is burdensome and that repudiation of the contract promotes the orderly administration of FNMAs or
FHLMCs affairs. In the event that FHFA, as conservator of, or if it is later appointed as receiver for, FNMA or FHLMC, were to repudiate any such guaranty obligation, the conservatorship or
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receivership estate, as applicable, would be liable for actual direct compensatory damages in accordance with the provisions of the Reform Act. Any such liability could be satisfied only to the
extent of FNMAs or FHLMCs assets available therefor. In the event of repudiation, the payments of interest to holders of FNMA or FHLMC MBS would be reduced if payments on the mortgage loans represented in the mortgage loan groups related
to such MBS are not made by the borrowers or advanced by the servicer. Any actual direct compensatory damages for repudiating these guaranty obligations may not be sufficient to offset any shortfalls experienced by such mortgage-backed security
holders. Further, in its capacity as conservator or receiver, FHFA has the right to transfer or sell any asset or liability of FNMA or FHLMC without any approval, assignment or consent. If FHFA, as conservator or receiver, were to transfer any such
guaranty obligation to another party, holders of FNMA or FHLMC MBS would have to rely on that party for satisfaction of the guaranty obligation and would be exposed to the credit risk of that party. In addition, certain rights provided to holders of
MBS issued by FNMA and FHLMC under the operative documents related to such securities may not be enforced against FHFA, or enforcement of such rights may be delayed, during the conservatorship or any future receivership. The operative documents for
FNMA and FHLMC MBS may provide (or with respect to securities issued prior to the date of the appointment of the conservator may have provided) that upon the occurrence of an event of default on the part of FNMA or FHLMC, in its capacity as
guarantor, which includes the appointment of a conservator or receiver, holders of such MBS have the right to replace FNMA or FHLMC as trustee if the requisite percentage of MBS holders consent. The Reform Act prevents mortgage-backed security
holders from enforcing such rights if the event of default arises solely because a conservator or receiver has been appointed.
A 2011
report to Congress from the Treasury Department and the Department of Housing and Urban Development set forth a plan to reform Americas housing finance market, which would reduce the role of and eventually eliminate FNMA and FHLMC, and
identified proposals for Congress and the administration to consider for the long-term structure of the housing finance markets after the elimination of FNMA and FHLMC. The impact of such reforms on the markets for MBS is currently unknown. It is
difficult, if not impossible, to predict the future political, regulatory or economic changes that could impact FNMA, FHLMC and the Federal Home Loan Banks, and the values of their related securities or obligations
Non-Agency RMBS Risk. Non-agency RMBS are securities
issued by non-governmental issuers. Non-agency RMBS have no direct or indirect government guarantees of payment and are subject to various risks as described herein.
Borrower Credit Risk. Credit-related risk on RMBS arises from losses due to delinquencies and defaults by the borrowers in
payments on the underlying mortgage loans and breaches by originators and servicers of their obligations under the underlying documentation pursuant to which the RMBS are issued. Non-agency residential
mortgage loans are obligations of the borrowers thereunder only and are not typically insured or guaranteed by any other person or entity. The rate of delinquencies and defaults on residential mortgage loans and the aggregate amount of the resulting
losses will be affected by a number of factors, including general economic conditions, particularly those in the area where the related mortgaged property is located, the level of the borrowers equity in the mortgaged property and the
individual financial circumstances of the borrower. If a residential mortgage loan is in default, foreclosure on the related residential property may be a lengthy and difficult process involving significant legal and other expenses. The net proceeds
obtained by the holder on a residential mortgage loan following the foreclosure on the related property may be less than the total amount that remains due on the loan. The prospect of incurring a loss upon the foreclosure of the related property may
lead the holder of the residential mortgage loan to restructure the residential mortgage loan or otherwise delay the foreclosure process.
RMBS Legal Risk. Legal risks associated with RMBS can arise as a result of the procedures followed in connection with the origination
of the mortgage loans or the servicing thereof, which may be subject to various federal and state laws (including, without limitation, predatory lending laws), public policies and principles of equity that regulate interest rates and other charges,
require certain disclosures, require licensing of originators, prohibit discriminatory lending practices, regulate the use of consumer credit information and debt collection practices and may limit the servicers ability to collect all or part
of the principal of or interest on a residential mortgage loan, entitle the borrower to a refund of amounts previously paid by it or subject the servicer to damages and sanctions. Specifically, provisions of federal predatory lending laws, such as
the federal Truth-in-Lending Act (as supplemented by the Home Ownership and Equity Protection Act of 1994) and Regulation Z, and various recently enacted state predatory
lending laws provide that a purchaser or assignee of specified types of residential mortgage loans (including an issuer of RMBS) may be held liable for violations by the originator of such mortgage loans.
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Under such assignee liability provisions, a borrower is generally given the right to assert against a purchaser of its mortgage loan any affirmative claims and defenses to payment that such
borrower could assert against the originator of the loan or, where applicable, the home improvement contractor that arranged the loan. Liability under such assignee liability provisions could, therefore, result in a disruption of cash flows
allocated to the holders of RMBS where either the issuer of such RMBS is liable for damages or is unable to enforce payment by the borrower.
In most but not all cases, the amount recoverable against a purchaser or assignee under such assignee liability provisions is limited to
amounts previously paid and still owed by the borrower. Moreover, sellers of residential mortgage loans to an issuer of RMBS typically represent that the loans have been originated in accordance with all applicable laws and in the event such
representation is breached, the seller typically must repurchase the offending loan. Notwithstanding these protections, an issuer of RMBS may be exposed to an unquantifiable amount of potential assignee liability because, first, the amount of
potential assignee liability under certain predatory lending laws is unclear and has yet to be litigated, and, second, in the event a predatory lending law does not prohibit class action lawsuits, it is possible that an issuer of RMBS could be
liable for damages for more than the original principal amount of the offending loans held by it. In such circumstances the issuer of RMBS may be forced to seek contribution from other parties, who may no longer exist or have adequate funds
available to fund such contribution.
In addition, structural and legal risks of RMBS include the possibility that, in a bankruptcy or
similar proceeding involving the originator or the servicer (often the same entity or affiliates), the assets of the issuer could be treated as never having been truly sold by the originator to the issuer and could be substantively consolidated with
those of the originator, or the transfer of such assets to the issuer could be voided as a fraudulent transfer. Challenges based on such doctrines could result also in cash flow delays and losses on the related issue of RMBS.
Mortgage Loan Market Risk. In the recent past, the residential mortgage market in the United States experienced difficulties that
adversely affected the performance and market value of certain mortgages and mortgage related securities. Delinquencies and losses on residential mortgage loans (especially sub-prime and second lien mortgage
loans) generally increased during this period and declines in or flattening of housing values in many housing markets were generally viewed as exacerbating such delinquencies and losses. Borrowers with adjustable rate mortgages (ARMs)
are more sensitive to changes in interest rates, which affect their monthly mortgage payments, and may be unable to secure replacement mortgages at comparably low interest rates.
At any one time, a portfolio of RMBS may be backed by residential mortgage loans that are highly concentrated in only a few states or regions.
As a result, the performance of such residential mortgage loans may be more susceptible to a downturn in the economy, including in particular industries that are highly represented in such states or regions, natural calamities and other adverse
conditions affecting such areas. The economic downturn experienced in the recent past at the national level, and the more serious economic downturn experienced in the recent past in certain geographic areas of the United States, including in
particular areas of the United States where rates of delinquencies and defaults on residential mortgage loans were particularly high, is generally viewed as having contributed to the higher rates of delinquencies and defaults on the residential
mortgage loans underlying RMBS during this period. There also can be no assurance that areas of the United States that mostly avoided higher rates of delinquencies and defaults on residential mortgage loans during this period would continue to do so
if an economic downturn were to reoccur at the national level.
Another factor that may contribute to, and may in the future result in,
higher delinquency and default rates is the increase in monthly payments on ARMs. Any increase in prevailing market interest rates, which are currently at historical lows, may result in increased payments for borrowers who have
ARMs. Moreover, with respect to hybrid mortgage loans (which are mortgage loans combining fixed and adjustable rate features) after their initial fixed rate period or other adjustable-rate mortgage loans, interest-only products or products
having a lower rate, and with respect to mortgage loans with a negative amortization feature which reach their negative amortization cap, borrowers may experience a substantial increase in their monthly payment even without an increase in prevailing
market interest rates. Increases in payments for borrowers may result in increased rates of delinquencies and defaults on residential mortgage loans underlying the non-agency RMBS.
As a result of rising concerns about increases in delinquencies and defaults on residential mortgage loans (particularly on sub-prime and adjustable-rate mortgage loans) and as a result of increasing concerns about the financial strength of originators and servicers and their ability to perform their obligations with respect to non-agency RMBS, there may be an adverse change in the market sentiments of investors about the market values and
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volatility and the degree of risk of non-agency RMBS generally. Some or all of the underlying residential mortgage loans in an issue of non-agency RMBS may have balloon payments due on their respective maturity dates. Balloon residential mortgage loans involve a greater risk to a lender than fully amortizing loans, because the ability of a borrower
to pay such amount will normally depend on its ability to obtain refinancing of the related mortgage loan or sell the related mortgaged property at a price sufficient to permit the borrower to make the balloon payment, which will depend on a number
of factors prevailing at the time such refinancing or sale is required, including, without limitation, the strength of the local or national residential real estate markets, interest rates and general economic conditions and the financial condition
of the borrower. If borrowers are unable to make such balloon payments, the related issue of non-agency RMBS may experience losses.
The Trust may acquire RMBS backed by collateral pools of mortgage loans that have been originated using underwriting standards that are less
restrictive than those used in underwriting prime mortgage loans and Alt-A mortgage loans. These lower standards include mortgage loans made to borrowers having imperfect or impaired
credit histories, mortgage loans where the amount of the loan at origination is 80% or more of the value of the mortgage property, mortgage loans made to borrowers with low credit scores, mortgage loans made to borrowers who have other debt that
represents a large portion of their income and mortgage loans made to borrowers whose income is not required to be disclosed or verified and are commonly referred to as sub-prime mortgage loans. Sub-prime mortgage loans have in recent periods experienced increased rates of delinquency, foreclosure, bankruptcy and loss, and they are likely to continue to experience delinquency, foreclosure, bankruptcy and
loss rates that are higher, and that may be substantially higher, than those experienced by mortgage loans underwritten in a more traditional manner. Certain categories of RMBS, such as option ARM RMBS and
sub-prime RMBS, have been referred to by the financial media as toxic assets.
Although the United States economy has been slowly improving in recent years, the impact of the novel coronavirus pandemic on the United
States economy could cause the economy to deteriorate again and the incidence of mortgage foreclosures, especially sub-prime mortgages, could begin to increase again, which could adversely affect the value of
any RMBS owned by the Trust.
CMBS Risk. CMBS are, generally, securities backed by obligations (including certificates of
participation in obligations) that are principally secured by mortgages on real property or interests therein having a multifamily or commercial use, such as regional malls, other retail space, office buildings, industrial or warehouse properties,
hotels, nursing homes and senior living centers. The market for CMBS developed more recently and, in terms of total outstanding principal amount of issues, is relatively small compared to the market for single-family RMBS.
CMBS are subject to particular risks, including lack of standardized terms, shorter maturities than residential mortgage loans and payment of
all or substantially all of the principal only at maturity rather than regular amortization of principal. Additional risks may be presented by the type and use of a particular commercial property. Special risks are presented by hospitals, nursing
homes, hospitality properties and certain other property types. Commercial property values and net operating income are subject to volatility, which may result in net operating income becoming insufficient to cover debt service on the related
mortgage loan. The repayment of loans secured by income-producing properties is typically dependent upon the successful operation of the related real estate project rather than upon the liquidation value of the underlying real estate. Furthermore,
the net operating income from and value of any commercial property is subject to various risks, including changes in general or local economic conditions and/or specific industry segments; the solvency of the related tenants; declines in real estate
values; declines in rental or occupancy rates; increases in interest rates, real estate tax rates and other operating expenses; changes in governmental rules, regulations and fiscal policies; acts of God; new and ongoing epidemics and pandemics of
infectious diseases and other global health events; natural/environmental disasters; terrorist threats and attacks and social unrest and civil disturbances. Consequently, adverse changes in economic conditions and circumstances are more likely to
have an adverse impact on MBS secured by loans on commercial properties than on those secured by loans on residential properties. In addition, commercial lending generally is viewed as exposing the lender to a greater risk of loss than one- to four- family residential lending. Commercial lending, for example, typically involves larger loans to single borrowers or groups of related borrowers than residential
one- to four- family mortgage loans. In addition, the repayment of loans secured by income producing properties typically is dependent upon the successful operation of the related real estate project and the
cash flow generated therefrom.
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The exercise of remedies and successful realization of liquidation proceeds relating to CMBS is
also highly dependent on the performance of the servicer or special servicer. In many cases, overall control over the special servicing of related underlying mortgage loans will be held by a directing certificateholder or a
controlling class representative, which is appointed by the holders of the most subordinate class of CMBS in such series. The Trust may not have the right to appoint the directing certificateholder. In connection with the servicing of
the specially serviced mortgage loans, the related special servicer may, at the direction of the directing certificateholder, take actions with respect to the specially serviced mortgage loans that could adversely affect the Trusts interests.
There may be a limited number of special servicers available, particularly those that do not have conflicts of interest.
The Trust may
invest in Subordinated CMBS issued or sponsored by commercial banks, savings and loan institutions, mortgage bankers, private mortgage insurance companies and other non-governmental issuers. Subordinated CMBS
have no governmental guarantee and are subordinated in some manner as to the payment of principal and/or interest to the holders of more senior CMBS arising out of the same pool of mortgages. Subordinated CMBS are often referred to as B-Pieces. The holders of Subordinated CMBS typically are compensated with a higher stated yield than are the holders of more senior CMBS. On the other hand, Subordinated CMBS typically subject the holder
to greater risk than senior CMBS and tend to be rated in a lower rating category (frequently a substantially lower rating category) than the senior CMBS issued in respect of the same mortgage pool. Subordinated CMBS generally are likely to be more
sensitive to changes in prepayment and interest rates and the market for such securities may be less liquid than is the case for traditional income securities and senior CMBS.
CMO Risk. There are certain risks associated specifically with CMOs. CMOs are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. The average life of a CMO is determined using mathematical models that incorporate prepayment assumptions and other factors that involve estimates of future economic and market conditions. Actual future results may
vary from these estimates, particularly during periods of extreme market volatility. Further, under certain market conditions, such as those that occurred during the recent downturn in the mortgage markets, the weighted average life of certain CMOs
may not accurately reflect the price volatility of such securities. For example, in periods of supply and demand imbalances in the market for such securities and/or in periods of sharp interest rate movements, the prices of CMOs may fluctuate to a
greater extent than would be expected from interest rate movements alone. CMOs issued by private entities are not obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities and are not guaranteed by any government
agency, although the securities underlying a CMO may be subject to a guarantee. Therefore, if the collateral securing the CMO, as well as any third party credit support or guarantees, is insufficient to make payments when due, the holder could
sustain a loss.
Inverse floating rate CMOs are typically more volatile than fixed or floating rate tranches of CMOs. Many inverse
floating rate CMOs have coupons that move inversely to a multiple of an index. The effect of the coupon varying inversely to a multiple of an applicable index creates a leverage factor. Inverse floaters based on multiples of a stated index are
designed to be highly sensitive to changes in interest rates and can subject the holders thereof to extreme reductions of yield and loss of principal. The market for inverse floating rate CMOs with highly leveraged characteristics at times may be
very thin. The Trusts ability to dispose of its positions in such securities will depend on the degree of liquidity in the markets for such securities. It is impossible to predict the amount of trading interest that may exist in such
securities, and therefore the future degree of liquidity.
The Trust may also invest in REMICs, which are CMOs that qualify for special
tax treatment under the Code and invest in certain mortgages principally secured by interests in real property and other permitted investments.
Credit Risk Associated with Originators and Servicers of Mortgage Loans. A number of originators and servicers of residential and
commercial mortgage loans, including some of the largest originators and servicers in the residential and commercial mortgage loan market, have experienced serious financial difficulties, including some that are now or were subject to federal
insolvency proceedings. These difficulties have resulted from many factors, including increased competition among originators for borrowers, decreased originations by such originators of mortgage loans and increased delinquencies and defaults on
such mortgage loans, as well as from increases in claims for repurchases of mortgage loans previously sold by them under agreements that require repurchase in the event of breaches of representations regarding loan quality and characteristics. Such
difficulties may affect the performance of MBS backed by mortgage loans. Furthermore, the inability of the originator to repurchase such mortgage loans in the event of loan representation breaches or the servicer to repurchase such mortgage loans
upon a breach of its servicing obligations also may affect the performance of related MBS. Delinquencies and losses on, and, in some cases, claims for repurchase by the originator of, mortgage loans originated by some mortgage lenders
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have recently increased as a result of inadequate underwriting procedures and policies, including inadequate due diligence, failure to comply with predatory and other lending laws and,
particularly in the case of any no documentation or limited documentation mortgage loans that may support non-agency RMBS, inadequate verification of income and employment history.
Delinquencies and losses on, and claims for repurchase of, mortgage loans originated by some mortgage lenders have also resulted from fraudulent activities of borrowers, lenders, appraisers, and other residential mortgage industry participants such
as mortgage brokers, including misstatements of income and employment history, identity theft and overstatements of the appraised value of mortgaged properties. Many of these originators and servicers are very highly leveraged. These difficulties
may also increase the chances that these entities may default on their warehousing or other credit lines or become insolvent or bankrupt and thereby increase the likelihood that repurchase obligations will not be fulfilled and the potential for loss
to holders of non-agency MBS and subordinated security holders.
The servicers of non-agency MBS are often the same entities as, or affiliates of, the originators of these mortgage loans. Accordingly, the financial risks relating to originators of MBS described immediately above also may affect
the servicing of MBS. In the case of such servicers, and other servicers, financial difficulties may have a negative effect on the ability of servicers to pursue collection on mortgage loans that are experiencing increased delinquencies and defaults
and to maximize recoveries on sale of underlying properties following foreclosure. In recent years, a number of lenders specializing in residential mortgages have sought bankruptcy protection, shut down or been refused further financings from their
lenders.
MBS typically provide that the servicer is required to make advances in respect of delinquent mortgage loans. However, servicers
experiencing financial difficulties may not be able to perform these obligations or obligations that they may have to other parties of transactions involving these securities. Like originators, these entities are typically very highly leveraged.
Such difficulties may cause servicers to default under their financing arrangements. In certain cases, such entities may be forced to seek bankruptcy protection. Due to the application of the provisions of bankruptcy law, servicers who have sought
bankruptcy protection may not be required to advance such amounts. Even if a servicer were able to advance amounts in respect of delinquent mortgage loans, its obligation to make such advances may be limited to the extent that it does not expect to
recover such advances due to the deteriorating credit of the delinquent mortgage loans or declining value of the related mortgaged properties. Moreover, servicers may overadvance against a particular mortgage loan or charge too many costs of
resolution or foreclosure of a mortgage loan to a securitization, which could increase the potential losses to holders of MBS. In such transactions, a servicers obligation to make such advances may also be limited to the amount of its
servicing fee. In addition, if an issue of MBS provides for interest on advances made by the servicer, in the event that foreclosure proceeds or payments by borrowers are not sufficient to cover such interest, such interest will be paid to the
servicer from available collections or other mortgage income, thereby reducing distributions made on the MBS and, in the case of senior-subordinated MBS described below, first from distributions that would otherwise be made on the most subordinated
MBS of such issue. Any such financial difficulties may increase the possibility of a servicer termination and the need for a transfer of servicing and any such liabilities or inability to assess such liabilities may increase the difficulties and
costs in affecting such transfer and the potential loss, through the allocation of such increased cost of such transfer, to subordinated security holders.
There can be no assurance that originators and servicers of mortgage loans will not continue to experience serious financial difficulties or
experience such difficulties in the future, including becoming subject to bankruptcy or insolvency proceedings, or that underwriting procedures and policies and protections against fraud will be sufficient in the future to prevent such financial
difficulties or significant levels of default or delinquency on mortgage loans. Because the recent financial difficulties experienced by such originators and servicers is unprecedented and unpredictable, the past performance of the residential and
commercial mortgage loans originated and serviced by them (and the corresponding performance of the related MBS) is not a reliable indicator of the future performance of such residential mortgage loans (or the related MBS).
In some cases, servicers of MBS have been the subject of legal proceedings involving the origination and/or servicing practices of such
servicers. Large groups of private litigants and states attorneys general have brought such proceedings. Because of the large volume of mortgage loans originated and serviced by such servicers, such litigation can cause heightened financial
strain on servicers. In other cases, origination and servicing practices may cause or contribute to such strain, because of representation and warranty repurchase liability arising in MBS and mortgage loan sale transactions. Any such financial
strain could cause servicers to service below required standards,
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causing delinquencies and losses in any related MBS transaction to rise, and in extreme cases could cause the servicer to seek the protection of any applicable bankruptcy or insolvency law. In
any such proceeding, it is unclear whether the fees that the servicer charges in such transactions would be sufficient to permit that servicer or a successor servicer to service the mortgage loans in such transaction adequately. If such fees had to
be increased, it is likely that the most subordinated security holders in such transactions would be effectively required to pay such increased fees. Finally, these entities may be the subject of future laws designed to protect consumers from
defaulting on their mortgage loans. Such laws may have an adverse effect on the cash flows paid under such MBS.
In addition, certain
lenders who service and/or issue MBS have recently announced that they are being investigated by or have received information requests from U.S. federal and/or state authorities, including the SEC. As a result of such investigations and other
similar investigations and general concerns about the adequacy or accuracy of disclosure of risks to borrowers and their understanding of such risks, U.S. financial regulators have recently indicated that they may propose new guidelines for the
mortgage industry. Guidelines, if introduced, together with the other factors described herein, may make it more difficult for borrowers with weaker credit to refinance, which may lead to further increases in delinquencies, extensions in duration
and losses in mortgage related assets.
Adjustable Rate Mortgage Risk. ARMs contain maximum and minimum
rates beyond which the mortgage interest rate may not vary over the lifetime of the security. In addition, many ARMs provide for additional limitations on the maximum amount by which the mortgage interest rate may adjust for any single adjustment
period. Alternatively, certain ARMs contain limitations on changes in the required monthly payment. In the event that a monthly payment is not sufficient to pay the interest accruing on an ARM, any excess interest is added to the principal balance
of the mortgage loan, which is repaid through future monthly payments. If the monthly payment for such an instrument exceeds the sum of the interest accrued at the applicable mortgage interest rate and the principal payment required at such point to
amortize the outstanding principal balance over the remaining term of the loan, the excess is used to reduce the then-outstanding principal balance of the ARM.
In addition, certain ARMs may provide for an initial fixed, below-market or teaser interest rate. During this initial fixed rate
period, the payment due from the related mortgagor may be less than that of a traditional loan. However, after the teaser rate expires, the monthly payment required to be made by the mortgagor may increase dramatically when the interest
rate on the mortgage loan adjusts. This increased burden on the mortgagor may increase the risk of delinquency or default on the mortgage loan and in turn, losses on the MBS into which that loan has been bundled. This risk may be increased as
increases in prevailing market interest rates, which are currently near historical lows, may result in increased payments for borrowers with ARMs
Stripped MBS Risk. Stripped MBS may be subject to additional risks. One type of stripped mortgage-backed
security pays to one class all of the interest from the mortgage assets (the IO class), while the other class will receive all of the principal (the PO class). The yield to maturity on an IO class is extremely sensitive to the rate of principal
payments (including prepayments) on the underlying mortgage assets and a rapid rate of principal payments may have a material adverse effect on the Trusts yield to maturity from these securities. If the assets underlying the IO class
experience greater than anticipated prepayments of principal, the Trust may fail to recoup fully, or at all, its initial investment in these securities. Conversely, PO class securities tend to decline in value if prepayments are slower than
anticipated.
Additional Risks of MBS. Additional risks associated with investments in MBS include:
Interest Rate Risk. In addition to the interest rate risks described above, certain MBS may be subject to
additional risks as the rate of interest payable on certain MBS may be set or effectively capped at the weighted average net coupon of the underlying mortgage loans themselves, often referred to as an available funds cap. As a result of
this cap, the return to the holder of such MBS is dependent on the relative timing and rate of delinquencies and prepayments of mortgage loans bearing a higher rate of interest. In general, early prepayments will have a greater negative impact on
the yield to the holder of such MBS.
Structural Risk. Because MBS generally are ownership or participation
interests in pools of mortgage loans secured by a pool of properties underlying the mortgage loan pool, the MBS are entitled to payments provided for in the underlying agreement only when and if funds are generated by the underlying mortgage loan
pool. This likelihood of the return of interest and principal may be assessed as a credit matter. However, the holders of MBS do
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not have the legal status of secured creditors, and cannot accelerate a claim for payment on their securities, or force a sale of the mortgage loan pool in the event that insufficient funds exist
to pay such amounts on any date designated for such payment. The holders of MBS do not typically have any right to remove a servicer solely as a result of a failure of the mortgage pool to perform as expected.
Subordination Risk. MBS may be subordinated to one or more other senior classes of securities of the same series
for purposes of, among other things, offsetting losses and other shortfalls with respect to the related underlying mortgage loans. For example, in the case of certain MBS, no distributions of principal will generally be made with respect to any
class until the aggregate principal balances of the corresponding senior classes of securities have been reduced to zero. As a result, MBS may be more sensitive to risk of loss, writedowns, the non-fulfillment
of repurchase obligations, overadvancing on a pool of loans and the costs of transferring servicing than senior classes of securities.
Prepayment, Extension and Redemption Risks. MBS may reflect an interest in monthly payments made by the
borrowers who receive the underlying mortgage loans. Although the underlying mortgage loans are for specified periods of time, such as 20 or 30 years, the borrowers can, and historically have paid them off sooner. When a prepayment happens, a
portion of the MBS which represents an interest in the underlying mortgage loan will be prepaid. A borrower is more likely to prepay a mortgage which bears a relatively high rate of interest. This means that in times of declining interest rates, a
portion of the Trusts higher yielding securities are likely to be redeemed and the Trust will probably be unable to replace them with securities having as great a yield. In addition to reductions in the level of market interest rates and the
prepayment provisions of the mortgage loans, repayments on the residential mortgage loans underlying an issue of RMBS may also be affected by a variety of economic, geographic and other factors, including the size difference between the interest
rates on the underlying residential mortgage loans (giving consideration to the cost of refinancing) and prevailing mortgage rates and the availability of refinancing. Prepayments can result in lower yields to shareholders. The increased likelihood
of prepayment when interest rates decline also limits market price appreciation of MBS. This is known as prepayment risk.
Except in the
case of certain types of RMBS, the mortgage loans underlying RMBS generally do not contain prepayment penalties and a reduction in market interest rates will increase the likelihood of prepayments on the related RMBS. In the case of certain home
equity loan securities and certain types of RMBS, even though the underlying mortgage loans often contain prepayment premiums, such prepayment premiums may not be sufficient to discourage borrowers from prepaying their mortgage loans in the event of
a reduction in market interest rates, resulting in a reduction in the yield to maturity for holders of the related RMBS. RMBS typically contain provisions that require repurchase of mortgage loans by the originator or other seller in the event of a
breach of a representation or warranty regarding loan quality and characteristics of such loan. Any repurchase of a mortgage loan as a result of a breach has the same effect on the yield received on the related issue of RMBS as a prepayment of such
mortgage loan. Any increase in breaches of representations and the consequent repurchases of mortgage loans that result from inadequate underwriting procedures and policies and protections against fraud will have the same effect on the yield on the
related RMBS as an increase in prepayment rates.
Risk of prepayment may be reduced for commercial real estate property loans containing
significant prepayment penalties or prohibitions on principal payments for a period of time following origination.
MBS also are subject
to extension risk. Extension risk is the possibility that rising interest rates may cause prepayments to occur at a slower than expected rate. This particular risk may effectively change a security which was considered short or intermediate term
into a long-term security. The values of long-term securities generally fluctuate more widely in response to changes in interest rates than short or intermediate-term securities.
In addition, MBS may be subject to redemption at the option of the issuer. If a MBS held by the Trust is called for redemption, the Trust will
be required to permit the issuer to redeem or pay-off the security, which could have an adverse effect on the Trusts ability to achieve its investment objectives.
Spread Widening Risk. The prices of MBS may decline substantially, for reasons that may not be attributable to
any of the other risks described in the prospectus and this SAI. In particular, purchasing assets at what may appear to be undervalued levels is no guarantee that these assets will not be trading at even more undervalued
levels at a time of valuation or at the time of sale. It may not be possible to predict, or to protect against, such spread widening risk.
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Illiquidity Risk. The liquidity of MBS varies by type of security;
at certain times the Trust may encounter difficulty in disposing of such investments. Because MBS have the potential to be less liquid than other securities, the Trust may be more susceptible to illiquidity risk than funds that invest in other
securities. In the past, in stressed markets, certain types of MBS suffered periods of illiquidity when disfavored by the market. Due to increased instability in the credit markets, the market for some MBS has experienced reduced liquidity and
greater volatility with respect to the value of such securities, making it more difficult to value such securities.
Municipal Securities Risk
Municipal securities involve certain risks. The municipal market is one in which dealer firms make markets in securities on a principal basis
using their proprietary capital, and during the recent market turmoil these firms capital was severely constrained. As a result, some firms were unwilling to commit their capital to purchase and to serve as a dealer for municipal securities.
Municipal securities are generally not registered with the SEC or any state securities commission and will not be listed on any national securities exchange. The amount of public information available about the municipal securities to which the
Trust is economically exposed is generally less than that for corporate equities or bonds, and the investment performance of the Trust may therefore be more dependent on the analytical abilities of the Advisors than would be a stock fund or a
taxable bond fund. The secondary market for municipal securities, particularly the below investment grade securities to which the Trust may be economically exposed, also tends to be less well-developed or liquid than many other securities markets,
which may adversely affect the Trusts ability to sell such securities at prices approximating those at which the Trust may currently value them.
In addition, many state and municipal governments that issue securities are under significant economic and financial stress and may not be
able to satisfy their obligations. The ability of municipal issuers to make timely payments of interest and principal may be diminished during general economic downturns and as governmental cost burdens are reallocated among federal, state and local
governments. The taxing power of any governmental entity may be limited by provisions of state constitutions or laws and an entitys credit will depend on many factors, including the entitys tax base, the extent to which the entity relies
on federal or state aid and other factors which are beyond the entitys control. In addition, laws enacted in the future by Congress or state legislatures or referenda could extend the time for payment of principal and/or interest, or impose
other constraints on enforcement of such obligations or on the ability of municipalities to levy taxes. Issuers of municipal securities might seek protection under bankruptcy laws. In the event of bankruptcy of such an issuer, holders of municipal
securities could experience delays in collecting principal and interest and such holders may not be able to collect all principal and interest to which they are entitled. To enforce its rights in the event of a default in the payment of interest or
repayment of principal, or both, the Trust may take possession of and manage the assets securing the issuers obligations on such securities, which may increase the Trusts operating expenses. Any income derived from the Trusts
ownership or operation of such assets could jeopardize the Trusts status as a RIC under the Code.
Revenue bonds issued by state or
local agencies to finance the development of low-income, multi-family housing involve special risks in addition to those associated with municipal securities generally, including that the underlying properties
may not generate sufficient income to pay expenses and interest costs. Such securities are generally non-recourse against the property owner, may be junior to the rights of others with an interest in the
properties, may pay interest that changes based in part on the financial performance of the property, may be prepayable without penalty and may be used to finance the construction of housing developments which, until completed and rented, do not
generate income to pay interest. Increases in interest rates payable on senior obligations may make it more difficult for issuers to meet payment obligations on subordinated bonds.
Municipal leases and certificates of participation involve special risks not normally associated with general obligations or revenue bonds.
Leases and installment purchase or conditional sale contracts (which normally provide for title to the leased asset to pass eventually to the governmental issuer) have evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance of debt. Such debt issuance limitations are usually deemed to be inapplicable because of the inclusion in many leases or contracts of
non-appropriation clauses that relieve the governmental issuer of any obligation to make future payments under the lease or contract unless money is appropriated for such purpose by the appropriate
legislative body on a yearly or other periodic basis. In addition, such leases or contracts may be subject to temporary abatement of payments in the event the governmental issuer is prevented from maintaining occupancy of the leased premises or
utilizing the leased equipment. Although the obligations may be secured by the leased equipment or facilities, the disposition of the property in the event of non-appropriation or foreclosure might prove
difficult, time consuming and costly, and may result in a delay in recovering or the failure to fully recover ownership of the assets.
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Certificates of participation, which represent interests in unmanaged pools of municipal leases
or installment contracts, involve the same risks as the underlying municipal leases. In addition, the Trust may be dependent upon the municipal authority issuing the certificate of participation to exercise remedies with respect to the underlying
securities. Certificates of participation also entail a risk of default or bankruptcy, both of the issuer of the municipal lease and also the municipal agency issuing the certificate of participation.
Municipal securities, like other debt obligations, are subject to the risk of nonpayment. The ability of issuers of municipal securities to
make timely payments of interest and principal may be adversely impacted in general economic downturns and as relative governmental cost burdens are allocated and reallocated among federal, state and local governmental units. Such nonpayment would
result in a reduction of income to the Trust and could result in a reduction in the value of the municipal security experiencing nonpayment and a potential decrease in the net asset value of the Trust. A decline in income could affect the
Trusts ability to pay dividends on the common shares.
The risks and special considerations involved in investment in municipal
securities vary with the types of instruments being acquired.
The value of municipal securities generally may be affected by
uncertainties in the municipal markets as a result of legislation or litigation, including legislation or litigation that changes the taxation of municipal securities or the rights of municipal security holders in the event of a bankruptcy. Certain
provisions of the U.S. Bankruptcy Code governing such bankruptcies are unclear. Further, the application of state law to municipal security issuers could produce varying results among the states or among municipal security issuers within a state.
These uncertainties could have a significant impact on the prices of the municipal securities in which the Trust invests.
The U.S.
economy may be in the process of deleveraging, with individuals, companies and municipalities reducing expenditures and paying down borrowings. In such event, the number of municipal borrowers and the amount of outstanding municipal
securities may contract, potentially without corresponding reductions in investor demand for municipal securities. As a result, the Trust may have fewer investment alternatives, may invest in securities that it previously would have declined and may
concentrate its investments in a smaller number of issuers.
Securities Lending Risk
The Trust may lend securities to financial institutions. In return, the Trust receives collateral in cash or securities issued or guaranteed by
the U.S. Government, which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. The Trust maintains the ability to obtain the right to vote or consent on proxy proposals involving
material events affecting securities loaned. The Trust receives the income on the loaned securities. Where the Trust receives securities as collateral, the Trust receives a fee for its loans from the borrower and does not receive the income on the
collateral. Where the Trust receives cash collateral, it may invest such collateral and retain the amount earned, net of any amount rebated to the borrower. As a result, the Trusts yield may increase. Loans of securities are terminable at any
time and the borrower, after notice, is required to return borrowed securities within the standard time period for settlement of securities transactions. The Trust is obligated to return the collateral to the borrower at the termination of the loan.
Securities lending involves the risk that the borrower may fail to return the securities in a timely manner or at all. As a result, the Trust may lose money and there may be a delay in recovering the loaned securities. The Trust could also lose
money if it does not recover the securities and/or the value of the collateral falls, including the value of investments made with cash collateral. These events could trigger adverse tax consequences for the Trust. The Trust could suffer a loss in
the event the Trust must return the cash collateral and there are losses on investments made with the cash collateral. In the event the borrower defaults on any of its obligations with respect to a securities loan, the Trust could suffer a loss
where there are losses on investments made with the cash collateral or where the value of the securities collateral falls below the market value of the borrowed securities. The Trust could also experience delays and costs in gaining access to the
collateral. The Trust may pay reasonable finders, lending agent, administrative and custodial fees in connection with its loans.
The Trust has received an exemptive order from the SEC permitting it to lend portfolio securities to affiliates of the Trust and to retain an
affiliate of the Trust as lending agent. Pursuant to that order and under a securities lending program approved by the Board, the Trust has retained an affiliate of the Advisor to serve as the securities
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lending agent for the Trust to the extent that the Trust participates in the securities lending program. For these services, the lending agent will receive a fee from the Trust, including a fee
based on the returns earned on the Trusts investment of the cash received as collateral for the loaned securities. In addition, one or more affiliates may be among the entities to which the Trust may lend its portfolio securities under the
securities lending program. In connection with securities lending activities, the lending agent may, on behalf of the Trust, invest cash collateral received by the Trust for such loans, among other things, in a private investment company managed by
the lending agent or in registered money market funds advised by the Advisor or its affiliates. Pursuant to the same order, the Trust may invest its uninvested cash in registered money market funds advised by the Advisor or its affiliates, or in a
private investment company managed by the lending agent. If the Trust acquires shares in either the private investment company or an affiliated money market fund, shareholders would bear both their proportionate share of the Trusts expenses
and, indirectly, the expenses of such other entities. However, in accordance with the exemptive order, the investment adviser to the private investment company will not charge any advisory fees with respect to shares purchased by the Trust. Such
shares also will not be subject to a sales load, redemption fee, distribution fee or service fee, or in the case of the shares of an affiliated money market fund, the payment of any such sales load, redemption fee, distribution fee or service fee
will be offset by the Advisors waiver of a portion of its management fee.
The Trust would continue to accrue interest on loaned
securities and would also earn income on investment collateral for such loans. Any cash collateral received by the Trust in connection with such loans may be invested in a broad range of high quality, U.S. dollar-denominated money market instruments
that meet Rule 2a-7 restrictions for money market funds. Specifically, cash collateral may be invested in any of the following instruments: (i) securities issued or guaranteed as to principal and interest
by the U.S. Government or by its agencies or instrumentalities and related custodial receipts; (ii) first tier quality commercial paper and other obligations issued or guaranteed by U.S. and foreign corporations and other issuers
rated (at the time of purchase) in the highest rating category by at least two Nationally Recognized Statistical Rating Organizations (NRSROs), or one if only rated by one NRSRO; (iii) U.S. dollar-denominated obligations issued or
supported by the credit of U.S. or foreign banks or savings institutions with total assets in excess of $1 billion (including obligations of foreign branches of such banks) (i.e., CDs, BAs and time deposits); (iv) repurchase agreements
relating to the above instruments, as well as corporate debt; and (v) unaffiliated and, to the extent permitted by SEC guidelines, affiliated money market funds. Any such investments must be rated first tier and must have a maturity
of 397 days or less from the date of purchase.
Short Selling Risk
Short-selling involves selling securities which may or may not be owned and borrowing the same securities for delivery to the purchaser, with
an obligation to replace the borrowed securities at a later date. Short-selling necessarily involves certain additional risks. However, if the short seller does not own the securities sold short (an uncovered short sale), the borrowed securities
must be replaced by securities purchased at market prices in order to close out the short position, and any appreciation in the price of the borrowed securities would result in a loss. Uncovered short sales expose the Trust to the risk of uncapped
losses until a position can be closed out due to the lack of an upper limit on the price to which a security may rise. Purchasing securities to close out the short position can itself cause the price of the securities to rise further, thereby
exacerbating the loss. There is the risk that the securities borrowed by the Trust in connection with a short-sale must be returned to the securities lender on short notice. If a request for return of borrowed securities occurs at a time when other
short-sellers of the security are receiving similar requests, a short squeeze can occur, and the Trust may be compelled to replace borrowed securities previously sold short with purchases on the open market at the most disadvantageous
time, possibly at prices significantly in excess of the proceeds received at the time the securities were originally sold short.
In
September 2008, in response to spreading turmoil in the financial markets, the SEC temporarily banned short selling in the stocks of numerous financial services companies, and also promulgated new disclosure requirements with respect to short
positions held by investment managers. The SECs temporary ban on short selling of such stocks has since expired, but should similar restrictions and/or additional disclosure requirements be promulgated, especially if market turmoil occurs, the
Trust may be forced to cover short positions more quickly than otherwise intended and may suffer losses as a result. Such restrictions may also adversely affect the ability of the Trust to execute its investment strategies generally. Similar
emergency orders have also recently been instituted in non-U.S. markets in response to increased volatility. The SEC recently adopted amendments to Regulation SHO under the Securities Exchange Act of 1934 that
restrict the ability to engage in a short sale at a price that is less than or equal to the current best bid if the price of the covered security has decreased by 10% or more from the covered securitys closing price as of the end of the prior
day.
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Risk Factors in Strategic Transactions and Derivatives
The Trusts use of derivative instruments involves risks different from, and possibly greater than, the risks associated with investing
directly in securities and other traditional investments. Derivatives are subject to a number of risks such as credit risk, leverage risk, illiquidity risk, correlation risk and index risk as described below:
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Credit Riskthe risk that the counterparty in a derivative transaction will be unable to honor its
financial obligation to the Trust, or the risk that the reference entity in a derivative will not be able to honor its financial obligations. In particular, derivatives traded in OTC markets often are not guaranteed by an exchange or clearing
corporation and often do not require payment of margin, and to the extent that the Trust has unrealized gains in such instruments or has deposited collateral with its counterparties the Trust is at risk that its counterparties will become bankrupt
or otherwise fail to honor their obligations.
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Currency Riskthe risk that changes in the exchange rate between two currencies will adversely affect
the value (in U.S. dollar terms) of an investment.
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Leverage Riskthe risk associated with certain types of investments or trading strategies (such as,
for example, borrowing money to increase the amount of investments) that relatively small market movements may result in large changes in the value of an investment. Certain transactions in derivatives (such as futures transactions or sales of put
options) involve substantial leverage risk and may expose the Trust to potential losses that exceed the amount originally invested by the Trust. When the Trust engages in such a transaction, the Trust will deposit in a segregated account, or earmark
on its books and records, liquid assets with a value at least equal to the Trusts exposure, on a mark-to-market basis, to the transaction (as calculated pursuant
to requirements of the SEC). Such segregation or earmarking will ensure that the Trust has assets available to satisfy its obligations with respect to the transaction, but will not limit the Trusts exposure to loss.
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Illiquidity Riskthe risk that certain securities may be difficult or impossible to sell at the time
that the Trust would like or at the price that the Trust as seller believes the security is currently worth. There can be no assurance that, at any specific time, either a liquid secondary market will exist for a derivative or the Trust will
otherwise be able to sell such instrument at an acceptable price. It may, therefore, not be possible to close a position in a derivative without incurring substantial losses, if at all. The absence of liquidity may also make it more difficult for
the Trust to ascertain a market value for such instruments. Although both OTC and exchange-traded derivatives markets may experience a lack of liquidity, certain derivatives traded in OTC markets, including swaps and OTC options, involve substantial
illiquidity risk. The illiquidity of the derivatives markets may be due to various factors, including congestion, disorderly markets, limitations on deliverable supplies, the participation of speculators, government regulation and intervention, and
technical and operational or system failures. In addition, the liquidity of a secondary market in an exchange-traded derivative contract may be adversely affected by daily price fluctuation limits established by the exchanges which limit
the amount of fluctuation in an exchange-traded contract price during a single trading day. Once the daily limit has been reached in the contract, no trades may be entered into at a price beyond the limit, thus preventing the liquidation of open
positions. Prices have in the past moved beyond the daily limit on a number of consecutive trading days. If it is not possible to close an open derivative position entered into by the Trust, the Trust would continue to be required to make daily cash
payments of variation margin in the event of adverse price movements. In such a situation, if the Trust has insufficient cash, it may have to sell portfolio securities to meet daily variation margin requirements at a time when it may be
disadvantageous to do so.
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Correlation Riskthe risk that changes in the value of a derivative will not match the changes in the
value of the portfolio holdings that are being hedged or of the particular market or security to which the Trust seeks exposure through the use of the derivative. There are a number of factors which may prevent a derivative instrument from achieving
the desired correlation (or inverse correlation) with an underlying asset, rate or index, such as the impact of fees, expenses and transaction costs, the timing of pricing, and disruptions or illiquidity in the markets for such derivative
instrument.
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Index RiskIf the derivative is linked to the performance of an index, it will be subject to the
risks associated with changes in that index. If the index changes, the Trust could receive lower interest payments or experience a reduction in the value of the derivative to below the price that the Trust paid for such derivative.
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Volatility Riskthe risk that the Trusts use of derivatives may reduce income or gain and/or
increase volatility. Volatility is defined as the characteristic of a security, an index or a market to fluctuate significantly in price over a defined time period. The Trust could suffer losses related to its derivative positions as a result of
unanticipated market movements, which losses are potentially unlimited.
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When a derivative is used as a hedge against a
position that the Trust holds, any loss generated by the derivative generally should be substantially offset by gains on the hedged investment, and vice versa. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains.
Hedges are sometimes subject to imperfect matching between the derivative and the underlying security, and there can be no assurance that the Trusts hedging transactions will be effective. The Trust could also suffer losses related to its
derivative positions as a result of unanticipated market movements, which losses are potentially unlimited. The Advisors may not be able to predict correctly the direction of securities prices, interest rates and other economic factors, which could
cause the Trusts derivatives positions to lose value. In addition, some derivatives are more sensitive to interest rate changes and market price fluctuations than other securities. The possible lack of a liquid secondary market for derivatives
and the resulting inability of the Trust to sell or otherwise close a derivatives position could expose the Trust to losses and could make derivatives more difficult for the Trust to value accurately.
When engaging in a hedging transaction, the Trust may determine not to seek to establish a perfect correlation between the hedging instruments
utilized and the portfolio holdings being hedged. Such an imperfect correlation may prevent the Trust from achieving the intended hedge or expose the Trust to a risk of loss. The Trust may also determine not to hedge against a particular risk
because it does not regard the probability of the risk occurring to be sufficiently high as to justify the cost of the hedge or because it does do not foresee the occurrence of the risk. It may not be possible for the Trust to hedge against a change
or event at attractive prices or at a price sufficient to protect the assets of the Trust from the decline in value of the portfolio positions anticipated as a result of such change. The Trust may also be restricted in its ability to effectively
manage the portion of its assets that are segregated or earmarked to cover its obligations. In addition, it may not be possible to hedge at all against certain risks.
If the Trust invests in a derivative instrument it could lose more than the principal amount invested. Moreover, derivatives raise certain
tax, legal, regulatory and accounting issues that may not be presented by investments in securities, and there is some risk that certain issues could be resolved in a manner that could adversely impact the performance of the Trust.
The Trust is not required to use derivatives or other portfolio strategies to seek to increase return or to seek to hedge its portfolio and
may choose not to do so. Also, suitable derivative transactions may not be available in all circumstances and there can be no assurance that the Trust will engage in these transactions to reduce exposure to other risks when that would be beneficial.
Although the Advisors seek to use derivatives to further the Trusts investment objectives, there is no assurance that the use of derivatives will achieve this result.
Options Risk. There are several risks associated with transactions in options on securities and indexes. For example, there are
significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objective. In addition, a liquid secondary market for particular
options, whether traded OTC or on a recognized securities exchange (e.g., NYSE), separate trading boards of a securities exchange or through a market system that provides contemporaneous transaction pricing information (an Exchange) may
be absent for reasons which include the following: there may
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be insufficient trading interest in certain options; restrictions may be imposed by an Exchange on opening transactions or closing transactions or both; trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of options or underlying securities; unusual or unforeseen circumstances may interrupt normal operations on an Exchange; the facilities of an Exchange or the OCC may not at all
times be adequate to handle current trading volume; or one or more Exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in
which event the secondary market on that Exchange (or in that class or series of options) would cease to exist, although outstanding options that had been issued by the OCC as a result of trades on that Exchange would continue to be exercisable in
accordance with their terms.
Futures Transactions and Options Risk. The primary risks associated with the use of futures contracts
and options are (a) the imperfect correlation between the change in market value of the instruments held by the Trust and the price of the futures contract or option; (b) possible lack of a liquid secondary market for a futures contract
and the resulting inability to close a futures contract when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; (d) the Advisors inability to predict correctly the direction of securities
prices, interest rates, currency exchange rates and other economic factors; and (e) the possibility that the counterparty will default in the performance of its obligations.
Investment in futures contracts involves the risk of imperfect correlation between movements in the price of the futures contract and the
price of the security being hedged. The hedge will not be fully effective when there is imperfect correlation between the movements in the prices of two financial instruments. For example, if the price of the futures contract moves more or less than
the price of the hedged security, the Trust will experience either a loss or gain on the futures contract which is not completely offset by movements in the price of the hedged securities. To compensate for imperfect correlations, the Trust may
purchase or sell futures contracts in a greater dollar amount than the hedged securities if the volatility of the hedged securities is historically greater than the volatility of the futures contracts. Conversely, the Trust may purchase or sell
fewer futures contracts if the volatility of the price of the hedged securities is historically lower than that of the futures contracts.
The particular securities comprising the index underlying a securities index financial futures contract may vary from the securities held by
the Trust. As a result, the Trusts ability to hedge effectively all or a portion of the value of its securities through the use of such financial futures contracts will depend in part on the degree to which price movements in the index
underlying the financial futures contract correlate with the price movements of the securities held by the Trust. The correlation may be affected by disparities in the average maturity, ratings, geographical mix or structure of the Trusts
investments as compared to those comprising the securities index and general economic or political factors. In addition, the correlation between movements in the value of the securities index may be subject to change over time as additions to and
deletions from the securities index alter its structure. The correlation between futures contracts on U.S. Government securities and the securities held by the Trust may be adversely affected by similar factors and the risk of imperfect correlation
between movements in the prices of such futures contracts and the prices of securities held by the Trust may be greater. The trading of futures contracts also is subject to certain market risks, such as inadequate trading activity, which could at
times make it difficult or impossible to liquidate existing positions.
The Trust may liquidate futures contracts it enters into through
offsetting transactions on the applicable contract market. There can be no assurance, however, that a liquid secondary market will exist for any particular futures contract at any specific time. Thus, it may not be possible to close out a futures
position. In the event of adverse price movements, the Trust would continue to be required to make daily cash payments of variation margin. In such situations, if the Trust has insufficient cash, it may be required to sell portfolio securities to
meet daily variation margin requirements at a time when it may be disadvantageous to do so. The inability to close out futures positions also could have an adverse impact on the Trusts ability to hedge effectively its investments in
securities. The liquidity of a secondary market in a futures contract may be adversely affected by daily price fluctuation limits established by commodity exchanges which limit the amount of fluctuation in a futures contract price during
a single trading day. Once the daily limit has been reached in the contract, no trades may be entered into at a price beyond the limit, thus preventing the liquidation of open futures positions. Prices have in the past moved beyond the daily limit
on a number of consecutive trading days.
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The successful use of transactions in futures and related options also depends on the ability of
the Advisors to forecast correctly the direction and extent of interest rate movements within a given time frame. To the extent interest rates remain stable during the period in which a futures contract or option is held by the Trust or such rates
move in a direction opposite to that anticipated, the Trust may realize a loss on the Strategic Transaction which is not fully or partially offset by an increase in the value of portfolio securities. As a result, the Trusts total return for
such period may be less than if it had not engaged in the Strategic Transaction.
Because of low initial margin deposits made upon the
opening of a futures position, futures transactions involve substantial leverage. As a result, relatively small movements in the price of the futures contracts can result in substantial unrealized gains or losses. There is also the risk of loss by
the Trust of margin deposits in the event of bankruptcy of a broker with which the Trust has an open position in a financial futures contract. Because the Trust will engage in the purchase and sale of futures contracts for hedging purposes or to
seek to enhance the Trusts return, any losses incurred in connection therewith may, if the strategy is successful, be offset in whole or in part by increases in the value of securities held by the Trust or decreases in the price of securities
the Trust intends to acquire.
The amount of risk the Trust assumes when it purchases an option on a futures contract is the premium paid
for the option plus related transaction costs. In addition to the correlation risks discussed above, the purchase of an option on a futures contract also entails the risk that changes in the value of the underlying futures contract will not be fully
reflected in the value of the option purchased.
General Risk Factors in Hedging Foreign Currency. Hedging transactions involving
Currency Instruments involve substantial risks, including correlation risk. While the Trusts use of Currency Instruments to effect hedging strategies is intended to reduce the volatility of the NAV of the Trusts common shares, the NAV of
the Trusts common shares will fluctuate. Moreover, although Currency Instruments may be used with the intention of hedging against adverse currency movements, transactions in Currency Instruments involve the risk that anticipated currency
movements will not be accurately predicted and that the Trusts hedging strategies will be ineffective. To the extent that the Trust hedges against anticipated currency movements that do not occur, the Trust may realize losses and decrease its
total return as the result of its hedging transactions. Furthermore, the Trust will only engage in hedging activities from time to time and may not be engaging in hedging activities when movements in currency exchange rates occur.
It may not be possible for the Trust to hedge against currency exchange rate movements, even if correctly anticipated, in the event that
(i) the currency exchange rate movement is so generally anticipated that the Trust is not able to enter into a hedging transaction at an effective price, or (ii) the currency exchange rate movement relates to a market with respect to which
Currency Instruments are not available and it is not possible to engage in effective foreign currency hedging. The cost to the Trust of engaging in foreign currency transactions varies with such factors as the currencies involved, the length of the
contract period and the market conditions then prevailing. Since transactions in foreign currency exchange usually are conducted on a principal basis, no fees or commissions are involved.
Foreign Currency Forwards Risk. Forward foreign currency exchange contracts do not eliminate fluctuations in the value of Non-U.S. Securities (as defined in the Prospectus) but rather allow the Trust to establish a fixed rate of exchange for a future point in time. This strategy can have the effect of reducing returns and minimizing
opportunities for gain.
In connection with its trading in forward foreign currency contracts, the Trust will contract with a foreign or
domestic bank, or foreign or domestic securities dealer, to make or take future delivery of a specified amount of a particular currency. There are no limitations on daily price moves in such forward contracts, and banks and dealers are not required
to continue to make markets in such contracts. There have been periods during which certain banks or dealers have refused to quote prices for such forward contracts or have quoted prices with an unusually wide spread between the price at which the
bank or dealer is prepared to buy and that at which it is prepared to sell. Governmental imposition of credit controls might limit any such forward contract trading. With respect to its trading of forward contracts, if any, the Trust will be subject
to the risk of bank or dealer failure and the inability of, or refusal by, a bank or dealer to perform with respect to such contracts. Any such default would deprive the Trust of any profit potential or force the Trust to cover its commitments for
resale, if any, at the then market price and could result in a loss to the Trust.
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The Trust may also engage in proxy hedging transactions to reduce the effect of currency
fluctuations on the value of existing or anticipated holdings of portfolio securities. Proxy hedging is often used when the currency to which the Trust is exposed is difficult to hedge or to hedge against the dollar. Proxy hedging entails entering
into a forward contract to sell a currency whose changes in value are generally considered to be linked to a currency or currencies in which some or all of the Trusts securities are, or are expected to be, denominated, and to buy U.S. dollars.
Proxy hedging involves some of the same risks and considerations as other transactions with similar instruments. Currency transactions can result in losses to the Trust if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. In addition, there is the risk that the perceived linkage between various currencies may not be present or may not be present during the particular time that the Trust is engaging in proxy hedging. The Trust may also
cross-hedge currencies by entering into forward contracts to sell one or more currencies that are expected to decline in value relative to other currencies to which the Trust has or in which the Trust expects to have portfolio exposure. For example,
the Trust may hold both Canadian government bonds and Japanese government bonds, and the Advisor may believe that Canadian dollars will deteriorate against Japanese yen. The Trust would sell Canadian dollars to reduce its exposure to that currency
and buy Japanese yen. This strategy would be a hedge against a decline in the value of Canadian dollars, although it would expose the Trust to declines in the value of the Japanese yen relative to the U.S. dollar.
Some of the forward non-U.S. currency contracts entered into by the Trust may be classified as non-deliverable forwards (NDFs). NDFs are cash-settled, short-term forward contracts that may be thinly traded or are denominated in non-convertible foreign
currency, where the profit or loss at the time at the settlement date is calculated by taking the difference between the agreed upon exchange rate and the spot rate at the time of settlement, for an agreed upon notional amount of funds. All NDFs
have a fixing date and a settlement date. The fixing date is the date at which the difference between the prevailing market exchange rate and the agreed upon exchange rate is calculated. The settlement date is the date by which the payment of the
difference is due to the party receiving payment. NDFs are commonly quoted for time periods of one month up to two years, and are normally quoted and settled in U.S. dollars. They are often used to gain exposure to and/or hedge exposure to foreign
currencies that are not internationally traded.
Currency Futures Risk. The Trust may also seek to hedge against the decline in the
value of a currency or to enhance returns through use of currency futures or options thereon. Currency futures are similar to forward foreign exchange transactions except that futures are standardized, exchange-traded contracts while forward foreign
exchange transactions are traded in the OTC market. Currency futures involve substantial currency risk, and also involve leverage risk.
Currency Options Risk. The Trust may also seek to hedge against the decline in the value of a currency or to enhance returns through
the use of currency options. Currency options are similar to options on securities. For example, in consideration for an option premium the writer of a currency option is obligated to sell (in the case of a call option) or purchase (in the case of a
put option) a specified amount of a specified currency on or before the expiration date for a specified amount of another currency. The Trust may engage in transactions in options on currencies either on exchanges or OTC markets. Currency options
involve substantial currency risk, and may also involve credit, leverage or illiquidity risk.
Currency Swaps Risk. The Trust may
enter into currency swaps, which are transactions in which one currency is simultaneously bought for a second currency on a spot basis and sold for the second currency on a forward basis. Currency swaps involve the exchange of the rights of the
Trust and another party to make or receive payments in specified currencies. Currency swaps usually involve the delivery of the entire principal value of one designated currency in exchange for the other designated currency. Because currency swaps
usually involve the delivery of the entire principal value of one designated currency in exchange for the other designated currency, the entire principal value of a currency swap is subject to the risk that the other party to the swap will default
on its contractual delivery obligations.
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Over-the-Counter Trading Risk. The derivative
instruments that may be purchased or sold by the Trust may include instruments not traded on an exchange. The risk of nonperformance by the counterparty to an instrument may be greater than, and the ease with which the Trust can dispose of or enter
into closing transactions with respect to an instrument may be less than, the risk associated with an exchange traded instrument. In addition, significant disparities may exist between bid and asked prices for derivative
instruments that are not traded on an exchange. The absence of liquidity may make it difficult or impossible for the Trust to sell such instruments promptly at an acceptable price. Derivative instruments not traded on exchanges also are not subject
to the same type of government regulation as exchange traded instruments, and many of the protections afforded to participants in a regulated environment may not be available in connection with the transactions. Because derivatives traded in OTC
markets generally are not guaranteed by an exchange or clearing corporation and generally do not require payment of margin, to the extent that the Trust has unrealized gains in such instruments or has deposited collateral with its counterparties the
Trust is at risk that its counterparties will become bankrupt or otherwise fail to honor its obligations.
Dodd-Frank Act Risk.
Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) (the Derivatives Title) imposed a substantially new regulatory structure on derivatives markets, with particular emphasis
on swaps (which are subject to oversight by the CFTC) and security-based swaps (which are subject to oversight by the SEC). The regulatory framework covers a broad range of swap market participants, including banks,
non-banks, credit unions, insurance companies, broker-dealers and investment advisers. Prudential regulators were granted authority to regulate margining of swaps and security-based swaps of banks and
bank-related entities.
Current regulations for swaps require the mandatory central clearing and mandatory exchange trading of particular
types of interest rate swaps and index credit default swaps (together, Covered Swaps). The Trust is required to clear its Covered Swaps through a clearing broker, which requires, among other things, posting initial margin and variation
margin to the Trusts clearing broker in order to enter into and maintain positions in Covered Swaps. Covered Swaps generally are required to be executed through a swap execution facility (SEF), which can involve additional
transaction fees.
Additionally, under the Dodd-Frank Act, uncleared swaps (and both uncleared swaps and uncleared security-based swaps
entered into with banks) are subject to margin requirements and swap dealers are required to collect from and post to the Trust both variation and initial margin with respect to such derivatives. Specifically, regulations are now in effect that
require swap dealers to post and collect variation margin (comprised of specified liquid instruments and subject to a required haircut) in connection with trading of uncleared OTC swaps with the Trust. Shares of investment companies (other than
certain money market funds) may not be posted as collateral under these regulations. The CFTC recently adopted capital requirements for swap dealers and compliance was required by October 2021. Regulations adopted by the SEC relating to
security-based swaps became effective on November 1, 2021. As a result, the Trust is now subject, among other things, to transaction reporting for security-based swaps and must post both variation and initial margin in connection with such
transactions. As capital and margin requirements for swap dealers and capital and margin requirements for security-based swaps are phased in and implemented, such requirements may make certain types of trades and/or trading strategies more costly.
There may be market dislocations due to uncertainty during the implementation period of any new regulation and the Advisor cannot know how the derivatives market will adjust to such new regulations.
In addition, regulations adopted by global prudential regulators that are now in effect require certain bank-regulated counterparties and
certain of their affiliates to include in qualified financial contracts, including many derivatives contracts as well as repurchase agreements and securities lending agreements, terms that delay or restrict the rights of counterparties
to terminate such contracts, foreclose upon collateral, exercise other default rights or restrict transfers of affiliate credit enhancements (such as guarantees) in the event that the bank-regulated counterparty and/or its affiliates are subject to
certain types of resolution or insolvency proceedings.
Legal and Regulatory Risk. At any time after the date hereof, legislation
or additional regulations may be enacted that could negatively affect the assets of the Trust. Changing approaches to regulation may have a negative impact on the securities in which the Trust invests. Legislation or regulation may also change the
way in which the Trust itself is regulated. There can be no assurance that future legislation, regulation or deregulation will not have a material adverse effect on the Trust or will not impair the ability of the Trust to achieve its investment
objectives. In addition, as new rules and regulations resulting from the passage of the Dodd-Frank Act are implemented and new international capital and liquidity requirements are introduced under the Basel III Accords, the market may not react
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the way the Advisor expects. Whether the Trust achieves its investment objectives may depend on, among other things, whether the Advisor correctly forecasts market reactions to this and other
legislation. In the event the Advisor incorrectly forecasts market reaction, the Trust may not achieve its investment objectives.
MANAGEMENT OF THE TRUST
Investment Management Agreement
Although the Advisor intends to devote such time and effort to the business of the Trust as is reasonably necessary to perform its duties to
the Trust, the services of the Advisor are not exclusive and the Advisor provides similar services to other investment companies and other clients and may engage in other activities.
The investment management agreement between the Advisor and the Trust (the Investment Management Agreement) also provides that in
the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations thereunder, the Advisor is not liable to the Trust or any of the Trusts shareholders for any act or omission by the Advisor in the
supervision or management of its respective investment activities or for any loss sustained by the Trust or the Trusts shareholders and provides for indemnification by the Trust of the Advisor, its directors, officers, employees, agents and
control persons for liabilities incurred by them in connection with their services to the Trust, subject to certain limitations and conditions.
The Investment Management Agreement provides for the Trust to pay a monthly management fee at an annual rate equal to 0.80% of the average
daily value of the Trusts Managed Assets. Managed Assets means the total assets of the Trust (including any assets attributable to money borrowed for investment purposes) minus the sum of the Trusts accrued liabilities (other
than money borrowed for investment purposes).
The Trust and the Advisor have entered into a fee waiver agreement (the Fee Waiver
Agreement), pursuant to which the Advisor has contractually agreed to waive the management fee with respect to any portion of the Trusts assets attributable to investments in any equity and fixed-income mutual funds and ETFs managed by
the Advisor or its affiliates that have a contractual management fee, through June 30, 2023. In addition, effective December 1, 2019, pursuant to the Fee Waiver Agreement, the Advisor has contractually agreed to waive its management fees
by the amount of investment advisory fees the Trust pays to the Advisor indirectly through its investment in money market funds advised by the Advisor or its affiliates, through June 30, 2023. The Fee Waiver Agreement may be continued from year
to year thereafter, provided that such continuance is specifically approved by the Advisor and the Trust (including by a majority of the Trustees who are not interested persons (as defined in the Investment Company Act) (the
Independent Trustees)). Neither the Advisor nor the Trust is obligated to extend the Fee Waiver Agreement. The Fee Waiver Agreement may be terminated at any time, without the payment of any penalty, only by the Trust (upon the vote of a
majority of the Independent Trustees or a majority of the outstanding voting securities of the Trust), upon 90 days written notice by the Trust to the Advisor. Prior to December 1, 2019, the agreement to waive a portion of the
Trusts management fee in connection with the Trusts investment in affiliated money market funds was voluntary.
The Investment
Management Agreement will continue in effect from year to year provided that each continuance is specifically approved at least annually by both (1) the vote of a majority of the Board or the vote of a majority of the outstanding voting
securities of the Trust (as such term is defined in the Investment Company Act) and (2) by the vote of a majority of the Trustees who are not parties to the Investment Management Agreement or interested persons (as such term is
defined in the Investment Company Act) of any such party, cast in person at a meeting called for the purpose of voting on such approval. The Investment Management Agreement may be terminated as a whole at any time by the Trust, without the payment
of any penalty, upon the vote of a majority of the Trustees or a majority of the outstanding voting securities of the Trust or by the Advisor, on 60 days written notice by either party to the other which can be waived by the non-terminating party. The Investment Management Agreement will terminate automatically in the event of its assignment (as such term is defined in the Investment Company Act and the rules thereunder).
S-37
The table below sets forth information about the total management fees paid by the Trust to the
Advisor, and the amounts waived by the Advisor, for the periods indicated:
|
|
|
|
|
|
|
|
|
Fiscal Year Ended October 31,
|
|
Paid to the Advisor
|
|
|
Waived by the Advisor
|
|
2021
|
|
$
|
8,705,347
|
|
|
$
|
7,175
|
|
2020
|
|
$
|
7,912,230
|
|
|
$
|
10,583
|
|
2019
|
|
$
|
8,613,272
|
|
|
$
|
5,450
|
|
Sub-Investment Advisory Agreements
BlackRock International Limited (BIL) and BlackRock (Singapore) Limited (BSL), each a wholly owned subsidiary of
BlackRock, perform certain of the day-to-day investment management of the Trust pursuant to
separate sub-investment advisory agreements.
The Advisor, and not the Trust, pays BIL
and BSL, for services they provide for that portion of the Trust for which BIL and BSL, as applicable, acts as sub-adviser, a monthly fee that is equal to a percentage of the investment advisory fees paid by
the Trust to the Advisor.
Each sub-investment advisory agreement provides that, in the
absence of willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations thereunder, the Trust will indemnify the applicable Sub-Advisor, its directors, officers,
employees, agents, associates and control persons for liabilities incurred by them in connection with their services to the Trust, subject to certain limitations.
Although each Sub-Advisor intends to devote such time and effort to the business of the
Trust as is reasonably necessary to perform its duties to the Trust, the services of each Sub-Advisor are not exclusive and each Sub-Advisor provides
similar services to other investment companies and other clients and may engage in other activities.
Each sub-investment advisory agreement will continue in effect for a period of two years
from its effective date, and if not sooner terminated, will continue in effect for successive periods of 12 months thereafter, provided that each continuance is specifically approved at least annually by both (1) the vote of a majority of the
Board or the vote of a majority of the outstanding voting securities of the Trust (as defined in the Investment Company Act) and (2) by the vote of a majority of the trustees who are not parties to such agreement or interested persons (as such
term is defined in the Investment Company Act) of any such party, cast in person at a meeting called for the purpose of voting on such approval. Each sub-investment advisory agreement may be
terminated as a whole at any time by the Trust without the payment of any penalty, upon the vote of a majority of the Board or a majority of the outstanding voting securities of the Trust or by the Advisor or the
respective Sub-Advisor, on 60 days written notice by either party to the other. The sub-investment advisory agreements will also terminate
automatically in the event of their assignment (as such term is defined in the Investment Company Act and the rules thereunder).
A
discussion regarding the basis for the approval of the Investment Management Agreement and the sub-advisory agreements by the Board is available in the Trusts annual report to shareholders for the fiscal
year ended October 31, 2021.
Biographical Information Pertaining to the Trustees
The Board consists of eleven individuals (each, a Trustee), nine of whom are Independent Trustees. The registered investment
companies advised by the Advisor or its affiliates (the BlackRock-advised Funds) are organized into one complex of closed-end funds and open-end non-index fixed-income funds (the BlackRock Fixed-Income Complex), one complex of open-end equity, multi-asset, index and money market funds (the BlackRock
Multi-Asset Complex) and one complex of exchange-traded funds (each, a BlackRock Fund Complex). The Trust is included in the BlackRock Fund Complex referred to as the BlackRock Fixed-Income Complex. The Trustees also
oversee as board members the operations of the other open-end and closed-end registered investment companies included in the BlackRock Fixed-Income Complex.
S-38
Please refer to the section of the Trusts June 8, 2021 definitive proxy statement on
Schedule 14A for the annual meeting of the Trusts shareholders entitled: Proposal 1 - Board Members/Nominees Biographical
Information, which is incorporated by reference herein, for a discussion of the Trusts trustees other than Lorenzo A. Flores, their principal occupations and other affiliates during the past five years, the number of portfolios in
the Fixed-Income Complex that they oversee, and other information about them.
Effective July 30, 2021, Lorenzo A. Flores was
appointed to the Board as an Independent Trustee. Certain biographical and other information relating to Lorenzo A. Flores is set forth below, including his year of birth, his principal occupation for at least the last five years, the length of time
served, the total number of BlackRock-advised Funds overseen and any public directorships or trusteeships.
|
|
|
|
|
|
|
|
|
Name and
Year of Birth1,2
|
|
Position(s)
Held
(Length of
Service)
|
|
Principal Occupation(s)
During Past Five Years
|
|
Number
of
BlackRock-
Advised
Registered
Investment
Companies
(RICs)
Consisting of
Investment
Portfolios
(Portfolios)
Overseen
|
|
Public
Company
and Other
Investment
Company
Directorships
Held During
Past Five
Years
|
Lorenzo A. Flores
1964
|
|
Trustee
(Since 2021)
|
|
Vice Chairman, Kioxia, Inc. since 2019; Chief Financial Officer, Xilinx, Inc. from 2016 to 2019; Corporate Controller, Xilinx, Inc. from 2008 to 2016.
|
|
73 RICs
consisting
of 100
Portfolios
|
|
None
|
1
|
The address of each Trustee is c/o BlackRock, Inc., 55 East 52nd Street, New York, New York 10055.
|
2
|
Each Independent Trustee holds office until his or her successor is duly elected and qualifies or until his or
her earlier death, resignation, retirement or removal as provided by the Trusts bylaws or charter or statute, or until December 31 of the year in which he or she turns 75. Trustees who are interested persons, as defined in the
Investment Company Act, serve until their successor is duly elected and qualifies or until their earlier death, resignation, retirement or removal as provided by the Trusts bylaws or statute, or until December 31 of the year in which they
turn 72. The Board may determine to extend the terms of Independent Trustees on a case-by-case basis, as appropriate.
|
The table below discusses some of the experiences, qualifications and skills of Lorenzo A. Flores that support the conclusion that he should
serve on the Board.
|
|
|
Trustee
|
|
Experience, Qualifications and Skills
|
Lorenzo A. Flores
|
|
The Board benefits from Lorenzo A. Floress many years of business, leadership and financial experience in his roles at various public and private companies. In particular, Mr. Floress service as Chief Financial
Officer and Corporate Controller of Xilinx, Inc. and Vice Chairman of Kioxia, Inc. and his long experience in the technology industry allow him to provide insight to into financial, business and technology trends. Mr. Floress knowledge of
financial and accounting matters qualifies him to serve as a member of the Audit Committee. Mr. Floress independence from the Trust and the Advisor enhances his service as a member of the Performance Oversight Committee.
|
Board Leadership Structure and Oversight
Please refer to the sections of the Trusts definitive proxy statement on Schedule 14A for the annual meeting of the Trusts shareholders entitled:
Proposal 1 - Board Leadership Structure and Oversight and Appendix
ECommittees of the Board which is incorporated by reference herein, for a discussion of the Boards leadership structure and oversight other than as noted below.
S-39
During the Trusts fiscal year ended October 31, 2021, the Boards Audit
Committee, Governance and Nominating Committee, Compliance Committee and Executive Committee met the following number of times:
|
|
|
|
|
|
|
|
|
Number of
Audit
Committee
Meetings
|
|
Number of
Governance
Committee
Meetings
|
|
Number of
Compliance
Committee
Meetings
|
|
Number of
Performance
Oversight
Committee
Meetings
|
|
Number of
Executive
Committee
Meetings
|
[●]
|
|
[●]
|
|
[●]
|
|
[●]
|
|
[●]
|
Effective July 30, 2021, J. Phillip Holloman was appointed to the Audit Committee of the Board and Stayce
D. Harris was appointed to the Compliance Committee of the Board. Effective August 5, 2021, Lorenzo A. Flores was appointed to the Audit Committee of the Board.
Effective November 18, 2021, Lorenzo A. Flores, Stayce D. Harris and J. Phillip Holloman were each appointed to the Performance Oversight
Committee of the Board.
Effective December 31, 2021, Michael J. Castellano and Richard E. Cavanagh each retired as a Trustee of the
Trust.
Effective January 1, 2022, R. Glenn Hubbard was appointed to serve as a Chair of the Board and as a member and Chair of the
Executive Committee of the Board; W. Carl Kester was appointed to serve as Vice Chair of the Board, as a member and Chair of the Governance and Nominating Committee of the Board and as a member of the Executive Committee of the Board; Catherine A.
Lynch was appointed to serve as Chair of the Audit Committee of the Board; and Karen P. Robards no longer serves as Co-Chair of the Board.
Trustee Share Ownership
Information
relating to each Trustees share ownership in the Trust and in all BlackRock-advised funds that are currently overseen by the respective Trustee (Supervised Funds) as of December 31, 2021 is set forth in the chart below:
|
|
|
|
|
Name of Trustee
|
|
Dollar Range of Equity
Securities in the Fund*
|
|
Aggregate Dollar Range of Equity
Securities in Supervised
Funds*
|
Independent Trustees
|
|
|
|
|
Cynthia L. Egan
|
|
$[●]
|
|
[Over $ 100,000
|
Frank J. Fabozzi
|
|
$[●]
|
|
Over $ 100,000
|
Lorenzo A. Flores
|
|
$[●]
|
|
Over $ 100,000
|
Stayce D. Harris
|
|
$[●]
|
|
Over $ 100,000
|
J. Phillip Holloman
|
|
$[●]
|
|
Over $ 100,000
|
R. Glenn Hubbard
|
|
$[●]
|
|
Over $ 100,000
|
W. Carl Kester
|
|
$[●]
|
|
Over $ 100,000
|
Catherine A. Lynch
|
|
$[●]
|
|
Over $ 100,000
|
S-40
|
|
|
|
|
Karen P. Robards
|
|
$[●]
|
|
Over $ 100,000
|
Interested Trustees
|
|
|
|
|
Robert Fairbairn
|
|
None
|
|
Over $ 100,000
|
John M. Perlowski
|
|
None
|
|
Over $ 100,000]
|
*
|
Includes share equivalents owned under the deferred compensation plan in the Supervised Funds by certain
Independent Trustees who have participated in the deferred compensation plan of the Supervised Funds.
|
Compensation of Trustees
Each Trustee who is an Independent Trustee is paid an annual retainer of $370,000 per year for his or her services as a Board member
of the BlackRock-advised Funds, including the Trust, and each Independent Trustee may also receive a $10,000 Board meeting fee for special unscheduled meetings or meetings in excess of six Board meetings held in a calendar year, together with out-of-pocket expenses in accordance with a Board policy on travel and other business expenses relating to attendance at meetings. [In addition, the Chair of the Board is paid
an additional annual retainer of $100,000.] The Chairs of the Audit Committee, Performance Oversight Committee, Compliance Committee, and Governance and Nominating Committee are paid an additional annual retainer of $45,000, $37,500, $45,000 and
$37,500, respectively. Each of the members of the Audit Committee and Compliance Committee are paid an additional annual retainer of $30,000 and $25,000, respectively, for his or her service on such committee. The Trust will pay a pro rata portion
quarterly (based on relative net assets) of the foregoing Trustee fees paid by the funds in the BlackRock Fixed-Income Complex.
The
Independent Trustee have agreed that a maximum of 50% of each Independent Trustees total compensation paid by funds in the BlackRock Fixed-Income Complex may be deferred pursuant to the BlackRock Fixed-Income Complexs deferred
compensation plan. Under the deferred compensation plan, deferred amounts earn a return for the Independent Trustees as though equivalent dollar amounts had been invested in shares of certain funds in the BlackRock Fixed-Income Complex selected by
the Independent Trustees. This has approximately the same economic effect for the Independent Trustees as if they had invested the deferred amounts in such funds in the BlackRock Fixed-Income Complex. The deferred compensation plan is not funded and
obligations thereunder represent general unsecured claims against the general assets of a fund and are recorded as a liability for accounting purposes.
The following table sets forth the compensation paid to the Trustees by the Trust for the fiscal year ended October 31, 2021, and the
aggregate compensation, including deferred compensation amounts, paid to them by all BlackRock-advised Funds for the calendar year ended December 31, 2021. Messrs. Fairbairn and Perlowski serve without compensation from the Fund because of
their affiliation with BlackRock, Inc. and the Advisor.
|
|
|
|
|
|
|
Name(1)
|
|
Compensation
from the
Trust
|
|
Estimated Annual
Benefits upon
Retirement
|
|
Aggregate Compensation from the
BlackRock-Advised
Funds(2)(3)
|
Independent Trustees
|
|
|
|
|
|
|
Michael J. Castellano(4)
|
|
$[ ]
|
|
None
|
|
$[ ]
|
Richard E. Cavanagh(5)
|
|
$[ ]
|
|
None
|
|
$[ ]
|
Cynthia L. Egan
|
|
$[ ]
|
|
None
|
|
$[ ]
|
Frank J. Fabozzi
|
|
$[ ]
|
|
None
|
|
$[ ]
|
Lorenzo A. Flores(6)
|
|
$[ ]
|
|
None
|
|
$[ ]
|
Stayce D. Harris(7)
|
|
$[ ]
|
|
None
|
|
$[ ]
|
J. Phillip Holloman(8)
|
|
$[ ]
|
|
None
|
|
$[ ]
|
R. Glenn Hubbard
|
|
$[ ]
|
|
None
|
|
$[ ]
|
W. Carl Kester
|
|
$[ ]
|
|
None
|
|
$[ ]
|
S-41
|
|
|
|
|
|
|
Catherine A. Lynch
|
|
$[ ]
|
|
None
|
|
$[ ]
|
Karen P. Robards
|
|
$[ ]
|
|
None
|
|
$[ ]
|
Interested Trustees
|
|
|
|
|
|
|
Robert Fairbairn
|
|
None
|
|
None
|
|
None
|
John M. Perlowski
|
|
None
|
|
None
|
|
None
|
(1)
|
For the number of BlackRock-advised Funds from which each Trustee receives compensation, see the Biographical
Information chart beginning on page S-39.
|
(2)
|
For the Independent Trustees, this amount represents the aggregate compensation earned from the funds in the
BlackRock Fixed-Income Complex during the calendar year ended December 31, 2021. Of this amount, Mr. Castellano, Mr. Cavanagh, Dr. Fabozzi, Dr. Hubbard, Dr. Kester, Ms. Lynch and Ms. Robards deferred
$[●], $[●], $[●], $[●], $[●], $[●] and $[●], respectively, pursuant to the BlackRock Fixed-Income Complexs deferred compensation plan.
|
(3)
|
Total amount of deferred compensation payable by the BlackRock Fixed-Income Complex to Mr. Castellano,
Mr. Cavanagh, Dr. Fabozzi, Dr. Hubbard, Dr. Kester, Ms. Lynch and Ms. Robards is $[●], $[●], $[●], $[●], $[●], $[●] and $[●], respectively, as of December 31, 2021.
Ms. Egan did not participate in the deferred compensation plan as of December 31, 2021.
|
(4)
|
Mr. Castellano retired as a Trustee of the Trust and Chair of the Audit Committee effective
December 31, 2021.
|
(5)
|
Mr. Cavanagh retired as a Trustee of the Trust and Co-Chair of the
Board effective December 31, 2021.
|
(6)
|
Mr. Flores was appointed as a Trustee of the Trust effective July 30, 2021, a member of the Audit
Committee effective August 5, 2021 and a member of the Performance Oversight Committee effective November 18, 2021.
|
(7)
|
Ms. Harris was appointed as a Trustee of the Trust effective June 10, 2021, a member of the
Compliance Committee effective July 30, 2021 and a member of the Performance Oversight Committee effective November 18, 2021.
|
(8)
|
Mr. Holloman was appointed as a Trustee of the Trust effective June 10, 2021, a member of the Audit
Committee effective July 30, 2021 and a member of the Performance Oversight Committee effective November 18, 2021.
|
Independent Trustee Ownership of Securities
[As of December 31, 2021, none of the Independent Trustees of the Trust or their immediate family members owned beneficially or of record
any securities of BlackRock or any affiliate of any BlackRock person controlling, controlled by or under common control with BlackRock nor did any Independent Trustee of the Trust or their immediate family members have any material interest in any
transaction, or series of similar transactions, during the most recently completed two calendar years involving the Trust, BlackRock or any affiliate of any BlackRock person controlling, controlled by or under common control with the Trust or
BlackRock.]
[As of the date of this SAI, the officers and Trustees of the Trust, as a group, beneficially owned less than 1% of the
outstanding common shares of the Trust.]
Information Pertaining to the Officers
Please refer to the section of the Trusts definitive proxy statement on Schedule 14A for the annual meeting of the Trusts
shareholders entitled: Appendix F Information Pertaining to the Executive Officers of the Funds, which is
incorporated by reference herein, for certain biographical and other information relating to the officers of the Trust who are not Trustees.
Indemnification of Trustees and Officers
The governing documents of the Trust generally provide that, to the extent permitted by applicable law, the Trust will indemnify its Trustees
and officers against liabilities and expenses incurred in connection with litigation in which they may be involved because of their offices with the Trust unless, as to liability to the Trust or its investors, it is finally adjudicated that they
engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in their offices. In addition, the Trust will not indemnify Trustees with respect to any matter as to which Trustees did not act in good faith
in the reasonable belief that his or her action was in the best interest of the Trust or, in the case of any criminal proceeding, as to which Trustees had reasonable cause to believe that the conduct was unlawful. Indemnification provisions
contained in the Trusts governing documents are subject to any limitations imposed by applicable law.
S-42
Closed-end funds in the BlackRock Fixed-Income Complex,
including the Trust, have also entered into a separate indemnification agreement with the board members of each board of such funds (the Indemnification Agreement). The Indemnification Agreement (i) extends the indemnification
provisions contained in a funds governing documents to board members who leave that funds board and serve on an advisory board of a different fund in the BlackRock Fixed-Income Complex; (ii) sets in place the terms of the
indemnification provisions of a funds governing documents once a board member retires from a board; and (iii) in the case of board members who left the board of a fund in connection with or prior to the board consolidation that occurred
in 2007 as a result of the merger of BlackRock and Merrill Lynch & Co., Inc.s investment management business, clarifies that such fund continues to indemnify the trustee for claims arising out of his or her past service to that fund.
Portfolio Management
Portfolio
Manager Assets Under Management
The following table sets forth information about funds and accounts other than the Trust for which the
portfolio managers are primarily responsible for the day-to-day portfolio management as of October 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(ii) Number of Other Accounts Managed
and Assets by Account Type
|
|
(iii) Number of Other Accounts and
Assets for Which Advisory Fee is
Performance-Based
|
(i) Name of Portfolio Manager
|
|
Other
Registered
Investment
Companies
|
|
Other Pooled
Investment
Vehicles
|
|
Other
Accounts
|
|
Other
Registered
Investment
Companies
|
|
Other Pooled
Investment
Vehicles
|
|
Other
Accounts
|
Scott MacLellan, CFA
|
|
13
|
|
16
|
|
131
|
|
0
|
|
0
|
|
2
|
|
|
$16.87 Billion
|
|
$4.22 Billion
|
|
$59.04 Billion
|
|
$0
|
|
$0
|
|
$752.7 Million
|
Akiva Dickstein
|
|
23
|
|
26
|
|
260
|
|
0
|
|
0
|
|
5
|
|
|
$30.45 Billion
|
|
$9.84 Billion
|
|
$101.4 Billion
|
|
$0
|
|
$0
|
|
$1.64 Billion
|
Samir Lakhani
|
|
5
|
|
11
|
|
6
|
|
0
|
|
1
|
|
0
|
|
|
$3.39 Billion
|
|
$4.02 Billion
|
|
$3.30 Billion
|
|
$0
|
|
$338.5 Million
|
|
$0
|
Portfolio Manager Compensation Overview
The discussion below describes the portfolio managers compensation as of October 31, 2021.
The Advisors financial arrangements with its portfolio managers, its competitive compensation and its career path emphasis at all levels
reflect the value senior management places on key resources. Compensation may include a variety of components and may vary from year to year based on a number of factors. The principal components of compensation include a base salary, a
performance-based discretionary bonus, participation in various benefits programs and one or more of the incentive compensation programs established by the Advisor.
Base Compensation. Generally, portfolio managers receive base compensation based on their position with the firm.
Discretionary Incentive Compensation. Discretionary incentive compensation is a function of several components: the performance of
BlackRock, Inc., the performance of the portfolio managers group within BlackRock, the investment performance, including risk-adjusted returns, of the firms assets under management or supervision by that portfolio manager relative to
predetermined benchmarks, and the individuals performance and contribution to the overall performance of these portfolios and BlackRock. In most cases, these benchmarks are the same as the benchmark or benchmarks against which the performance
of the Trust or other accounts managed by the portfolio managers are measured. Among other things, BlackRocks Chief Investment Officers make a subjective determination with respect to each portfolio managers compensation based on the
performance of the Trust and other accounts managed by each portfolio manager relative to the various benchmarks. Performance of fixed income funds is measured on a pre-tax and/or after-tax basis over various time periods including 1-, 3- and 5- year periods, as applicable.
With respect to these portfolio managers, such benchmarks for the Trust and other accounts are:
S-43
|
|
|
Portfolio Managers
|
|
Applicable Benchmarks
|
Akiva Dickstein
|
|
A combination of market-based indices (e.g. Bloomberg US Aggregate Index, Bloomberg US Universal Index and Bloomberg Intermediate Aggregate Index), certain customized indices and certain fund industry peer groups.
|
Samir Lakhani
|
|
A combination of market-based CMBS and ABS indices, certain customized indices and certain fund industry peer groups.
|
Scott MacLellan
|
|
A combination of market-based indices (e.g., Bank of America Merrill Lynch U.S. Corporate & Government Index, 1-3 Years), certain customized indices and certain fund industry peer
groups.
|
Distribution of Discretionary Incentive Compensation. Discretionary incentive compensation is
distributed to portfolio managers in a combination of cash, deferred BlackRock, Inc. stock awards, and/or deferred cash awards that notionally track the return of certain BlackRock investment products.
Portfolio managers receive their annual discretionary incentive compensation in the form of cash. Portfolio managers whose total compensation
is above a specified threshold also receive deferred BlackRock, Inc. stock awards annually as part of their discretionary incentive compensation. Paying a portion of discretionary incentive compensation in the form of deferred BlackRock, Inc. stock
puts compensation earned by a portfolio manager for a given year at risk based on BlackRocks ability to sustain and improve its performance over future periods. In some cases, additional deferred BlackRock, Inc. stock may be
granted to certain key employees as part of a long-term incentive award to aid in retention, align interests with long-term shareholders and motivate performance. Deferred BlackRock, Inc. stock awards are generally granted in the form of BlackRock,
Inc. restricted stock units that vest pursuant to the terms of the applicable plan and, once vested, settle in BlackRock, Inc. common stock. The portfolio managers of this Trust have deferred BlackRock, Inc. stock awards.
For certain portfolio managers, a portion of the discretionary incentive compensation is also distributed in the form of deferred cash awards
that notionally track the returns of select BlackRock investment products they manage, which provides direct alignment of portfolio manager discretionary incentive compensation with investment product results. Deferred cash awards vest ratably over
a number of years and, once vested, settle in the form of cash. Only portfolio managers who manage specified products and whose total compensation is above a specified threshold are eligible to participate in the deferred cash award program.
Other Compensation Benefits. In addition to base salary and discretionary incentive compensation, portfolio managers may be
eligible to receive or participate in one or more of the following:
Incentive Savings PlansBlackRock, Inc. has created
a variety of incentive savings plans in which BlackRock, Inc. employees are eligible to participate, including a 401(k) plan, the BlackRock Retirement Savings Plan (RSP), and the BlackRock Employee Stock Purchase Plan (ESPP). The employer
contribution components of the RSP include a company match equal to 50% of the first 8% of eligible pay contributed to the plan capped at $5,000 per year, and a company retirement contribution equal
to 3-5% of eligible compensation up to the Internal Revenue Service limit ($290,000 for 2021). The RSP offers a range of investment options, including registered investment companies and collective
investment funds managed by the firm. BlackRock, Inc. contributions follow the investment direction set by participants for their own contributions or, absent participant investment direction, are invested into a target date fund that corresponds
to, or is closest to, the year in which the participant attains age 65. The ESPP allows for investment in BlackRock, Inc. common stock at a 5% discount on the fair market value of the stock on the purchase date. Annual participation in the
ESPP is limited to the purchase of 1,000 shares of common stock or a dollar value of $25,000 based on its fair market value on the purchase date. All of the eligible portfolio managers are eligible to participate in these plans.
S-44
Securities Ownership of Portfolio Managers
As of October 31, 2021, the end of the Trusts most recently completed fiscal year end, the dollar range of securities beneficially
owned by each portfolio manager in the Trust is shown below:
|
|
|
Portfolio Manager
|
|
Dollar Range of Equity
Securities of the Trust
Beneficially Owned
|
Scott MacLellan, CFA
|
|
$50,001 - $100,000
|
Akiva Dickstein
|
|
$100,001 - $500,000
|
Samir Lakhani
|
|
$100,001 - $500,000
|
Potential Material Conflicts of Interest
The Advisor has built a professional working environment, firm-wide compliance culture and compliance procedures and systems designed to
protect against potential incentives that may favor one account over another. The Advisor has adopted policies and procedures that address the allocation of investment opportunities, execution of portfolio transactions, personal trading by employees
and other potential conflicts of interest that are designed to ensure that all client accounts are treated equitably over time. Nevertheless, the Advisor furnishes investment management and advisory services to numerous clients in addition to the
Trust, and the Advisor may, consistent with applicable law, make investment recommendations to other clients or accounts (including accounts which are hedge funds or have performance or higher fees paid to the Advisor, or in which portfolio managers
have a personal interest in the receipt of such fees), which may be the same as or different from those made to the Trust. In addition, BlackRock, Inc., its affiliates and significant shareholders and any officer, director, shareholder or employee
may or may not have an interest in the securities whose purchase and sale the Advisor recommends to the Trust. BlackRock, Inc. or any of its affiliates or significant shareholders, or any officer, director, shareholder, employee or any member of
their families may take different actions than those recommended to the Trust by the Advisor with respect to the same securities. Moreover, the Advisor may refrain from rendering any advice or services concerning securities of companies of which any
of BlackRock, Inc.s (or its affiliates or significant shareholders) officers, directors or employees are directors or officers, or companies as to which BlackRock, Inc. or any of its affiliates or significant shareholders or the
officers, directors and employees of any of them has any substantial economic interest or possesses material non-public information. Certain portfolio managers also may manage accounts whose investment
strategies may at times be opposed to the strategy utilized for a fund. It should also be noted that Messrs. Dickstein, Lakhani and MacLellan may be managing certain hedge fund and/or long only accounts, or may be part of a team managing certain
hedge fund and/or long only accounts, subject to incentive fees. Messrs. Dickstein, Lakhani and MacLellan may therefore be entitled to receive a portion of any incentive fees earned on such accounts.
As a fiduciary, the Advisor owes a duty of loyalty to its clients and must treat each client fairly. When the Advisor purchases or sells
securities for more than one account, the trades must be allocated in a manner consistent with its fiduciary duties. The Advisor attempts to allocate investments in a fair and equitable manner among client accounts, with no account receiving
preferential treatment. To this end, BlackRock, Inc. has adopted policies that are intended to ensure reasonable efficiency in client transactions and provide the Advisor with sufficient flexibility to allocate investments in a manner that is
consistent with the particular investment discipline and client base, as appropriate.
Proxy Voting Policies
The Board has delegated the voting of proxies for the Trusts securities to the Advisor pursuant to the Advisors proxy voting
guidelines. Under these guidelines, the Advisor will vote proxies related to Trust securities in the best interests of the Trust and its shareholders. From time to time, a vote may present a conflict between the interests of the Trusts
shareholders, on the one hand, and those of the Advisor, or any affiliated person of the Trust or the Advisor, on the other. In such event, provided that the Advisors Equity Investment Policy Oversight Committee, or a sub-committee thereof (the Oversight Committee), is aware of the real or potential conflict, if the matter to be
S-45
voted on represents a material, non-routine matter and if the Oversight Committee does not reasonably believe it is able to follow its general voting
guidelines (or if the particular proxy matter is not addressed in the guidelines) and vote impartially, the Oversight Committee may retain an independent fiduciary to advise the Oversight Committee on how to vote or to cast votes on behalf of the
Advisors clients. If the Advisor determines not to retain an independent fiduciary, or does not desire to follow the advice of such independent fiduciary, the Oversight Committee shall determine how to vote the proxy after consulting with the
Advisors Portfolio Management Group and/or the Advisors Legal and Compliance Department and concluding that the vote cast is in its clients best interest notwithstanding the conflict. A copy of the
Closed-End Fund Proxy Voting Policy is included as Appendix B to this SAI. Information on how the Trust voted proxies relating to portfolio securities during the most recent
12-month period ended June 30 will be available (i) at www.blackrock.com and (ii) on the SECs website at http://www.sec.gov.
Codes of Ethics
The Trust and the
Advisor have adopted codes of ethics pursuant to Rule 17j-1 under the Investment Company Act. These codes permit personnel subject to the codes to invest in securities, including securities that may be
purchased or held by the Trust. These codes may be obtained by calling the SEC at (202) 551-8090. These codes of ethics are available on the EDGAR Database on the SECs website (http://www.sec.gov), and
copies of these codes may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov.
Other Information
BlackRock, Inc. is
independent in ownership and governance, with no single majority stockholder and a majority of independent directors.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board, the Advisor is primarily responsible for the
execution of the Trusts portfolio transactions and the allocation of brokerage. The Advisor does not execute transactions through any particular broker or dealer, but seeks to obtain the best net results for the Trust, taking into account such
factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution, operational facilities of the firm and the firms risk and skill in positioning blocks of securities. While the Advisor
generally seeks reasonable trade execution costs, the Trust does not necessarily pay the lowest spread or commission available, and payment of the lowest commission or spread is not necessarily consistent with obtaining the best price and execution
in particular transactions. Subject to applicable legal requirements, the Advisor may select a broker based partly upon brokerage or research services provided to the Advisor and its clients, including the Trust. In return for such services, the
Advisor may cause the Trust to pay a higher commission than other brokers would charge if the Advisor determines in good faith that the commission is reasonable in relation to the services provided.
In selecting brokers or dealers to execute portfolio transactions, the Advisor seeks to obtain the best price and most favorable execution for
the Trust, taking into account a variety of factors including: (i) the size, nature and character of the security or instrument being traded and the markets in which it is purchased or sold; (ii) the desired timing of the transaction;
(iii) the Advisors knowledge of the expected commission rates and spreads currently available; (iv) the activity existing and expected in the market for the particular security or instrument, including any anticipated execution
difficulties; (v) the full range of brokerage services provided; (vi) the brokers or dealers capital; (vii) the quality of research and research services provided; (viii) the reasonableness of the commission, dealer
spread or its equivalent for the specific transaction; and (ix) the Advisors knowledge of any actual or apparent operational problems of a broker or dealer.
Section 28(e) of the Exchange Act (Section 28(e)) permits an investment adviser, under certain circumstances and, if
applicable, subject to the restrictions of MiFID II as described further below, to cause an account to pay a broker or dealer a commission for effecting a transaction that exceeds the amount another broker or dealer would have charged for effecting
the same transaction in recognition of the value of brokerage and research services provided by that broker or dealer. This includes commissions paid on riskless principal transactions under certain conditions. Brokerage and research services
include: (1) furnishing advice as to the value of securities, including pricing and appraisal advice, credit analysis, risk measurement analysis, performance and other analysis, as well as the
S-46
advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; (2) furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and (3) effecting securities transactions and performing functions incidental to securities transactions (such as clearance,
settlement, and custody). The Advisor believes that access to independent investment research is beneficial to its investment decision-making processes and, therefore, to the Trust.
The Advisor, unless prohibited by applicable law, may participate in client commission arrangements under which the Advisor may execute
transactions through a broker-dealer and request that the broker-dealer allocate a portion of the commissions or commission credits to another firm that provides research to the Advisor. The Advisor believes that research services obtained through
soft dollar or commission sharing arrangements enhance its investment decision-making capabilities, thereby increasing the prospects for higher investment returns. The Advisor will engage only in soft dollar or commission sharing transactions that
comply with the requirements of Section 28(e) and MiFID II. Under MiFID II, EU investment managers, including BIL, pay for any research out of their own resources and not through soft dollars or commission sharing arrangements. The Advisor
regularly evaluates the soft dollar products and services utilized, as well as the overall soft dollar and commission sharing arrangements to ensure that trades are executed by firms that are regarded as best able to execute trades for client
accounts, while at the same time providing access to the research and other services the Advisor views as impactful to its trading results.
The Advisor, unless prohibited by applicable law, may utilize soft dollars and related services, including research (whether prepared by the
broker-dealer or prepared by a third-party and provided to the Advisor by the broker-dealer) and execution or brokerage services within applicable rules and the Advisors policies to the extent that such permitted services do not compromise the
Advisors ability to seek to obtain best execution. In this regard, the portfolio management investment and/or trading teams may consider a variety of factors, including the degree to which the broker-dealer: (a) provides access to company
management; (b) provides access to their analysts; (c) provides meaningful/insightful research notes on companies or other potential investments; (d) facilitates calls on which meaningful or insightful ideas about companies or
potential investments are discussed; (e) facilitates conferences at which meaningful or insightful ideas about companies or potential investments are discussed; or (f) provides research tools such as market data, financial analysis, and
other third party related research and brokerage tools that aid in the investment process.
Research-oriented services for which the
Advisor, unless prohibited by applicable law, might pay with Trust commissions may be in written form or through direct contact with individuals and may include information as to particular companies or industries and securities or groups of
securities, as well as market, economic, or institutional advice and statistical information, political developments and technical market information that assists in the valuation of investments. Except as noted immediately below, research services
furnished by brokers may be used in servicing some or all client accounts and not all services may be used in connection with the Trust or account that paid commissions to the broker providing such services. In some cases, research information
received from brokers by investment company management personnel, or personnel principally responsible for the Advisors individually managed portfolios, is not necessarily shared by and between such personnel. Any investment advisory or other
fees paid by the Trust to the Advisor are not reduced as a result of the Advisors receipt of research services. In some cases, the Advisor may receive a service from a broker that has both a research and a non-research use. When this occurs the Advisor makes a good faith allocation, under all the circumstances, between the research and non-research uses of the
service. The percentage of the service that is used for research purposes may be paid for with client commissions, while the Advisor will use its own funds to pay for the percentage of the service that is used for
non-research purposes. In making this good faith allocation, the Advisor faces a potential conflict of interest, but the Advisor believes that its allocation procedures are reasonably designed to ensure that
it appropriately allocates the anticipated use of such services to their research and non-research uses.
Effective January 3, 2018 under MiFID II, investment managers in the EU, including BIL, are no longer able to use soft dollars to pay for
research from brokers. Investment managers in the EU are required to either pay for research out of their own profit and loss or agree with clients to have research costs paid by clients through research payment accounts that are funded out of
execution commissions or by a specific client research charge, provided that the payments for research are unbundled from the payments for execution. MiFID II restricts the use of soft dollars by sub-advisers
to the Funds located in the EU, such as BIL, if applicable. BIL will pay for any research out of its own resources and not through soft dollars or commission sharing arrangements.
S-47
Payments of commissions to brokers who are affiliated persons of the Trust will be made in
accordance with Rule 17e-1 under the Investment Company Act.
From time to time, the Trust may
purchase new issues of securities in a fixed price offering. In these situations, the broker may be a member of the selling group that will, in addition to selling securities, provide the Advisor with research services. The Financial Industry
Regulatory Authority, Inc. has adopted rules expressly permitting these types of arrangements under certain circumstances. Generally, the broker will provide research credits in these situations at a rate that is higher than that
available for typical secondary market transactions. These arrangements may not fall within the safe harbor of Section 28(e).
The
Advisor does not consider sales of shares of the investment companies it advises as a factor in the selection of brokers or dealers to execute portfolio transactions for the Trust; however, whether or not a particular broker or dealer sells shares
of the investment companies advised by the Advisor neither qualifies nor disqualifies such broker or dealer to execute transactions for those investment companies.
The Trust anticipates that its brokerage transactions involving foreign securities generally will be conducted primarily on the principal
stock exchanges of the applicable country. Foreign equity securities may be held by the Trust in the form of depositary receipts, or other securities convertible into foreign equity securities. Depositary receipts may be listed on stock exchanges,
or traded in OTC markets in the United States or Europe, as the case may be. American Depositary Receipts, like other securities traded in the United States, will be subject to negotiated commission rates.
The Trust may invest in certain securities traded in the OTC market and intends to deal directly with the dealers who make a market in the
particular securities, except in those circumstances in which better prices and execution are available elsewhere. Under the Investment Company Act, persons affiliated with the Trust and persons who are affiliated with such affiliated persons are
prohibited from dealing with the Trust as principal in the purchase and sale of securities unless a permissive order allowing such transactions is obtained from the SEC. Since transactions in the OTC market usually involve transactions with the
dealers acting as principal for their own accounts, the Trust will not deal with affiliated persons in connection with such transactions. However, an affiliated person of the Trust may serve as its broker in OTC transactions conducted on an agency
basis provided that, among other things, the fee or commission received by such affiliated broker is reasonable and fair compared to the fee or commission received by non-affiliated brokers in connection with
comparable transactions.
OTC issues, including most fixed-income securities such as corporate debt and U.S. Government securities, are
normally traded on a net basis without a stated commission, through dealers acting for their own account and not as brokers. The Trust will primarily engage in transactions with these dealers or deal directly with the issuer unless a
better price or execution could be obtained by using a broker. Prices paid to a dealer with respect to both foreign and domestic securities will generally include a spread, which is the difference between the prices at which the dealer
is willing to purchase and sell the specific security at the time, and includes the dealers normal profit.
Purchases of money
market instruments by the Trust are made from dealers, underwriters and issuers. The Trust does not currently expect to incur any brokerage commission expense on such transactions because money market instruments are generally traded on a
net basis with dealers acting as principal for their own accounts without a stated commission. The price of the security, however, usually includes a profit to the dealer.
Securities purchased in underwritten offerings include a fixed amount of compensation to the underwriter, generally referred to as the
underwriters concession or discount. When securities are purchased or sold directly from or to an issuer, no commissions or discounts are paid.
The Advisor may seek to obtain an undertaking from issuers of commercial paper or dealers selling commercial paper to consider the repurchase
of such securities from the Trust prior to maturity at their original cost plus interest (sometimes adjusted to reflect the actual maturity of the securities), if it believes that the Trusts anticipated need for
S-48
liquidity makes such action desirable. Any such repurchase prior to maturity reduces the possibility that the Trust would incur a capital loss in liquidating commercial paper, especially if
interest rates have risen since acquisition of such commercial paper.
Investment decisions for the Trust and for other investment
accounts managed by the Advisor are made independently of each other in light of differing conditions. The Advisor allocates investments among client accounts in a fair and equitable manner. A variety of factors will be considered in making such
allocations. These factors include: (i) investment objectives or strategies for particular accounts, including sector, industry, country or region and capitalization weightings, (ii) tax considerations of an account, (iii) risk or
investment concentration parameters for an account, (iv) supply or demand for a security at a given price level, (v) size of available investment, (vi) cash availability and liquidity requirements for accounts, (vii) regulatory
restrictions, (viii) minimum investment size of an account, (ix) relative size of account, and (x) such other factors as may be approved by the Advisors general counsel. Moreover, investments may not be allocated to one client
account over another based on any of the following considerations: (i) to favor one client account at the expense of another, (ii) to generate higher fees paid by one client account over another or to produce greater performance
compensation to the Advisor, (iii) to develop or enhance a relationship with a client or prospective client, (iv) to compensate a client for past services or benefits rendered to the Advisor or to induce future services or benefits to be
rendered to the Advisor, or (v) to manage or equalize investment performance among different client accounts.
Equity securities will
generally be allocated among client accounts within the same investment mandate on a pro rata basis. This pro-rata allocation may result in the Trust receiving less of a particular security than if pro-ration had not occurred. All allocations of equity securities will be subject, where relevant, to share minimums established for accounts and compliance constraints.
Initial public offerings of securities may be over-subscribed and subsequently trade at a premium in the secondary market. When the Advisor is
given an opportunity to invest in such an initial offering or new or hot issue, the supply of securities available for client accounts is often less than the amount of securities the accounts would otherwise take. In order to
allocate these investments fairly and equitably among client accounts over time, each portfolio manager or a member of his or her respective investment team will indicate to the Advisors trading desk their level of interest in a particular
offering with respect to eligible client accounts for which that team is responsible. Initial public offerings of U.S. equity securities will be identified as eligible for particular client accounts that are managed by portfolio teams who have
indicated interest in the offering based on market capitalization of the issuer of the security and the investment mandate of the client account and in the case of international equity securities, the country where the offering is taking place and
the investment mandate of the client account. Generally, shares received during the initial public offering will be allocated among participating client accounts within each investment mandate on a pro rata basis. In situations where supply is too
limited to be allocated among all accounts for which the investment is eligible, portfolio managers may rotate such investment opportunities among one or more accounts so long as the rotation system provides for fair access for all client accounts
over time. Other allocation methodologies that are considered by the Advisor to be fair and equitable to clients may be used as well.
Because different accounts may have differing investment objectives and policies, the Advisor may buy and sell the same securities at the same
time for different clients based on the particular investment objective, guidelines and strategies of those accounts. For example, the Advisor may decide that it may be entirely appropriate for a growth fund to sell a security at the same time a
value fund is buying that security. To the extent that transactions on behalf of more than one client of the Advisor or its affiliates during the same period may increase the demand for securities being purchased or the supply of securities being
sold, there may be an adverse effect on price. For example, sales of a security by the Advisor on behalf of one or more of its clients may decrease the market price of such security, adversely impacting other of the Advisors clients that still
hold the security. If purchases or sales of securities arise for consideration at or about the same time that would involve the Trust or other clients or funds for which the Advisor or an affiliate act as investment manager, transactions in such
securities will be made, insofar as feasible, for the respective funds and clients in a manner deemed equitable to all.
In certain
instances, the Advisor may find it efficient for purposes of seeking to obtain best execution, to aggregate or bunch certain contemporaneous purchases or sale orders of its advisory accounts. In general, all contemporaneous trades for
client accounts under management by the same portfolio manager or investment team
S-49
will be bunched in a single order if the trader believes the bunched trade would provide each client with an opportunity to achieve a more favorable execution at a potentially lower execution
cost. The costs associated with a bunched order will be shared pro rata among the clients in the bunched order. Generally, if an order for a particular portfolio manager or management team is filled at several different prices through multiple
trades, all accounts participating in the order will receive the average price except in the case of certain international markets where average pricing is not permitted. While in some cases this practice could have a detrimental effect upon the
price or value of the security as far as the Trust is concerned, in other cases it could be beneficial to the Trust. Transactions effected by the Advisor on behalf of more than one of its clients during the same period may increase the demand for
securities being purchased or the supply of securities being sold, causing an adverse effect on price. The trader will give the bunched order to the broker dealer that the trader has identified as being able to provide the best execution of the
order. Orders for purchase or sale of securities will be placed within a reasonable amount of time of the order receipt and bunched orders will be kept bunched only long enough to execute the order.
The Trust will not purchase securities during the existence of any underwriting or selling group relating to such securities of which the
Advisor or any affiliated person (as defined in the Investment Company Act) thereof is a member except pursuant to procedures adopted by the Board in accordance with Rule 10f-3 under the Investment Company
Act. In no instance will portfolio securities be purchased from or sold to the Advisor or any affiliated person of the foregoing entities except as permitted by SEC exemptive order or by applicable law.
While the Trust generally does not expect to engage in trading for short-term gains, it will effect portfolio transactions without regard to
any holding period if, in the Advisors judgment, such transactions are advisable in light of a change in circumstances of a particular company or within a particular industry or in general market, economic or financial conditions. The
portfolio turnover rate is calculated by dividing the lesser of the Trusts annual sales or purchases of portfolio securities (exclusive of purchases or sales of U.S. Government Securities and all other securities whose maturities at the time
of acquisition were one year or less) by the monthly average value of the securities in the portfolio during the year. A high rate of portfolio turnover results in certain tax consequences, such as increased capital gain dividends and/or ordinary
income dividends, and in correspondingly greater transaction costs in the form of dealer spreads and brokerage commissions, which are borne directly by the Trust.
Information about the brokerage commissions paid by the Trust, including commissions paid to affiliates, for the last three fiscal years, is
set forth in the following table:
|
|
|
|
|
|
|
|
|
Fiscal Year Ended October 31,
|
|
Aggregate Brokerage
Commissions Paid
|
|
|
Commissions Paid to Affiliates
|
|
2021
|
|
$
|
88,001
|
|
|
$
|
0
|
|
2020
|
|
$
|
67,689
|
|
|
$
|
0
|
|
2019
|
|
$
|
44,767
|
|
|
$
|
0
|
|
For the fiscal year ended October 31, 2021, the brokerage commissions paid to affiliates by the Trust
represented 0% of the aggregate brokerage commissions paid and involved 0% of the dollar amount of transactions involving payment of commissions during the year.
The following table shows the dollar amount of brokerage commissions paid to brokers for providing third-party research services and the
approximate dollar amount of the transactions involved for the fiscal year ended October 31, 2021. The provision of third-party research services was not necessarily a factor in the placement of all brokerage business with such brokers.
|
|
|
Amount of Commissions Paid to Brokers for
Providing Research Services
|
|
Amount of Brokerage Transactions Involved
|
$[●]
|
|
$[●]
|
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As of October 31, 2021, the Trust held securities of its regular brokers or
dealers (as defined in Rule 10b-1 under the Investment Company Act) whose shares were purchased during the fiscal year ended October 31, 2021, as follows :
|
|
|
|
|
|
|
Regular Broker or Dealer
|
|
Debt (D) /
Equity (E)
|
|
Aggregate Holdings
(000s)
|
|
Wells Fargo & Company
|
|
D
|
|
$
|
9,856
|
|
CitiGroup Inc.
|
|
D
|
|
$
|
4,597
|
|
UBS Group
|
|
D
|
|
$
|
1,947
|
|
Barclays PLC
|
|
D
|
|
$
|
801
|
|
CONFLICTS OF INTEREST
Certain activities of BlackRock, Inc., the Advisor, the Sub-Advisors and the other subsidiaries of
BlackRock, Inc. (collectively referred to in this section as BlackRock) and their respective directors, officers or employees, with respect to the Trust and/or other accounts managed by BlackRock, may give rise to actual or perceived
conflicts of interest such as those described below.
BlackRock is one of the worlds largest asset management firms. BlackRock,
its subsidiaries and their respective directors, officers and employees, including the business units or entities and personnel who may be involved in the investment activities and business operations of the Trust, are engaged worldwide in
businesses, including managing equities, fixed income securities, cash and alternative investments, and other financial services, and have interests other than that of managing the Trust. These are considerations of which investors in the Trust
should be aware, and which may cause conflicts of interest that could disadvantage the Trust and its shareholders. These businesses and interests include potential multiple advisory, transactional, financial and other relationships with, or
interests in companies and interests in securities or other instruments that may be purchased or sold by the Trust.
BlackRock has
proprietary interests in, and may manage or advise with respect to, accounts or funds (including separate accounts and other funds and collective investment vehicles) that have investment objectives similar to those of the Trust and/or that engage
in transactions in the same types of securities, currencies and instruments as the Trust. BlackRock is also a major participant in the global currency, equities, swap and fixed income markets, in each case, for the accounts of clients and, in some
cases, on a proprietary basis. As such, BlackRock is or may be actively engaged in transactions in the same securities, currencies, and instruments in which the Trust invests. Such activities could affect the prices and availability of the
securities, currencies, and instruments in which the Trust invests, which could have an adverse impact on the Trusts performance. Such transactions, particularly in respect of most proprietary accounts or client accounts, will be executed
independently of the Trusts transactions and thus at prices or rates that may be more or less favorable than those obtained by the Trust.
When BlackRock seeks to purchase or sell the same assets for client accounts, including the Trust, the assets actually purchased or sold may
be allocated among the accounts on a basis determined in its good faith discretion to be equitable. In some cases, this system may adversely affect the size or price of the assets purchased or sold for the Trust. In addition, transactions in
investments by one or more other accounts managed by BlackRock may have the effect of diluting or otherwise disadvantaging the values, prices or investment strategies of the Trust, particularly, but not limited to, with respect to small
capitalization, emerging market or less liquid strategies. This may occur with respect to BlackRock-advised accounts when investment decisions regarding the Trust are based on research or other information that is also used to support decisions for
other accounts. When BlackRock implements a portfolio decision or strategy on behalf of another account ahead of, or contemporaneously with, similar decisions or strategies for the Trust, market impact, liquidity constraints, or other factors could
result in the Trust receiving less favorable trading results and the costs of implementing such decisions or strategies could be increased or the Trust could otherwise be disadvantaged. BlackRock may, in certain cases, elect to implement internal
policies and procedures designed to limit such consequences, which may cause the Trust to be unable to engage in certain activities, including purchasing or disposing of securities, when it might otherwise be desirable for it to do so. Conflicts may
also arise because portfolio decisions regarding the Trust may benefit other accounts managed by BlackRock. For example, the sale of a long position or establishment of a short position by the Trust may impair the price of the same security sold
short by (and therefore benefit) BlackRock or its other accounts or funds, and the purchase of a security or covering of a short position in a security by the Trust may increase the price of the same security held by (and therefore benefit)
BlackRock or its other accounts or funds.
S-51
BlackRock, on behalf of other client accounts, on the one hand, and the Trust, on the other hand,
may invest in or extend credit to different parts of the capital structure of a single issuer. BlackRock may pursue rights, provide advice or engage in other activities, or refrain from pursuing rights, providing advice or engaging in other
activities, on behalf of other clients with respect to an issuer in which the Trust has invested, and such actions (or refraining from action) may have a material adverse effect on the Trust. In situations in which clients of BlackRock (including
the Trust) hold positions in multiple parts of the capital structure of an issuer, BlackRock may not pursue certain actions or remedies that may be available to the Trust, as a result of legal and regulatory requirements or otherwise. BlackRock
addresses these and other potential conflicts of interest based on the facts and circumstances of particular situations. For example, BlackRock may determine to rely on information barriers between different business units or portfolio management
teams. BlackRock may also determine to rely on the actions of similarly situated holders of loans or securities rather than, or in connection with, taking such actions itself on behalf of the Trust.
In addition, to the extent permitted by applicable law, the Trust may invest its assets in other funds advised by BlackRock, including funds
that are managed by one or more of the same portfolio managers, which could result in conflicts of interest relating to asset allocation, timing of Trust purchases and redemptions, and increased remuneration and profitability for BlackRock and/or
its personnel, including portfolio managers.
In certain circumstances, BlackRock, on behalf of the Trust, may seek to buy from or sell
securities to another fund or account advised by BlackRock. BlackRock may (but is not required to) effect purchases and sales between BlackRock clients (cross trades), including the Trust, if BlackRock believes such transactions are
appropriate based on each partys investment objectives and guidelines, subject to applicable law and regulation. There may be potential conflicts of interest or regulatory issues relating to these transactions which could limit
BlackRocks decision to engage in these transactions for the Trust. BlackRock may have a potentially conflicting division of loyalties and responsibilities to the parties in such transactions.
BlackRock and its clients may pursue or enforce rights with respect to an issuer in which the Trust has invested, and those activities may
have an adverse effect on the Trust. As a result, prices, availability, liquidity and terms of the Trusts investments may be negatively impacted by the activities of BlackRock or its clients, and transactions for the Trust may be impaired or
effected at prices or terms that may be less favorable than would otherwise have been the case.
The results of the Trusts
investment activities may differ significantly from the results achieved by BlackRock for its proprietary accounts or other accounts (including investment companies or collective investment vehicles) that it manages or advises. It is possible that
one or more accounts managed or advised by BlackRock and such other accounts will achieve investment results that are substantially more or less favorable than the results achieved by the Trust. Moreover, it is possible that the Trust will sustain
losses during periods in which one or more proprietary or other accounts managed or advised by BlackRock achieve significant profits. The opposite result is also possible.
From time to time, the Trust may be restricted from purchasing or selling securities, or from engaging in other investment activities because
of regulatory, legal or contractual requirements applicable to BlackRock or other accounts managed or advised by BlackRock, and/or the internal policies of BlackRock designed to comply with such requirements. As a result, there may be periods, for
example, when BlackRock will not initiate or recommend certain types of transactions in certain securities or instruments with respect to which BlackRock is performing services or when position limits have been reached. For example, the investment
activities of BlackRock for its proprietary accounts and accounts under its management may limit the investment opportunities for the Trust in certain emerging and other markets in which limitations are imposed upon the amount of investment, in the
aggregate or in individual issuers, by affiliated foreign investors.
In connection with its management of the Trust, BlackRock may have
access to certain fundamental analysis and proprietary technical models developed by BlackRock. BlackRock will not be under any obligation, however, to effect transactions on behalf of the Trust in accordance with such analysis and models. In
addition, BlackRock will not have any obligation to make available any information regarding its proprietary activities or strategies, or the activities or strategies used for other accounts managed by them, for the benefit of the management of the
Trust and
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it is not anticipated that BlackRock will have access to such information for the purpose of managing the Trust. The proprietary activities or portfolio strategies of BlackRock, or the activities
or strategies used for accounts managed by BlackRock or other client accounts could conflict with the transactions and strategies employed by BlackRock in managing the Trust.
The Trust may be included in investment models developed by BlackRock for use by clients and financial advisors. To the extent clients invest
in these investment models and increase the assets under management of the Trust, the investment management fee amounts paid by the Trust to BlackRock may also increase. The liquidity of the Trust may be impacted by redemptions of the Trust by
model-driven investment portfolios.
In addition, certain principals and certain employees of the Trusts investment adviser are also
principals or employees of other business units or entities within BlackRock. As a result, these principals and employees may have obligations to such other business units or entities or their clients and such obligations to other business units or
entities or their clients may be a consideration of which investors in the Trust should be aware.
BlackRock may enter into transactions
and invest in securities, instruments and currencies on behalf of the Trust in which clients of BlackRock, or, to the extent permitted by the SEC and applicable law, BlackRock, serves as the counterparty, principal or issuer. In such cases, such
partys interests in the transaction will be adverse to the interests of the Trust, and such party may have no incentive to assure that the Trust obtains the best possible prices or terms in connection with the transactions. In addition, the
purchase, holding and sale of such investments by the Trust may enhance the profitability of BlackRock.
BlackRock may also create, write
or issue derivatives for clients, the underlying securities, currencies or instruments of which may be those in which the Trust invests or which may be based on the performance of the Trust. BlackRock has entered into an arrangement with Markit
Indices Limited, the index provider for underlying fixed-income indexes used by certain iShares ETFs, related to derivative fixed-income products that are based on such iShares ETFs. BlackRock will receive certain payments for licensing intellectual
property belonging to BlackRock and for facilitating provision of data in connection with such derivative products, which may include payments based on the trading volumes of, or revenues generated by, the derivative products. The Trust and other
accounts managed by BlackRock may from time to time transact in such derivative products where permitted by the Trusts investment strategy, which could contribute to the viability of such derivative products by making them more appealing to
funds and accounts managed by third parties, and in turn lead to increased payments to BlackRock. Trading activity in these derivative products could also potentially lead to greater liquidity for such products, increased purchase activity with
respect to these iShares ETFs and increased assets under management for BlackRock.
The Trust may, subject to applicable law, purchase
investments that are the subject of an underwriting or other distribution by BlackRock and may also enter into transactions with other clients of BlackRock where such other clients have interests adverse to those of the Trust. At times, these
activities may cause business units or entities within BlackRock to give advice to clients that may cause these clients to take actions adverse to the interests of the Trust. To the extent such transactions are permitted, the Trust will deal with
BlackRock on an arms-length basis.
To the extent authorized by applicable law, BlackRock may act as broker, dealer, agent, lender or
adviser or in other commercial capacities for the Trust. It is anticipated that the commissions, mark-ups, mark-downs, financial advisory fees, underwriting and placement fees, sales fees, financing and
commitment fees, brokerage fees, other fees, compensation or profits, rates, terms and conditions charged by BlackRock will be in its view commercially reasonable, although BlackRock, including its sales personnel, will have an interest in obtaining
fees and other amounts that are favorable to BlackRock and such sales personnel, which may have an adverse effect on the Trust. Index based funds may use an index provider that is affiliated with another service provider of the Trust or BlackRock
that acts as a broker, dealer, agent, lender or in other commercial capacities for the Trust or BlackRock.
Subject to applicable law,
BlackRock (and its personnel and other distributors) will be entitled to retain fees and other amounts that they receive in connection with their service to the Trust as broker, dealer, agent, lender, adviser or in other commercial capacities. No
accounting to the Trust or its shareholders will be required, and no fees or other compensation payable by the Trust or its shareholders will be reduced by reason of receipt by BlackRock of any such fees or other amounts.
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When BlackRock acts as broker, dealer, agent, adviser or in other commercial capacities in
relation to the Trust, BlackRock may take commercial steps in its own interests, which may have an adverse effect on the Trust.
The Trust
will be required to establish business relationships with its counterparties based on the Trusts own credit standing. BlackRock will not have any obligation to allow its credit to be used in connection with the Trusts establishment of
its business relationships, nor is it expected that the Trusts counterparties will rely on the credit of BlackRock in evaluating the Trusts creditworthiness.
BlackRock Investment Management, LLC (BIM), an affiliate of BlackRock, pursuant to SEC exemptive relief, acts as securities
lending agent to, and receives a share of securities lending revenues from, the Trust. BIM may receive compensation for managing the reinvestment of the cash collateral from securities lending. There are potential conflicts of interests in managing
a securities lending program, including but not limited to: (i) BIM as securities lending agent may have an incentive to increase or decrease the amount of securities on loan or to lend particular securities in order to generate additional
risk-adjusted revenue for BIM and its affiliates; and (ii) BIM as securities lending agent may have an incentive to allocate loans to clients that would provide more revenue to BIM. As described further below, BIM seeks to mitigate this
conflict by providing its securities lending clients with equal lending opportunities over time in order to approximate pro rata allocation.
As part of its securities lending program, BlackRock indemnifies certain clients and/or funds against a shortfall in collateral in the event
of borrower default. BlackRock calculates, on a regular basis, its potential dollar exposure to the risk of collateral shortfall upon counterparty default (shortfall risk) under the securities lending program for both indemnified and non-indemnified clients. On a periodic basis, BlackRock also determines the maximum amount of potential indemnified shortfall risk arising from securities lending activities (indemnification exposure
limit) and the maximum amount of counterparty-specific credit exposure (credit limits) BlackRock is willing to assume as well as the programs operational complexity. BlackRock oversees the risk model that calculates projected
shortfall values using loan-level factors such as loan and collateral type and market value as well as specific borrower counterparty credit characteristics. When necessary, BlackRock may further adjust other securities lending program attributes by
restricting eligible collateral or reducing counterparty credit limits. As a result, the management of the indemnification exposure limit may affect the amount of securities lending activity BlackRock may conduct at any given point in time and
impact indemnified and non-indemnified clients by reducing the volume of lending opportunities for certain loans (including by asset type, collateral type and/or revenue profile).
BlackRock uses a predetermined systematic process in order to approximate pro rata allocation over time. In order to allocate a loan to a
portfolio: (i) BlackRock as a whole must have sufficient lending capacity pursuant to the various program limits (i.e. indemnification exposure limit and counterparty credit limits); (ii) the lending portfolio must hold the asset at the time a
loan opportunity arrives; and (iii) the lending portfolio must also have enough inventory, either on its own or when aggregated with other portfolios into one single market delivery, to satisfy the loan request. In doing so, BlackRock seeks to
provide equal lending opportunities for all portfolios, independent of whether BlackRock indemnifies the portfolio. Equal opportunities for lending portfolios does not guarantee equal outcomes. Specifically, short and long-term outcomes for
individual clients may vary due to asset mix, asset/liability spreads on different securities, and the overall limits imposed by the firm.
Purchases and sales of securities and other assets for the Trust may be bunched or aggregated with orders for other BlackRock client accounts,
including with accounts that pay different transaction costs solely due to the fact that they have different research payment arrangements. BlackRock, however, is not required to bunch or aggregate orders if portfolio management decisions for
different accounts are made separately, or if they determine that bunching or aggregating is not practicable or required, or in cases involving client direction.
Prevailing trading activity frequently may make impossible the receipt of the same price or execution on the entire volume of securities
purchased or sold. When this occurs, the various prices may be averaged, and the Trust will be charged or credited with the average price. Thus, the effect of the aggregation may operate on some occasions to the disadvantage of the Trust. In
addition, under certain circumstances, the Trust will not be charged the same commission or commission equivalent rates in connection with a bunched or aggregated order.
As discussed in the section below entitled Portfolio Transactions and Brokerage in this SAI, BlackRock, unless prohibited by
applicable law, may cause the Trust or account to pay a broker or dealer a commission for effecting a
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transaction that exceeds the amount another broker or dealer would have charged for effecting the same transaction in recognition of the value of brokerage and research services provided by that
broker or dealer. Under MiFID II, EU investment managers, including BIL, pay for research from brokers and dealers directly out of their own resources, rather than through client commissions.
Subject to applicable law, BlackRock may select brokers that furnish BlackRock, the Trust, other BlackRock client accounts or personnel,
directly or through correspondent relationships, with research or other appropriate services which provide, in BlackRocks view, appropriate assistance to BlackRock in the investment decision-making process (including with respect to futures,
fixed-price offerings and OTC transactions). Such research or other services may include, to the extent permitted by law, research reports on companies, industries and securities; economic and financial data; financial publications; proxy analysis;
trade industry seminars; computer data bases; research-oriented software and other services and products.
Research or other services
obtained in this manner may be used in servicing any or all of the Trust and other BlackRock client accounts, including in connection with BlackRock client accounts other than those that pay commissions to the broker relating to the research or
other service arrangements. Such products and services may disproportionately benefit other BlackRock client accounts relative to the Trust based on the amount of brokerage commissions paid by the Trust and such other BlackRock client accounts. For
example, research or other services that are paid for through one clients commissions may not be used in managing that clients account. In addition, other BlackRock client accounts may receive the benefit, including disproportionate
benefits, of economies of scale or price discounts in connection with products and services that may be provided to the Trust and to such other BlackRock client accounts. To the extent that BlackRock uses soft dollars, it will not have to pay for
those products and services itself.
BlackRock, unless prohibited by applicable law, may endeavor to execute trades through brokers who,
pursuant to such arrangements, provide research or other services in order to ensure the continued receipt of research or other services BlackRock believes are useful in its investment decision-making process. BlackRock may from time to time choose
not to engage in the above described arrangements to varying degrees. BlackRock, unless prohibited by applicable law, may also enter into commission sharing arrangements under which BlackRock may execute transactions through a broker-dealer and
request that the broker-dealer allocate a portion of the commissions or commission credits to another firm that provides research to BlackRock. To the extent that BlackRock engages in commission sharing arrangements, many of the same conflicts
related to traditional soft dollars may exist.
BlackRock may utilize certain electronic crossing networks (ECNs) (including,
without limitation, ECNs in which BlackRock has an investment or other interest, to the extent permitted by applicable law) in executing client securities transactions for certain types of securities. These ECNs may charge fees for their services,
including access fees and transaction fees. The transaction fees, which are similar to commissions or markups/markdowns, will generally be charged to clients and, like commissions and markups/markdowns, would generally be included in the cost of the
securities purchased. Access fees may be paid by BlackRock even though incurred in connection with executing transactions on behalf of clients, including the Trust. In certain circumstances, ECNs may offer volume discounts that will reduce the
access fees typically paid by BlackRock. BlackRock will only utilize ECNs consistent with its obligation to seek to obtain best execution in client transactions.
BlackRock owns a minority interest in, and is a member of, Members Exchange (MEMX), a newly created U.S. stock exchange.
Transactions for the Trust may be executed on MEMX if third party brokers select MEMX as the appropriate venue for execution of orders placed by BlackRock traders on behalf of client portfolios.
BlackRock has adopted policies and procedures designed to prevent conflicts of interest from influencing proxy voting decisions that it makes
on behalf of advisory clients, including the Trust, and to help ensure that such decisions are made in accordance with BlackRocks fiduciary obligations to its clients. Nevertheless, notwithstanding such proxy voting policies and procedures,
actual proxy voting decisions of BlackRock may have the effect of favoring the interests of other clients or businesses of other divisions or units of BlackRock, provided that BlackRock believes such voting decisions to be in accordance with its
fiduciary obligations. For a more detailed discussion of these policies and procedures, see Appendix B.
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It is also possible that, from time to time, BlackRock may, subject to compliance with applicable
law, purchase and hold shares of the Trust. Increasing the Trusts assets may enhance investment flexibility and diversification and may contribute to economies of scale that tend to reduce the Trusts expense ratio. BlackRock reserves the
right, subject to compliance with applicable law, to redeem at any time some or all of the shares of the Trust acquired for its own accounts. A large redemption of shares of the Trust by BlackRock could significantly reduce the asset size of the
Trust, which might have an adverse effect on the Trusts investment flexibility, portfolio diversification and expense ratio. BlackRock seeks to consider the effect of redemptions on the Trust and other shareholders in deciding whether to
redeem its shares but is not obligated to do so and may elect not to do so.
It is possible that the Trust may invest in securities of, or
engage in transactions with, companies in which BlackRock has significant debt or equity investments or other interests. The Trust may also invest in issuances (such as structured notes) by entities for which BlackRock provides and is compensated
for cash management services relating to the proceeds from the sale of such issuances. In making investment decisions for the Trust, BlackRock is not permitted to obtain or use material non-public information
acquired by any unit of BlackRock, in the course of these activities. In addition, from time to time, the activities of BlackRock may limit the Trusts flexibility in purchases and sales of securities. As indicated below, BlackRock may engage
in transactions with companies in which BlackRock-advised funds or other clients of BlackRock have an investment.
BlackRock and Chubb
Limited (Chubb), a public company whose securities are held by BlackRock-advised funds and other accounts, partially funded the creation of a re-insurance company (Re Co) pursuant to
which each has approximately a 9.9% ownership interest and each has representation on the board of directors. Certain employees and executives of BlackRock have a less than 1⁄2 of 1% ownership interest in Re Co. BlackRock manages the investment portfolio of Re Co, which is held in a wholly-owned subsidiary. Re Co participates as a reinsurer with reinsurance contracts underwritten by
subsidiaries of Chubb.
BlackRock and its personnel and other financial service providers may have interests in promoting sales of the
Trust. With respect to BlackRock and its personnel, the remuneration and profitability relating to services to and sales of the Trust or other products may be greater than remuneration and profitability relating to services to and sales of certain
funds or other products that might be provided or offered. BlackRock and its sales personnel may directly or indirectly receive a portion of the fees and commissions charged to the Trust or their shareholders. BlackRock and its advisory or other
personnel may also benefit from increased amounts of assets under management. Fees and commissions may also be higher than for other products or services, and the remuneration and profitability to BlackRock and such personnel resulting from
transactions on behalf of or management of the Trust may be greater than the remuneration and profitability resulting from other funds or products.
BlackRock may provide valuation assistance to certain clients with respect to certain securities or other investments and the valuation
recommendations made for such clients accounts may differ from the valuations for the same securities or investments assigned by the Trusts pricing vendors, especially if such valuations are based on broker-dealer quotes or other data
sources unavailable to the Trusts pricing vendors. While BlackRock will generally communicate its valuation information or determinations to the Trusts pricing vendors and/or fund accountants, there may be instances where the
Trusts pricing vendors or fund accountants assign a different valuation to a security or other investment than the valuation for such security or investment determined or recommended by BlackRock.
As disclosed in more detail in Net Asset Value in the Prospectus, when market quotations are not readily available or are believed
by BlackRock to be unreliable, the Trusts investments are valued at fair value by BlackRocks Valuation Committee (the Valuation Committee), in accordance with policies and procedures approved by the Trusts Board of
Trustees (the Valuation Procedures). When determining a fair value price, the Valuation Committee seeks to determine the price that the Trust might reasonably expect to receive from the current sale of that asset or liability
in an arms-length transaction. The price generally may not be determined based on what the Trust might reasonably expect to receive for selling an asset or liability at a later time or if it holds the
asset or liability to maturity. While fair value determinations will be based upon all available factors that BlackRock deems relevant at the time of the determination, and may be based on analytical values determined by BlackRock using proprietary
or third party valuation models, fair value represents only a good faith approximation of the value of an asset or liability. The fair value of one or more assets or liabilities may not, in retrospect, be the price at which those assets or
liabilities could have been sold during the period in which the particular fair values were used in
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determining the Trusts NAV. As a result, the Trusts sale or redemption of its shares at NAV, at a time when a holding or holdings are valued by the Valuation Committee at fair value,
may have the effect of diluting or increasing the economic interest of existing shareholders and may affect the amount of revenue received by BlackRock with respect to services for which it receives an asset-based fee.
To the extent permitted by applicable law, the Trust may invest all or some of its short term cash investments in any money market fund or
similarly-managed private fund advised or managed by BlackRock. In connection with any such investments, the Trust, to the extent permitted by the Investment Company Act, may pay its share of expenses of a money market fund or other
similarly-managed private fund in which it invests, which may result in the Trust bearing some additional expenses.
BlackRock and its
directors, officers and employees, may buy and sell securities or other investments for their own accounts and may have conflicts of interest with respect to investments made on behalf of the Trust. As a result of differing trading and investment
strategies or constraints, positions may be taken by directors, officers and employees of BlackRock that are the same, different from or made at different times than positions taken for the Trust. To lessen the possibility that the Trust will be
adversely affected by this personal trading, the Trust and the Advisor each have adopted a Code of Ethics in compliance with Section 17(j) of the Investment Company Act that restricts securities trading in the personal accounts of investment
professionals and others who normally come into possession of information regarding the Trusts portfolio transactions. Each Code of Ethics is also available on the EDGAR Database on the SECs Internet site at http://www.sec.gov, and
copies may be obtained, after paying a duplicating fee, by e-mail at publicinfo@sec.gov.
BlackRock will not purchase securities or other property from, or sell securities or other property to, the Trust, except that the Trust may
in accordance with rules or guidance adopted under the Investment Company Act engage in transactions with another BlackRock-advised fund or accounts that are affiliated with the Trust as a result of common officers, directors, or investment advisers
or pursuant to exemptive orders granted to the Trust and/or BlackRock by the Commission. These transactions would be effected in circumstances in which BlackRock determined that it would be appropriate for the Trust to purchase and another client of
BlackRock to sell, or the Trust to sell and another client of BlackRock to purchase, the same security or instrument on the same day. From time to time, the activities of the Trust may be restricted because of regulatory requirements applicable to
BlackRock and/or BlackRocks internal policies designed to comply with, limit the applicability of, or otherwise relate to such requirements. A client not advised by BlackRock would not be subject to some of those considerations. There may be
periods when BlackRock may not initiate or recommend certain types of transactions, or may otherwise restrict or limit its advice in certain securities or instruments issued by or related to companies for which BlackRock is performing advisory or
other services or has proprietary positions. For example, when BlackRock is engaged to provide advisory or risk management services for a company, BlackRock may be prohibited from or limited in purchasing or selling securities of that company on
behalf of the Trust, particularly where such services result in BlackRock obtaining material non-public information about the company (e.g., in connection with participation in a creditors committee).
Similar situations could arise if personnel of BlackRock serve as directors of companies the securities of which the Trust wishes to purchase or sell. However, if permitted by applicable law, and where consistent with BlackRocks policies and
procedures (including the necessary implementation of appropriate information barriers), the Trust may purchase securities or instruments that are issued by such companies, are the subject of an advisory or risk management assignment by BlackRock,
or where personnel of BlackRock are directors or officers of the issuer.
The investment activities of BlackRock for its proprietary
accounts and for client accounts may also limit the investment strategies and rights of the Trust. For example, in certain circumstances where the Trust invests in securities issued by companies that operate in certain regulated industries, in
certain emerging or international markets, or are subject to corporate or regulatory ownership restrictions, or invest in certain futures and derivative transactions, there may be limits on the aggregate amount invested by BlackRock for their
proprietary accounts and for client accounts (including the Trust) that may not be exceeded without the grant of a license or other regulatory or corporate consent, or, if exceeded, may cause BlackRock, the Trust or other client accounts to suffer
disadvantages or business restrictions. If certain aggregate ownership thresholds are reached or certain transactions undertaken, the ability of BlackRock on behalf of clients (including the Trust) to purchase or dispose of investments, or exercise
rights or undertake business transactions, may be restricted by regulation or otherwise impaired. As a result, BlackRock on behalf of its clients (including the Trust) may limit purchases, sell existing investments, or
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otherwise restrict, forgo or limit the exercise of rights (including transferring, outsourcing or limiting voting rights or forgoing the right to receive dividends) when BlackRock, in its sole
discretion, deems it appropriate in light of potential regulatory or other restrictions on ownership or other consequences resulting from reaching investment thresholds.
In those circumstances where ownership thresholds or limitations must be observed, BlackRock seeks to allocate limited investment
opportunities equitably among clients (including the Trust), taking into consideration benchmark weight and investment strategy. When ownership in certain securities nears an applicable threshold, BlackRock may limit purchases in such securities to
the issuers weighting in the applicable benchmark used by BlackRock to manage the Trust. If client (including Trust) holdings of an issuer exceed an applicable threshold and BlackRock is unable to obtain relief to enable the continued holding
of such investments, it may be necessary to sell down these positions to meet the applicable limitations. In these cases, benchmark overweight positions will be sold prior to benchmark positions being reduced to meet applicable limitations.
In addition to the foregoing, other ownership thresholds may trigger reporting requirements to governmental and regulatory authorities, and
such reports may entail the disclosure of the identity of a client or BlackRocks intended strategy with respect to such security or asset.
BlackRock may maintain securities indices. To the extent permitted by applicable laws, the Trust may seek to license and use such indices as
part of their investment strategy. Index based funds that seek to track the performance of securities indices also may use the name of the index or index provider in the fund name. Index providers, including BlackRock (to the extent permitted by
applicable law), may be paid licensing fees for use of their index or index name. BlackRock is not obligated to license its indices to the Trust and the Trust is under no obligation to use BlackRock indices. The Trust cannot be assured that the
terms of any index licensing agreement with BlackRock will be as favorable as those terms offered to other licensees.
BlackRock may not
serve as an Authorized Participant in the creation and redemption of BlackRock-advised ETFs.
The custody arrangement described in
Management and Other Service Arrangements may lead to potential conflicts of interest with BlackRock where BlackRock has agreed to waive fees and/or reimburse ordinary operating expenses in order to cap expenses of the Trust or where
BlackRock charges a unitary management fee. This is because the custody arrangements with certain of the Trusts custodian may have the effect of reducing custody fees when the Trust leaves cash balances uninvested. When a Trusts actual
operating expense ratio exceeds a stated cap, a reduction in custody fees reduces the amount of waivers and/or reimbursements BlackRock would be required to make to the Trust. This could be viewed as having the potential to provide BlackRock an
incentive to keep high positive cash balances for the Trust in order to offset fund custody fees that BlackRock might otherwise reimburse or pay. However, BlackRocks portfolio managers do not intentionally keep uninvested balances high, but
rather make investment decisions that they anticipate will be beneficial to fund performance.
BlackRock may enter into contractual
arrangements with third-party service providers to the Trust (e.g., custodians, administrators and index providers) pursuant to which BlackRock receives fee discounts or concessions in recognition of BlackRocks overall relationship with such
service providers. To the extent that BlackRock is responsible for paying these service providers out of its management fee, the benefits of any such fee discounts or concessions may accrue, in whole or in part, to BlackRock.
BlackRock owns or has an ownership interest in certain trading, portfolio management, operations and/or information systems used by Trust
service providers. These systems are, or will be, used by a Trust service provider in connection with the provision of services to accounts managed by BlackRock and funds managed and sponsored by BlackRock, including the Trust, that engage the
service provider (typically the custodian). The Trusts service provider remunerates BlackRock for the use of the systems. A Trust service providers payments to BlackRock for the use of these systems may enhance the profitability of
BlackRock.
BlackRocks receipt of fees from a service provider in connection with the use of systems provided by BlackRock may
create an incentive for BlackRock to recommend that the Trust enter into or renew an arrangement with the service provider.
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In recognition of a BlackRock clients overall relationship with BlackRock, BlackRock may
offer special pricing arrangements for certain services provided by BlackRock. Any such special pricing arrangements will not affect Trust fees and expenses applicable to such clients investment in the Trust.
Present and future activities of BlackRock and its directors, officers and employees, in addition to those described in this section, may give
rise to additional conflicts of interest.
DESCRIPTION OF SHARES
Common Shares
The Trust intends to hold
annual meetings of shareholders so long as the common shares are listed on a national securities exchange and such meetings are required as a condition to such listing.
Preferred Shares
The Trust currently
does not intend to issue preferred shares. Although the terms of any preferred shares that the Trust might issue in the future, including dividend rate, liquidation preference and redemption provisions, will be determined by the Board, subject to
applicable law and the Agreement and Declaration of Trust, it is likely that any such preferred shares issued would be structured to carry a relatively short-term dividend rate reflecting interest rates on short-term debt securities, by providing
for the periodic redetermination of the dividend rate at relatively short intervals through a fixed spread or remarketing procedure, subject to a maximum rate which would increase over time in the event of an extended period of unsuccessful
remarketing. The Trust also believes that it is likely that the liquidation preference, voting rights and redemption provisions of any such preferred shares would be similar to those stated below.
Liquidation Preference. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Trust, the holders
of shares of any outstanding preferred shares will be entitled to receive a preferential liquidating distribution (expected to equal the original purchase price per share plus an amount equal to accumulated but unpaid dividends, whether or not
earned or declared) before any distribution of assets is made to holders of beneficial interests. After payment of the full amount of the liquidating distribution to which they are entitled, it is expected that preferred shareholders will not be
entitled to any further participation in any distribution of assets by the Trust. A consolidation or merger of the Trust with or into any other corporation or corporations or a sale of all or substantially all of the assets of the Trust will not be
deemed to be a liquidation, dissolution or winding up of the Trust.
Voting Rights. Except as otherwise indicated in the Prospectus
and except as otherwise required by applicable law, holders of shares of any outstanding preferred shares will have equal voting rights with holders of shares of beneficial interests (one vote per share) and will vote together with holders of
beneficial interests as a single class. In connection with the election of the Trusts Trustees, holders of shares of any outstanding preferred shares, voting as a separate class, will be entitled to elect two of the Trusts Trustees, and
the remaining Trustees will be elected by all holders of capital stock, voting as a single class. So long as any preferred share is outstanding, it is expected that the Trust will have not less than five Trustees. If at any time dividends on shares
of any outstanding preferred share shall be unpaid in an amount equal to two full years dividends thereon, the holders of all outstanding shares of preferred shares, voting as a separate class, will be entitled to elect a majority of the
Trusts Trustees until all dividends in default have been paid or declared and set apart for payment. It is expected that the affirmative vote of the holders of a majority of the outstanding shares of any outstanding preferred shares, voting as
a separate class, will be required to (i) authorize, create or issue any class or series of stock ranking prior to any series of preferred shares with respect to payment of dividends or the distribution of assets on liquidation or
(ii) amend, alter or repeal the provisions of the Agreement and Declaration of Trust, whether by merger, consolidation or otherwise, so as to adversely affect any of the contract rights expressly set forth in the Agreement and Declaration of
Trust of holders of preferred shares.
Redemption Provisions. It is anticipated that any outstanding shares of preferred shares
will generally be redeemable at the option of the Trust at a price equal to their liquidation preference plus accumulated but unpaid dividends to the
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date of redemption plus, under certain circumstances, a redemption premium. Shares of preferred shares will also be subject to mandatory redemption at a price equal to their liquidation
preference plus accumulated but unpaid dividends to the date of redemption upon the occurrence of certain specified events, such as the failure of the Trust to maintain asset coverage requirements for the preferred shares specified by the Investment
Company Act and rating services that issue ratings on the preferred shares.
Liquidity Feature. Preferred shares may include a
liquidity feature that allows holders of preferred shares to have their shares purchased by a liquidity provider in the event that sell orders have not been matched with purchase orders and successfully settled in a remarketing. The Trust would pay
a fee to the provider of this liquidity feature, which would be borne by common shareholders of the Trust. The terms of such liquidity feature may require the Trust to redeem preferred shares still owned by the liquidity provider following a certain
period of continuous, unsuccessful remarketing, which may adversely impact the Trust.
The discussion above describes the possible
offering of preferred shares by the Trust. If the Board determines to proceed with such an offering, the terms of the preferred shares may be the same as, or different from, the terms described above, subject to applicable law and the Agreement and
Declaration of Trust. The Board, without the approval of the holders of common shares, may authorize an offering of preferred shares or may determine not to authorize such an offering, and may fix the terms of the preferred shares to be offered.
Other Shares
The Board (subject to
applicable law and the Agreement and Declaration of Trust) may authorize an offering, without the approval of the holders of common shares and, depending on their terms, any preferred shares outstanding at that time, of other classes of shares, or
other classes or series of shares, as they determine to be necessary, desirable or appropriate, having such terms, rights, preferences, privileges, limitations and restrictions as the Board sees fit. The Trust currently does not expect to issue any
other classes of shares, or series of shares, except for the common shares.
REPURCHASE OF COMMON SHARES
The Trust is a closed-end management investment company and as such its shareholders will not
have the right to cause the Trust to redeem their shares. Instead, the Trusts common shares will trade in the open market at a price that will be a function of several factors, including dividend levels (which are in turn affected by
expenses), NAV, call protection for portfolio securities, dividend stability, liquidity, relative demand for and supply of the common shares in the market, general market and economic conditions and other factors. Because shares of a closed-end investment company may frequently trade at prices lower than NAV, the Board may consider action that might be taken to reduce or eliminate any material discount from NAV in respect of common shares, which
may include the repurchase of such shares in the open market or in private transactions, the making of a tender offer for such shares, or the conversion of the Trust to an open-end investment company. The
Board may decide not to take any of these actions. In addition, there can be no assurance that share repurchases or tender offers, if undertaken, will reduce market discount.
Notwithstanding the foregoing, at any time when the Trust has preferred shares outstanding, the Trust may not purchase, redeem or otherwise
acquire any of its common shares unless (1) all accrued preferred share dividends have been paid and (2) at the time of such purchase, redemption or acquisition, the NAV of the Trusts portfolio (determined after deducting the
acquisition price of the common shares) is at least 200% of the liquidation value of any outstanding preferred shares (expected to equal the original purchase price per share plus any accrued and unpaid dividends thereon). Any service fees incurred
in connection with any tender offer made by the Trust will be borne by the Trust and will not reduce the stated consideration to be paid to tendering shareholders.
Subject to its investment restrictions, the Trust may borrow to finance the repurchase of shares or to make a tender offer. Interest on any
borrowings to finance share repurchase transactions or the accumulation of cash by the Trust in anticipation of share repurchases or tender offers will reduce the Trusts net income. Any share repurchase, tender offer or borrowing that might be
approved by the Board would have to comply with the Exchange Act, the Investment Company Act and the rules and regulations thereunder.
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Although the decision to take action in response to a discount from NAV will be made by the Board
at the time it considers such issue, it is the Boards present policy, which may be changed by the Board, not to authorize repurchases of common shares or a tender offer for such shares if: (i) such transactions, if consummated, would
(a) result in the delisting of the common shares from the NYSE, or (b) impair the Trusts status as a RIC under the Code, (which would make the Trust a taxable entity, causing the Trusts income to be taxed at the corporate level
in addition to the taxation of shareholders who receive dividends from the Trust) or as a registered closed-end investment company under the Investment Company Act; (ii) the Trust would not be able to
liquidate portfolio securities in an orderly manner and consistent with the Trusts investment objectives and policies in order to repurchase shares; or (iii) there is, in the Boards judgment, any (a) material legal action or
proceeding instituted or threatened challenging such transactions or otherwise materially adversely affecting the Trust, (b) general suspension of or limitation on prices for trading securities on the NYSE, (c) declaration of a banking
moratorium by federal or state authorities or any suspension of payment by United States or New York banks, (d) material limitation affecting the Trust or the issuers of its portfolio securities by federal or state authorities on the extension
of credit by lending institutions or on the exchange of foreign currency, (e) commencement of war, armed hostilities or other international or national calamity directly or indirectly involving the United States, or (f) other event or
condition which would have a material adverse effect (including any adverse tax effect) on the Trust or its shareholders if shares were repurchased. The Board may in the future modify these conditions in light of experience.
The repurchase by the Trust of its shares at prices below NAV will result in an increase in the NAV of those shares that remain outstanding.
However, there can be no assurance that share repurchases or tender offers at or below NAV will result in the Trusts common shares trading at a price equal to their NAV. Nevertheless, the fact that the Trusts common shares may be the
subject of repurchases or tender offers from time to time, or that the Trust may be converted to an open-end investment company, may reduce any spread between market price and NAV that might otherwise exist.
In addition, a purchase by the Trust of its common shares will decrease the Trusts net assets which would likely have the effect of
increasing the Trusts expense ratio. Any purchase by the Trust of its common shares at a time when preferred shares are outstanding will increase the leverage applicable to the outstanding common shares then remaining.
Before deciding whether to take any action if the common shares trade below NAV, the Board would likely consider all relevant factors,
including the extent and duration of the discount, the liquidity of the Trusts portfolio, the impact of any action that might be taken on the Trust or its shareholders and market considerations. Based on these considerations, even if the
Trusts common shares should trade at a discount, the Board may determine that, in the interest of the Trust and its shareholders, no action should be taken.
TAX MATTERS
The following is a description of certain U.S. federal income tax consequences to a shareholder of acquiring, holding and disposing of common
shares of the Trust. Except as otherwise noted, this discussion assumes you are a taxable U.S. holder (as defined below). This discussion is based upon current provisions of the Internal Revenue Code of 1986, as amended (the Code), the
regulations promulgated thereunder and judicial and administrative authorities, all of which are subject to change or differing interpretations by the courts or the Internal Revenue Service, possibly with retroactive effect. No attempt is made to
present a detailed explanation of all U.S. federal income tax concerns affecting the Trust and its shareholders, and the discussions set forth here do not constitute tax advice. This discussion assumes that investors hold common shares of the Trust
as capital assets for U.S. federal income tax purposes(generally, assets held for investment). The Trust has not sought and will not seek any ruling from the Internal Revenue Service regarding any matters discussed herein. No assurance can be given
that the Internal Revenue Service would not assert, or that a court would not sustain, a position contrary to those set forth below. This summary does not discuss any aspects of non-U.S., state or local tax.
Prospective investors must consult their own tax advisers as to the U.S. federal income tax consequences (including the alternative minimum tax consequences) of acquiring, holding and disposing of the Trusts common shares, as well as the
effects of state, local and non-U.S. tax laws.
In addition, no attempt is made to address tax
considerations applicable to an investor with a special tax status, such as a financial institution, REIT, insurance company, regulated investment company, individual retirement account,
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other tax-exempt organization, dealer in securities or currencies, person holding shares of the Trust as part of a hedging, integrated, conversion or
straddle transaction, trader in securities that has elected the mark-to-market method of accounting for its securities, U.S. holder (as defined below) whose functional
currency is not the U.S. dollar, investor with applicable financial statements within the meaning of Section 451(b) of the Code, or non-U.S. investor. Furthermore, this discussion does not
reflect possible application of the alternative minimum tax.
A U.S. holder is a beneficial owner that is for U.S. federal income tax
purposes:
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a citizen or individual resident of the United States (including certain former citizens and former long-term
residents);
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a corporation or other entity treated as a corporation for U.S. federal income tax purposes, created or organized
in or under the laws of the United States or any state thereof or the District of Columbia;
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an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
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a trust with respect to which a court within the United States is able to exercise primary supervision over its
administration and one or more U.S. persons have the authority to control all of its substantial decisions or the trust has made a valid election in effect under applicable Treasury regulations to be treated as a U.S. person for U.S. federal income
tax purposes, whose status as a U.S. person is not overridden by an applicable tax treaty.
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Taxation of the Trust
The Trust intends to elect to be treated and to qualify to be taxed as a RIC under Subchapter M of the Code. In order to qualify as a RIC, the
Trust must, among other things, satisfy certain requirements relating to the sources of its income, diversification of its assets, and distribution of its income to its shareholders. First, the Trust must derive at least 90% of its annual gross
income from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock or securities or foreign currencies, or other income (including but not limited to gains from options, futures and forward
contracts) derived with respect to its business of investing in such stock, securities or currencies, or net income derived from interests in qualified publicly traded partnerships (as defined in the Code) (the 90% gross income
test). Second, the Trust must diversify its holdings so that, at the close of each quarter of its taxable year, (i) at least 50% of the value of its total assets consists of cash, cash items, U.S. Government securities, securities of
other RICs and other securities, with such other securities limited in respect of any one issuer to an amount not greater in value than 5% of the value of the Trusts total assets and to not more than 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the market value of the total assets is invested in the securities (other than U.S. Government securities and securities of other RICs) of any one issuer, any two or more issuers controlled by the
Trust and engaged in the same, similar or related trades or businesses, or any one or more qualified publicly traded partnerships.
As long as the Trust qualifies as a RIC, the Trust will generally not be subject to corporate-level U.S. federal income tax on income and
gains that it distributes each taxable year to its shareholders, provided that in such taxable year it distributes at least 90% of the sum of (i) its net tax-exempt interest income, if any, and
(ii) its investment company taxable income (which includes, among other items, dividends, taxable interest, taxable original issue discount and market discount income, income from securities lending, net short-term capital gain in
excess of net long-term capital loss, and any other taxable income other than net capital gain (as defined below) and is reduced by deductible expenses) determined without regard to the deduction for dividends paid. The Trust may retain
for investment its net capital gain (which consists of the excess of its net long-term capital gain over its net short-term capital loss). However, if the Trust retains any net capital gain or any investment company taxable income, it will be
subject to tax at regular corporate rates on the amount retained.
The Code imposes a 4% nondeductible excise tax on the Trust to the
extent the Trust does not distribute by the end of any calendar year at least the sum of (i) 98% of its ordinary income (not taking into account any capital gain or loss) for the calendar year and (ii) 98.2% of its capital gain in excess
of its capital loss (adjusted for certain ordinary losses) for a one-year period generally ending on October 31 of the calendar year (unless an election is made to use
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the Trusts fiscal year). In addition, the minimum amounts that must be distributed in any year to avoid the excise tax will be increased or decreased to reflect any under-distribution or
over-distribution, as the case may be, from the previous year. For purposes of the excise tax, the Trust will be deemed to have distributed any income on which it paid U.S. federal income tax. While the Trust intends to distribute any income and
capital gain in the manner necessary to minimize imposition of the 4% nondeductible excise tax, there can be no assurance that sufficient amounts of the Trusts taxable income and capital gain will be distributed to entirely avoid the
imposition of the excise tax. In that event, the Trust will be liable for the excise tax only on the amount by which it does not meet the foregoing distribution requirement.
If in any taxable year the Trust should fail to qualify under Subchapter M of the Code for tax treatment as a RIC, the Trust would incur a
regular corporate U.S. federal income tax upon all of its taxable income for that year, and all distributions to its shareholders (including distributions of net capital gain) would be taxable to shareholders as ordinary dividend income for U.S.
federal income tax purposes to the extent of the Trusts earnings and profits. Provided that certain holding period and other requirements were met, such dividends would be eligible (i) to be treated as qualified dividend income in the
case of shareholders taxed as individuals and (ii) for the dividends received deduction in the case of corporate shareholders. In addition, to qualify again to be taxed as a RIC in a subsequent year, the Trust would be required to
distribute to shareholders its earnings and profits attributable to non-RIC years. In addition, if the Trust failed to qualify as a RIC for a period greater than two taxable years, then, in order to qualify as
a RIC in a subsequent year, the Trust would be required to elect to recognize and pay tax on any net built-in gain (the excess of aggregate gain, including items of income, over aggregate loss that would have
been realized if the Trust had been liquidated) or, alternatively, be subject to taxation on such built-in gain recognized for a period of five years.
The remainder of this discussion assumes that the Trust qualifies for taxation as a RIC.
The Trusts Investments
Certain of
the Trusts investment practices are subject to special and complex U.S. federal income tax provisions (including mark-to-market, constructive sale, straddle, wash
sale, short sale and other rules) that may, among other things, (i) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (ii) convert lower taxed long-term capital gains or qualified dividend income into
higher taxed short-term capital gains or ordinary income, (iii) convert ordinary loss or a deduction into capital loss (the deductibility of which is more limited), (iv) cause the Trust to recognize income or gain without a corresponding
receipt of cash, (v) adversely affect the time as to when a purchase or sale of stock or securities is deemed to occur, (vi) adversely alter the characterization of certain complex financial transactions and (vii) produce income that
will not be qualified income for purposes of the 90% annual gross income requirement described above. These U.S. federal income tax provisions could therefore affect the amount, timing and character of distributions to common
shareholders. The Trust intends to monitor its transactions and may make certain tax elections and may be required to dispose of securities to mitigate the effect of these provisions and prevent disqualification of the Trust as a RIC. Additionally,
the Trust may be required to limit its activities in derivative instruments in order to enable it to maintain its RIC status.
The Trust
may invest a portion of its net assets in below investment grade securities, commonly known as junk securities. Investments in these types of securities may present special tax issues for the Trust. U.S. federal income tax rules are not
entirely clear about issues such as when the Trust may cease to accrue interest, original issue discount or market discount, when and to what extent deductions may be taken for bad debts or worthless securities, how payments received on obligations
in default should be allocated between principal and income and whether modifications or exchanges of debt obligations in a bankruptcy or workout context are taxable. These and other issues could affect the Trusts ability to distribute
sufficient income to preserve its status as a RIC or to avoid the imposition of U.S. federal income or excise tax.
Certain debt
securities acquired by the Trust may be treated as debt securities that were originally issued at a discount. Generally, the amount of the original issue discount is treated as interest income and is included in taxable income (and required to be
distributed by the Trust in order to qualify as a RIC and avoid U.S. federal income tax or the 4% excise tax on undistributed income) over the term of the security, even though payment of that amount is not received until a later time, usually when
the debt security matures.
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If the Trust purchases a debt security on a secondary market at a price lower than its adjusted
issue price, the excess of the adjusted issue price over the purchase price is market discount. Unless the Trust makes an election to accrue market discount on a current basis, generally, any gain realized on the disposition of, and any
partial payment of principal on, a debt security having market discount is treated as ordinary income to the extent the gain, or principal payment, does not exceed the accrued market discount on the debt security. Market discount
generally accrues in equal daily installments. If the Trust ultimately collects less on the debt instrument than its purchase price plus the market discount previously included in income, the Trust may not be able to benefit from any offsetting loss
deductions.
The Trust may invest in preferred securities or other securities the U.S. federal income tax treatment of which may not be
clear or may be subject to recharacterization by the Internal Revenue Service. To the extent the tax treatment of such securities or the income from such securities differs from the tax treatment expected by the Trust, it could affect the timing or
character of income recognized by the Trust, potentially requiring the Trust to purchase or sell securities, or otherwise change its portfolio, in order to comply with the tax rules applicable to RICs under the Code.
Gain or loss on the sale of securities by the Trust will generally be long-term capital gain or loss if the securities have been held by the
Trust for more than one year. Gain or loss on the sale of securities held for one year or less will be short-term capital gain or loss.
Because the Trust may invest in foreign securities, its income from such securities may be subject to
non-U.S. taxes.
Foreign currency gain or loss on foreign currency exchange contracts, non-U.S. dollar-denominated securities contracts, and non-U.S. dollar-denominated futures contracts, options and forward contracts that are not section 1256 contracts (as
defined below) generally will be treated as ordinary income and loss.
Income from options on individual securities written by the Trust
will generally not be recognized by the Trust for tax purposes until an option is exercised, lapses or is subject to a closing transaction (as defined by applicable regulations) pursuant to which the Trusts obligations with respect
to the option are otherwise terminated. If the option lapses without exercise, the premiums received by the Trust from the writing of such options will generally be characterized as short-term capital gain. If the Trust enters into a closing
transaction, the difference between the premiums received and the amount paid by the Trust to close out its position will generally be treated as short-term capital gain or loss. If an option written by the Trust is exercised, thereby requiring the
Trust to sell the underlying security, the premium will increase the amount realized upon the sale of the security, and the character of any gain on such sale of the underlying security as short-term or long-term capital gain will depend on the
holding period of the Trust in the underlying security. Because the Trust will not have control over the exercise of the options it writes, such exercises or other required sales of the underlying securities may cause the Trust to realize gains or
losses at inopportune times.
Options on indices of securities and sectors of securities that qualify as section 1256
contracts will generally be marked-to-market for U.S. federal income tax purposes. As a result, the Trust will generally recognize gain or loss on the
last day of each taxable year equal to the difference between the value of the option on that date and the adjusted basis of the option. The adjusted basis of the option will consequently be increased by such gain or decreased by such loss. Any gain
or loss with respect to options on indices and sectors that qualify as section 1256 contracts will be treated as short-term capital gain or loss to the extent of 40% of such gain or loss and long-term capital gain or loss to the
extent of 60% of such gain or loss. Because the mark-to-market rules may cause the Trust to recognize gain in advance of the receipt of cash, the Trust may be required
to dispose of investments in order to meet its distribution requirements. Mark-to-market losses may be suspended or otherwise limited if such losses are part
of a straddle or similar transaction.
Taxation of Common Shareholders
Trust distributions of its tax-exempt interest on municipal securities, if properly reported by the
Trust to its shareholders (exempt-interest dividends), will generally be exempt from regular federal income tax. In order for the Trust to pay exempt-interest dividends, at least 50% of the value of the Trusts total assets must
consist of tax-exempt obligations on a quarterly basis. Although the Trust intends to meet this requirement, no assurance can be given in this regard. If the Trust failed to do so, it would not be able to pay tax-exempt dividends, and your distributions attributable to interest received by the Trust from any source (including distributions of tax-exempt interest income) would be
taxable as ordinary income to the extent of the Trusts earnings and profits.
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The Trust will either distribute or retain for reinvestment all or part of its net capital gain.
If any such gain is retained, the Trust will be subject to a corporate income tax on such retained amount. In that event, the Trust expects to report the retained amount as undistributed capital gain in a notice to its common shareholders, each of
whom, if subject to U.S. federal income tax on long-term capital gains, (i) will be required to include in income for U.S. federal income tax purposes as long-term capital gain its share of such undistributed amounts, (ii) will be entitled
to credit its proportionate share of the tax paid by the Trust against its U.S. federal income tax liability and to claim refunds to the extent that the credit exceeds such liability and (iii) will increase its basis in its common shares by the
amount of undistributed capital gains included in the shareholders income less the tax deemed paid by the shareholder under clause (ii).
Distributions paid to you by the Trust from its net capital gain, if any, that the Trust properly reports as capital gain dividends
(capital gain dividends) are taxable as long-term capital gains, regardless of how long you have held your common shares. All other dividends paid to you by the Trust (including dividends from net short-term capital gains) from its
current or accumulated earnings and profits, other than exempt-interest dividends (ordinary income dividends), are generally subject to tax as ordinary income. Provided that certain holding period and other requirements are met, ordinary
income dividends (if properly reported by the Trust) may qualify (i) for the dividends received deduction in the case of corporate shareholders to the extent that the Trusts income consists of dividend income from U.S. corporations, and
(ii) in the case of individual shareholders, as qualified dividend income eligible to be taxed at long-term capital gains rates to the extent that the Trust receives qualified dividend income. Qualified dividend income is, in
general, dividend income from taxable domestic corporations and certain qualified foreign corporations (e.g., generally, foreign corporations incorporated in a possession of the United States or in certain countries with a qualifying comprehensive
tax treaty with the United States, or whose stock with respect to which such dividend is paid is readily tradable on an established securities market in the United States). There can be no assurance as to what portion, if any, of the Trusts
distributions will constitute qualified dividend income or be eligible for the dividends received deduction.
Any distributions you
receive that are in excess of the Trusts current and accumulated earnings and profits will be treated as a return of capital to the extent of your adjusted tax basis in your common shares, and thereafter as capital gain from the sale of common
shares. The amount of any Trust distribution that is treated as a return of capital will reduce your adjusted tax basis in your common shares, thereby increasing your potential gain or reducing your potential loss on any subsequent sale or other
disposition of your common shares.
Common shareholders may be entitled to offset their capital gain dividends with capital losses. The
Code contains a number of statutory provisions affecting when capital losses may be offset against capital gain, and limiting the use of losses from certain investments and activities. Accordingly, common shareholders that have capital losses are
urged to consult their tax advisers.
Dividends and other taxable distributions are taxable to you even though they are reinvested in
additional common shares of the Trust. Dividends and other distributions paid by the Trust are generally treated under the Code as received by you at the time the dividend or distribution is made. If, however, the Trust pays you a dividend in
January that was declared in the previous October, November or December to common shareholders of record on a specified date in one of such months, then such dividend will be treated for U.S. federal income tax purposes as being paid by the Trust
and received by you on December 31 of the year in which the dividend was declared. In addition, certain other distributions made after the close of the Trusts taxable year may be spilled back and treated as paid by the Trust
(except for purposes of the 4% nondeductible excise tax) during such taxable year. In such case, you will be treated as having received such dividends in the taxable year in which the distributions were actually made.
Interest on certain private activity bonds is an item of tax preference subject to the alternative minimum tax on individuals. The
Trust may invest a portion of its assets in municipal bonds subject to this provision so that a portion of its exempt-interest dividends is an item of tax preference to the extent such dividends represent interest received from these private
activity bonds. Accordingly, investment in the Trust could cause a holder of common shares to be subject to, or result in an increased liability under, the alternative minimum tax.
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Exempt-interest dividends are included in determining what portion, if any, of a persons
Social Security and railroad retirement benefits will be includable in gross income subject to federal income tax.
The price of common
shares purchased at any time may reflect the amount of a forthcoming distribution. Those purchasing common shares just prior to the record date for a distribution will receive a distribution which will be taxable to them even though it represents,
economically, a return of invested capital.
The Trust will send you information after the end of each year setting forth the amount and
tax status of any distributions paid to you by the Trust.
The sale or other disposition of common shares will generally result in capital
gain or loss to you and will be long-term capital gain or loss if you have held such common shares for more than one year at the time of sale. Any loss upon the sale or other disposition of common shares held for six months or less will be treated
as long-term capital loss to the extent of any capital gain dividends received (including amounts credited as an undistributed capital gain dividend) by you with respect to such common shares. Any loss you recognize on a sale or other disposition of
common shares will be disallowed if you acquire other common shares (whether through the automatic reinvestment of dividends or otherwise) within a 61-day period beginning 30 days before and ending
30 days after your sale or exchange of the common shares. In such case, your tax basis in the common shares acquired will be adjusted to reflect the disallowed loss.
If the Trust conducts a tender offer for its shares, a repurchase by the Trust of a shareholders shares pursuant to such tender offer
generally will be treated as a sale or exchange of the shares by a shareholder provided that either (i) the shareholder tenders, and the Trust repurchases, all of such shareholders shares, thereby reducing the shareholders
percentage ownership of the Trust, whether directly or by attribution under Section 318 of the Code, to 0%, (ii) the shareholder meets numerical safe harbors under the Code with respect to percentage voting interest and reduction in
ownership of the Trust following completion of the tender offer, or (iii) the tender offer otherwise results in a meaningful reduction of the shareholders ownership percentage interest in the Trust, which determination depends
on a particular shareholders facts and circumstances.
If a tendering shareholders proportionate ownership of the Trust
(determined after applying the ownership attribution rules under Section 318 of the Code) is not reduced to the extent required under the tests described above, such shareholder will be deemed to receive a distribution from the Trust under
Section 301 of the Code with respect to the shares held (or deemed held under Section 318 of the Code) by the shareholder after the tender offer (a Section 301 distribution). The amount of this distribution will equal the
price paid by the Trust to such shareholder for the shares sold, and will be taxable as a dividend, i.e., as ordinary income, to the extent of the Trusts current or accumulated earnings and profits allocable to such distribution, with
the excess treated as a return of capital reducing the shareholders tax basis in the shares held after the tender offer, and thereafter as capital gain. Any Trust shares held by a shareholder after a tender offer will be subject to basis
adjustments in accordance with the provisions of the Code.
Provided that no tendering shareholder is treated as receiving a
Section 301 distribution as a result of selling shares pursuant to a particular tender offer, shareholders who do not sell shares pursuant to that tender offer will not realize constructive distributions on their shares as a result of other
shareholders selling shares in the tender offer. In the event that any tendering shareholder is deemed to receive a Section 301 distribution, it is possible that shareholders whose proportionate ownership of the Trust increases as a result of
that tender offer, including shareholders who do not tender any shares, will be deemed to receive a constructive distribution under Section 305(c) of the Code in an amount equal to the increase in their percentage ownership of the Trust as a
result of the tender offer. Such constructive distribution will be treated as a dividend to the extent of current or accumulated earnings and profits allocable to it.
Use of the Trusts cash to repurchase shares may adversely affect the Trusts ability to satisfy the distribution requirements for
treatment as a regulated investment company described above. The Trust may also recognize income in connection with the sale of portfolio securities to fund share purchases, in which case the Trust would take any such income into account in
determining whether such distribution requirements have been satisfied.
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If the Trust liquidates, shareholders generally will realize capital gain or loss upon such
liquidation in an amount equal to the difference between the amount of cash or other property received by the shareholder (including any property deemed received by reason of its being placed in a liquidating trust) and the shareholders
adjusted tax basis in its shares. Any such gain or loss will be long-term if the shareholder is treated as having a holding period in Trust shares of greater than one year, and otherwise will be short-term.
The foregoing discussion does not address the tax treatment of shareholders who do not hold their shares as a capital asset. Such shareholders
should consult their own tax advisors on the specific tax consequences to them of participating or not participating in the tender offer or upon liquidation of the Trust.
Current U.S. federal income tax law taxes both long-term and short-term capital gain of corporations at the rates applicable to ordinary
income. For non-corporate taxpayers, short-term capital gain is currently taxed at rates applicable to ordinary income while long-term capital gain generally is taxed at a reduced maximum rate. The
deductibility of capital losses is subject to limitations under the Code.
Certain U.S. holders who are individuals, estates or trusts and
whose income exceeds certain thresholds will be required to pay a 3.8% Medicare tax on all or a portion of their net investment income, which includes dividends received from the Trust and capital gains from the sale or other disposition
of the Trusts common shares.
A common shareholder that is a nonresident alien individual or a foreign corporation (a foreign
investor) generally will be subject to U.S. federal withholding tax at the rate of 30% (or possibly a lower rate provided by an applicable tax treaty) on ordinary income dividends (except as discussed below). In general, U.S. federal
withholding tax and U.S. federal income tax will not apply to any gain or income realized by a foreign investor in respect of any distribution of exempt-interest dividends or net capital gain (including amounts credited as an undistributed capital
gain dividend) or upon the sale or other disposition of common shares of the Trust. Different tax consequences may result if the foreign investor is engaged in a trade or business in the United States or, in the case of an individual, is present in
the United States for 183 days or more during a taxable year and certain other conditions are met. Foreign investors should consult their tax advisers regarding the tax consequences of investing in the Trusts common shares.
Ordinary income dividends properly reported by the RIC are generally exempt from U.S. federal withholding tax where they (i) are paid in
respect of the RICs qualified net interest income (generally, its U.S.-source interest income, other than certain contingent interest and interest from obligations of a corporation or partnership in which the RIC is at least a 10%
shareholder, reduced by expenses that are allocable to such income) or (ii) are paid in respect of the RICs qualified short-term capital gains (generally, the excess of the RICs net short-term capital gain over its
long-term capital loss for such taxable year). Depending on its circumstances, the Trust may report all, some or none of its potentially eligible dividends as such qualified net interest income or as qualified short-term capital gains, and/or treat
such dividends, in whole or in part, as ineligible for this exemption from withholding. In order to qualify for this exemption from withholding, a foreign investor needs to comply with applicable certification requirements relating to its non-U.S. status (including, in general, furnishing an IRS Form W-8BEN, W-8BEN-E, or substitute
Form). In the case of common shares held through an intermediary, the intermediary may have withheld tax even if the Trust reported the payment as qualified net interest income or qualified short-term capital gain. Foreign investors should contact
their intermediaries with respect to the application of these rules to their accounts. There can be no assurance as to what portion of the Trusts distributions would qualify for favorable treatment as qualified net interest income or qualified
short-term capital gains if the provision is extended.
In addition withholding at a rate of 30% will apply to dividends paid in respect
of common shares of the Trust held by or through certain foreign financial institutions (including investment funds), unless such institution enters into an agreement with the Treasury to report, on an annual basis, information with respect to
shares in, and accounts maintained by, the institution to the extent such shares or accounts are held by certain U.S. persons and by certain non-U.S. entities that are wholly or partially owned by U.S. persons
and to withhold on certain payments. Accordingly, the entity through which common shares of the Trust are held will affect the determination of whether such withholding is required. Similarly, dividends paid in respect of common shares of the Trust
held by an investor that is a non-financial foreign entity that does not qualify under certain exemptions will be subject to withholding at a rate of 30%, unless such entity either (i) certifies that such
entity does not have any substantial United States owners or (ii) provides certain information regarding the entitys substantial United States owners, which the
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applicable withholding agent will in turn provide to the Secretary of the Treasury. An intergovernmental agreement between the United States and an applicable foreign country, or future
Treasury regulations or other guidance, may modify these requirements. The Trust will not pay any additional amounts to common shareholders in respect of any amounts withheld. Foreign investors are encouraged to consult with their tax advisers
regarding the possible implications of these rules on their investment in the Trusts common shares.
U.S. federal backup withholding
tax may be required on dividends, distributions and sale proceeds payable to certain non-exempt common shareholders who fail to supply their correct taxpayer identification number (in the case of individuals,
generally, their social security number) or to make required certifications, or who are otherwise subject to backup withholding. Backup withholding is not an additional tax and any amount withheld may be refunded or credited against your U.S.
federal income tax liability, if any, provided that you timely furnish the required information to the Internal Revenue Service.
Ordinary
income dividends, capital gain dividends, and gain from the sale or other disposition of common shares of the Trust also may be subject to state, local, and/or foreign taxes. Common shareholders are urged to consult their own tax advisers regarding
specific questions about U.S. federal, state, local or foreign tax consequences to them of investing in the Trust.
Under U.S. Treasury
regulations, if a common shareholder recognizes a loss with respect to common shares of $2 million or more for an individual shareholder in a single taxable year (or $4 million or more in any combination of taxable years in which the
transaction is entered into and the five succeeding taxable years) or $10 million or more for a corporate shareholder in any single taxable year (or $20 million or more in any combination of taxable years in which the transaction is
entered into and the five succeeding taxable years), the shareholder must file with the Internal Revenue Service a disclosure statement on Internal Revenue Service Form 8886. The fact that a loss is reportable under these regulations does not affect
the legal determination of whether the taxpayers treatment of the loss is proper. Common shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.
***
The foregoing is a general
and abbreviated summary of certain provisions of the Code and the Treasury Regulations presently in effect as they directly govern the taxation of the Trust and its shareholders. For complete provisions, reference should be made to the pertinent
Code sections and Treasury Regulations. The Code and the Treasury Regulations are subject to change by legislative or administrative action, and any such change may be retroactive with respect to Trust transactions. Holders of common shares are
advised to consult their own tax advisers for more detailed information concerning the U.S. federal income taxation of the Trust and the income tax consequences to its holders of common shares.
CUSTODIAN AND TRANSFER AGENT
The custodian of the assets of the Trust is State Street Bank and Trust Company, whose principal business address is One Lincoln Street,
Boston, Massachusetts 02111. The custodian is responsible for, among other things, receipt of and disbursement of funds from the Trusts accounts, establishment of segregated accounts as necessary, and transfer, exchange and delivery of Trust
portfolio securities.
Computershare Trust Company, N.A., whose principal business address is 150 Royall Street, Canton, Massachusetts
02021, serves as the Trusts transfer agent with respect to the common shares.
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
[ ], whose
principal business address is [ ], is the independent registered public accounting firm of the Trust and is expected to render an opinion annually on the
financial statements of the Trust.
S-68
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
A control person is a person who beneficially owns, either directly or indirectly, more than 25% of the voting securities of a company. As of
[●], 2022, the Trust did not know of any person or entity who controlled the Trust. As of December 31, 2021, to the knowledge of the Trust, no person owned of record or beneficially 5% or more of the outstanding common shares
of any class of the Trust.
INCORPORATION BY REFERENCE
This SAI is part of a registration statement that we have filed with the SEC. We are allowed to incorporate by reference the
information that we file with the SEC, which means that we can disclose important information to you by referring you to those documents. We incorporate by reference into this SAI the documents listed below and any future filings we make with the
SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, including any filings on or after the date of this SAI from the date of filing (excluding any information furnished, rather than filed), until we have sold all of the offered
securities to which this SAI, the Prospectus and any accompanying prospectus supplement relates or the offering is otherwise terminated. The information incorporated by reference is an important part of this SAI. Any statement in a document
incorporated by reference into this SAI will be deemed to be automatically modified or superseded to the extent a statement contained in (1) this SAI or (2) any other subsequently filed document that is incorporated by reference into this
SAI modifies or supersedes such statement. The documents incorporated by reference herein include:
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the Trusts Prospectus, dated [●], 2022, filed with this SAI;
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the description of
the Trusts common shares contained in our Registration Statement on Form 8-A (File No. 001-35819) filed with the SEC on February 20, 2013, including
any amendment or report filed for the purpose of updating such description prior to the termination of the offering registered hereby.
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The Trust will provide without charge to each person, including any beneficial owner, to whom this SAI is delivered, upon written or oral
request, a copy of any and all of the documents that have been or may be incorporated by reference in this SAI, the Prospectus or the accompanying prospectus supplement. You should direct requests for documents by calling:
Client Services Desk
(800) 882-0052
The Trust makes available the Prospectus, SAI and the Trusts annual and semi-annual
reports, free of charge, at http://www.blackrock.com. You may also obtain this SAI, the Prospectus, other documents incorporated by reference and other information the Trust files electronically, including reports and proxy statements, on the SEC
website (http://www.sec.gov) or with the payment of a duplication fee, by electronic request at publicinfo@sec.gov. Information contained in, or that can be accessed through, the Trusts website is not part of this SAI, the Prospectus or the
accompanying prospectus supplement.
FINANCIAL STATEMENTS
The audited financial statements and financial highlights included in the annual
report to the Trusts shareholders for the fiscal year ended October 31, 2021 (the 2021 Annual Report), together with the report of [
] on the financial statements and financial highlights included in the Trusts 2021 Annual Report, are incorporated herein by reference.
S-69
APPENDIX A
Description of Bond Ratings
Description of S&P Global Ratings (S&P), a Division of S&P Global Inc., Issue Credit Ratings
An S&P issue credit rating is a forward-looking opinion about the creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium-term note programs and commercial paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or other
forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The opinion reflects S&Ps view of the obligors capacity and willingness to meet its financial commitments as
they come due, and this opinion may assess terms, such as collateral security and subordination, which could affect ultimate payment in the event of default.
Issue credit ratings can be either long-term or short-term. Short-term issue credit ratings are generally assigned to those obligations
considered short-term in the relevant market, typically with an original maturity of no more than 365 days. Short-term issue credit ratings are also used to indicate the creditworthiness of an obligor with respect to put features on long-term
obligations. S&P would typically assign a long-term issue credit rating to an obligation with an original maturity of greater than 365 days. However, the ratings S&P assigns to certain instruments may diverge from these guidelines based on
market practices. Medium-term notes are assigned long-term ratings.
Issue credit ratings are based, in varying degrees, on S&Ps
analysis of the following considerations:
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The likelihood of paymentthe capacity and willingness of the obligor to meet its financial commitments on
an obligation in accordance with the terms of the obligation;
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The nature and provisions of the financial obligation, and the promise S&P imputes; and
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The protection afforded by, and relative position of, the financial obligation in the event of a bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors rights.
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An
issue rating is an assessment of default risk but may incorporate an assessment of relative seniority or ultimate recovery in the event of default. Junior obligations are typically rated lower than senior obligations, to reflect lower priority in
bankruptcy, as noted above. (Such differentiation may apply when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations.)
Long-Term Issue Credit Ratings*
Issue
credit ratings are based, in varying degrees, on S&Ps analysis of the following considerations:
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The likelihood of payment the capacity and willingness of the obligor to meet its financial commitments on
an obligation in accordance with the terms of the obligation;
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The nature and provisions of the financial obligation, and the promise we impute; and
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The protection afforded by, and relative position of, the financial obligation in the event of a bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors rights.
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An
issue rating is an assessment of default risk but may incorporate an assessment of relative seniority or ultimate recovery in the event of default. Junior obligations are typically rated lower than senior obligations, to reflect lower
A-1
priority in bankruptcy, as noted above. (Such differentiation may apply when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and
holding company obligations.)
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AAA
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An obligation rated AAA has the highest rating assigned by S&P. The obligors capacity to meet its financial commitments on the obligation is extremely strong.
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AA
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An obligation rated AA differs from the highest-rated obligations only to a small degree. The obligors capacity to meet its financial commitments on the obligation is very strong.
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A
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An obligation rated A is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligors capacity to meet its
financial commitments on the obligation is still strong.
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BBB
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An obligation rated BBB exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to weaken the obligors capacity to meet its financial commitments on
the obligation.
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BB, B, CCC, CC, and C
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Obligations rated BB, B, CCC, CC, and C are regarded as having significant speculative characteristics. BB indicates the least degree of speculation and
C the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposure to adverse conditions.
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BB
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An obligation rated BB is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to
the obligors inadequate capacity to meet its financial commitments on the obligation.
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B
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An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but the obligor currently has the capacity to meet its financial commitments on the obligation. Adverse business, financial,
or economic conditions will likely impair the obligors capacity or willingness to meet its financial commitments on the obligation.
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CCC
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An obligation rated CCC is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitments on the obligation. In the event
of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitments on the obligation.
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CC
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An obligation rated CC is currently highly vulnerable to nonpayment. The CC rating is used when a default has not yet occurred but S&P expects default to be a virtual certainty, regardless of the
anticipated time to default.
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C
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An obligation rated C is currently highly vulnerable to nonpayment, and the obligation is expected to have lower relative seniority or lower ultimate recovery compared with obligations that are rated higher.
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D
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An obligation rated D is in default or in breach of an imputed promise. For non-hybrid capital instruments, the D rating category is used when payments on an obligation
are not made on the date due, unless S&P 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.
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* 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.
A-2
Short-Term Issue Credit Ratings
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A-1
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A short-term obligation rated A-1 is rated in the highest category by S&P. The obligors capacity to meet its financial commitments on the obligation is strong. Within
this category, certain obligations are designated with a plus sign (+). This indicates that the obligors capacity to meet its financial commitments on these obligations is extremely strong.
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A-2
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A short-term obligation rated A-2 is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating
categories. However, the obligors capacity to meet its financial commitments on the obligation is satisfactory.
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A-3
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A short-term obligation rated A-3 exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to weaken an
obligors capacity to meet its financial commitments on the obligation.
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B
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A short-term obligation rated B is regarded as vulnerable and has significant speculative characteristics. The obligor currently has the capacity to meet its financial commitments; however, it faces major ongoing
uncertainties that could lead to the obligors inadequate capacity to meet its financial commitments.
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C
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A short-term obligation rated C is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitments on the
obligation.
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D
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A short-term obligation rated D is in default or in breach of an imputed promise. For non-hybrid capital instruments, the D rating category is used when payments on an
obligation are not made on the date due, unless S&P believes that such payments will be made within any stated grace period. However, any stated grace period longer than five business days will be treated as five business days. The D
rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions. A rating on an obligation is lowered to
D if it is subject to a distressed debt restructuring.
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Description of S&Ps Municipal Short-Term Note Ratings
An S&P U.S. municipal note rating reflects S&Ps opinion about the liquidity factors and market access risks unique to the notes.
Notes due in three years or less will likely receive a note rating. Notes with an original maturity of more than three years will most likely receive a long-term debt rating. In determining which type of rating, if any, to assign, S&Ps
analysis will review the following considerations:
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Amortization schedule the larger the final maturity relative to other maturities, the more likely it will
be treated as a note; and
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Source of payment the more dependent the issue is on the market for its refinancing, the more likely it
will be treated as a note.
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S&Ps municipal short-term note rating symbols are as follows:
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SP-1
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Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+) designation.
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A-3
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SP-2
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Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes.
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SP-3
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Speculative capacity to pay principal and interest.
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D
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D is assigned upon failure to pay the note when due, completion of a distressed exchange offer, or the filing of a bankruptcy petition or the taking of similar action and where default on an obligation is a virtual
certainty, for example due to automatic stay provisions.
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Description of Moodys Investors Service, Inc.s (Moodys) Global Rating Scales
Ratings assigned on Moodys global long-term and short-term rating scales are forward-looking opinions of the relative credit risks of
financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project finance vehicles, and public sector entities. Moodys defines credit risk as the risk
that an entity may not meet its contractual financial obligations as they come due and any estimated financial loss in the event of default or impairment. The contractual financial obligations addressed by Moodys ratings are those that call
for, without regard to enforceability, the payment of an ascertainable amount, which may vary based upon standard sources of variation (e.g., floating interest rates), by an ascertainable date. Moodys rating addresses the issuers ability
to obtain cash sufficient to service the obligation, and its willingness to pay. Moodys ratings do not address non-standard sources of variation in the amount of the principal obligation (e.g., equity
indexed), absent an express statement to the contrary in a press release accompanying an initial rating. Long-term ratings are assigned to issuers or obligations with an original maturity of one year or more and reflect both on the likelihood of a
default or impairment on contractual financial obligations and the expected financial loss suffered in the event of default or impairment. Short-term ratings are assigned for obligations with an original maturity of thirteen months or less and
reflect both on the likelihood of a default or impairment on contractual financial obligations and the expected financial loss suffered in the event of default or impairment. Moodys issues ratings at the issuer level and instrument level on
both the long-term scale and the short-term scale. Typically, ratings are made publicly available although private and unpublished ratings may also be assigned.
Description of Moodys Global Long Term Rating Scale
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Aaa
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Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk.
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Aa
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Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
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A
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Obligations rated A are judged to be upper-medium grade and are subject to low credit risk.
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Baa
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Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics.
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Ba
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Obligations rated Ba are judged to be speculative and are subject to substantial credit risk.
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B
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Obligations rated B are considered speculative and are subject to high credit risk.
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Caa
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Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk.
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Ca
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Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
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C
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Obligations rated C are the lowest rated and are typically in default, with little prospect for recovery of principal or interest.
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A-4
Note: Moodys appends numerical modifiers 1, 2, and 3 to each generic rating
classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates a ranking in the lower end of that generic rating category. Additionally, a (hyb) indicator is appended to all ratings of hybrid securities issued by banks, insurers, finance companies, and securities firms.
By their terms, hybrid securities allow for the omission of scheduled dividends, interest, or principal payments, which can potentially result
in impairment if such an omission occurs. Hybrid securities may also be subject to contractually allowable write-downs of principal that could result in impairment. Together with the hybrid indicator, the long-term obligation rating assigned to a
hybrid security is an expression of the relative credit risk associated with that security.
Global Short-Term Rating Scale
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P-1
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Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.
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P-2
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Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations.
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P-3
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Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay short-term obligations.
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NP
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Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.
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Description of Moodys US Municipal Short-Term Debt and Demand Obligation Ratings
Description of Moodys Short-Term Obligation Ratings
Moodys uses the global short-term Prime rating scale for commercial paper issued by U.S. municipalities and nonprofits. These commercial
paper programs may be backed by external letters of credit or liquidity facilities, or by an issuers self-liquidity.
For other
short-term municipal obligations, Moodys uses one of two other short-term rating scales, the Municipal Investment Grade (MIG) and Variable Municipal Investment Grade (VMIG) scales discussed below.
Moodys uses the MIG scale for U.S. municipal cash flow notes, bond anticipation notes and certain other short-term obligations, which
typically mature in three years or less. Under certain circumstances, Moodys uses the MIG scale for bond anticipation notes with maturities of up to five years.
MIG Scale
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MIG 1
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This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to the market for refinancing.
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MIG 2
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This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group.
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MIG 3
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This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely to be less well-established.
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SG
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This designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection.
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Description of Moodys Demand Obligation Ratings
In the case of variable rate demand obligations (VRDOs), a two-component rating is
assigned. The components are a long-term rating and a short-term demand obligation rating. The long-term rating addresses the issuers ability to meet scheduled principal and interest payments. The short-term demand obligation rating addresses
the ability of the issuer or the liquidity provider to make payments associated with the purchase-price-upon-demand feature (demand feature) of the VRDO. The short-term demand obligation rating uses the VMIG scale. VMIG ratings with
liquidity support use as an input the short-term Counterparty Risk Assessment of the support provider, or the long-term rating of the underlying obligor in the absence of third party liquidity support. Transitions of VMIG ratings of demand
obligations with conditional liquidity support differ from transitions on the Prime scale to reflect the risk that external liquidity support will terminate if the issuers long-term rating drops below investment grade.
Moodys typically assigns the VMIG short-term demand obligation rating if the frequency of the demand feature is less than every three
years. If the frequency of the demand feature is less than three years but the purchase price is payable only with remarketing proceeds, the short-term demand obligation rating is NR.
VMIG Scale
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VMIG 1
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This designation denotes superior credit quality. Excellent protection is afforded by the superior short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of
purchase price upon demand.
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VMIG 2
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This designation denotes strong credit quality. Good protection is afforded by the strong short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price
upon demand.
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VMIG 3
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This designation denotes acceptable credit quality. Adequate protection is afforded by the satisfactory short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of
purchase price upon demand.
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SG
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This designation denotes speculative-grade credit quality. Demand features rated in this category may be supported by a liquidity provider that does not have a sufficiently strong short-term rating or may lack the structural or
legal protections necessary to ensure the timely payment of purchase price upon demand.
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Description of Fitch Ratings (Fitchs) Credit Ratings Scales
Fitch Ratings publishes opinions on a variety of scales. The most common of these are credit ratings, but the agency also publishes ratings,
scores and other relative opinions relating to financial or operational strength. For example, Fitch also provides specialized ratings of servicers of residential and commercial mortgages, asset managers and funds. In each case, users should refer
to the definitions of each individual scale for guidance on the dimensions of risk covered in each assessment.
Fitchs credit
ratings relating to issuers are an opinion on the relative ability of an entity to meet financial commitments, such as interest, preferred dividends, repayment of principal, insurance claims or counterparty obligations. Credit ratings relating to
securities and obligations of an issuer can include a recovery expectation. Credit ratings are used by investors as indications of the likelihood of receiving the money owed to them in accordance with the terms on which they invested. The
agencys credit ratings cover the global spectrum of corporate, sovereign financial, bank, insurance, and public finance entities (including supranational and sub-national entities) and the securities or
other obligations they issue, as well as structured finance securities backed by receivables or other financial assets.
The terms
investment grade and speculative grade have established themselves over time as shorthand to describe the categories AAA to BBB (investment grade) and BB to D (speculative
grade). The terms investment grade and speculative grade are market conventions and do not imply any recommendation or endorsement of a specific security for investment purposes. Investment grade categories indicate relatively low to moderate credit
risk, while ratings in the speculative categories either signal a higher level of credit risk or that a default has already occurred.
A-6
For the convenience of investors, Fitch may also include issues relating to a rated issuer that
are not and have not been rated on its web page. Such issues are also denoted as NR.
Credit ratings express risk in relative
rank order, which is to say they are ordinal measures of credit risk and are not predictive of a specific frequency of default or loss. For information about the historical performance of ratings please refer to Fitchs Ratings Transition and
Default studies which detail the historical default rates and their meaning. The European Securities and Markets Authority also maintains a central repository of historical default rates.
Fitchs credit ratings do not directly address any risk other than credit risk. In particular, ratings do not deal with the risk of a
market value loss on a rated security due to changes in interest rates, liquidity and other market considerations. However, in terms of payment obligation on the rated liability, market risk may be considered to the extent that it influences the
ability of an issuer to pay upon a commitment. Ratings nonetheless do not reflect market risk to the extent that they influence the size or other conditionality of the obligation to pay upon a commitment (for example, in the case of index-linked
bonds).
In the default components of ratings assigned to individual obligations or instruments, the agency typically rates to the
likelihood of non-payment or default in accordance with the terms of that instruments documentation. In limited cases, Fitch may include additional considerations (i.e. rate to a higher or lower
standard than that implied in the obligations documentation).
The primary credit rating scales can be used to provide a rating of
privately issued obligations or certain note issuance programs or for private ratings. In this case the rating is not published, but only provided to the issuer or its agents in the form of a rating letter.
The primary credit rating scales may also be used to provide ratings for a more narrow scope, including interest strips and return of
principal or in other forms of opinions such as credit opinions or rating assessment services. Credit opinions are either a notch- or category-specific view using the primary rating scale and omit one or more characteristics of a full rating or meet
them to a different standard. Credit opinions will be indicated using a lower case letter symbol combined with either an * (e.g. bbb+*) or (cat) suffix to denote the opinion status. Credit opinions will be point-in-time typically but may be monitored if the analytical group believes information will be sufficiently available. Rating assessment services are a notch-specific view
using the primary rating scale of how an existing or potential rating may be changed by a given set of hypothetical circumstances. While credit opinions and rating assessment services are point-in-time and are not monitored, they may have a directional watch or outlook assigned, which can signify the trajectory of the credit profile.
Description of Fitchs Long-Term Credit Ratings Scale
Rated entities in a number of sectors, including financial and non-financial corporations, sovereigns,
insurance companies and certain sectors within public finance, are generally assigned Issuer Default Ratings (IDRs). IDRs are also assigned to certain entities or enterprises in global infrastructure, project finance and public finance. IDRs opine
on an entitys relative vulnerability to default (including by way of a distressed debt exchange) on financial obligations. The threshold default risk addressed by the IDR is generally that of the financial obligations whose non-payment would best reflect the uncured failure of that entity. As such, IDRs also address relative vulnerability to bankruptcy, administrative receivership or similar concepts.
In aggregate, IDRs provide an ordinal ranking of issuers based on the agencys view of their relative vulnerability to default, rather
than a prediction of a specific percentage likelihood of default.
A-7
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AAA
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Highest credit quality. AAA ratings denote the lowest expectation of default risk. They are assigned only in cases of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely
to be adversely affected by foreseeable events.
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AA
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Very high credit quality. AA ratings denote expectations of very low default risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable
events.
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A
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High credit quality. A ratings denote expectations of low default risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or
economic conditions than is the case for higher ratings.
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BBB
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Good credit quality. BBB ratings indicate that expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate, but adverse business or economic conditions are
more likely to impair this capacity.
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BB
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Speculative. BB ratings indicate an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time; however, business or financial flexibility exists
that supports the servicing of financial commitments.
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B
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Highly speculative. B ratings indicate that material default risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is vulnerable
to deterioration in the business and economic environment.
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CCC
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Substantial credit risk. Default is a real possibility.
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CC
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Very high levels of credit risk. Default of some kind appears probable.
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C
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Near default. A default or default-like process has begun, or the issuer is in standstill, or for a closed funding vehicle, payment capacity is irrevocably impaired. Conditions that are indicative of a C category rating
for an issuer include:
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a. the issuer has entered into a grace or cure period following non-payment of a material financial obligation;
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b. the issuer has entered into a temporary negotiated waiver or standstill agreement
following a payment default on a material financial obligation;
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c. the formal announcement by the issuer or their agent of a distressed debt
exchange;
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d. a closed financing vehicle where payment capacity is irrevocably impaired such
that it is not expected to pay interest and/or principal in full during the life of the transaction, but where no payment default is imminent.
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RD
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Restricted default. RD ratings indicate an issuer that in Fitchs opinion has experienced:
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a. an uncured payment default or distressed debt exchange on a bond, loan or
other material financial obligation, but
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b. has not entered into bankruptcy filings, administration, receivership,
liquidation, or other formal winding-up procedure, and
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c. has not otherwise ceased operating.
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This would include:
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i. the selective payment default on a specific class or currency of
debt;
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ii. the uncured expiry of any applicable grace period, cure period or default
forbearance period following a payment default on a bank loan, capital markets security or other material financial obligation;
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A-8
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iii. the extension of multiple waivers or forbearance periods upon a payment
default on one or more material financial obligations, either in series or in parallel; ordinary execution of a distressed debt exchange on one or more material financial obligations.
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D
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Default. D ratings indicate an issuer that in Fitchs opinion has entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up
procedure or that has otherwise ceased business.
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Default ratings are not assigned prospectively to entities or their obligations; within this context, non-payment on an instrument that contains a deferral feature or grace period will
generally not be considered a default until after the expiration of the deferral or grace period, unless a default is otherwise driven by bankruptcy or other similar circumstance, or by a distressed debt exchange.
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In all cases, the assignment of a default rating reflects the agencys opinion as to the most appropriate rating category consistent with the rest of its universe of ratings and may differ from the definition of default under
the terms of an issuers financial obligations or local commercial practice.
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Notes: The modifiers + or - may be appended to a rating to denote relative
status within major rating categories.
Description of Fitchs Short-Term Credit Ratings Assigned to Issuers and Obligations
A short-term issuer or obligation rating is based in all cases on the short-term vulnerability to default of the rated entity and relates to
the capacity to meet financial obligations in accordance with the documentation governing the relevant obligation. Short-term deposit ratings may be adjusted for loss severity. Short-term deposit ratings may be adjusted for loss severity. Short-Term
Ratings are assigned to obligations whose initial maturity is viewed as short term based on market convention. Typically, this means up to 13 months for corporate, sovereign, and structured obligations and up to 36 months for obligations
in U.S. public finance markets.
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F1
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Highest Short-Term Credit Quality. Indicates the strongest intrinsic capacity for timely payment of financial commitments; may have an added + to denote any exceptionally strong credit feature.
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F2
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Good Short-Term Credit Quality. Good intrinsic capacity for timely payment of financial commitments.
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F3
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Fair Short-Term Credit Quality. The intrinsic capacity for timely payment of financial commitments is adequate.
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B
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Speculative Short-Term Credit Quality. Minimal capacity for timely payment of financial commitments, plus heightened vulnerability to near term adverse changes in financial and economic conditions.
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C
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High Short-Term Default Risk. Default is a real possibility.
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RD
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Restricted Default. Indicates an entity that has defaulted on one or more of its financial commitments, although it continues to meet other financial obligations. Typically applicable to entity ratings only.
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D
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Default. Indicates a broad-based default event for an entity, or the default of a short-term obligation.
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Specific Limitations Relating to Credit Rating Scales
The following specific limitations relate to issuer default scales, ratings assigned to corporate finance obligations, ratings assigned to
public finance obligations, ratings assigned to structured finance transactions, ratings assigned to global infrastructure and project finance transactions, ratings assigned for banks (Viability Ratings, Support Ratings, Support Floors), derivative
counterparty ratings and insurer financial strength ratings.
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The ratings do not predict a specific percentage of default likelihood or failure likelihood over any given time
period.
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A-9
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The ratings do not opine on the market value of any issuers securities or stock, or the likelihood that
this value may change.
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The ratings do not opine on the liquidity of the issuers securities or stock.
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The ratings do not opine on the possible loss severity on an obligation should an issuer (or an obligation with
respect to structured finance transactions) default, except in the following cases:
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Ratings assigned to individual obligations of issuers in corporate finance, banks,
non-bank financial institutions, insurance and covered bonds.
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In limited circumstances for U.S. public finance obligations where Chapter 9 of the Bankruptcy Code provides
reliably superior prospects for ultimate recovery to local government obligations that benefit from a statutory lien on revenues or during the pendency of a bankruptcy proceeding under the Code if there is sufficient visibility on potential recovery
prospects.
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The ratings do not opine on the suitability of an issuer as a counterparty to trade credit.
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The ratings do not opine on any quality related to an issuers business, operational or financial profile
other than the agencys opinion on its relative vulnerability to default or in the case of bank Viability Ratings on its relative vulnerability to failure. For the avoidance of doubt, not all defaults will be considered a default for rating
purposes. Typically, a default relates to a liability payable to an unaffiliated, outside investor.
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The ratings do not opine on any quality related to a transactions profile other than the agencys
opinion on the relative vulnerability to default of an issuer and/or of each rated tranche or security.
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The ratings do not predict a specific percentage of extraordinary support likelihood over any given period.
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In the case of bank Support Ratings and Support Rating Floors, the ratings do not opine on any quality related to
an issuers business, operational or financial profile other than the agencys opinion on its relative likelihood of receiving external extraordinary support.
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The ratings do not opine on the suitability of any security for investment or any other purposes
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The above list is not exhaustive and is provided for the readers convenience.
A-10
APPENDIX B
Closed-End Fund Proxy Voting Policy
August 1, 2021
Effective Date: August 1, 2021
Applies to the following types of Funds registered under the 1940 Act:
☐ Open-End Mutual Funds (including money market funds)
☐ Money Market Funds Only
☐ iShares and BlackRock
ETFs
☒ Closed-End Funds
☐ Other
Objective and Scope
Set forth below is the Closed-End Fund Proxy Voting Policy.
Policy / Document Requirements and Statements
The Boards of
Trustees/Directors (the Directors) of the closed-end funds advised by BlackRock Advisors, LLC (BlackRock) (the Funds) have the responsibility for the oversight of voting
proxies relating to portfolio securities of the Funds, and have determined that it is in the best interests of the Funds and their shareholders to delegate that responsibility to BlackRock as part of BlackRocks authority to manage, acquire and
dispose of account assets, all as contemplated by the Funds respective investment management agreements.
BlackRock has adopted guidelines and procedures
(together and as from time to time amended, the BlackRock Proxy Voting Guidelines) governing proxy voting by accounts managed by BlackRock.
BlackRock
will cast votes on behalf of each of the Funds on specific proxy issues in respect of securities held by each such Fund in accordance with the BlackRock Proxy Voting Guidelines; provided, however, that in the case of underlying closed-end funds (including business development companies and other similarly-situated asset pools) held by the Funds that have, or are proposing to adopt, a classified board structure, BlackRock will typically
(a) vote in favor of proposals to adopt classification and against proposals to eliminate classification, and (b) not vote against directors as a result of their adoption of a classified board structure.
BlackRock will report on an annual basis to the Directors on (1) a summary of all proxy votes that BlackRock has made on behalf of the Funds in the preceding year
together with a representation that all votes were in accordance with the BlackRock Proxy Voting Guidelines (as modified pursuant to the immediately preceding paragraph), and (2) any changes to the BlackRock Proxy Voting Guidelines that have
not previously been reported.
B-1
BlackRock
Investment
Stewardship
Global Principles
Effective as of January 2021
B-2
BlackRock
CONTENTS
The purpose of this document is to provide an overarching explanation of BlackRocks approach globally to our
responsibilities as a shareholder on behalf of our clients, our expectations of companies, and our commitments to clients in terms of our own governance and transparency.
If you would like additional information, please contact:
ContactStewardship@blackrock.com
B-3
INTRODUCTION TO BLACKROCK
BlackRocks purpose is to help more and more people experience financial well-being. We manage assets on behalf of institutional and individual clients,
across a full spectrum of investment strategies, asset classes, and regions. Our client base includes pension plans, endowments, foundations, charities, official institutions, insurers, and other financial institutions, as well as individuals around
the world. As part of our fiduciary duty to our clients, we have determined that it is generally in the best long-term interest of our clients to promote sound corporate governance through voting as an informed, engaged shareholder. This is the
responsibility of the Investment Stewardship Team.
Philosophy on investment stewardship
Companies are responsible for ensuring they have appropriate governance structures to serve the interests of shareholders and other key stakeholders. We
believe that there are certain fundamental rights attached to shareholding. Companies and their boards should be accountable to shareholders and structured with appropriate checks and balances to ensure that they operate in shareholders best
interests to create sustainable value. Shareholders should have the right to vote to elect, remove, and nominate directors, approve the appointment of the auditor, and amend the corporate charter or by-laws.
Shareholders should be able to vote on matters that are material to the protection of their investment, including but not limited to, changes to the purpose of the business, dilution levels and pre-emptive
rights, and the distribution of income and capital structure. In order to make informed decisions, we believe that shareholders have the right to sufficient and timely information. In addition, shareholder voting rights should be proportionate to
their economic ownershipthe principle of one share, one vote helps achieve this balance.
Consistent with these shareholder rights, we
believe BlackRock has a responsibility to monitor and provide feedback to companies, in our role as stewards of our clients investments. BlackRock Investment Stewardship (BIS) does this through engagement with management teams
and/or board members on material business issues including environmental, social, and governance (ESG) matters and, for those clients who have given us authority, through voting proxies in the best long-term economic interests of our
clients. We also participate in the public debate to shape global norms and industry standards with the goal of a policy framework consistent with our clients interests as long-term shareholders.
BlackRock looks to companies to provide timely, accurate, and comprehensive reporting on all material governance and business matters, including ESG issues.
This allows shareholders to appropriately understand and assess how relevant risks and opportunities are being effectively identified and managed. Where company reporting and disclosure is inadequate or the approach taken is inconsistent with our
view of what supports sustainable long-term value creation, we will engage with a company and/or use our vote to encourage a change in practice.
BlackRock views engagement as an important activity; engagement provides us with the opportunity to improve our understanding of the business and ESG risks
and opportunities that are material to the companies in which our clients invest. As long-term investors on behalf of clients, we seek to have regular and continuing dialogue with executives and board directors to advance sound governance and
sustainable business practices, as well as to understand the effectiveness of the companys management and oversight of material issues. Engagement is an important mechanism for providing feedback on company practices and disclosures,
particularly where we believe they could be enhanced. We primarily engage through direct dialogue but may use other tools such as written correspondence to share our perspectives. Engagement also informs our voting decisions.
We vote in support of management and boards where and to the extent they demonstrate an approach consistent with creating sustainable long-term value. If we
have concerns about a companys approach, we may choose to engage to explain our expectations. Where we consider that a company has failed to address one or more material issues within an appropriate timeframe, we may hold directors accountable
or take other voting actions to signal our concerns. We apply our voting guidelines to achieve the outcome we believe is most aligned with our clients long-term economic interests.
B-4
Key themes
We recognize that accepted standards and norms of corporate governance differ between markets; however, there are sufficient common threads globally to
identify this overarching set of principles (the Principles) which are anchored in transparency and accountability. At a minimum, we expect companies to observe the accepted corporate governance standards in their domestic market or to
explain why not doing so supports sustainable long-term value creation.
Our regional and market-specific voting guidelines explain how these Principles
inform our voting decisions in relation to specific ballot items for shareholder meetings.
These Principles cover seven key themes:
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Auditors and audit-related issues
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Capital structure, mergers, asset sales, and other special transactions
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Compensation and benefits
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Environmental and social issues
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General corporate governance matters and shareholder protections
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Boards and directors
The
performance of the board is critical to the economic success of the company and the protection of shareholders interests. As part of their responsibilities, board members owe fiduciary duties to shareholders in overseeing the strategic
direction and operation of the company. For this reason, BlackRock focuses on directors in many of our engagements and sees the election of directors as one of our most important responsibilities in the proxy voting context.
We support boards whose approach is consistent with creating sustainable long-term value. This includes the effective management of strategic, operational,
and material ESG factors and the consideration of key stakeholder interests. Our primary focus is on the performance of the board of directors. The board should establish and maintain a framework of robust and effective governance mechanisms to
support its oversight of the companys strategic aims. We look to the board to articulate the effectiveness of these mechanisms in overseeing the management of business risks and opportunities and the fulfillment of the companys purpose.
Disclosure of material issues that affect the companys long-term strategy and value creation, including material ESG factors, is essential for shareholders to be able to appropriately understand and assess how the board is effectively
identifying, managing, and mitigating risks.
Where a company has not adequately disclosed and demonstrated these responsibilities, we will consider
withholding our support for the re-election of directors whom we hold accountable. We assess director performance on a
case-by-case basis and in light of each companys particular circumstances, taking into consideration our assessment of their governance, sustainable business
practices, and performance. In serving the interests of shareholders, the responsibility of the board of directors includes, but is not limited to, the following:
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Establishing an appropriate corporate governance structure
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B-5
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Supporting and overseeing management in setting long-term strategic goals, applicable measures of value-creation
and milestones that will demonstrate progress, and steps taken if any obstacles are anticipated or incurred
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Providing oversight on the identification and management of material, business operational and
sustainability-related risks
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Overseeing the financial resilience of the company, the integrity of financial statements, and the robustness of
a companys Enterprise Risk Management1 frameworks
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Making decisions on matters that require independent evaluation which may include mergers, acquisitions and
disposals, activist situations or other similar cases
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Establishing appropriate executive compensation structures
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Addressing business issues, including environmental and social issues, when they have the potential to materially
impact the companys long-term value
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There should be clear definitions of the role of the board, the committees of the board and
senior management. We set out below ways in which boards and directors can demonstrate a commitment to acting in the best interests of long-term shareholders. We will seek to engage with the appropriate directors where we have concerns about the
performance of the company, board, or individual directors. As noted above, we believe that when a company is not effectively addressing a material issue, its directors should be held accountable.
Regular accountability
BlackRock believes that
directors should stand for re-election on a regular basis, ideally annually. In our experience, annual re-elections allow shareholders to reaffirm their support for
board members or hold them accountable for their decisions in a timely manner. When board members are not re-elected annually, we believe it is good practice for boards to have a rotation policy to ensure
that, through a board cycle, all directors have had their appointment re-confirmed, with a proportion of directors being put forward for re-election at each annual
general meeting.
Effective board composition
Regular director elections also give boards the opportunity to adjust their composition in an orderly way to reflect the evolution of the companys
strategy and the market environment. BlackRock believes it is beneficial for new directors to be brought onto the board periodically to refresh the groups thinking and in a manner that supports both continuity and appropriate succession
planning. We expect companies to keep under regular review the effectiveness of its board (including its size), and assess directors nominated for election or re-election in the context of the composition of
the board as a whole. This assessment should consider a number of factors, including the potential need to address gaps in skills or experience, the diversity of the board, and the balance of independent and
non-independent directors. We also consider the average tenure of the overall board, where we are seeking a balance between the knowledge and experience of longer-serving members and the fresh perspectives of
newer members.
When nominating new directors to the board, there should be detailed information on the individual candidates in order for shareholders to
assess the suitability of an individual nominee and the overall board composition. These disclosures should give a clear sense of how the collective experience and expertise of the board aligns with the companys long-term strategy and business
model. We also expect disclosures to demonstrate how diversity is accounted for within the proposed board composition, including demographic factors such as gender, ethnicity, and age; as well as professional characteristics, such as a
directors industry experience, specialist areas of expertise, and geographic location.
1 Enterprise risk management is a process, effected by the entitys board of directors, management,
and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within the risk appetite, to provide reasonable assurance regarding the achievement
of objectives. (Committee of Sponsoring Organizations of the Treadway Commission (COSO), Enterprise Risk Management Integrated Framework, September 2004, New York, NY).
B-6
We expect there to be a sufficient number of independent directors, free from conflicts of interest or undue
influence from connected parties, to ensure objectivity in the decision-making of the board and its ability to oversee management. Common impediments to independence may include but are not limited to:
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Current or recent employment at the company or a subsidiary
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Being, or representing, a shareholder with a substantial shareholding in the company
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Interlocking directorships
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Having any other interest, business, or other relationship which could, or could reasonably be perceived to,
materially interfere with a directors ability to act in the best interests of the company
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BlackRock believes that the board is
able to fulfill its fiduciary duty when there is a clearly independent, senior non-executive director to chair it or, where the chairman is also the CEO (or is otherwise not independent), a lead independent
director. The role of this director is to enhance the effectiveness of the independent members of the board through shaping the agenda, ensuring adequate information is provided to the board and encouraging independent participation in board
deliberations. The lead independent director or another appropriate director should be available to shareholders in those situations where an independent director is best placed to explain and justify a companys approach.
There are matters for which the board has responsibility that may involve a conflict of interest for executives or for affiliated directors. BlackRock
believes that objective oversight of such matters is best achieved when the board forms committees comprised entirely of independent directors. In many markets, these committees of the board specialize in audit, director nominations and compensation
matters. An ad hoc committee might also be formed to decide on a special transaction, particularly one involving a related party, or to investigate a significant adverse event.
Sufficient capacity
As the role of a director is
demanding, directors must be able to commit an appropriate amount of time to board and committee matters. It is important that every director has the capacity to meet all of his/her responsibilities including when there are unforeseen events
and therefore, he/she should not take on an excessive number of roles that would impair his/her ability to fulfill his/her duties.
Auditors and audit-related issues
BlackRock recognizes the critical importance of financial statements, which should provide a true and fair
picture of a companys financial condition. Accordingly, the assumptions made by management and reviewed by the auditor in preparing the financial statements should be reasonable and justified.
The accuracy of financial statements, inclusive of financial and non-financial information, is clearly of paramount
importance to BlackRock. Investors views on financial materiality are developing to encompass a broader range of risks. Over time, we expect increased scrutiny of the assumptions underlying financial reports.
In this context, audit committees, or equivalent, play a vital role in a companys financial reporting system by providing independent oversight of the
accounts, material financial and non-financial information, internal control frameworks, and Enterprise Risk Management systems. BlackRock believes that effective audit and risk committee oversight strengthens
the quality and reliability of a companys financial statements and provides an important level of reassurance to shareholders.
We hold the members
of the audit committee or equivalent responsible for overseeing the management of the audit function. Audit committees or equivalent should have clearly articulated charters that set out the committees responsibilities and have a rotation plan
in place that allows for a periodic refreshment of the committee memberships.
B-7
We take particular note of critical accounting matters, cases involving significant financial restatements or ad
hoc notifications of material financial weakness. In this respect, audit committees should provide timely disclosure on the remediation of Key and Critical Audit Matters identified either by the external auditor or Internal Audit function.
The integrity of financial statements depends on the auditor being free of any impediments to being an effective check on management. To that end, we believe
it is important that auditors are, and are seen to be, independent. Where the audit firm provides services to the company in addition to the audit, the fees earned should be disclosed and explained. Audit committees should have in place a procedure
for assessing annually the independence of the auditor and the quality of the external audit process.
Comprehensive disclosure provides investors with a
sense of the companys long-term operational risk management practices and, more broadly, the quality of the boards oversight. The audit committee or equivalent should periodically review the companys risk assessment and risk
management policies and significant risks and exposures identified by management, the internal auditors or the independent accountants, and managements steps to address them. In the absence of robust disclosures, we may reasonably conclude
that companies are not adequately managing risk.
Capital structure, mergers, asset sales and other special transactions
The capital structure of a company is critical to shareholders as it impacts the value of their investment and the priority of their interest in the
company relative to that of other equity or debt investors. Pre-emptive rights are a key protection for shareholders against the dilution of their interests.
Effective voting rights are basic rights of share ownership and we believe strongly in one vote for one share as a guiding principle that supports effective
corporate governance. Shareholders, as the residual claimants, have the strongest interest in protecting company value, and voting power should match economic exposure.
In principle, we disagree with the creation of a share class with equivalent economic exposure and preferential, differentiated voting rights as it violates
the fundamental corporate governance principle of proportionality, and results in a concentration of power in the hands of a few shareholders, thus disenfranchising other shareholders and amplifying any potential conflicts of interest. However, we
recognize that in certain markets, at least for a period of time, companies may have a valid argument for dual-class listings. We believe that such companies should review these share class structures on a regular basis or as company circumstances
change. Additionally, they should receive shareholder approval of their capital structure on a periodic basis via a management proposal at the companys shareholder meeting. The proposal should give unaffiliated shareholders the opportunity to
affirm the current structure or establish mechanisms to end or phase out controlling structures at the appropriate time, while minimizing costs to shareholders.
In assessing mergers, asset sales, or other special transactions, BlackRocks primary consideration is the long-term economic interests of our clients as
shareholders. Boards proposing a transaction need to clearly explain the economic and strategic rationale behind it. We will review a proposed transaction to determine the degree to which it enhances long-term shareholder value. We would prefer that
proposed transactions have the unanimous support of the board and have been negotiated at arms length. We may seek reassurance from the board that executives and/or board members financial interests in a given transaction have not
adversely affected their ability to place shareholders interests before their own. Where the transaction involves related parties, we would expect the recommendation to support it to come from the independent directors, and ideally, the terms
have been assessed through an independent appraisal process. In addition, it is good practice that it be approved by a separate vote of the non-conflicted shareholders.
BlackRock believes that shareholders have a right to dispose of company shares in the open market without unnecessary restriction. In our view, corporate
mechanisms designed to limit shareholders ability to sell their shares
B-8
are contrary to basic property rights. Such mechanisms can serve to protect and entrench interests other than those of the shareholders. We believe that shareholders are broadly capable of making
decisions in their own best interests. We expect any so-called shareholder rights plans proposed by a board to be subject to shareholder approval upon introduction and periodically thereafter for
continuation.
Compensation and benefits
BlackRock expects a companys board of directors to put in place a compensation structure that incentivizes and rewards executives appropriately and is
linked with performance that aligns with shareholder interests, particularly the generation of sustainable long-term value. We would expect the compensation committee to carefully consider the specific circumstances of the company and the key
individuals the board is trying to incentivize. We encourage companies to ensure that their compensation plans incorporate appropriate and rigorous performance metrics consistent with corporate strategy and market practice. We use third party
research, in addition to our own analysis, to evaluate existing and proposed compensation structures. We hold members of the compensation committee or equivalent board members accountable for poor compensation practices or structures.
BlackRock believes that there should be a clear link between variable pay and company performance that drives value creation. We are not supportive of one-off or special bonuses unrelated to company or individual performance. Where discretion has been used by the compensation committee, we expect disclosure relating to how and why the discretion was used, and
further, how the adjusted outcome is aligned with the interests of shareholders. We acknowledge that the use of peer group evaluation by compensation committees can help ensure competitive pay; however, we are concerned when the rationale for
increases in total compensation at a company is solely based on peer benchmarking rather than a rigorous measure of outperformance.
We support incentive
plans that foster the sustainable achievement of results consistent with the companys long-term strategic initiatives. The vesting timeframes associated with incentive plans should facilitate a focus on long-term value creation. We believe
consideration should be given to building claw back provisions into incentive plans such that executives would be required to forgo rewards when they are not justified by actual performance and/or when compensation was based on faulty financial
reporting or deceptive business practices. We also favor recoupment from any senior executive whose behavior caused material financial harm to shareholders, material reputational risk to the company, or resulted in a criminal investigation, even if
such actions did not ultimately result in a material restatement of past results. Compensation committees should guard against contractual arrangements that would entitle executives to material compensation for early termination of their contract.
Finally, pension contributions and other deferred compensation arrangements should be reasonable in light of market practice.
Non-executive directors should be compensated in a manner that is commensurate with the time and effort expended in fulfilling their professional responsibilities. Additionally, these compensation arrangements
should not risk compromising their independence or aligning their interests too closely with those of the management, whom they are charged with overseeing.
Environmental and social issues
We believe that well-managed companies will deal effectively with material ESG factors relevant to their businesses. As stated throughout this document,
governance is the core structure by which boards can oversee the creation of sustainable long-term value appropriate risk oversight of environmental and social (E&S) considerations stems from this construct.
Robust disclosure is essential for investors to effectively gauge companies business practices and strategic planning related to E&S risks and
opportunities. When a companys reporting is inadequate, investors, including BlackRock, will increasingly conclude that companies are not adequately managing risk. Given the increased understanding of material sustainability risks and
opportunities, and the need for better information to assess them, BlackRock will advocate for continued improvement in companies reporting and will hold management and/or directors accountable where disclosures or the business practices
underlying them are inadequate.
B-9
BlackRock views the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and the
standards put forward by the Sustainability Accounting Standards Board (SASB) as appropriate and complementary frameworks for companies to adopt for the disclosure of financially material sustainability information. While the TCFD framework was
crafted with the aim of climate-related risk disclosure, the four pillars of the TCFD Governance, Strategy, Risk Management, and Metrics and Targets are a useful way for companies to disclose how they identify, assess, manage, and oversee a variety
of sustainability-related risks and opportunities. SASBs industry-specific guidance (as identified in its materiality map) is beneficial in helping companies identify key performance indicators (KPIs) across various dimensions of
sustainability that are considered to be financially material and decision-useful within their industry,
Accordingly, we ask companies to:
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Disclose the identification, assessment, management, and oversight of sustainability-related risks in accordance
with the four pillars of TCFD; and
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Publish SASB-aligned reporting with industry-specific, material metrics and rigorous targets2.
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Companies may also adopt or refer to guidance on sustainable and responsible
business conduct issued by supranational organizations such as the United Nations or the Organization for Economic Cooperation and Development. Further, industry specific initiatives on managing specific operational risks may be useful. Companies
should disclose any global standards adopted, the industry initiatives in which they participate, any peer group benchmarking undertaken, and any assurance processes to help investors understand their approach to sustainable and responsible business
practices.
Climate risk
BlackRock believes that
climate change has become a defining factor in companies long-term prospects. We expect every company to help their investors understand how the company may be impacted by climate-related risk and opportunities, and how they are considered
within strategy. Specifically, we expect companies to articulate how they are aligned to a scenario in which global warming is limited to well below 2°C and is consistent with a global aspiration to reach net zero GHG emissions by 20503.
The public and private sectors have roles to play in aligning greenhouse gas reduction efforts with
targets based on science, where available, to curb the worst effects of climate change and reach the global goal of carbon neutrality by the mid-century. Companies have an opportunity to utilize and contribute
to the development of current and future low-carbon transition technologies, which are an important consideration for the rate at which emissions can be reduced. We expect companies to disclose how they are
considering these challenges, alongside opportunities for innovation, within their strategy and emissions reduction efforts.
Key stakeholder interests
Given our expectation that companies operate in long-term shareholders interests to create sustainable value and fulfill their purpose,
BlackRock believes that companies should take due account of their key stakeholders interests. It is for each company to determine its key stakeholders based on what is material to its business, but they are likely to include employees,
business partners (such as suppliers and distributors), clients and consumers, government and regulators, and the communities in which they operate, as well as investors.
Having regard to the interests of key stakeholders recognizes the collective nature of long-term value creation, and the extent to which each companys
prospects for growth are tied to its ability to foster strong sustainable relationships with those stakeholders. Companies should articulate how they address adverse impacts that could
2 See our commentary on our approach to engagement on TCFD and SASB aligned reporting for greater detail of
our expectations.
3 The global aspiration is reflective of aggregated efforts; companies in developed
and emerging markets are not equally equipped to transition their business and reduce emissions at the same ratethose in developed markets with the largest market capitalization are better positioned to adapt their business models at an
accelerated pace. Government policy and regional targets may be reflective of these realities.
B-10
arise from their business practices and affect critical business relationships with their stakeholders. We expect companies to implement, to the extent appropriate, monitoring processes (often
referred to as due diligence) to identify and mitigate potential adverse impacts, and grievance mechanisms to remediate any actual adverse impacts. The maintenance of trust within these relationships is often equated with a companys social
license to operate.
To ensure transparency and accountability, companies should report on how they have identified their key stakeholders and considered
their interests in business decision-making, demonstrating the applicable governance, strategy, risk management, and metrics and targets. This approach should be overseen by the board, whose job it is to ensure that the approach taken is informed by
and aligns with the companys purpose.
General corporate governance matters and shareholder protections
BlackRock believes that shareholders have a right to material and timely information on the financial performance and viability of the companies in which they
invest. In addition, companies should also publish information on the governance structures in place and the rights of shareholders to influence these structures. The reporting and disclosure provided by companies help shareholders assess whether
their economic interests have been protected and the quality of the boards oversight of management. We believe shareholders should have the right to vote on key corporate governance matters, including changes to governance mechanisms, to
submit proposals to the shareholders meeting, and to call special meetings of shareholders.
Shareholder proposals
In most markets in which BlackRock invests on behalf of clients, shareholders have the right to submit proposals to be voted on by shareholders at a
companys annual or extraordinary meeting, as long as eligibility and procedural requirements are met. The matters that we see put forward by shareholders address a wide range of topics, including governance reforms, capital management, and
improvements in the management or disclosure of environmental and social risks.
When assessing shareholder proposals, we evaluate each proposal on its
merit, with a singular focus on its implications for long-term value creation. We consider the business and economic relevance of the issue raised, as well as its materiality and the urgency with which we believe it should be addressed. We take into
consideration the legal effect of the proposal, as shareholder proposals may be advisory or legally binding depending on the jurisdiction. We would not support proposals that we believe would result in over-reaching into the basic business decisions
of the issuer.
Where a proposal is focused on an issue that we agree needs to be addressed and the intended outcome is consistent with long-term value
creation, we will look to the board and management to demonstrate that the company has met the intent of the request made in the shareholder proposal. Where our analysis and/or engagement indicate a need for improvement in the companys
approach to the issue, we will support shareholder proposals that are reasonable and not unduly constraining on management. Alternatively, or in addition, we may vote against the re-election of one of more
directors if, in our assessment, the board has not responded sufficiently or with an appropriate sense of urgency.
BlackRocks oversight of its investment stewardship activities
Oversight
We hold ourselves
to a very high standard in our investment stewardship activities, including proxy voting. To meet this standard, BIS is comprised of BlackRock employees who do not have other responsibilities other than their roles in BIS. BIS is considered an
investment function.
BlackRock maintains three regional advisory committees (Stewardship Advisory Committees) for (a) the Americas;
(b) Europe, the Middle East and Africa (EMEA); and (c) Asia-Pacific, generally consisting of senior
B-11
BlackRock investment professionals and/or senior employees with practical boardroom experience. The regional Stewardship Advisory Committees review and advise on amendments to BIS proxy voting
guidelines covering markets within each respective region (Guidelines).
In addition to the regional Stewardship Advisory Committees, the
Investment Stewardship Global Oversight Committee (Global Committee) is a risk-focused committee, comprised of senior representatives from various BlackRock investment teams, a senior legal representative, the Global Head of Investment
Stewardship (Global Head), and other senior executives with relevant experience and team oversight.
The Global Head has primary oversight of
the activities of BIS, including voting in accordance with the Guidelines, which require the application of professional judgment and consideration of each companys unique circumstances. The Global Committee reviews and approves amendments to
these Principles. The Global Committee also reviews and approves amendments to the regional Guidelines, as proposed by the regional Stewardship Advisory Committees.
In addition, the Global Committee receives and reviews periodic reports regarding the votes cast by BIS, as well as updates on material process issues,
procedural changes, and other risk oversight considerations. The Global Committee reviews these reports in an oversight capacity as informed by the BIS corporate governance engagement program and the Guidelines.
BIS carries out engagement with companies, monitors and executes proxy votes, and conducts vote operations (including maintaining records of votes cast) in a
manner consistent with the relevant Guidelines. BIS also conducts research on corporate governance issues and participates in industry discussions to contribute to and keep abreast of important developments in the corporate governance field. BIS may
utilize third parties for certain of the foregoing activities and performs oversight of those third parties. BIS may raise complicated or particularly controversial matters for internal discussion with the relevant investment teams and/or refer such
matters to the appropriate regional Stewardship Advisory Committees for review, discussion and guidance prior to making a voting decision.
Vote execution
We carefully consider proxies submitted to funds and other fiduciary account(s) (Fund or Funds) for which
we have voting authority. BlackRock votes (or refrains from voting) proxies for each Fund for which we have voting authority based on our evaluation of the best long-term economic interests of our clients as shareholders, in the exercise of our
independent business judgment, and without regard to the relationship of the issuer of the proxy (or any shareholder proponent or dissident shareholder) to the Fund, the Funds affiliates (if any), BlackRock or BlackRocks affiliates, or
BlackRock employees (see Conflicts management policies and procedures, below).
When exercising voting rights, BlackRock will normally vote on
specific proxy issues in accordance with the Guidelines for the relevant market. The Guidelines are reviewed regularly and are amended consistent with changes in the local market practice, as developments in corporate governance occur, or as
otherwise deemed advisable by the applicable Stewardship Advisory Committees. BIS analysts may, in the exercise of their professional judgment, conclude that the Guidelines do not cover the specific matter upon which a proxy vote is required or that
an exception to the Guidelines would be in the best long-term economic interests of BlackRocks clients.
In the uncommon circumstance of there being
a vote with respect to fixed income securities or the securities of privately held issuers, the decision generally will be made by a Funds portfolio managers and/or BIS based on their assessment of the particular transactions or other matters
at issue.
In certain markets, proxy voting involves logistical issues which can affect BlackRocks ability to vote such proxies, as well as the
desirability of voting such proxies. These issues include, but are not limited to: (i) untimely notice of shareholder meetings; (ii) restrictions on a foreigners ability to exercise votes; (iii) requirements to vote proxies in
person; (iv) share-blocking (requirements that investors who exercise their voting rights surrender the right to dispose of their holdings for some specified period in proximity to the shareholder meeting); (v) potential difficulties in
translating the proxy; (vi) regulatory constraints; and (vii) requirements to provide local agents with unrestricted powers of attorney to facilitate voting instructions. We are not supportive of impediments to the exercise of voting
rights such as share-blocking or overly burdensome administrative requirements.
B-12
As a consequence, BlackRock votes proxies on a best-efforts basis. In addition, BIS may determine
that it is generally in the best interests of BlackRocks clients not to vote proxies if the costs (including but not limited to opportunity costs associated with share-blocking constraints) associated with exercising a vote are expected to
outweigh the benefit the client would derive by voting on the proposal.
Portfolio managers have full discretion to vote the shares in the Funds they
manage based on their analysis of the economic impact of a particular ballot item. Portfolio managers may from time to time reach differing views on how best to maximize economic value with respect to a particular investment. Therefore, portfolio
managers may, and sometimes do, vote shares in the Funds under their management differently from one another. However, because BlackRocks clients are mostly long-term investors with long-term economic goals, ballots are frequently cast in a
uniform manner.
Conflicts management policies and procedures
BIS maintains policies and procedures that seek to prevent undue influence on BlackRocks proxy voting activity. Such influence might stem from any
relationship between the investee company (or any shareholder proponent or dissident shareholder) and BlackRock, BlackRocks affiliates, a Fund or a Funds affiliates, or BlackRock employees. The following are examples of sources of
perceived or potential conflicts of interest:
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BlackRock clients who may be issuers of securities or proponents of shareholder resolutions
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BlackRock business partners or third parties who may be issuers of securities or proponents of shareholder
resolutions
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BlackRock employees who may sit on the boards of public companies held in Funds managed by BlackRock
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Significant BlackRock, Inc. investors who may be issuers of securities held in Funds managed by BlackRock
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Securities of BlackRock, Inc. or BlackRock investment funds held in Funds managed by BlackRock
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BlackRock, Inc. board members who serve as senior executives of public companies held in Funds managed by
BlackRock
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BlackRock has taken certain steps to mitigate perceived or potential conflicts including, but not limited to, the following:
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Adopted the Guidelines which are designed to advance our clients interests in the companies in which
BlackRock invests on behalf of clients.
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Established a reporting structure that separates BIS from employees with sales, vendor management, or business
partnership roles. In addition, BlackRock seeks to ensure that all engagements with corporate issuers, dissident shareholders or shareholder proponents are managed consistently and without regard to BlackRocks relationship with such parties.
Clients or business partners are not given special treatment or differentiated access to BIS. BIS prioritizes engagements based on factors including, but not limited to, our need for additional information to make a voting decision or our view on
the likelihood that an engagement could lead to positive outcome(s) over time for the economic value of the company. Within the normal course of business, BIS may engage directly with BlackRock clients, business partners and/or third parties, and/or
with employees with sales, vendor management, or business partnership roles, in discussions regarding our approach to stewardship, general corporate governance matters, client reporting needs, and/or to otherwise ensure that proxy-related client
service levels are met.
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Determined to engage, in certain instances, an independent fiduciary to vote proxies as a further safeguard to
avoid potential conflicts of interest, to satisfy regulatory compliance requirements, or as may be otherwise
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B-13
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required by applicable law. In such circumstances, the independent fiduciary provides BlackRocks proxy voting agent with instructions, in accordance with the Guidelines, as to how to vote
such proxies, and BlackRocks proxy voting agent votes the proxy in accordance with the independent fiduciarys determination. BlackRock uses an independent fiduciary to vote proxies of BlackRock, Inc. and companies affiliated with
BlackRock, Inc. BlackRock may also use an independent fiduciary to vote proxies of:
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public companies that include BlackRock employees on their boards of directors,
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ii.
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public companies of which a BlackRock, Inc. board member serves as a senior executive,
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iii.
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public companies that are the subject of certain transactions involving BlackRock Funds,
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iv.
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public companies that are joint venture partners with BlackRock, and
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v.
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public companies when legal or regulatory requirements compel BlackRock to use an independent fiduciary.
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In selecting an independent fiduciary, we assess several characteristics, including but not limited to: independence, an ability to
analyze proxy issues and vote in the best economic interest of our clients, reputation for reliability and integrity, and operational capacity to accurately deliver the assigned votes in a timely manner. We may engage more than one independent
fiduciary, in part in order to mitigate potential or perceived conflicts of interest at an independent fiduciary. The Global Committee appoints and reviews the performance of the independent fiduciaries, generally on an annual basis.
When so authorized, BlackRock acts as a securities lending agent on behalf of Funds. With regard to the relationship between securities lending and proxy
voting, BlackRocks approach is driven by our clients economic interests. The decision whether to recall securities on loan to vote is based on a formal analysis of the revenue producing value to clients of loans, against the assessed
economic value of casting votes. Generally, we expect that the likely economic value to clients of casting votes would be less than the securities lending income, either because, in our assessment, the resolutions being voted on will not have
significant economic consequences or because the outcome would not be affected by BlackRock voting the loaned securities that were recalled in order to vote. BlackRock also may, in our discretion, determine that the value of voting outweighs the
cost of recalling shares, and thus recall shares to vote in that instance.
Periodically, BlackRock reviews our process for determining whether to recall
securities on loan in order to vote and may modify it as necessary.
Voting guidelines
The issue-specific Guidelines published for each region/country in which we vote are intended to summarize BlackRocks general philosophy and approach to
issues that may commonly arise in the proxy voting context in each market where we invest. The Guidelines are not intended to be exhaustive. BIS applies the Guidelines on a
case-by-case basis, in the context of the individual circumstances of each company and the specific issue under review. As such, the Guidelines do not indicate how BIS
will vote in every instance. Rather, they reflect our view about corporate governance issues generally, and provide insight into how we typically approach issues that commonly arise on corporate ballots.
Reporting and vote transparency
Investment stewardship is how we use our voice as an investor to promote sound corporate governance and business practices to help maximize long-term
shareholder value for our clients, the vast majority of whom are investing for long-term goals such as retirement. We are committed to transparency in the stewardship work we do on behalf of clients. We inform clients about our engagement and voting
policies and activities through direct communication and through disclosure on our website. Each year we publish an annual report as well as quarterly stewardship
B-14
reports which provide a global overview of our investment stewardship engagement and voting activities during the quarter, including market developments, speaking engagements, and engagement, and
voting statistics. Additionally, we make public our market-specific voting guidelines for the benefit of clients and companies with whom we engage. We also publish commentaries to share our perspective on market developments and emerging key themes.
At a more granular level, we publish quarterly our vote record for each company that held a shareholder meeting during the period, showing how we voted
on each proposal and explaining any votes against management proposals or on shareholder proposals. For shareholder meetings where a vote might be high profile or of significant interest to clients, we publish a voting bulletin shortly after the
meeting, disclosing and explaining our vote on key proposals. We also publish a quarterly list of all companies we engaged and the key topics addressed in the engagement meeting.
In this way, we help inform our clients about the work we do on their behalf in promoting the governance and business practices that support long-term
sustainable value creation.
This document is provided for information purposes only and is subject to change. Reliance upon this information is at the
sole discretion of the reader.
Prepared by BlackRock, Inc.
©2020 BlackRock, Inc. All rights reserved.
B-15
BlackRock
Investment
Stewardship
Proxy voting guidelines for U.S. securities
Effective as of January 2021
BlackRock
B-16
CONTENTS
If you would like additional information, please contact:
ContactStewardship@blackrock.com
B-17
These guidelines should be read in conjunction with the BlackRock Investment Stewardship Global Principles.
Introduction
We believe
BlackRock has a responsibility to monitor and provide feedback to companies, in our role as stewards of our clients investments. BlackRock Investment Stewardship (BIS) does this through engagement with management teams and/or board
members on material business issues, including environmental, social, and governance (ESG) matters and, for those clients who have given us authority, through voting proxies in the best long-term economic interests of our clients.
The following issue-specific proxy voting guidelines (the Guidelines) are intended to summarize BIS general philosophy and approach to ESG
factors, as well as our expectations of directors, that most commonly arise in proxy voting for U.S. securities. These Guidelines are not intended to limit the analysis of individual issues at specific companies or provide a guide to how BlackRock
will vote in every instance. They are applied with discretion, taking into consideration the range of issues and facts specific to the company, as well as individual ballot items.
Voting guidelines
These
guidelines are divided into eight key themes, which group together the issues that frequently appear on the agenda of annual and extraordinary meetings of shareholders:
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Auditors and audit-related issues
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Mergers, acquisitions, asset sales, and other special transactions
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Environmental and social issues
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General corporate governance matters
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Shareholder protections
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Boards and directors
The
effective performance of the board is critical to the economic success of the company and the protection of shareholders interests. As part of their responsibilities, board members owe fiduciary duties to shareholders in overseeing the
strategic direction and operation of the company. For this reason, BlackRock focuses on directors in many of our engagements and sees the election of directors as one of our most critical responsibilities.
Disclosure of material issues that affect the companys long-term strategy and value creation, including material ESG factors, is essential for
shareholders to be able to appropriately understand and assess how effectively the board is identifying, managing, and mitigating risks.
B-18
Where we conclude that a board has failed to address or disclose one or more material issues within a specified
timeframe, we may hold directors accountable or take other appropriate action in the context of our voting decisions.
Director elections
Where a board has not adequately demonstrated, through company disclosures and actions, how material issues are appropriately identified, managed, and
overseen, we will consider withholding our support for the re-election of directors whom we hold accountable.
In
addition, we may withhold votes from directors or members of particular board committees in certain situations, as indicated below.
Independence
We expect a majority of the directors on the board to be independent. In addition, all members of key committees, including audit, compensation, and
nominating/governance committees, should be independent. Our view of independence may vary from listing standards.
Common impediments to independence may
include:
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Employment as a senior executive by the company or a subsidiary within the past five years
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An equity ownership in the company in excess of 20%
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Having any other interest, business, or relationship (professional or personal) which could, or could reasonably
be perceived to, materially interfere with the directors ability to act in the best interests of the company
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When evaluating controlled companies, as defined by the U.S. stock exchanges, we may vote against insiders or
affiliates who sit on the audit committee, but not other key committees
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We may vote against directors serving on key committees who we
do not consider to be independent.
Oversight
We
expect the board to exercise appropriate oversight over management and business activities of the company. We will consider voting against committee members and/or individual directors in the following circumstances:
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Where the board has failed to exercise sufficient oversight with regard to material ESG risk factors, or the
company has failed to provide shareholders with adequate disclosure to conclude appropriate strategic consideration is given to these factors by the board
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Where the board has failed to exercise oversight with regard to accounting practices or audit oversight, we will
consider voting against the current audit committee, and any other members of the board who may be responsible. For example, we may vote against members of the audit committee during a period when the board failed to facilitate quality, independent
auditing if substantial accounting irregularities suggest insufficient oversight by that committee
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Members of the compensation committee during a period in which executive compensation appears excessive relative
to performance and peers, and where we believe the compensation committee has not already substantially addressed this issue
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B-19
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The chair of the nominating/governance committee, or where no chair exists, the nominating/governance committee
member with the longest tenure, where the board is not comprised of a majority of independent directors. This may not apply in the case of a controlled company
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Where it appears the director has acted (at the company or at other companies) in a manner that compromises
his/her ability to represent the best long-term economic interests of shareholders
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Where a director has a multi-year pattern of poor attendance at combined board and applicable committee meetings,
or a director has poor attendance in a single year with no disclosed rationale. Excluding exigent circumstances, BlackRock generally considers attendance at less than 75% of the combined board and applicable committee meetings to be poor attendance
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Where a director serves on an excessive number of boards, which may limit his/her capacity to focus on each
boards requirements. The following identifies the maximum number of boards on which a director may serve, before he/she is considered to be over-committed:
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Public Company
Executive or Fund
Manager4
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# Outside Public Boards5
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Total # of Public Boards
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Director A
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✓
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1
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2
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Director B
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3
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4
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Responsiveness to shareholders
We expect a board to be engaged and responsive to its shareholders, including acknowledging voting outcomes for shareholder proposals, director elections,
compensation, and other ballot items. Where we believe a board has not substantially addressed shareholder concerns, we may vote against the responsible committees and/or individual directors. The following illustrates common circumstances:
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The independent chair or lead independent director, members of the nominating/governance committee, and/or the
longest tenured director(s), where we observe a lack of board responsiveness to shareholders, evidence of board entrenchment, and/or failure to plan for adequate board member succession
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The chair of the nominating/governance committee, or where no chair exists, the nominating/governance committee
member with the longest tenure, where board member(s) at the most recent election of directors have received against votes from more than 25% of shares voted, and the board has not taken appropriate action to respond to shareholder concerns. This
may not apply in cases where BlackRock did not support the initial against vote
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The independent chair or lead independent director and/or members of the nominating/governance committee, where a
board fails to consider shareholder proposals that receive substantial support, and the proposals, in our view, have a material impact on the business, shareholder rights, or the potential for long-term value creation
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4 In this instance, fund manager refers to individuals whose full-time employment involves
responsibility for the investment and oversight of fund vehicles, and those who have employment as professional investors and provide oversight for those holdings.
5 In addition to the company under review
B-20
Shareholder rights
We expect a board to act with integrity and to uphold governance best practices. Where we believe a board has not acted in the best interests of its
shareholders, we may vote against the appropriate committees and/or individual directors. The following illustrates common circumstances:
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The independent chair or lead independent director and members of the nominating/governance committee, where a
board implements or renews a poison pill without shareholder approval
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The independent chair or lead independent director and members of the nominating/governance committee, where a
board amends the charter/articles/bylaws such that the effect may be to entrench directors or to significantly reduce shareholder rights
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Members of the compensation committee where the company has repriced options without shareholder approval
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If a board maintains a classified structure, it is possible that the director(s) with whom we have a particular
concern may not be subject to election in the year that the concern arises. In such situations, if we have a concern regarding the actions of a committee and the responsible member(s) or committee chair are not up for
re-election, we will generally register our concern by voting against all available members of the relevant committee
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Board composition and effectiveness
We encourage boards
to periodically renew their membership to ensure relevant skills and experience within the boardroom. To this end, regular performance reviews and skills assessments should be conducted by the nominating/governance committee or the lead independent
director.
Furthermore, we expect boards to be comprised of a diverse selection of individuals who bring their personal and professional experiences to
bear in order to create a constructive debate of a variety of views and opinions in the boardroom. We recognize that diversity has multiple dimensions. In identifying potential candidates, boards should take into consideration the full breadth of
diversity, including personal factors, such as gender, ethnicity, race, and age, as well as professional characteristics, such as a directors industry, area of expertise, and geographic location. In addition to other elements of diversity, we
encourage companies to have at least two women directors on their board. Our publicly available commentary explains our approach to engaging on board diversity.
We encourage boards to disclose:
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The mix of competencies, experience, and other qualities required to effectively oversee and guide management in
light of the stated long-term strategy of the company
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The process by which candidates are identified and selected, including whether professional firms or other
sources outside of incumbent directors networks have been engaged to identify and/or assess candidates
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The process by which boards evaluate themselves and any significant outcomes of the evaluation process, without
divulging inappropriate and/or sensitive details
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Demographics related to board diversity, including, but not limited to, gender, ethnicity, race, age, and
geographic location, in addition to measurable milestones to achieve a boardroom reflective of multi-faceted racial, ethnic, and gender representation
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B-21
Our primary concern is that board members are able to contribute effectively as corporate strategy evolves and
business conditions change. We acknowledge that no single person can be expected to bring all relevant skill sets to a board; at the same time, we generally do not believe it is necessary or appropriate to have any particular director on the board
solely by virtue of a singular background or specific area of expertise.
Where boards find that age limits or term limits are the most efficient and
objective mechanism for ensuring periodic board refreshment, we generally defer to the boards determination in setting such limits. BlackRock will also consider the average board tenure to evaluate processes for board renewal. We may oppose
boards that appear to have an insufficient mix of short-, medium-, and long-tenured directors.
To the extent that a company has not adequately accounted
for diversity in its board composition within a reasonable timeframe, based on our assessment, we may vote against members of the nominating/governance committee for an apparent lack of commitment to board effectiveness.
Board size
We typically defer to the board in setting
the appropriate size and believe directors are generally in the best position to assess the optimal board size to ensure effectiveness. However, we may oppose boards that appear too small to allow for the necessary range of skills and experience or
too large to function efficiently.
CEO and management succession planning
There should be a robust CEO and senior management succession plan in place at the board level that is reviewed and updated on a regular basis. We expect
succession planning to cover both long-term planning consistent with the strategic direction of the company and identified leadership needs over time, as well as short-term planning in the event of an unanticipated executive departure. We encourage
the company to explain its executive succession planning process, including where accountability lies within the boardroom for this task, without prematurely divulging sensitive information commonly associated with this exercise.
Classified board of directors/staggered terms
We
believe that directors should be re-elected annually; classification of the board generally limits shareholders rights to regularly evaluate a boards performance and select directors. While we will
typically support proposals requesting board de-classification, we may make exceptions, should the board articulate an appropriate strategic rationale for a classified board structure, such as when a company
needs consistency and stability during a time of transition, e.g. newly public companies or companies undergoing a strategic restructuring. A classified board structure may also be justified at non-operating
companies, e.g. closed-end funds or business development companies (BDC)6, in certain circumstances. We would, however, expect boards with a classified
structure to periodically review the rationale for such structure and consider when annual elections might be more appropriate.
Without a voting
mechanism to immediately address concerns about a specific director, we may choose to vote against the available slate of directors (see Shareholder rights for additional detail).
Contested director elections
The details of contested
elections, or proxy contests, are assessed on a case-by-case basis. We evaluate a number of factors, which may include: the qualifications of the dissident and
management candidates; the validity of the concerns identified by the dissident; the viability of both the dissidents and managements plans; the ownership stake and holding period of the dissident; the likelihood that the
dissidents solutions will produce the desired change; and whether the dissident represents the best option for enhancing long-term shareholder value.
6 A BDC is a special investment vehicle under the Investment Company Act of 1940 that is designed to
facilitate capital formation for small and middle-market companies.
B-22
Cumulative voting
We believe that a majority vote standard is in the best long-term interests of shareholders. It ensures director accountability through the requirement to be
elected by more than half of the votes cast. As such, we will generally oppose proposals requesting the adoption of cumulative voting, which may disproportionately aggregate votes on certain issues or director candidates.
Director compensation and equity programs
We believe
that compensation for directors should be structured to attract and retain directors, while also aligning their interests with those of shareholders. We believe director compensation packages that are based on the companys long-term value
creation and include some form of long-term equity compensation are more likely to meet this goal. In addition, we expect directors to build meaningful share ownership over time.
Majority vote requirements
BlackRock believes that
directors should generally be elected by a majority of the shares voted and will normally support proposals seeking to introduce bylaws requiring a majority vote standard for director elections. Majority vote standards assist in ensuring that
directors who are not broadly supported by shareholders are not elected to serve as their representatives. Some companies with a plurality voting standard have adopted a resignation policy for directors who do not receive support from at least a
majority of votes cast. Where we believe that the company already has a sufficiently robust majority voting process in place, we may not support a shareholder proposal seeking an alternative mechanism.
We note that majority voting may not be appropriate in all circumstances, for example, in the context of a contested election, or for majority-controlled
companies.
Risk oversight
Companies should have an
established process for identifying, monitoring, and managing business and material ESG risks. Independent directors should have access to relevant management information and outside advice, as appropriate, to ensure they can properly oversee risk.
We encourage companies to provide transparency around risk management, mitigation, and reporting to the board. We are particularly interested in understanding how risk oversight processes evolve in response to changes in corporate strategy and/or
shifts in the business and related risk environment. Comprehensive disclosure provides investors with a sense of the companys long-term operational risk management practices and, more broadly, the quality of the boards oversight. In the
absence of robust disclosures, we may reasonably conclude that companies are not adequately managing risk.
Separation of chairman and CEO
We believe that independent leadership is important in the boardroom. There are two commonly accepted structures for independent board leadership: 1) an
independent chairman; or 2) a lead independent director when the roles of chairman and CEO are combined.
In the absence of a significant governance
concern, we defer to boards to designate the most appropriate leadership structure to ensure adequate balance and independence.
In the event that the
board chooses a combined chair/CEO model, we generally support the designation of a lead independent director if they have the power to: 1) provide formal input into board meeting agendas; 2)
B-23
call meetings of the independent directors; and 3) preside at meetings of independent directors. Furthermore, while we anticipate that most directors will be elected annually, we believe an
element of continuity is important for this role to provide appropriate leadership balance to the chair/CEO.
The following table illustrates examples of
responsibilities under each board leadership model:
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Combined Chair/CEO Model
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Separate Chair Model
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Chair/CEO
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Lead Independent Director
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|
Chair
|
|
|
|
|
Board Meetings
|
|
Authority to call full meetings of the board of directors
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|
Attends full meetings of the board of directors
Authority to call meetings of independent directors
Briefs CEO on issues arising from executive sessions
|
|
Authority to call full meetings of the board of directors
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|
|
|
|
Agenda
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|
Primary responsibility for shaping board agendas,
consulting with the lead independent director
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|
Collaborates with chair/CEO to set board agenda and board
information
|
|
Primary responsibility for shaping board agendas,
in conjunction with CEO
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|
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Board
Communications
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|
Communicates with all directors on key issues and concerns outside of full board meetings
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|
Facilitates discussion among independent directors on key issues and
concerns outside of full board meetings, including contributing to the oversight of CEO and management succession planning
|
|
Facilitates discussion among independent directors
on key issues and concerns outside of full board meetings, including contributing to the oversight of CEO and management succession planning
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B-24
Auditors and audit-related issues
BlackRock recognizes the critical importance of financial statements to provide a complete and accurate portrayal of a companys financial condition.
Consistent with our approach to voting on boards of directors, we seek to hold the audit committee of the board responsible for overseeing the management of the audit function at a company, and may vote against the audit committee members where the
board has failed to facilitate quality, independent auditing. We look to the audit committee report for insight into the scope of the audit committee responsibilities, including an overview of audit committee processes, issues on the audit committee
agenda, and key decisions taken by the audit committee. We take particular note of cases involving significant financial restatements or material weakness disclosures, and we expect timely disclosure and remediation of accounting irregularities.
The integrity of financial statements depends on the auditor effectively fulfilling its role. To that end, we favor an independent auditor. In addition,
to the extent that an auditor fails to reasonably identify and address issues that eventually lead to a significant financial restatement, or the audit firm has violated standards of practice that protect the interests of shareholders, we may also
vote against ratification.
From time to time, shareholder proposals may be presented to promote auditor independence or the rotation of audit firms. We
may support these proposals when they are consistent with our views as described above.
Capital structure proposals
Equal voting rights
BlackRock believes that
shareholders should be entitled to voting rights in proportion to their economic interests. We believe that companies that look to add or already have dual or multiple class share structures should review these structures on a regular basis, or as
company circumstances change. Companies with multiple share classes should receive shareholder approval of their capital structure on a periodic basis via a management proposal on the companys proxy. The proposal should give unaffiliated
shareholders the opportunity to affirm the current structure or establish mechanisms to end or phase out controlling structures at the appropriate time, while minimizing costs to shareholders.
Blank check preferred stock
We frequently oppose
proposals requesting authorization of a class of preferred stock with unspecified voting, conversion, dividend distribution, and other rights (blank check preferred stock) because they may serve as a transfer of authority from
shareholders to the board and as a possible entrenchment device. We generally view the boards discretion to establish voting rights on a when-issued basis as a potential anti-takeover device, as it affords the board the ability to place a
block of stock with an investor sympathetic to management, thereby foiling a takeover bid without a shareholder vote.
Nonetheless, we may support the
proposal where the company:
|
|
|
Appears to have a legitimate financing motive for requesting blank check authority
|
|
|
|
Has committed publicly that blank check preferred shares will not be used for anti-takeover purposes
|
|
|
|
Has a history of using blank check preferred stock for financings
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|
|
Has blank check preferred stock previously outstanding such that an increase would not necessarily provide
further anti-takeover protection but may provide greater financing flexibility
|
B-25
Increase in authorized common shares
BlackRock will evaluate requests to increase authorized shares on a
case-by-case basis, in conjunction with industry-specific norms and potential dilution, as well as a companys history with respect to the use of its common shares.
Increase or issuance of preferred stock
We
generally support proposals to increase or issue preferred stock in cases where the company specifies the voting, dividend, conversion, and other rights of such stock and where the terms of the preferred stock appear reasonable.
Stock splits
We generally support stock splits that are
not likely to negatively affect the ability to trade shares or the economic value of a share. We generally support reverse stock splits that are designed to avoid delisting or to facilitate trading in the stock, where the reverse split will not have
a negative impact on share value (e.g. one class is reduced while others remain at pre-split levels). In the event of a proposal for a reverse split that would not proportionately reduce the companys
authorized stock, we apply the same analysis we would use for a proposal to increase authorized stock.
Mergers,
acquisitions, asset sales, and other special transactions
In assessing mergers, acquisitions, asset sales, or other special transactions,
BlackRocks primary consideration is the long-term economic interests of our clients as shareholders. Boards proposing a transaction need to clearly explain the economic and strategic rationale behind it. We will review a proposed transaction
to determine the degree to which it enhances long-term shareholder value. While mergers, acquisitions, asset sales, and other special transaction proposals vary widely in scope and substance, we closely examine certain salient features in our
analyses, such as:
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|
|
The degree to which the proposed transaction represents a premium to the companys trading price. We
consider the share price over multiple time periods prior to the date of the merger announcement. We may consider comparable transaction analyses provided by the parties financial advisors and our own valuation assessments. For companies
facing insolvency or bankruptcy, a premium may not apply
|
|
|
|
There should be clear strategic, operational, and/or financial rationale for the combination
|
|
|
|
Unanimous board approval and arms-length negotiations are
preferred. We will consider whether the transaction involves a dissenting board or does not appear to be the result of an arms-length bidding process. We may also consider whether executive and/or board
members financial interests appear likely to affect their ability to place shareholders interests before their own
|
|
|
|
We prefer transaction proposals that include the fairness opinion of a reputable financial advisor assessing the
value of the transaction to shareholders in comparison to recent similar transactions
|
Poison pill plans
Where a poison pill is put to a shareholder vote by management, our policy is to examine these plans individually. Although we oppose most plans, we may
support plans that include a reasonable qualifying offer clause. Such clauses typically require shareholder ratification of the pill and stipulate a sunset provision whereby the pill expires unless it is renewed. These clauses also tend
to specify that an all-cash bid for all shares that includes a fairness opinion and evidence of financing does not trigger the pill, but forces either a special meeting at which the offer is put to a
shareholder vote, or requires the board to seek the written consent
B-26
of shareholders, where shareholders could rescind the pill at their discretion. We may also support a pill where it is the only effective method for protecting tax or other economic benefits that
may be associated with limiting the ownership changes of individual shareholders.
We generally vote in favor of shareholder proposals to rescind poison
pills.
Reimbursement of expenses for successful shareholder campaigns
We generally do not support shareholder proposals seeking the reimbursement of proxy contest expenses, even in situations where we support the shareholder
campaign. We believe that introducing the possibility of such reimbursement may incentivize disruptive and unnecessary shareholder campaigns.
Executive compensation
BlackRock expects a companys board of directors to put in place a compensation structure that incentivizes and
rewards executives appropriately and is aligned with shareholder interests, particularly the generation of sustainable long-term value.
We expect the
compensation committee to carefully consider the specific circumstances of the company and the key individuals the board is focused on incentivizing. We encourage companies to ensure that their compensation plans incorporate appropriate and rigorous
performance metrics consistent with corporate strategy and market practice. We use third party research, in addition to our own analysis, to evaluate existing and proposed compensation structures. We hold members of the compensation committee, or
equivalent board members, accountable for poor compensation practices or structures.
BlackRock believes that there should be a clear link between
variable pay and company performance that drives value creation. We are generally not supportive of one-off or special bonuses unrelated to company or individual performance. Where discretion has been used by
the compensation committee, we expect disclosure relating to how and why the discretion was used and further, how the adjusted outcome is aligned with the interests of shareholders.
We acknowledge that the use of peer group evaluation by compensation committees can help calibrate competitive pay; however, we are concerned when the
rationale for increases in total compensation is solely based on peer benchmarking, rather than absolute outperformance.
We support incentive plans that
foster the sustainable achievement of results consistent with the companys long-term strategic initiatives. The vesting timeframes associated with incentive plans should facilitate a focus on long-term value creation. Compensation committees
should guard against contractual arrangements that would entitle executives to material compensation for early termination of their contract. Finally, pension contributions and other deferred compensation arrangements should be reasonable in light
of market practice.
Say on Pay advisory resolutions
In cases where there is a Say on Pay vote, BlackRock will respond to the proposal as informed by our evaluation of compensation practices at that
particular company and in a manner that appropriately addresses the specific question posed to shareholders. In a commentary on our website, entitled BlackRock Investment Stewardships approach to executive compensation, we explain
our expectations related to executive compensation practices, our Say on Pay analysis framework, and our typical approach to engagement and voting on Say on Pay.
Where we conclude that a company has failed to align pay with performance, we will vote against the management compensation proposal and consider voting
against the compensation committee members.
B-27
Frequency of Say on Pay advisory resolutions
BlackRock will generally support annual advisory votes on executive compensation, and will consider biennial and triennial timeframes, absent compensation
concerns. In evaluating pay, we believe that the compensation committee is responsible for constructing a plan that appropriately incentivizes executives for long-term value creation, utilizing relevant metrics and structure to promote overall pay
and performance alignment.
Clawback proposals
We
generally favor recoupment from any senior executive whose compensation was based on faulty financial reporting or deceptive business practices. We also favor recoupment from any senior executive whose behavior caused material financial harm to
shareholders, material reputational risk to the company, or resulted in a criminal proceeding, even if such actions did not ultimately result in a material restatement of past results. This includes, but is not limited to, settlement agreements
arising from such behavior and paid for directly by the company. We typically support shareholder proposals on these matters unless the company already has a robust claw back policy that sufficiently addresses our concerns.
Employee stock purchase plans
We believe employee stock
purchase plans (ESPP) are an important part of a companys overall human capital management strategy and can provide performance incentives to help align employees interests with those of shareholders. The most common form of
ESPP qualifies for favorable tax treatment under Section 423 of the Internal Revenue Code. We will typically support qualified ESPP proposals.
Equity compensation plans
BlackRock supports equity
plans that align the economic interests of directors, managers, and other employees with those of shareholders. We believe that boards should establish policies prohibiting the use of equity awards in a manner that could disrupt the intended
alignment with shareholder interests (e.g. the use of stock as collateral for a loan; the use of stock in a margin account; the use of stock in hedging or derivative transactions). We may support shareholder proposals requesting the establishment of
such policies.
Our evaluation of equity compensation plans is based on a companys executive pay and performance relative to peers and whether the
plan plays a significant role in a pay-for-performance disconnect. We generally oppose plans that contain evergreen provisions, which allow for the unlimited
increase of shares reserved without requiring further shareholder approval after a reasonable time period. We also generally oppose plans that allow for repricing without shareholder approval. We may also oppose plans that provide for the
acceleration of vesting of equity awards even in situations where an actual change of control may not occur. We encourage companies to structure their change of control provisions to require the termination of the covered employee before
acceleration or special payments are triggered (commonly referred to as double trigger change of control provisions).
Golden parachutes
We generally view golden parachutes as encouragement to management to consider transactions that might be beneficial to shareholders. However, a
large potential pay-out under a golden parachute arrangement also presents the risk of motivating a management team to support a sub-optimal sale price for a company.
When determining whether to support or oppose an advisory vote on a golden parachute plan, BlackRock may consider several factors, including:
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Whether we believe that the triggering event is in the best interests of shareholders
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B-28
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Whether management attempted to maximize shareholder value in the triggering event
|
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The percentage of total premium or transaction value that will be transferred to the management team, rather than
shareholders, as a result of the golden parachute payment
|
|
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Whether excessively large excise tax gross-up payments are part of the pay-out
|
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Whether the pay package that serves as the basis for calculating the golden parachute payment was reasonable in
light of performance and peers
|
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Whether the golden parachute payment will have the effect of rewarding a management team that has failed to
effectively manage the company
|
It may be difficult to anticipate the results of a plan until after it has been triggered; as a result,
BlackRock may vote against a golden parachute proposal even if the golden parachute plan under review was approved by shareholders when it was implemented.
We may support shareholder proposals requesting that implementation of such arrangements require shareholder approval. We generally support proposals
requiring shareholder approval of plans that exceed 2.99 times an executives current salary and bonus, including equity compensation.
Option
exchanges
We believe that there may be legitimate instances where underwater options create an overhang on a companys capital structure and a
repricing or option exchange may be warranted. We will evaluate these instances on a case-by-case basis. BlackRock may support a request to reprice or exchange
underwater options under the following circumstances:
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The company has experienced significant stock price decline as a result of macroeconomic trends, not individual
company performance
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Directors and executive officers are excluded; the exchange is value neutral or value creative to shareholders;
tax, accounting, and other technical considerations have been fully contemplated
|
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|
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There is clear evidence that absent repricing, the company will suffer serious employee incentive or retention
and recruiting problems
|
BlackRock may also support a request to exchange underwater options in other circumstances, if we determine
that the exchange is in the best interests of shareholders.
Supplemental executive retirement plans
BlackRock may support shareholder proposals requesting to put extraordinary benefits contained in supplemental executive retirement plans (SERP)
to a shareholder vote unless the companys executive pension plans do not contain excessive benefits beyond what is offered under employee-wide plans.
Environmental and social issues
We believe that well-managed companies deal effectively with material ESG factors relevant to their businesses. As stated throughout this document, governance
is the core structure by which boards can oversee the creation of sustainable long-term valueappropriate risk oversight of environmental and social (E&S) considerations stems from this construct.
B-29
Robust disclosure is essential for investors to effectively gauge companies business practices and
strategic planning related to E&S risks and opportunities. When a companys reporting is inadequate, investors, including BlackRock, will increasingly conclude that the company is not adequately managing risk. Given the increased
understanding of material sustainability risks and opportunities, and the need for better information to assess them, BlackRock will advocate for continued improvement in companies reporting and will hold management and/or directors
accountable where disclosures or the business practices underlying them are inadequate.
BlackRock views the recommendations of the Task Force on
Climate-related Financial Disclosures (TCFD) and the standards put forth by the Sustainability Accounting Standards Board (SASB) as appropriate and complementary frameworks for companies to disclose financially material sustainability information.
While the TCFD framework was crafted with the aim of climate-related risk disclosure, the four pillars of the TCFDGovernance, Strategy, Risk Management, and Metrics and Targetsare a useful way for companies to disclose how they identify,
assess, manage, and oversee a variety of sustainability-related risks and opportunities. SASBs industry-specific guidance (as identified in its materiality map) is beneficial in helping companies identify key performance indicators (KPIs)
across various dimensions of sustainability that are considered to be financially material and decision-useful within their industry.
Accordingly, we ask
companies to:
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|
|
Disclose the identification, assessment, management, and oversight of sustainability-related risks in accordance
with the four pillars of TCFD
|
|
|
|
Publish SASB-aligned reporting with industry-specific, material metrics and rigorous targets
|
See our commentary on our approach to engagement on TCFD- and SASB-aligned reporting for greater detail of our expectations.
Climate risk
BlackRock believes that climate change has
become a defining factor in companies long-term prospects. We expect every company to help their investors understand how the company may be impacted by climate-related risks and opportunities, and how they are considered within the
companys strategy.
Specifically, we expect companies to articulate how they are aligned to a scenario in which global warming is limited to well
below 2° C and is consistent with a global aspiration to reach net zero GHG emissions by 2050.7 In order to assess companies progress, BIS expects carbon-intensive companies to disclose
explicit GHG emissions reduction targets.
The public and private sectors have roles to play in aligning greenhouse gas reduction efforts with targets
based on science, where available to curb the worst effects of climate change and reach the global goal of carbon neutrality by mid-century. Companies have an opportunity to utilize and contribute to the
development of current and future low-carbon transition technologies, which are an important consideration for the rate at which emissions can be reduced. We expect companies to disclose how they are
considering these challenges, alongside opportunities for innovation, within their strategy and emissions reduction efforts.
We may support shareholder
proposals that ask companies to disclose climate plans aligned with our expectations.
7 The global aspiration is reflective of aggregated efforts; companies in developed and emerging markets
are not equally equipped to transition their business and reduce emissions at the same ratethose in developed markets with the largest market capitalization are better positioned to adapt their business models at an accelerated pace.
Government policy and regional targets may be reflective of these realities.
B-30
Key stakeholder interests
As a long-term investor, we believe that in order to deliver value for shareholders, companies should also consider their stakeholders. While stakeholder
groups may vary across industries, they are likely to include employees; business partners (such as suppliers and distributors); clients and consumers; government and regulators; and the communities in which companies operate. Companies that build
strong relationships with their stakeholders are more likely to meet their own strategic objectives, while poor relationships may create adverse impacts that expose a company to legal, regulatory, operational, and reputational risks and jeopardize
their social license to operate. We expect companies to effectively oversee and mitigate these risks with appropriate due diligence processes and board oversight.
Human capital management
A companys approach to
human capital management is a critical factor in fostering an inclusive, diverse, and engaged workforce, which contributes to business continuity, innovation, and long-term value creation. As an important component of strategy, we expect boards to
oversee human capital management.
We believe that clear and consistent reporting on these matters is critical for investors to understand the composition
of a companys workforce. We expect companies to disclose workforce demographics, such as gender, race, and ethnicity in line with the US Equal Employment Opportunity Commissions EEO-1 Survey,
alongside the steps they are taking to advance diversity, equity, and inclusion. Where we believe a companys disclosures or practices fall short relative to the market or peers, or we are unable to ascertain the board and managements
effectiveness in overseeing related risks and opportunities, we may vote against members of the appropriate committee or support relevant shareholder proposals. Our commentary on human capital management provides more information on our
expectations.
Corporate political activities
Companies may engage in certain political activities, within legal and regulatory limits, in order to influence public policy consistent with the
companies values and strategies. These activities can also create risks, including: the potential for allegations of corruption; reputational risk associated with a candidate, party, or issue; and risks that arise from the complex legal,
regulatory, and compliance considerations associated with corporate political spending and lobbying activity. Companies that engage in political activities should develop and maintain robust processes to guide these activities and mitigate risks,
including board oversight.
When presented with shareholder proposals requesting increased disclosure on corporate political activities, BlackRock will
evaluate publicly available information to consider how a companys lobbying may impact the company. We will also evaluate whether there is alignment between a companys stated positions on policy matters material to its strategy and the
positions taken by industry groups of which it is a member. We may decide to support a shareholder proposal requesting additional disclosure if we identify a material misalignment. Additional detail can be found in our commentary on political
contributions and lobbying disclosures.
General corporate governance matters
Adjourn meeting to solicit additional votes
We
generally support such proposals unless the agenda contains items that we judge to be detrimental to shareholders best long-term economic interests.
B-31
Bundled proposals
We believe that shareholders should have the opportunity to review substantial governance changes individually without having to accept bundled proposals.
Where several measures are grouped into one proposal, BlackRock may reject certain positive changes when linked with proposals that generally contradict or impede the rights and economic interests of shareholders.
Exclusive forum provisions
BlackRock generally supports
proposals to seek exclusive forum for certain shareholder litigation. In cases where a board unilaterally adopts exclusive forum provisions that we consider unfavorable to the interests of shareholders, we will vote against the independent chair or
lead independent director and members of the nominating/governance committee.
Multi-jurisdictional companies
Where a company is listed on multiple exchanges or incorporated in a country different from its primary listing, we will seek to apply the most relevant
market guideline(s) to our analysis of the companys governance structure and specific proposals on the shareholder meeting agenda. In doing so, we typically consider the governance standards of the companys primary listing, the market
standards by which the company governs itself, and the market context of each specific proposal on the agenda. If the relevant standards are silent on the issue under consideration, we will use our professional judgment as to what voting outcome
would best protect the long-term economic interests of investors. We expect companies to disclose the rationale for their selection of primary listing, country of incorporation, and choice of governance structures, particularly where there is
conflict between relevant market governance practices.
Other business
We oppose giving companies our proxy to vote on matters where we are not given the opportunity to review and understand those measures and carry out an
appropriate level of shareholder oversight.
Reincorporation
Proposals to reincorporate from one state or country to another are most frequently motivated by considerations of anti-takeover protections, legal
advantages, and/or cost savings. We will evaluate, on a case-by-case basis, the economic and strategic rationale behind the companys proposal to reincorporate. In all instances, we will evaluate the
changes to shareholder protections under the new charter/articles/bylaws to assess whether the move increases or decreases shareholder protections. Where we find that shareholder protections are diminished, we may support reincorporation if we
determine that the overall benefits outweigh the diminished rights.
IPO governance
We expect boards to consider and disclose how the corporate governance structures adopted upon initial public offering (IPO) are in
shareholders best long-term interests. We also expect boards to conduct a regular review of corporate governance and control structures, such that boards might evolve foundational corporate governance structures as company circumstances
change, without undue costs and disruption to shareholders. In our letter on unequal voting structures, we articulate our view that one vote for one share is the preferred structure for publicly-traded companies. We also recognize the
potential benefits of dual class shares to newly public companies as they establish themselves; however, we believe that these structures should have a specific and limited duration. We will generally engage new companies on topics such as
classified boards and supermajority vote provisions to amend bylaws, as we believe that such arrangements may not be in the best interest of shareholders in the long-term.
B-32
We will typically apply a one-year grace period for the application of
certain director-related guidelines (including, but not limited to, responsibilities on other public company boards and board composition concerns), during which we expect boards to take steps to bring corporate governance standards in line with our
expectations.
Further, if a company qualifies as an emerging growth company (an EGC) under the Jumpstart Our Business Startups Act of 2012
(the JOBS Act), we will give consideration to the NYSE and NASDAQ governance exemptions granted under the JOBS Act for the duration such a company is categorized as an EGC. We expect an EGC to have a totally independent audit committee
by the first anniversary of its IPO, with our standard approach to voting on auditors and audit-related issues applicable in full for an EGC on the first anniversary of its IPO.
Shareholder protections
Amendment to charter/articles/bylaws
We believe that
shareholders should have the right to vote on key corporate governance matters, including changes to governance mechanisms and amendments to the charter/articles/bylaws. We may vote against certain directors where changes to governing documents are
not put to a shareholder vote within a reasonable period of time, particularly if those changes have the potential to impact shareholder rights (see Director elections). In cases where a boards unilateral adoption of changes to the
charter/articles/bylaws promotes cost and operational efficiency benefits for the company and its shareholders, we may support such action if it does not have a negative effect on shareholder rights or the companys corporate governance
structure.
When voting on a management or shareholder proposal to make changes to the charter/articles/bylaws, we will consider in part the
companys and/or proponents publicly stated rationale for the changes; the companys governance profile and history; relevant jurisdictional laws; and situational or contextual circumstances which may have motivated the proposed
changes, among other factors. We will typically support amendments to the charter/articles/bylaws where the benefits to shareholders outweigh the costs of failing to make such changes.
Proxy access
We believe that long-term shareholders
should have the opportunity, when necessary and under reasonable conditions, to nominate directors on the companys proxy card.
In our view,
securing the right of shareholders to nominate directors without engaging in a control contest can enhance shareholders ability to meaningfully participate in the director election process, encourage board attention to shareholder interests,
and provide shareholders an effective means of directing that attention where it is lacking. Proxy access mechanisms should provide shareholders with a reasonable opportunity to use this right without stipulating overly restrictive or onerous
parameters for use, and also provide assurances that the mechanism will not be subject to abuse by short-term investors, investors without a substantial investment in the company, or investors seeking to take control of the board.
In general, we support market-standardized proxy access proposals, which allow a shareholder (or group of up to 20 shareholders) holding three percent of a
companys outstanding shares for at least three years the right to nominate the greater of up to two directors or 20% of the board. Where a standardized proxy access provision exists, we will generally oppose shareholder proposals requesting
outlier thresholds.
Right to act by written consent
In exceptional circumstances and with sufficiently broad support, shareholders should have the opportunity to raise issues of substantial importance without
having to wait for management to schedule a meeting. We therefore believe that shareholders should have the right to solicit votes by written consent provided that: 1)
B-33
there are reasonable requirements to initiate the consent solicitation process (in order to avoid the waste of corporate resources in addressing narrowly supported interests); and 2) shareholders
receive a minimum of 50% of outstanding shares to effectuate the action by written consent. We may oppose shareholder proposals requesting the right to act by written consent in cases where the proposal is structured for the benefit of a dominant
shareholder to the exclusion of others, or if the proposal is written to discourage the board from incorporating appropriate mechanisms to avoid the waste of corporate resources when establishing a right to act by written consent. Additionally, we
may oppose shareholder proposals requesting the right to act by written consent if the company already provides a shareholder right to call a special meeting that we believe offers shareholders a reasonable opportunity to raise issues of substantial
importance without having to wait for management to schedule a meeting.
Right to call a special meeting
In exceptional circumstances and with sufficiently broad support, shareholders should have the opportunity to raise issues of substantial importance without
having to wait for management to schedule a meeting. Accordingly, shareholders should have the right to call a special meeting in cases where a reasonably high proportion of shareholders (typically a minimum of 15% but no higher than 25%) are
required to agree to such a meeting before it is called. However, we may oppose this right in cases where the proposal is structured for the benefit of a dominant shareholder, or where a lower threshold may lead to an ineffective use of corporate
resources. We generally believe that a right to act via written consent is not a sufficient alternative to the right to call a special meeting.
Simple
majority voting
We generally favor a simple majority voting requirement to pass proposals. Therefore, we will support the reduction or the
elimination of supermajority voting requirements to the extent that we determine shareholders ability to protect their economic interests is improved. Nonetheless, in situations where there is a substantial or dominant shareholder,
supermajority voting may be protective of minority shareholder interests and we may support supermajority voting requirements in those situations.
Virtual meetings
Shareholders should have the
opportunity to participate in the annual and special meetings for the companies in which they are invested, as these meetings facilitate an opportunity for shareholders to provide feedback and hear from the board and management. While these meetings
have traditionally been conducted in-person, virtual meetings are an increasingly viable way for companies to utilize technology to facilitate shareholder accessibility, inclusiveness, and cost efficiencies.
We expect shareholders to have a meaningful opportunity to participate in the meeting and interact with the board and management in these virtual settings; companies should facilitate open dialogue and allow shareholders to voice concerns and
provide feedback without undue censorship.
This document is provided for information purposes only and is subject to change. Reliance upon this
information is at the sole discretion of the reader.
Prepared by BlackRock, Inc.
©2020 BlackRock, Inc. All rights reserved
B-34
PART C
Other Information
Item 25.
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Financial Statements And Exhibits
|
The agreements included or incorporated by reference as exhibits to this Registration Statement contain representations and warranties by each of the parties
to the applicable agreement. These representations and warranties were made solely for the benefit of the other parties to the applicable agreement and (i) were not intended to be treated as categorical statements of fact, but rather as a way
of allocating the risk to one of the parties if those statements prove to be inaccurate; (ii) may have been qualified in such agreement by disclosures that were made to the other party in connection with the negotiation of the applicable
agreement; (iii) may apply contract standards of materiality that are different from materiality under the applicable securities laws; and (iv) were made only as of the date of the applicable agreement or such other
date or dates as may be specified in the agreement.
The Registrant acknowledges that, notwithstanding the inclusion of the foregoing cautionary
statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this Registration Statement not misleading.
C-1
C-2
Item 26.
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Marketing Arrangements
|
The information contained under the section entitled Plan of Distribution in the Prospectus is incorporated by reference, and any information
concerning any underwriters will be contained in the accompanying Prospectus Supplement, if any.
Item 27.
|
Other Expenses Of Issuance And Distribution
|
The following table sets forth the estimated expenses to be incurred in connection with the offering described in this Registration Statement:
|
|
|
|
|
Registration fee
|
|
|
$29,784
|
|
NYSE listing fee
|
|
|
2,500
|
|
Accounting fees and expenses
|
|
|
4,000
|
|
Legal fees and expenses
|
|
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100,000
|
|
FINRA fee
|
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41,450
|
|
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Total
|
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$
|
177,734
|
(1)
|
(1)
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Estimate is based on the aggregate estimated expenses to be incurred during a three year shelf
offering period.
|
Item 28.
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Persons Controlled By Or Under Common Control With The Registrant
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None.
Item 29.
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Number Of Holders Of Shares
|
As of December 31, 2021:
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|
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Title Of Class
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Number Of Record Holders
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Common Shares of Beneficial Interest
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5
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Article V of the Registrants Agreement and Declaration of Trust provides as follows:
5.1 No Personal Liability of Shareholders, Trustees, etc. No Shareholder of the Trust shall be subject in such capacity to any
personal liability whatsoever to any Person in connection with Trust Property or the acts, obligations or affairs of the Trust. Shareholders shall have the same limitation of personal liability as is extended to stockholders of a private corporation
for profit incorporated under the Delaware General Corporation Law. No Trustee or officer of the Trust shall be subject in such capacity to any personal liability whatsoever to any Person in connection with Trust Property or the affairs of the
Trust, save only liability to the Trust or its Shareholders arising from bad faith, willful misfeasance, gross negligence or reckless disregard for his duty to such Person; and, subject to the foregoing exception, all such Persons shall look solely
to the Trust Property for satisfaction of claims of any nature arising in connection with the affairs of the Trust. If any Shareholder, Trustee or officer, as such, of the Trust, is made a party to any suit or proceeding to enforce any such
liability, subject to the foregoing exception, he shall not, on account thereof, be held to any personal liability. Any repeal or modification of this Section 5.1 shall not adversely affect any right or protection of a Trustee or officer of the
Trust existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification.
5.2
Mandatory Indemnification. (a) The Trust hereby agrees to indemnify each person who at any time serves as a Trustee or officer of the Trust (each such person being an indemnitee) against any
liabilities and expenses,
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including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and reasonable counsel fees reasonably incurred by such indemnitee in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal, before any court or administrative or investigative body in which he may be or may have been involved as a party or otherwise or with which he may be or may have been
threatened, while acting in any capacity set forth in this Article V by reason of his having acted in any such capacity, except with respect to any matter as to which he shall not have acted in good faith in the reasonable belief that his action was
in the best interest of the Trust or, in the case of any criminal proceeding, as to which he shall have had reasonable cause to believe that the conduct was unlawful, provided, however, that no indemnitee shall be indemnified hereunder against any
liability to any person or any expense of such indemnitee arising by reason of (i) willful misfeasance, (ii) bad faith, (iii) gross negligence, or (iv) reckless disregard of the duties involved in the conduct of his position (the
conduct referred to in such clauses (i) through (iv) being sometimes referred to herein as disabling conduct). Notwithstanding the foregoing, with respect to any action, suit or other proceeding voluntarily prosecuted by any
indemnitee as plaintiff, indemnification shall be mandatory only if the prosecution of such action, suit or other proceeding by such indemnitee (1) was authorized by a majority of the Trustees or (2) was instituted by the indemnitee to
enforce his or her rights to indemnification hereunder in a case in which the indemnitee is found to be entitled to such indemnification. The rights to indemnification set forth in this Declaration shall continue as to a person who has ceased to be
a Trustee or officer of the Trust and shall inure to the benefit of his or her heirs, executors and personal and legal representatives. No amendment or restatement of this Declaration or repeal of any of its provisions shall limit or eliminate any
of the benefits provided to any person who at any time is or was a Trustee or officer of the Trust or otherwise entitled to indemnification hereunder in respect of any act or omission that occurred prior to such amendment, restatement or repeal.
(b) Notwithstanding the foregoing, no indemnification shall be made hereunder unless there has been a determination (i) by a
final decision on the merits by a court or other body of competent jurisdiction before whom the issue of entitlement to indemnification hereunder was brought that such indemnitee is entitled to indemnification hereunder or, (ii) in the absence
of such a decision, by (1) a majority vote of a quorum of those Trustees who are neither interested persons of the Trust (as defined in Section 2(a)(19) of the 1940 Act) nor parties to the proceeding (Disinterested Non-Party Trustees), that the indemnitee is entitled to indemnification hereunder, or (2) if such quorum is not obtainable or even if obtainable, if such majority so directs, independent legal counsel in
a written opinion concludes that the indemnitee should be entitled to indemnification hereunder. All determinations to make advance payments in connection with the expense of defending any proceeding shall be authorized and made in accordance with
the immediately succeeding paragraph (c) below.
(c) The Trust shall make advance payments in connection with the expenses of
defending any action with respect to which indemnification might be sought hereunder if the Trust receives a written affirmation by the indemnitee of the indemnitees good faith belief that the standards of conduct necessary for indemnification
have been met and a written undertaking to reimburse the Trust unless it is subsequently determined that the indemnitee is entitled to such indemnification and if a majority of the Trustees determine that the applicable standards of conduct
necessary for indemnification appear to have been met. In addition, at least one of the following conditions must be met: (i) the indemnitee shall provide adequate security for his undertaking, (ii) the Trust shall be insured against
losses arising by reason of any lawful advances, or(iii) a majority of a quorum of the Disinterested Non-Party Trustees, or if a majority vote of such quorum so direct, independent legal counsel in a written
opinion, shall conclude, based on a review of readily available facts (as opposed to a full trial-type inquiry), that there is substantial reason to believe that the indemnitee ultimately will be found entitled to indemnification.
(d) The rights accruing to any indemnitee under these provisions shall not exclude any other right which any person may have or
hereafter acquire under this Declaration, the By-Laws of the Trust, any statute, agreement, vote of stockholders or Trustees who are disinterested persons (as defined in Section 2(a)(19) of
the 1940 Act) or any other right to which he or she may be lawfully entitled.
(e) Subject to any limitations provided by the 1940
Act and this Declaration, the Trust shall have the power and authority to indemnify and provide for the advance payment of expenses to employees, agents and other Persons providing services to the Trust or serving in any capacity at the request of
the Trust to the full extent corporations organized under the Delaware General Corporation Law may indemnify or provide for the advance payment of expenses for such Persons, provided that such indemnification has been approved by a majority of the
Trustees.
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5.3 No Bond Required of Trustees. No Trustee shall, as such, be obligated to give
any bond or other security for the performance of any of his duties hereunder.
5.4 No Duty of Investigation; No Notice in
Trust Instruments, etc. No purchaser, lender, transfer agent or other person dealing with the Trustees or with any officer, employee or agent of the Trust shall be bound to make any inquiry concerning the validity of any transaction purporting
to be made by the Trustees or by said officer, employee or agent or be liable for the application of money or property paid, loaned, or delivered to or on the order of the Trustees or of said officer, employee or agent. Every obligation, contract,
undertaking, instrument, certificate, Share, other security of the Trust, and every other act or thing whatsoever executed in connection with the Trust shall be conclusively taken to have been executed or done by the executors thereof only in their
capacity as Trustees under this Declaration or in their capacity as officers, employees or agents of the Trust. The Trustees may maintain insurance for the protection of the Trust Property, the Shareholders, Trustees, officers, employees and agents
in such amount as the Trustees shall deem adequate to cover possible tort liability, and such other insurance as the Trustees in their sole judgment shall deem advisable or is required by the 1940 Act.
5.5 Reliance on Experts, etc. Each Trustee and officer or employee of the Trust shall, in the performance of its duties, be
fully and completely justified and protected with regard to any act or any failure to act resulting from reliance in good faith upon the books of account or other records of the Trust, upon an opinion of counsel, or upon reports made to the Trust by
any of the Trusts officers or employees or by any advisor, administrator, manager, distributor, selected dealer, accountant, appraiser or other expert or consultant selected with reasonable care by the Trustees, officers or employees of the
Trust, regardless of whether such counsel or expert may also be a Trustee.
Registrant has also entered into an agreement with Trustees and officers of
the Registrant entitled to indemnification under the Agreement and Declaration of Trust pursuant to which the Registrant has agreed to advance expenses and costs incurred by the indemnitee in connection with any matter in respect of which
indemnification might be sought pursuant to the Agreement and Declaration of Trust to the maximum extent permitted by law.
Reference is also made to:
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Sections 10 and 11 of the Registrants Investment Management Agreement, a form of which is filed as Exhibit
(g)(1) of this Registration Statement.
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Sections 9 and 10 of the Registrants Sub-Investment Advisory
Agreement with BlackRock International Limited, which is filed as Exhibit (g)(2) of this Registration Statement.
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Sections 9 and 10 of the Registrants Sub-Investment Advisory
Agreement with BlackRock (Singapore) Limited, which is filed as Exhibit (g)(3) of this Registration Statement.
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Additionally, the
Registrant and the other funds in the BlackRock Fixed-Income Complex jointly maintain, at their own expense, E&O/D&O insurance policies for the benefit of its Trustees, officers and certain affiliated persons. The Registrant pays a pro rata
portion of the premium on such insurance policies.
5.6 Indemnification of Shareholders. If any Shareholder or former
Shareholder shall be held personally liable solely by reason of its being or having been a Shareholder and not because of its acts or omissions or for some other reason, the Shareholder or former Shareholder (or its heirs, executors, administrators
or other legal representatives or in the case of any entity, its general successor) shall be entitled out of the assets belonging to the Trust to be held harmless from and indemnified to the maximum extent permitted by law against all loss and
expense arising from such liability. The Trust shall, upon request by such Shareholder, assume the defense of any claim made against such Shareholder for any act or obligation of the Trust and satisfy any judgment thereon from the assets of the
Trust.
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Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to Trustees, officers and controlling persons of the Trust, pursuant to the
foregoing provisions or otherwise, the Trust has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a Trustee, officer or controlling person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such Trustee, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
Item 31.
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Business And Other Connections Of Investment Advisor
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BlackRock Advisors, LLC, a limited liability company organized under the laws of Delaware (the Advisor), acts as investment adviser to the
Registrant. BlackRock International Limited, a corporation organized under the laws of Scotland (BIL) and BlackRock (Singapore) Limited, a corporation organized under the laws of Singapore (BSL) serve as sub-advisers to the Trust (each, a Sub-Advisor). The Registrant is fulfilling the requirement of this Item 31 to provide a list of the officers and directors of
the Advisor and the Sub-Advisors, together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by the Advisor and
Sub-Advisors or those officers and directors during the past two years, by incorporating by reference the information contained in the Form ADV of the Advisor filed with the Commission pursuant to the
Investment Advisers Act of 1940 (Commission File No. 801-47710), the Form ADV of BIL filed with the Commission pursuant to the Investment Advisers Act of 1940 (Commission File No. 801-51087), and the Form ADV of BSL filed with the Commission pursuant to the Investment Advisers Act of 1940 (Commission File No. 801-76926).
Item 32.
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Location Of Accounts And Records
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Omitted pursuant to the Instruction of Item 32 of Form N-2.
Item 33.
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Management Services
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Not Applicable
(3)
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The securities being registered will be offered on a delayed or continuous basis in reliance on Rule 415 under
the Securities Act of 1933. Accordingly, the Registrant undertakes:
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(a)
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to file, during and period in which offers or sales are being made, a post-effective amendment to this
Registration Statement:
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(1) to include any prospectus required by Section 10(a)(3) of the Securities Act of
1933;
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(2) to reflect in the prospectus any facts or events after the effective date of the Registration
Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the Calculation of Registration Fee
table in the effective registration statement.
(3) to include any material information with respect to the plan of distribution not
previously disclosed in the Registration Statement or any material change to such information in the Registration Statement.
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(b)
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that for the purpose of determining any liability under the Securities Act of 1933, each post-effective
amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof;
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(c)
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to remove from registration by means of a post-effective amendment any of the securities being registered which
remain unsold at the termination of the offering; and
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(d)
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that, for the purpose of determining liability under the Securities Act of 1933 to any purchaser:
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(1) if the Registrant is relying on Rule 430B [17 CFR 230.430B]:
(A) Each prospectus filed by the Registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date
the filed prospectus was deemed part of and included in the registration statement; and
(B) Each prospectus required to be filed pursuant
to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (x), or (xi) for the purpose of providing the information required by
Section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of
sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the
registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided,
however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is
part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such effective date; or
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(2) if the Registrant is subject to Rule 430C [17 CFR 230.430C]: Each prospectus filed pursuant
to Rule 424(b) under the Securities Act of 1933 as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be
part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a
document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify
any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
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(e)
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that for the purpose of determining liability of the Registrant under the Securities Act of 1933 to any
purchaser in the initial distribution of securities: The undersigned Registrant undertakes that in a primary offering of securities of the undersigned Registrant pursuant to this Registration Statement, regardless of the underwriting method used to
sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned Registrant will be a seller to the purchaser and will be considered to offer or sell such
securities to the purchaser: (1) any preliminary prospectus or prospectus of the undersigned Registrant relating to the offering required to be filed pursuant to Rule 424 under the Securities Act of 1933; (2) free writing prospectus relating to
the offering prepared by or on behalf of the undersigned Registrant or used or referred to by the undersigned Registrant; (3) the portion of any other free writing prospectus or advertisement pursuant to Rule 482 under the Securities Act of
1933 relating to the offering containing material information about the undersigned Registrant or its securities provided by or on behalf of the undersigned Registrant; and (4) any other communication that is an offer in the offering made by
the undersigned Registrant to the purchaser.
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(a)
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For the purposes of determining any liability under the Securities Act of 1933, the information omitted from
the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant under Rule 424(b)(1) under the Securities Act of 1933 shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
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(b)
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For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment
that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering thereof.
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(5)
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The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrants annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference into the registration statement shall be deemed
to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
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C-8
(6)
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Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will
be governed by the final adjudication of such issue.
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(7)
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The Registrant undertakes to send by first class mail or other means designed to ensure equally prompt delivery
within two business days of receipt of a written or oral request, any prospectus or Statement of Additional Information constituting Part B of this Registration Statement.
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C-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Trust has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, and the State of New York, on the 12th day of January, 2022.
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BLACKROCK MULTI-SECTOR INCOME TRUST
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By:
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/s/ John M. Perlowski
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John M. Perlowski
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President and Chief Executive Officer
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Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following
persons in the capacities indicated and on the 12th day of January, 2022.
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Signature
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Title
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/s/ John M. Perlowski
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Trustee, President and Chief Executive Officer
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January 12, 2022
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(John M. Perlowski)
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(Principal Executive Officer)
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/s/ Trent Walker
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Chief Financial Officer
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January 12, 2022
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(Trent Walker)
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(Principal Financial and Accounting
Officer)
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CYNTHIA L. EGAN*
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Trustee
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(Cynthia L. Egan)
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FRANK J. FABOZZI*
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Trustee
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(Frank J. Fabozzi)
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LORENZO A. FLORES*
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Trustee
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(Lorenzo A. Flores)
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STAYCE D. HARRIS*
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Trustee
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(Stayce D. Harris)
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J. PHILLIP HOLLOMAN*
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Trustee
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(J. Phillip Holloman)
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R. GLENN HUBBARD*
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Trustee
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(R. Glenn Hubbard)
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W. CARL KESTER*
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Trustee
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(W. Carl Kester)
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CATHERINE A. LYNCH*
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Trustee
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(Catherine A. Lynch)
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KAREN P. ROBARDS*
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Trustee
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(Karen P. Robards)
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ROBERT FAIRBAIRN*
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Trustee
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(Robert Fairbairn)
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*By: /s/ Janey Ahn
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January 12, 2022
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(Janey Ahn, Attorney-In-Fact)
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