The following table describes the performance for the fiscal periods indicated.
Market price total return is calculated assuming an initial investment made at the market price at the
beginning of the period, reinvestment of all dividends and distributions at market price during the period,
and sale at the market price on the last day of the period. These figures have been derived from the
fund’s financial statements and, with respect to common stock, market price data for the fund’s common
shares.
See notes to financial statements.
NOTE
1—Significant Accounting Policies:
BNY Mellon Strategic Municipals, Inc.
(the “fund”), which is registered under the Investment Company Act of 1940, as amended (the “Act”),
is a diversified closed-end management investment company. The fund’s investment objective is to maximize
current income exempt from federal income tax to the extent consistent with the preservation of capital.
BNY Mellon Investment Adviser, Inc. (the “Adviser”), a wholly-owned subsidiary of The Bank of New
York Mellon Corporation (“BNY Mellon”), serves as the fund’s investment adviser. Insight North
America LLC (the “Sub-Adviser”), a wholly-owned subsidiary of BNY Mellon and an affiliate of the
Adviser, serves as the fund’s sub-adviser. The fund’s Common Stock trades on the New York Stock
Exchange (the “NYSE”) under the ticker symbol LEO.
The fund has outstanding
763 Series M shares, 747 Series T shares, 660 Series W shares, 566 Series TH shares and 420 series F
shares for a total of 3,156 shares of Auction Preferred Stock (“APS”), with a liquidation preference
of $25,000 per share (plus an amount equal to accumulated but unpaid dividends upon liquidation). APS
dividend rates are determined pursuant to periodic auctions or by reference to a market rate. Deutsche
Bank Trust Company America, as the Auction Agent, receives a fee from the fund for its services in connection
with such auctions. The fund also compensates broker-dealers generally at an annual rate of .15%-.25%
of the purchase price of shares of APS.
The fund is subject to certain restrictions
relating to the APS. Failure to comply with these restrictions could preclude the fund from declaring
any distributions to shareholders of Common Stock (“Common Shareholders”) or repurchasing shares
of Common Stock and/or could trigger the mandatory redemption of APS at liquidation value. Thus, redemptions
of APS may be deemed to be outside of the control of the fund.
The holders of APS,
voting as a separate class, have the right to elect at least two directors. The holders of APS will vote
as a separate class on certain other matters, as required by law. The fund’s Board of Directors (the
“Board”) has designated Robin A. Melvin and Benaree Pratt Wiley as directors to be elected by the
holders of APS.
The Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) is the exclusive reference of authoritative U.S. generally accepted
accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities.
Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under
33
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
authority of federal laws are also sources of authoritative GAAP for SEC registrants.
The fund is an investment company and applies the accounting and reporting guidance of the FASB ASC Topic
946 Financial Services-Investment Companies. The fund’s financial statements are prepared in accordance
with GAAP, which may require the use of management estimates and assumptions. Actual results could differ
from those estimates.
The fund enters into contracts that contain a variety
of indemnifications. The fund’s maximum exposure under these arrangements is unknown. The fund does
not anticipate recognizing any loss related to these arrangements.
(a) Portfolio valuation:
The fair value of a financial instrument is the amount that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement date
(i.e., the exit price). GAAP establishes a fair value hierarchy that prioritizes the inputs of valuation
techniques used to measure fair value. This hierarchy gives the highest priority to unadjusted quoted
prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority
to unobservable inputs (Level 3 measurements).
Additionally, GAAP
provides guidance on determining whether the volume and activity in a market has decreased significantly
and whether such a decrease in activity results in transactions that are not orderly. GAAP requires enhanced
disclosures around valuation inputs and techniques used during annual and interim periods.
Various
inputs are used in determining the value of the fund’s investments relating to fair value measurements.
These inputs are summarized in the three broad levels listed below:
Level 1—unadjusted quoted
prices in active markets for identical investments.
Level 2—other significant
observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds,
credit risk, etc.).
Level 3—significant unobservable inputs (including
the fund’s own assumptions in determining the fair value of investments).
The
inputs or methodology used for valuing securities are not necessarily an indication of the risk associated
with investing in those securities.
34
Changes in valuation techniques may result in transfers in or out of an assigned
level within the disclosure hierarchy. Valuation techniques used to value the fund’s investments are
as follows:
The Board has designated the Adviser as the fund’s valuation
designee to make all fair value determinations with respect to the fund’s portfolio investments, subject
to the Board’s oversight and pursuant to Rule 2a-5 under the Act.
Investments in municipal
securities, excluding short-term investment (other than U.S. Treasury Bills), are valued each business
day by an independent pricing service (the “Service”) approved by the Board. Investments for which
quoted bid prices are readily available and are representative of the bid side of the market in the judgment
of the Service are valued at the mean between the quoted bid prices (as obtained by the Service from
dealers in such securities) and asked prices (as calculated by the Service based upon its evaluation
of the market for such securities). Municipal investments (which constitute a majority of the portfolio
securities) are carried at fair value as determined by the Service, based on methods which include consideration
of the following: yields or prices of municipal securities of comparable quality, coupon, maturity and
type; indications as to values from dealers; and general market conditions. The Service is engaged under
the general oversight of the Board. All of the preceding securities are generally categorized within
Level 2 of the fair value hierarchy.
When market quotations or official closing
prices are not readily available, or are determined not to accurately reflect fair value, such as when
the value of a security has been significantly affected by events after the close of the exchange or
market on which the security is principally traded, but before the fund calculates its net asset value,
the fund may value these investments at fair value as determined in accordance with the procedures approved
by the Board. Certain factors may be considered when fair valuing investments such as: fundamental analytical
data, the nature and duration of restrictions on disposition, an evaluation of the forces that influence
the market in which the securities are purchased and sold, and public trading in similar securities of
the issuer or comparable issuers. These securities are either categorized within Level 2 or 3 of the
fair value hierarchy depending on the relevant inputs used.
For securities where
observable inputs are limited, assumptions about market activity and risk are used and such securities
are generally categorized within Level 3 of the fair value hierarchy.
35
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
The
following is a summary of the inputs used as of March 31, 2023 in valuing the fund’s
investments:
| | | | | | |
| Level
1-Unadjusted Quoted Prices | Level 2- Other Significant Observable Inputs | | Level
3-Significant Unobservable Inputs | Total | |
Assets ($) | | |
Investments in Securities:† | | |
Collateralized
Municipal-Backed Securities | - | 1,537,296 | | - | 1,537,296 | |
Municipal
Securities | - | 647,822,427 | | - | 647,822,427 | |
Liabilities
($) | | |
Other Financial Instruments: | | |
Inverse Floater Notes†† | - | (147,222,907) | | - | (147,222,907) | |
† See
Statement of Investments for additional detailed categorizations, if any.
†† Certain of the fund’s liabilities are held at carrying amount,
which approximates fair value for financial reporting purposes.
(b) Securities transactions
and investment income: Securities transactions are recorded on a trade date basis. Realized gains and
losses from securities transactions are recorded on the identified cost basis. Interest income, adjusted
for accretion of discount and amortization of premium on investments, is earned from settlement date
and recognized on the accrual basis. Securities purchased or sold on a when-issued or delayed delivery
basis may be settled a month or more after the trade date.
(c) Market Risk: The value of the securities
in which the fund invests may be affected by political, regulatory, economic and social developments,
and developments that impact specific economic sectors, industries or segments of the market. The value
of a security may also decline due to general market conditions that are not specifically related to
a particular company or industry, such as real or perceived adverse economic conditions, changes in the
general outlook for corporate earnings, changes in interest or currency rates, changes to inflation,
adverse changes to credit markets or adverse investor sentiment generally.
Additional
Information section within the annual report dated September 30, 2022, provides more details about the
fund’s principal risk factors.
(d) Dividends and distributions to Common Shareholders:
Dividends and distributions are recorded on the ex-dividend date. Dividends from net investment income
are normally declared and paid monthly. Dividends from net realized capital gains, if any, are normally
declared and paid
36
annually, but the fund may make distributions on a more frequent basis to comply
with the distribution requirements of the Internal Revenue Code of 1986, as amended (the “Code”).
To the extent that net realized capital gains can be offset by capital loss carryovers, it is the policy
of the fund not to distribute such gains. Income and capital gain distributions are determined in accordance
with income tax regulations, which may differ from GAAP.
Common Shareholders
will have their distributions reinvested in additional shares of the fund, unless such Common Shareholders
elect to receive cash, at the lower of the market price or net asset value per share (but not less than
95% of the market price). If market price is equal to or exceeds net asset value, shares will be issued
at net asset value. If net asset value exceeds market price, Computershare Inc., the transfer agent for
the fund’s Common Stock, will buy fund shares in the open market and reinvest those shares accordingly.
On March 30, 2023, the Board declared a cash dividend of $.023 per share from
net investment income, payable on April 28, 2023 to Common Shareholders of record as of the close of
business on April 17, 2023. The ex-dividend date was April 14, 2023.
(e) Dividends and distributions to shareholders
of APS: Dividends, which are cumulative, are generally reset every seven days for each
series of APS pursuant to a process specified in related fund charter documents. Dividend rates as of
March 31, 2023, for each series of APS were as follows: Series M-7.118%, Series T-7.118%, Series W-7.118%,
Series TH-7.118% and Series F-6.773%. These rates reflect the “maximum rates” under the governing
instruments as a result of “failed auctions” in which sufficient clearing bids are not received.
The average dividend rates for the period ended March 31, 2023 for each series of APS were as follows:
Series M-5.190%, Series T-4.732%, Series W-4.883%, Series TH-4.891% and Series F-4.579%.
(f)
Federal income taxes: It is the policy of the fund to continue to qualify as a regulated investment
company, which can distribute tax-exempt dividends, by complying with the applicable provisions of the
Code, and to make distributions of income and net realized capital gain sufficient to relieve it from
substantially all federal income and excise taxes.
As of and during the
period ended March 31, 2023, the fund did not have any liabilities for any uncertain tax positions. The
fund recognizes interest and penalties, if any, related to uncertain tax positions as income tax expense
in the Statement of Operations. During the period ended March 31, 2023, the fund did not incur any interest
or penalties.
37
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
Each tax year in the three-year period ended September 30, 2022 remains subject
to examination by the Internal Revenue Service and state taxing authorities.
The
fund is permitted to carry forward capital losses for an unlimited period. Furthermore, capital loss
carryovers retain their character as either short-term or long-term capital losses.
The
fund has an unused capital loss carryover of $34,564,887 available for federal income tax purposes to
be applied against future net realized capital gains, if any, realized subsequent to September 30, 2022.
The fund has $18,972,229 of short-term capital losses and $15,592,658 of long-term capital losses which
can be carried forward for an unlimited period.
The tax character of distributions paid
to shareholders during the fiscal year ended September 30, 2022 was as follows: tax-exempt income of
$23,520,925. The tax character of current year distributions will be determined at the end of the current
fiscal year.
(g) New accounting pronouncements: In 2020, the FASB issued Accounting Standards
Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate
Reform on Financial Reporting, which provides optional guidance to ease the potential burden in accounting
for (or recognizing the effects of) reference rate reform on financial reporting.
The
objective of the guidance in Topic 848 is to provide temporary relief during the transition period. The
FASB included a sunset provision within Topic 848 based on expectations of when the LIBOR would cease
being published. At the time that Update 2020-04 was issued, the UK Financial Conduct Authority (FCA)
had established its intent that it would no longer be necessary to persuade, or compel, banks to submit
to LIBOR after December 31, 2021. As a result, the sunset provision was set for December 31, 2022—12
months after the expected cessation date of all currencies and tenors of LIBOR.
In
March 2021, the FCA announced that the intended cessation date of the overnight 1-, 3-, 6-, and 12-month
tenors of USD LIBOR would be June 30, 2023, which is beyond the current sunset date of Topic 848.
Because the current relief in Topic 848 may not cover a period of time during
which a significant number of modifications may take place, the amendments in this Update defer the sunset
date of Topic 848 from December 31, 2022, to December 31, 2024 (“FASB Sunset Date”), after which
entities will no longer be permitted to apply the relief in Topic 848.
38
Management had evaluated the impact of Topic 848 on the fund’s investments,
derivatives, debt and other contracts that will undergo reference rate-related modifications as a result
of the Reference Rate Reform. Management has no concerns in adopting Topic 848 by FASB Sunset Date. Management
will continue to work with other financial institutions and counterparties to modify contracts as required
by applicable regulation and within the regulatory deadlines. As of March 31, 2023, management believes
these accounting standards have no impact on the fund and does not have any concerns of adopting the
regulations by FASB Sunset Date.
NOTE 2—Management Fee, Sub-Advisory Fee and Other Transactions with Affiliates:
(a)
Pursuant
to a management agreement (the “Agreement”) with the Adviser, the management fee is computed at the
annual rate of .75% of the value of the fund’s average weekly net assets (including net assets representing
APS outstanding) and is payable monthly. The Agreement provides for an expense reimbursement from the
Adviser should the fund’s aggregate expenses (excluding taxes, interest on borrowings, brokerage fees
and extraordinary expenses) in any full fiscal year exceed the lesser of (1) the expense limitation of
any state having jurisdiction over the fund or (2) 2% of the first $10 million, 1½%
of the next $20 million and 1% of the excess over $30 million of the average weekly value of the fund’s
net assets. During the period ended March 31, 2023, there was no expense reimbursement pursuant to the
Agreement.
The Adviser has agreed, from October 1, 2022 through November 30, 2023, to waive
receipt of a portion of the fund’s management fee, in the amount of .10% of the value of the fund’s
average weekly net assets (including net assets representing APS outstanding). The reduction in expenses,
pursuant to the undertaking, amounted to $250,286 during the period ended March 31, 2023.
Pursuant to a sub-investment advisory agreement between the Adviser and the Sub-Adviser,
the Adviser pays the Sub-Adviser a monthly fee at an annual rate of .36% of the value of the fund’s
average weekly net assets (including net assets representing APS outstanding).
(b) The
fund has an arrangement with The Bank of New York Mellon (the “Custodian”), a subsidiary of BNY Mellon
and an affiliate of the Adviser, whereby the fund may receive earnings credits when
positive cash balances are maintained, which are used to offset custody fees. For financial reporting
purposes, the fund includes net earnings credits as an expense offset in the Statement of Operations.
39
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
The
fund compensates the Custodian under a custody agreement for providing custodial services for the fund.
These fees are determined based on transaction activity. During the period ended March 31, 2023,
the
fund was charged $5,564 for out-of-pocket and custody transaction expenses, pursuant to the custody agreement.
These fees were partially offset by earnings credits of $1,880.
During
the period ended March 31, 2023, the fund was charged $4,680 for services performed by the fund’s Chief
Compliance Officer and his staff. These fees are included in Chief Compliance Officer fees in the Statement
of Operations.
The components of “Due to BNY Mellon Investment Adviser,
Inc. and affiliates” in the Statement of Assets and Liabilities consist of: management fee of $321,369,
Custodian fees of $6,873 and Chief Compliance Officer fees of $2,315, which are offset against an expense
reimbursement currently in effect in the amount of $42,825.
(c) Each board member also
serves as a board member of other funds in the BNY Mellon Family of Funds complex. Annual retainer fees
and attendance fees are allocated to each fund based on net assets.
NOTE 3—Securities Transactions:
The aggregate amount of purchases and sales (including paydowns) of investment
securities, excluding short-term securities, during the period ended March 31, 2023, amounted to $48,673,475
and $45,561,505, respectively.
Inverse Floater Securities: The fund participates
in secondary inverse floater structures in which fixed-rate, tax-exempt municipal bonds are transferred
to a trust (the “Inverse Floater Trust”). The Inverse Floater Trust typically issues two variable
rate securities that are collateralized by the cash flows of the fixed-rate, tax-exempt municipal bonds.
One of these variable rate securities pays interest based on a short-term floating rate set by a remarketing
agent at predetermined intervals (“Trust Certificates”). A residual interest tax-exempt security
is also created by the Inverse Floater Trust, which is transferred to the fund, and is paid interest
based on the remaining cash flows of the Inverse Floater Trust, after payment of interest on the other
securities and various expenses of the Inverse Floater Trust. An Inverse Floater Trust may be collapsed
without the consent of the fund due to certain termination events such as bankruptcy, default or other
credit event.
The fund accounts for the transfer of bonds to the Inverse
Floater Trust as secured borrowings, with the securities transferred remaining in the fund’s
40
investments, and the Trust Certificates reflected as fund liabilities in the Statement
of Assets and Liabilities.
The fund may invest in inverse floater securities on either
a non-recourse or recourse basis. These securities are typically supported by a liquidity facility provided
by a bank or other financial institution (the “Liquidity Provider”) that allows the holders of the
Trust Certificates to tender their certificates in exchange for payment from the Liquidity Provider of
par plus accrued interest on any business day prior to a termination event. When the fund invests in
inverse floater securities on a non-recourse basis, the Liquidity Provider is required to make a payment
under the liquidity facility due to a termination event to the holders of the Trust Certificates. When
this occurs, the Liquidity Provider typically liquidates all or a portion of the municipal securities
held in the Inverse Floater Trust. A liquidation shortfall occurs if the Trust Certificates exceed the
proceeds of the sale of the bonds in the Inverse Floater Trust (“Liquidation Shortfall”). When a
fund invests in inverse floater securities on a recourse basis, the fund typically enters into a reimbursement
agreement with the Liquidity Provider where the fund is required to repay the Liquidity Provider the
amount of any Liquidation Shortfall. As a result, a fund investing in a recourse inverse floater security
bears the risk of loss with respect to any Liquidation Shortfall.
The average amount
of borrowings outstanding under the inverse floater structure during the period ended March 31, 2023
was approximately $160,875,861 with a related weighted average annualized interest rate of 3.17%.
At March 31, 2023, accumulated net unrealized depreciation on investments was
$22,238,808, consisting of $10,928,859 gross unrealized appreciation and $33,167,667 gross unrealized
depreciation.
At March 31, 2023, the cost of investments for federal income
tax purposes was substantially the same as the cost for financial reporting purposes (see the Statement
of Investments).
41
INFORMATION ABOUT THE RENEWAL OF THE FUND’S MANAGEMENT AND
SUB-INVESTMENT ADVISORY AGREEMENTS (Unaudited)
At
a meeting of the fund’s Board of Directors held on October 31-November 1, 2022, the Board considered
the renewal of the fund’s Management Agreement, pursuant to which the Adviser provides the
fund with investment advisory and administrative services, and the Sub-Investment Advisory Agreement
(together with the Management Agreement, the “Agreements”), pursuant to which Insight North America
LLC (the “Sub-Adviser”) provides day-to-day management of the fund’s investments. The Board members,
none of whom are “interested persons” (as defined in the Investment Company Act of 1940, as amended)
of the fund, were assisted in their review by independent legal counsel and met with counsel in executive
session separate from representatives of the Adviser and the Sub-Adviser. In considering the renewal
of the Agreements, the Board considered several factors that it believed to be relevant, including those
discussed below. The Board did not identify any one factor as dispositive, and each Board member may
have attributed different weights to the factors considered.
Analysis of Nature, Extent, and Quality
of Services Provided to the Fund. The Board considered information provided to it at the meeting
and in previous presentations from representatives of the Adviser regarding the nature, extent, and quality
of the services provided to funds in the BNY Mellon fund complex, including the fund. Representatives
of the Adviser noted that the fund is a closed-end fund without daily inflows and outflows of capital
and provided the fund’s asset size.
The Board also considered research support
available to, and portfolio management capabilities of, the fund’s portfolio management personnel and
that the Adviser also provides oversight of day-to-day fund operations, including fund accounting and
administration and assistance in meeting legal and regulatory requirements. The Board also considered
the Adviser’s extensive administrative, accounting and compliance infrastructures, as well as the Adviser’s
supervisory activities over the Sub-Adviser.
Comparative Analysis of the Fund’s Performance and
Management Fee and Expense Ratio. The Board reviewed reports prepared by Broadridge Financial
Solutions, Inc. (“Broadridge”), an independent provider of investment company data based on classifications
provided by Thomson Reuters Lipper (“Lipper”), which included information comparing (1) the fund’s
performance with the performance of a group of leveraged closed-end general and insured municipal debt
funds selected by Broadridge as comparable to the fund (the “Performance Group”) and with a broader
group of funds consisting of all leveraged closed-end general and insured municipal debt funds (the “Performance
Universe”), all for various periods ended September 30, 2022, and (2) the fund’s actual and contractual
management fees and total expenses with those of the same group of funds in the Performance Group (the
“Expense Group”) and with a broader group of funds consisting of all leveraged closed-end general
and insured municipal debt funds, excluding outliers (the “Expense Universe”), the information for
which was derived in part from fund financial statements available to Broadridge as of the date of its
analysis. The Adviser previously had furnished the Board with a
42
description of the methodology Broadridge used to select the Performance Group
and Performance Universe and the Expense Group and Expense Universe.
Performance Comparisons. Representatives of
the Adviser stated that the usefulness of performance comparisons may be affected by a number of factors,
including different investment limitations and policies and the extent and manner in which leverage is
employed that may be applicable to the fund and comparison funds and the end date selected. The Board
also considered the fund’s performance in light of overall financial market conditions. The Board discussed
with representatives of the Adviser and the Sub-Adviser the results of the comparisons and considered
that the fund’s total return performance, on a net asset value basis, was at or above the Performance
Group median for all periods, except the one-year period when the fund’s total return performance was
below the Performance Group median, and was above the Performance Universe median for all periods, except
the one- and four-year periods when the fund’s total return performance was below the Performance Universe
median. The Board further considered that the fund’s total return performance, on a market price basis,
was at or above the Performance Group and Performance Universe medians for the one-, four- and ten-year
periods, and was below the Performance Group and Performance Universe medians for the two-, three- and
five-year periods. The Board also considered that the fund’s yield performance, on a net asset value
basis, was at or above the Performance Group median for all ten one-year periods ended September 30th
and above the Performance Universe median for nine of the ten one-year periods ended September 30th
and, on a market price basis, the fund’s yield performance was at or above the Performance Group median
for nine of the ten one-year periods ended September 30th and above the Performance
Universe median for nine of the ten one-year periods ended September 30th.
The Board discussed with representatives of the Adviser and the Sub-Adviser the reasons for the fund’s
underperformance versus the Performance Group and Performance Universe during certain periods under review
and noted that the portfolio managers are very experienced with an impressive long-term track record
and continued to apply a consistent investment strategy. The Adviser also provided a comparison of the
fund’s calendar year total returns (on a net asset value basis) to the returns of the fund’s benchmark
index, and it was noted that the fund’s returns were above the returns of the index in seven of the
ten calendar years shown.
Management Fee and Expense Ratio Comparisons. The Board reviewed
and considered the contractual management fee rate payable by the fund to the Adviser in light of the
nature, extent and quality of the management services and the sub-advisory services provided by the Adviser
and the Sub-Adviser, respectively. In addition, the Board reviewed and considered the actual management
fee rate paid by the fund over the fund’s last fiscal year, which included reductions for a fee waiver
arrangement in place that reduced the management fee paid to the Adviser. The Board also reviewed the
range of actual and contractual management fees and total expenses as a percentage of average net assets
of the Expense Group and Expense Universe funds and discussed the results of the comparisons.
43
INFORMATION ABOUT THE RENEWAL OF THE FUND’S MANAGEMENT AND
SUB-INVESTMENT ADVISORY AGREEMENTS (Unaudited) (continued)
The Board considered that, based on common assets alone, the fund’s contractual
management fee was higher than the Expense Group median contractual management fee, the fund’s actual
management fee was lower than the Expense Group median and Expense Universe median actual management
fee and the fund’s total expenses were lower than the Expense Group median and Expense Universe median
total expenses. The Board also considered that, based on common and leveraged assets together, the fund’s
actual management fee was higher than the Expense Group median and Expense Universe median actual management
fee and the fund’s total expenses were equal to the Expense Group median and above the Expense Universe
median total expenses.
Representatives of the Adviser stated that the Adviser has
contractually agreed, until May 31, 2023, to waive receipt of a portion of the fund’s management fee,
in the amount of .10% of the value of the fund’s average weekly net assets (including net assets representing
APS outstanding).
Representatives of the Adviser reviewed with the Board the
contractual management or investment advisory fees paid by funds advised by the Adviser that are in the
same Lipper category as the fund (the “Similar Funds”), and explained the nature of the Similar Funds.
They discussed differences in fees paid and the relationship of the fees paid in light of any differences
in the services provided and other relevant factors, noting that the fund is a closed-end fund. The Board
considered the relevance of the fee information provided for the Similar Funds to evaluate the appropriateness
of the fund’s management fee. Representatives of the Adviser noted that there were no separate accounts
and/or other types of client portfolios advised by the Adviser or the Sub-Adviser that are considered
to have similar investment strategies and policies as the fund.
The Board considered
the fee payable to the Sub-Adviser in relation to the fee payable to the Adviser by the fund and the
respective services provided by the Sub-Adviser and the Adviser. The Board also took into consideration
that the Sub-Adviser’s fee is paid by the Adviser, out of its fee from the fund, and not the fund.
Analysis
of Profitability and Economies of Scale. Representatives of the Adviser reviewed the expenses allocated
and profit received by the Adviser and its affiliates and the resulting profitability percentage for
managing the fund and the aggregate profitability percentage to the Adviser and its affiliates for managing
the funds in the BNY Mellon fund complex, and the method used to determine the expenses and profit. The
Board concluded that the profitability results were not excessive, given the services rendered and service
levels provided by the Adviser and its affiliates. The Board also considered the fee waiver arrangement
and its effect on the profitability of the Adviser and its affiliates. The Board also had been provided
with information prepared by an independent consulting firm regarding the Adviser’s approach to allocating
costs to, and determining the profitability of, individual funds and the entire BNY Mellon fund complex.
The consulting firm also had analyzed where any economies of scale might emerge in connection with the
management of a fund.
44
The Board considered, on the advice of its counsel, the profitability analysis
(1) as part of its evaluation of whether the fees under the Agreements, considered in relation to the
mix of services provided by the Adviser and the Sub-Adviser, including the nature, extent and quality
of such services, supported the renewal of the Agreements and (2) in light of the relevant circumstances
for the fund and the extent to which economies of scale would be realized if the fund grows and whether
fee levels reflect these economies of scale for the benefit of fund shareholders. Representatives of
the Adviser stated that, because the fund is a closed-end fund without daily inflows and outflows of
capital, there were not significant economies of scale at this time to be realized by the Adviser in
managing the fund’s assets. Representatives of the Adviser also stated that, as a result of shared
and allocated costs among funds in the BNY Mellon fund complex, the extent of economies of scale could
depend substantially on the level of assets in the complex as a whole, so that increases and decreases
in complex-wide assets can affect potential economies of scale in a manner that is disproportionate to,
or even in the opposite direction from, changes in the fund’s asset level. The Board also considered
potential benefits to the Adviser and the Sub-Adviser from acting as investment adviser and sub-investment
adviser, respectively, and took into consideration that there were no soft dollar arrangements in effect
for trading the fund’s investments.
At the conclusion of these discussions,
the Board agreed that it had been furnished with sufficient information to make an informed business
decision with respect to the renewal of the Agreements. Based on the discussions and considerations as
described above, the Board concluded and determined as follows.
· The Board concluded that the nature, extent and quality of
the services provided by the Adviser and the Sub-Adviser are adequate and appropriate.
· The Board agreed to closely monitor performance and determined
to approve renewal of the Agreements only through the second quarter 2023 regular Board meeting, at which
time the Board would consider renewal of the Agreements for the remainder of their terms.
· The
Board concluded that the fees paid to the Adviser and the Sub-Adviser continued to be appropriate under
the circumstances and in light of the factors and the totality of the services provided as discussed
above.
· The
Board determined that the economies of scale which may accrue to the Adviser and its affiliates in connection
with the management of the fund had been adequately considered by the Adviser in connection with the
fee rate charged to the fund pursuant to the Management Agreement and that, to the extent in the future
it were determined that material economies of scale had not been shared with the fund, the Board would
seek to have those economies of scale shared with the fund.
In evaluating the Agreements,
the Board considered these conclusions and determinations and also relied on its previous knowledge,
gained through meetings and other interactions with the Adviser and its affiliates and the Sub-Adviser,
of the Adviser
45
INFORMATION ABOUT THE RENEWAL OF THE FUND’S MANAGEMENT AND
SUB-INVESTMENT ADVISORY AGREEMENTS (Unaudited) (continued)
and the Sub-Adviser and the services provided to the fund by the Adviser and the
Sub-Adviser. The Board also relied on information received on a routine and regular basis throughout
the year relating to the operations of the fund and the investment management and other services provided
under the Agreements, including information on the investment performance of the fund in comparison to
similar funds and benchmark performance indices; general market outlook as applicable to the fund; and
compliance reports. In addition, the Board’s consideration of the contractual fee arrangements for
the fund had the benefit of a number of years of reviews of the Agreements for the fund, or substantially
similar agreements for other BNY Mellon funds that the Board oversees, during which lengthy discussions
took place between the Board and representatives of the Adviser. Certain aspects of the arrangements
may receive greater scrutiny in some years than in others, and the Board’s conclusions may be based,
in part, on their consideration of the fund’s arrangements, or substantially similar arrangements for
other BNY Mellon funds that the Board oversees, in prior years. The Board determined to renew the Agreements
until the second quarter 2023 regular Board meeting, at which time the Board would consider renewal of
the Agreements for the remainder of their terms.
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