See notes to financial
statements.
See notes to financial
statements.
Opinion on the Financial Statements
We have audited the
accompanying statement of assets and liabilities of BNY Mellon Strategic Municipal Bond Fund, Inc. (the
“Fund”), including the statement of investments, as of November 30, 2022, and the related statements
of operations and cash flows for the year then ended, the statements of changes in net assets for each
of the two years in the period then ended, the financial highlights for each of the five years in the
period then ended and the related notes (collectively referred to as the “financial statements”).
In our opinion, the financial statements present fairly, in all material respects, the financial position
of the Fund at November 30, 2022, the results of its operations and its cash flows for the year then
ended, the changes in its net assets for each of the two years in the period then ended and its financial
highlights for each of the five years in the period then ended, in conformity with U.S. generally accepted
accounting principles.
Basis for Opinion
These financial statements
are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the
Fund’s financial statements based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent
with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we
engaged to perform, an audit of the Fund’s internal control over financial reporting. As part of our
audits, we are required to obtain an understanding of internal control over financial reporting, but
not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over
financial reporting. Accordingly, we express no such opinion.
Our audits included
performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned as of November 30, 2022, by correspondence with
the custodian, brokers and others; when replies were not received from brokers and others, we performed
other auditing procedures. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
We have served as the
auditor of one or more investment companies in the BNY Mellon Family of Funds since at least 1957, but
we are unable to determine the specific year.
New York, New York
January 23, 2023
42
ADDITIONAL
INFORMATION (Unaudited)
Dividend
Reinvestment Plan
Under the fund’s Dividend Reinvestment Plan (the “Plan”),
a Common Shareholder who has fund shares registered in his or her name will have all dividends and distributions
reinvested automatically by Computershare Trust Company, N.A., as Plan administrator (the “Administrator”),
in additional shares of the fund at the lower of prevailing market price or net asset value (but not
less than 95% of market value at the time of valuation) unless such Common Shareholder elects to receive
cash as provided below. 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 or if a cash dividend only is declared, the
Administrator, as agent for the Plan participants, will buy fund shares in the open market. A Plan participant
is not relieved of any income tax that may be payable on such dividends or distributions.
A
Common Shareholder who owns fund shares registered in nominee name through his or her broker/dealer (i.e.,
in “street name”) may not participate in the Plan, but may elect to have cash dividends and distributions
reinvested by his or her broker/dealer in additional shares of the fund if such service is provided by
the broker/dealer; otherwise such dividends and distributions will be treated like any other cash dividend.
A Common Shareholder who has fund shares registered in his or her name may elect
to withdraw from the Plan at any time for a $5.00 fee and thereby elect to receive cash in lieu of shares
of the fund. Changes in elections must be in writing, sent to The Bank of New York Mellon, c/o Computershare
Inc., P.O. Box 30170, College Station, TX 77842-3170, should include the Common Shareholder’s name
and address as they appear on the Administrator’s records and will be effective only if received more
than fifteen days prior to the record date for any distribution.
The Administrator maintains
all Common Shareholder accounts in the Plan and furnishes written confirmations of all transactions in
the account. Shares in the account of each Plan participant will be held by the Administrator in non-certificated
form in the name of the participant, and each such participant’s proxy will include those shares purchased
pursuant to the Plan.
The fund pays the Administrator’s fee for reinvestment of
dividends and distributions. Plan participants pay a pro rata share of brokerage commissions incurred
with respect to the Administrator’s open market purchases in connection with the reinvestment of dividends
or distributions.
The fund reserves the right to amend or terminate the Plan
as applied to any dividend or distribution paid subsequent to written notice of the change sent to Plan
participants at least 90 days before the record date for such dividend or distribution. The Plan also
may be amended or terminated by the Administrator on at least 90 days’ written notice to Plan participants.
Level
Distribution Policy
The fund’s dividend policy is to distribute substantially
all of its net investment income to its shareholders on a monthly basis. In order to provide shareholders
with a more consistent yield to the current trading price of shares of Common Stock of the fund, the
fund may at
43
ADDITIONAL
INFORMATION (Unaudited) (continued)
times pay out less than the entire amount of net investment income earned in any
particular month and may at times in any month pay out such accumulated but undistributed income in addition
to net investment income earned in that month. As a result, the dividends paid by the fund for any particular
month may be more or less than the amount of net investment income earned by the fund during such month.
Investment
Objective and Principal Investment Strategies
Investment Objective. The fund’s investment
objective is to maximize current income exempt from federal income tax to the extent believed by the
Adviser to be consistent with the preservation of capital. The fund’s investment
objective is fundamental and may not be changed without the affirmative vote of the holders of a majority
(as defined in the Act) of the fund’s outstanding voting securities. No assurance can be given that
the fund will achieve its investment objective.
Fundamental
Investment Policy. The fund ordinarily invests all of its net assets in municipal
obligations that provide income exempt from federal personal income tax, and has adopted a fundamental
investment policy to invest, under normal market conditions, at least
80% of its net assets in municipal obligations. As with the fund’s investment objective,
this investment policy may not be changed without the affirmative vote of the holders of a majority (as
defined in the Act) of the fund’s outstanding voting securities.
Municipal
obligations are debt obligations issued by states, territories and possessions of the United States and
the District of Columbia and their political subdivisions, agencies and instrumentalities, or multi-state
agencies or authorities, that provide income exempt from federal income tax. Municipal obligations are
classified as general obligation bonds, revenue bonds and notes. General obligation bonds are secured
by the issuer’s pledge of its faith, credit and taxing power for the payment of principal and interest.
Revenue bonds are payable from the revenue derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise or other specific revenue source, but not from
the general taxing power. Notes are short term instruments which are obligations of the issuing municipalities
or agencies and are sold in anticipation of a bond sale, collection of taxes or receipt of other revenues.
The fund may purchase floating and variable rate obligations, municipal derivatives, such as custodial
receipt programs created by financial intermediaries, tender option bonds, and participations in municipal
obligations.
Non-Fundamental Investment Policies. Under normal market
conditions, the fund invests at least 80% of its net assets in municipal obligations considered investment
grade by Moody’s, S&P or Fitch or the unrated equivalent as determined by the Sub-Adviser in the
case of bonds, and in the two highest rating categories of Moody’s, S&P or Fitch or the unrated
equivalent as determined by the Sub-Adviser in the case of short term obligations having or deemed to
have maturities of less than one year. The fund may invest the remainder of its assets in municipal obligations
considered below investment grade by Moody’s, S&P and Fitch, including those rated no lower than
C, but it currently is the intention of the fund to invest such remainder of its assets
44
primarily in bonds rated no lower than Ba by Moody’s and BB by S&P and Fitch.
Bonds rated below investment grade and short term obligations rated below the two highest rating categories
of Moody’s, S&P and Fitch will be purchased only if the Sub-Adviser determines that the purchase
is consistent with the fund’s investment objective. Investment grade bonds are those rated in the four
highest rating categories of Moody’s, S&P or Fitch. The fund also may invest in taxable investments
to the extent and of the quality described below. At least 65% of the value of the fund’s net assets
(except when maintaining a temporary defensive position) will be invested in bonds and debentures.
Under normal market conditions, the weighted average maturity of the fund’s
portfolio is expected to exceed ten years. The fund emphasizes investments in municipal obligations with
long term maturities, but the degree of such emphasis depends upon market conditions existing at the
time of investment. Under normal market conditions, long term municipal obligations generally provide
a higher yield than short term municipal obligations. The fund, however, may invest in short term municipal
obligations when their yields are greater than yields available on long term municipal obligations and
for temporary defensive purposes.
From time to time, the fund may invest
more than 25% of the value of its total assets in industrial development bonds which, although issued
by industrial development authorities, may be backed only by the assets and revenues of the non-governmental
users. Interest on certain municipal obligations (including certain industrial development bonds) which
are specific private activity bonds, while exempt from federal income tax, is a preference item for the
purpose of the federal alternative minimum tax. If the fund, as a regulated investment company, receives
such interest, a proportionate share of any exempt-interest dividend paid by the fund will be treated
as a preference item to an investor. The fund may invest without limitation in such municipal obligations
if the Adviser determines that their purchase is consistent with the fund’s investment objective.
Taxable Investments and other Investment Techniques.
The
fund may employ, among others, the investment techniques described below. Use of certain of these techniques
may give rise to taxable income.
Temporary Investments. From time to time,
on a temporary basis other than for temporary defensive purposes (but not to exceed 20% of the fund’s
net assets) or for temporary defensive purposes without limitation, the fund may invest in taxable short
term investments (“Taxable Investments”) consisting of: notes of issuers having, at the time of purchase,
a quality rating within the two highest grades of Moody’s, S&P or Fitch; obligations of the U.S.
Government, its agencies or instrumentalities; commercial paper rated at least P-2 by Moody’s or at
least A-2 by S&P or Fitch; certificates of deposit of U.S. domestic banks, including foreign branches
of domestic banks, with assets of $1 billion or more; bankers’ acceptances; time deposits; and repurchase
agreements in respect of any of the foregoing. Dividends paid by the fund that are attributable to interest
earned from Taxable Investments will be taxable to investors. Under normal
45
ADDITIONAL
INFORMATION (Unaudited) (continued)
market conditions, the fund anticipates that not more than 5% of its total assets
will be invested in any of the foregoing categories of Taxable Investments.
When-Issued Securities.
New issues of municipal obligations usually are offered on a when-issued basis, which means that delivery
and payment for such municipal obligations normally take place within 35 days after the date of the commitment
to purchase. The payment obligation and the interest rate that will be received on the municipal obligations
are fixed at the time the buyer enters into the commitment. The fund will make commitments to purchase
such municipal obligations only with the intention of actually acquiring the securities, but the fund
may sell these securities before the settlement date if it is deemed advisable, although any gain realized
on such sale would be taxable. The fund will not accrue income with respect to a when-issued security
before its stated delivery date. No additional when-issued commitments will be made if more than 20%
of the fund’s net assets would be so committed.
Stand-By Commitments. The fund may acquire
“stand-by commitments” with respect to municipal obligations held in its portfolio. Under a stand-by
commitment the fund obligates a broker, dealer or bank to repurchase, at the fund’s option, specified
securities at a specified price and, in this respect, stand-by commitments are comparable to put options.
The exercise of a stand-by commitment, therefore, is subject to the ability of the seller to make payment
on demand. The fund will acquire stand-by commitments solely to facilitate portfolio liquidity and does
not intend to exercise its rights thereunder for trading purposes. The fund anticipates that stand-by
commitments will be available from brokers, dealers and banks without the payment of any direct or indirect
consideration. The fund may pay for stand-by commitments if such action is deemed necessary, thus increasing
to a degree the cost of the underlying municipal obligation and similarly decreasing such security’s
yield to investors.
Inverse Floating Rate Securities. The fund may invest in residual interest
municipal obligations whose interest rates bear an inverse relationship to the interest rate on another
security or the value of an index (“inverse floaters”). An investment in inverse floaters may involve
greater risk than an investment in a fixed-rate bond. Because changes in the interest rate on the other
security or index inversely affect the residual interest paid on the inverse floater, the value of an
inverse floater is generally more volatile than that of a fixed-rate bond. Inverse floaters have interest
rate adjustment formulas which generally reduce or, in the extreme, eliminate the interest paid to the
fund when short term interest rates rise, and increase the interest paid to the fund when short term
interest rates fall. Inverse floaters have varying degrees of liquidity, and the market for these securities
is relatively volatile. These securities tend to underperform the market for fixed-rate bonds in a rising
interest rate environment, but tend to outperform the market for fixed-rate bonds when interest rates
decline. Shifts in long term interest rates may, however, alter this tendency. Although volatile, inverse
floaters typically offer the potential for yields exceeding the yields available on fixed-rate bonds
with comparable credit quality, coupon, call provisions and maturity. These securities usually permit
the investor to convert the floating-rate to a fixed-rate (normally adjusted
46
downward), and this optional conversion feature may provide a partial hedge against
rising rates if exercised at an opportune time.
Use of Leverage. The fund utilizes
leverage to seek to enhance the yield and net asset value of its Common Stock. These objectives cannot
be achieved in all interest rate environments. To leverage, the fund issues APS and floating rate certificate
securities, which pay dividends or interest at prevailing short-term interest rates, and invests the
proceeds in long-term municipal bonds. The interest earned on these investments is paid to Common Shareholders
in the form of dividends, and the value of these portfolio holdings is reflected in the per share net
asset value of the fund’s Common Stock. In order for either of these forms of leverage to benefit Common
Shareholders, the yield curve must be positively sloped: that is, short-term interest rates must be lower
than long-term interest rates. At the same time, a period of generally declining interest rates will
benefit Common Shareholders. If either of these conditions change along with other factors that may have
an effect on APS dividends or floating rate certificate securities, then the risk of leveraging will
begin to outweigh the benefits.
Principal Risk Factors
The fund is a diversified,
closed-end management investment company designed primarily as a long-term investment and not as a short-term
trading vehicle. The fund is not intended to be a complete investment program and, due to the uncertainty
inherent in all investments, there can be no assurance that the fund will achieve its investment objective.
Different risks may be more significant at different times depending on market conditions.
Municipal Obligations
Risk. The amount of public information available about municipal obligations is generally
less than that for corporate equities or bonds. Special factors, such as legislative changes, and state
and local economic and business developments, may adversely affect the yield and/or value of the fund’s
investments in municipal obligations. Other factors include the general conditions of the municipal obligations
market, the size of the particular offering, and the maturity of the obligation and the rating of the
issue. The municipal obligations market can be susceptible to increases in volatility and decreases in
liquidity. Liquidity can decline unpredictably in response to overall economic conditions or credit tightening.
Increases in volatility and decreases in liquidity may be caused by a rise in interest rates (or the
expectation of a rise in interest rates). During periods of reduced market liquidity, the fund may not
be able to readily sell municipal obligations at prices at or near their perceived value. Changes in
economic, business or political conditions relating to a particular municipal project, municipality,
or state, territory or possession of the United States in which the fund invests may have an impact on
the fund’s net asset value per share of Common Stock. A credit rating downgrade relating to, default
by, or insolvency or bankruptcy of, one or several municipal security issuers of a state, territory or
possession of the United States in which the fund invests could affect the market values and marketability
of many or all municipal securities of such state, territory or possession.
47
ADDITIONAL
INFORMATION (Unaudited) (continued)
In addition, the fund may invest up to 20% of its net assets in below investment
grade municipal obligations. Below investment grade municipal obligations (commonly referred to as “high
yield” or “junk” bonds) involve substantial risk of loss and are considered predominantly speculative
with respect to the issuer’s or obligor’s ability to pay interest and repay principal and are susceptible
to default or decline in market value due to adverse economic and business developments. The market values
for high yield municipal obligations tend to be very volatile, and those bonds are less liquid than investment
grade municipal obligations.
Because there is no established retail secondary market for
many of these municipal obligations, it may be anticipated that such obligations could be sold only to
a limited number of dealers or institutional investors. To the extent a secondary trading market for
these obligations does exist, it generally is not as liquid as the secondary market for higher-rated
municipal obligations. The lack of a liquid secondary market may have an adverse impact on market price
and yield and the fund’s ability to dispose of particular issues in response to a specific economic
event such as a deterioration in the creditworthiness of the issuer. The lack of a liquid secondary market
for certain municipal obligations also may make it more difficult for the fund to obtain accurate market
quotations for purposes of valuing the fund’s portfolio and calculating its net asset value. In such
cases, the Sub-Adviser’s judgment may play a greater role in valuation because less reliable, objective
data may be available.
Call Risk. Some municipal obligations give the issuer the option to
“call,” or prepay, the securities before their maturity date. If interest rates fall, it is possible
that issuers of callable bonds with high interest coupons will call their bonds. If a call were exercised
by the issuer of a bond held by the fund during a period of declining interest rates, the fund is likely
to replace such called bond with a lower yielding bond. If that were to happen, it could decrease the
fund’s distributions and possibly could affect the market price of the Common Stock. Similar risks
exist when the fund invests the proceeds from matured, traded or prepaid bonds at market interest rates
that are below the fund’s current earnings rate. A decline in income could affect the market price
or overall return of the Common Stock. During periods of market illiquidity or rising interest rates,
prices of “callable” issues are subject to increased price fluctuation.
Credit Risk.
Credit risk is the risk that one or more municipal bonds in the fund’s portfolio will decline in price,
or the issuer or obligor thereof will fail to pay interest or repay principal when due, because the issuer
or obligor experiences a decline or there is a perception of a decline in its financial status. Below
investment grade municipal obligations involve greater credit risk than investment grade municipal obligations.
In addition, sizable investments by the fund in revenue obligations could involve an increased risk to
the fund should any of the related facilities experience financial difficulties.
Interest Rate Risk.
Prices of municipal obligations and other fixed-income securities tend to move inversely with changes
in interest rates. Typically, a rise in rates will adversely affect fixed-income securities and, accordingly,
will cause the value of the fund’s investments in these securities to decline. A wide variety of market
factors can cause
48
interest rates to rise, including central bank monetary policy, rising inflation
and changes in general economic conditions. During periods of very low interest rates, which occur from
time to time due to market forces or actions of governments and/or their central banks, including the
Board of Governors of the Federal Reserve System in the U.S., the fund may be subject to a greater risk
of principal decline from rising interest rates. When interest rates fall, the values of already-issued
fixed-income securities generally rise. However, when interest rates fall, the fund’s investments in
new securities may be at lower yields and may reduce the fund’s income. The magnitude of these fluctuations
in the market price of fixed-income securities is generally greater for securities with longer effective
maturities and durations because such instruments do not mature, reset interest rates or become callable
for longer periods of time. The change in the value of a fixed-income security or portfolio can be approximated
by multiplying its duration by a change in interest rates. For example, the market price of a fixed-income
security with a duration of three years would be expected to decline 3% if interest rates rose 1%. Conversely,
the market price of the same security would be expected to increase 3% if interest rates fell 1%. Interest
rates in the United States, however, have been rising and are expected to continue to increase in the
future. Changing interest rates may have unpredictable effects on markets, may result in heightened market
volatility and may detract from fund performance.
Tax Risk. To be tax-exempt, municipal obligations
generally must meet certain regulatory requirements. Although the fund will invest in municipal obligations
that pay income that is exempt, in the opinion of counsel to the issuer (or on the basis of other authority
believed by the Adviser to be reliable), from regular federal income tax, if any such municipal obligation
fails to meet these regulatory requirements, the income received by the fund from its investment in such
obligations and distributed by the fund to Common Shareholders will be taxable. Changes or proposed changes
in federal tax laws may cause the prices of municipal obligations to fall. In addition, the federal income
tax treatment of payments in respect of certain derivatives contracts is unclear. Common Shareholders
may receive distributions that are attributable to derivatives contracts that are treated as ordinary
income for federal income tax purposes
Liquidity Risk. When there is little or no active trading
market for specific types of securities, it can become more difficult to sell the securities in a timely
manner at or near their perceived value. In such a market, the value of such securities and the fund’s
net asset value per share of Common Stock may fall dramatically, even during periods of declining interest
rates. Other market developments can adversely affect fixed-income securities markets. Regulations and
business practices, for example, have led some financial intermediaries to curtail their capacity to
engage in trading (i.e., “market making”) activities for certain fixed-income
securities, which could have the potential to decrease liquidity and increase volatility in the fixed-income
securities markets. The secondary market for certain municipal obligations tends to be less well developed
or liquid than many other securities markets, which may adversely affect the fund’s ability to sell
such municipal obligations at attractive prices. Investments that are illiquid or that trade in lower
volumes may be more difficult to value. Liquidity can decline unpredictably in response to overall economic
conditions or credit tightening. Increases
49
ADDITIONAL
INFORMATION (Unaudited) (continued)
in volatility and decreases in liquidity may be caused by a rise in interest rates
(or the expectation of a rise in interest rates).
When-Issued Securities Risk.
When purchasing a security on a forward commitment basis, the fund assumes the rights and risks of ownership
of the security, including the risk of price and yield fluctuations. Because the fund is not required
to pay for these securities until the delivery date, these risks are in addition to the risks associated
with the fund’s other investments. Securities purchased on a forward commitment, when-issued or delayed-delivery
basis are subject to changes in value (generally appreciating when interest rates decline and depreciating
when interest rates rise) based upon the public’s perception of the creditworthiness of the issuer
and changes, real or anticipated, in the level of interest rates. Securities purchased on a forward commitment,
when-issued or delayed-delivery basis may expose the fund to risks because they may experience such fluctuations
prior to their actual delivery.
Use of Leverage Risk. Leverage is a speculative
technique and there are special risks and costs associated with leveraging. There is no assurance that
leveraging strategy will be successful. Leverage involves risks and special considerations for Common
Shareholders, including: the likelihood of greater volatility of net asset value, market price and dividend
rate of Common Stock than a comparable portfolio without leverage; the risk that fluctuations in the
interest or dividend rates that the fund must pay on any leverage will reduce the return to Common Shareholders;
the effect of leverage in a declining market, which is likely to cause a greater decline in the net asset
value of Common Stock than if the fund were not leveraged, which may result in a greater decline in the
market price of Common Stock.
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. In addition, turbulence
in financial markets and reduced liquidity in equity, credit and/or fixed income markets may negatively
affect many issuers, which could adversely affect the fund. Global economies and financial markets are
becoming increasingly interconnected, and conditions and events in one country, region or financial market
may adversely impact issuers in a different country, region or financial market. These risks may be magnified
if certain events or developments adversely interrupt the global supply chain; in these and other circumstances,
such risks might affect companies worldwide. Recent examples include pandemic risks related to COVID-19
and aggressive measures taken worldwide in response by governments, including closing borders, restricting
international and domestic travel, and the imposition of prolonged quarantines of large populations,
and by businesses, including changes to operations and reducing staff. The effects of COVID-19 have contributed
to increased volatility in global markets and will likely affect certain countries, companies, industries
and market sectors more dramatically than others. The COVID-19 pandemic has had, and any other outbreak
of an infectious disease or other serious public health concern could have, a significant negative impact
on economic and market conditions and could trigger a prolonged period of global economic slowdown. To
the extent the fund may overweight its investments in certain
50
regions, companies, industries or market sectors, such positions will increase
the fund’s exposure to risk of loss from adverse developments affecting those regions, companies, industries
or sectors.
Risk of Market Price Discount from Net Asset Value. Shares of closed-end
funds, such as the fund, frequently trade at a discount from their net asset value. This characteristic
is a risk separate and distinct from the risk that net asset value could decrease as a result of investment
activities. The fund cannot predict whether its Common Stock will trade at, above or below net asset
value.
Management Risk. The fund is subject to management risk because the Adviser
actively manages the fund. The Sub-Adviser and the fund’s portfolio managers will apply investment
techniques and risk analyses in making investment decisions for the fund, but there can be no guarantee
that these will produce the desired results.
Cybersecurity Risk. The fund and its service
providers are susceptible to operational and information security risks due to cybersecurity incidents.
In general, cybersecurity incidents can result from deliberate attacks or unintentional events. Cybersecurity
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 also may 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 services unavailable to intended users). Cybersecurity incidents affecting
the Adviser or other service providers, as well as financial intermediaries, have the ability to cause
disruptions and impact business operations, potentially resulting in financial losses, including by interference
with the fund’s ability to calculate its net asset value; impediments to trading for the fund’s portfolio;
the inability of Common Shareholders to transact business with the fund; violations of applicable privacy,
data security or other laws; regulatory fines and penalties; reputational damage; reimbursement or other
compensation or remediation costs; legal fees; or additional compliance costs. Similar adverse consequences
could result from cybersecurity incidents affecting issuers of securities in which the fund invests,
counterparties with which the fund engages in transactions, governmental and other regulatory authorities,
exchange and other financial market operators, banks, brokers, dealers, insurance companies and other
financial institutions and other parties. While information risk management systems and business continuity
plans have been developed which are designed to reduce the risks associated with cybersecurity, there
are inherent limitations in any cybersecurity risk management systems or business continuity plans, including
the possibility that certain risks have not been identified.
Given the risks described
above, an investment in Common Stock may not be appropriate for all investors. You should carefully consider
your ability to assume these risks before making an investment in the fund.
51
ADDITIONAL
INFORMATION (Unaudited) (continued)
Recent
Changes
During the period ended November 30, 2022, there were: (i) no material changes
in the fund’s investment objectives or policies that have not been approved by shareholders, (ii) no
changes in the fund’s charter or by-laws that would delay or prevent a change of control of the fund
that have not been approved by shareholders, (iii) no material changes to the principal risk factors
associated with investment in the fund, and (iv) no change in the persons primarily responsible for the
day-to-day management of the fund’s portfolio.
52
IMPORTANT
TAX INFORMATION (Unaudited)
In accordance with federal tax law, the fund hereby reports all the dividends
paid from net investment income during its fiscal year ended November 30, 2022 as “exempt-interest
dividends” (not generally subject to regular federal income tax). Where required by federal tax law
rules, shareholders will receive notification of their portion of the fund’s taxable ordinary dividends
(if any), capital gains distributions (if any) and tax-exempt dividends paid for the 2022 calendar year
on Form 1099-DIV, which will be mailed in early 2023.
53
INFORMATION ABOUT THE RENEWAL OF THE FUND’S INVESTMENT ADVISORY,
ADMINISTRATION 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 Investment Advisory Agreement and Administration
Agreement, pursuant to which the Adviser provides the fund with investment advisory and administrative
services, respectively, and the Sub-Investment Advisory Agreement (together with the Investment Advisory
Agreement and Administration 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. 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
54
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 below the Performance Group
median for all periods, except the two-year period when the fund’s total return performance was above
the Performance Group median, and was below the Performance Universe median for all periods, except the
one- and two-years periods when the fund’s total return performance was at or above the Performance
Universe median. The Board also considered that the fund’s total return performance, on a market price
basis, was below the Performance Group and Performance Universe medians for all periods, except the one-
and two-years periods when the fund’s total return performance was at or above the Performance Group
median and above the Performance Universe median. The Board also considered that the fund’s yield performance,
on a net asset value basis, was at or above the Performance Group and Performance Universe medians for
nine of the ten one-year periods ended September 30th and, on a market price
basis, was at or above the Performance Group median for all of the ten one-year periods ended September
30th
and at or 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 Board also considered the relative proximity
of the fund’s performance to the relevant Performance Group and/or Performance Universe medians in
certain periods when performance was below median. 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 (i.e., the aggregate of
the investment advisory and administration fees pursuant to the Investment Advisory Agreement and Administration
Agreement) 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
55
INFORMATION ABOUT THE RENEWAL OF THE FUND’S INVESTMENT ADVISORY,
ADMINISTRATION AND SUB-INVESTMENT ADVISORY AGREEMENTS (Unaudited) (continued)
Expense Group and Expense Universe funds and discussed the results of the comparisons.
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 and the fund’s actual
management fee was lower than the Expense Group median and the 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 higher than the Expense Group median and Expense Universe median
total expenses.
Representatives of the Adviser stated that the Adviser had
agreed, until May 31, 2023, to waive receipt of a portion of its management fee from the fund 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 fee 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 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
56
complex. The consulting firm also had analyzed where any economies of scale might
emerge in connection with the management of a fund.
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 generally was satisfied with the fund’s overall
relative performance.
· 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 Investment Advisory Agreement and Administration 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 and the Sub-Adviser and the services provided
to the fund by the Adviser and the Sub-
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INFORMATION ABOUT THE RENEWAL OF THE FUND’S INVESTMENT ADVISORY,
ADMINISTRATION AND SUB-INVESTMENT ADVISORY AGREEMENTS (Unaudited) (continued)
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 its 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.
58
BOARD
MEMBERS INFORMATION (Unaudited)
Independent
Board Members
Joseph S. DiMartino (79)
Chairman
of the Board (1995)
Current term expires in 2024.
Principal
Occupation During Past 5 Years:
· Director
or Trustee of funds in the BNY Mellon Family of Funds and certain other entities (as described in the
fund’s Statement of Additional Information) (1995-Present)
Other Public Company
Board Memberships During Past 5 Years:
· CBIZ,
Inc., a public company providing professional business services, products and solutions, Director
(1997-Present)
No. of Portfolios for which Board Member Serves: 92
———————
Joni Evans (80)
Board Member (2006)
Current term expires in 2024.
Principal Occupation
During Past 5 Years:
· www.wowOwow.com,
an online community dedicated to women’s conversations and publications, Chief Executive Officer
(2007-2019)
· Joni
Evans Ltd. publishing, Principal (2006-2019)
No. of Portfolios for which Board Member
Serves: 17
———————
Joan
Gulley (75)
Board Member (2017)
Current term expires in
2023.
Principal Occupation During Past 5 Years:
· Nantucket Atheneum, public library, Chair (2018-June 2021) and
Director
(2015-June 2021)
· Orchard
Island Club, golf and beach club, Governor (2016-Present)
No. of Portfolios for
which Board Member Serves: 39
———————
59
BOARD
MEMBERS INFORMATION (Unaudited) (continued)
Alan H. Howard (63)
Board Member (2018)
Current term expires in 2025.
Principal Occupation
During Past 5 Years:
· Heathcote
Advisors LLC, a financial advisory services firm, Managing Partner (2008-Present)
· Dynatech/MPX
Holdings LLC, a global supplier and service provider of military aircraft parts, President
(2012-2019); and Board Member of its two operating subsidiaries, Dynatech International
LLC and Military Parts Exchange LLC (2012-2019), including Chief Executive Officer of an operating subsidiary,
Dynatech International LLC (2013-2019)
· Rossoff
& Co., an independent investment banking firm, Senior Advisor (2013-June 2021)
Other Public Company Board Memberships During Past 5 Years:
· Movado Group, Inc., a public company that designs, sources,
markets and distributes watches, Director (1997-Present)
· Diamond Offshore Drilling, Inc., a public company that provides
contract drilling services, Director (March 2020-April 2021)
No. of Portfolios for
which Board Member Serves: 17
———————
Robin A. Melvin (59)
Board Member (1995)
Current term expires in 2025.
Principal Occupation
During Past 5 Years:
· Westover
School, a private girls’ boarding school in Middlebury, Connecticut, Trustee
(2019-Present)
· Mentor
Illinois, a non-profit organization dedicated to increasing the quantity and quality of mentoring services
in Illinois. Co-Chair (2014–2020); Board Member, Mentor Illinois (2013-2020)
· JDRF,
a non-profit juvenile diabetes research foundation, Board Member (June 2021-June 2022)
Other Public Company Board Memberships During Past 5 Years:
· HPS Corporate Lending Fund, a closed-end management investment
company regulated as a business development company, Trustee (August 2021-Present)
No.
of Portfolios for which Board Member Serves: 71
———————
Burton N. Wallack (72)
Board Member (2006)
Current term expires in 2023.
Principal Occupation
During Past 5 Years:
Wallack Management Company, a real estate management company,
President
and Co-owner (1987-Present)
Other Public Company Board Memberships
During Past 5 Years:
Mount Sinai Hospital Urology, Board Member
(2017-Present)
No. of Portfolios for which Board Member Serves: 17
———————
60
Benaree Pratt Wiley (76)
Board Member (1998)
Current term expires in 2023.
Principal Occupation
During Past 5 Years:
· The
Wiley Group, a firm specializing in strategy and business development. Principal
(2005-Present)
Other Public Company Board Memberships During Past 5 Years:
· CBIZ,
Inc., a public company providing professional business services, products and solutions, Director
(2008-Present)
· Blue
Cross-Blue Shield of Massachusetts, Director (2004-2020)
No. of Portfolios for
which Board Member Serves: 60
———————
Gordon J. Davis (81)
Advisory Board Member (2021)
Principal Occupation During Past 5 Years:
· Venable LLP, a law firm, Partner (2012-Present)
Other Public Company Board Memberships During Past 5 Years:
· BNY Mellon Family of Funds (53 funds), Board Member
(1995-August 2021)
No. of Portfolios for which Advisory Board Member Serves: 39
———————
The address of the Board Members and Officers is c/o BNY Mellon Investment Adviser,
Inc., 240 Greenwich Street, New York, New York 10286.
61
OFFICERS
OF THE FUND (Unaudited)
DAVID
DIPETRILLO, President since January 2021.
Vice President and Director
of Adviser since February 2021; Head of North America Product, BNY Mellon Investment Management since
January 2018; and Director of Product Strategy, BNY Mellon Investment Management from January 2016 to
December 2017. He is an officer of 54 investment companies (comprised of 107 portfolios) managed by Adviser
or an affiliate of Adviser. He is 44 years old and has been an employee of BNY Mellon since 2005.
JAMES
WINDELS, Treasurer since November 2001.
Vice President of Adviser
since September 2020; and Director–BNY Mellon Fund Administration. He is an officer of 55 investment
companies (comprised of 127 portfolios) managed by Adviser or an affiliate of Adviser. He is 64 years
old and has been an employee of Adviser since April 1985.
PETER M. SULLIVAN, Chief Legal Officer since
July 2021 and Vice President and Assistant Secretary since March 2019.
Chief
Legal Officer of Adviser and Associate General Counsel of BNY Mellon since July 2021; Senior Managing Counsel
of BNY Mellon from December 2020 to July 2021; and Managing Counsel of BNY Mellon from March 2009 to
December 2020. He is an officer of 55 investment companies (comprised of 127 portfolios) managed by Adviser
or an affiliate of Adviser. He is 54 years old and has been an employee of BNY Mellon since April 2004.
JAMES
BITETTO, Vice President since August 2005 and Secretary since February 2018.
Senior
Managing Counsel of BNY Mellon since December 2019; Managing Counsel of BNY Mellon from April 2014 to
December 2019; and Secretary of Adviser. He is an officer of 55 investment companies (comprised of 127
portfolios) managed by Adviser or an affiliate of Adviser. He is 56 years old and has been an employee
of Adviser since December 1996.
DEIRDRE CUNNANE, Vice President and Assistant Secretary since
March 2019.
Managing Counsel of BNY Mellon since December 2021, Counsel
of BNY Mellon from August 2018 to December 2021; and Senior Regulatory Specialist at BNY Mellon Investment
Management Services from February 2016 to August 2018. She is an officer of 55 investment companies (comprised
of 127 portfolios) managed by Adviser or an affiliate of Adviser. She is 32 years old and has been an
employee of Adviser since August 2018.
SARAH S. KELLEHER, Vice President and Assistant Secretary since
April 2014.
Vice President of BNY Mellon ETF Investment Adviser; LLC since
February 2020; Senior Managing Counsel of BNY Mellon since September 2021; Managing Counsel of BNY Mellon
from December 2017 to September 2021; and Senior Counsel of BNY Mellon from March 2013 to December 2017.
She is an officer of 55 investment companies (comprised of 127 portfolios) managed by Adviser or an affiliate
of Adviser. She is 47 years old and has been an employee of Adviser since March 2013.
JEFF PRUSNOFSKY, Vice President
and Assistant Secretary since August 2005.
Senior Managing Counsel
of BNY Mellon. He is an officer of 55 investment companies (comprised of 127 portfolios) managed by Adviser
or an affiliate of Adviser. He is 57 years old and has been an employee of Adviser since October 1990.
AMANDA
QUINN, Vice President and Assistant Secretary since March 2020.
Counsel
of BNY Mellon since June 2019; Regulatory Administration Manager at BNY Mellon Investment Management
Services from September 2018 to May 2019; and Senior Regulatory Specialist at BNY Mellon Investment Management
Services from April 2015 to August 2018. She is an officer of 55 investment companies (comprised of 127
portfolios) managed by Adviser or an affiliate of Adviser. She is 37 years old and has been an employee
of Adviser since June 2019.
62
NATALYA ZELENSKY, Vice President and Assistant Secretary since March 2017.
Chief Compliance Officer since August 2021 and Vice President since February 2020
of BNY Mellon ETF Investment Adviser, LLC; Chief Compliance Officer since August 2021 and Vice President
and Assistant Secretary since February 2020 of BNY Mellon ETF Trust; Managing Counsel of BNY Mellon from
December 2019 to August 2021; Counsel of BNY Mellon from May 2016 to December 2019; and Assistant Secretary
of Adviser from April 2018 to August 2021. She is an officer of 55 investment companies (comprised of
127 portfolios) managed by Adviser or an affiliate of Adviser. She is 37 years old and has been an employee
of BNY Mellon since May 2016.
DANIEL GOLDSTEIN, Vice President
since March 2022.
Vice President and Head
of Product Development of North America Product, BNY Mellon Investment Management since January 2018;
Co-Head of Product Management, Development & Oversight of North America Product, BNY Mellon Investment
Management from January 2010 to January 2018; and Senior Vice President, Development & Oversight
of North America Product, BNY Mellon Investment Management since 2010. He is an officer of 54 investment
companies (comprised of 107 portfolios) managed by Adviser or an affiliate of Adviser. He is 53 years
old and has been an employee of the Distributor since 1991.
JOSEPH
MARTELLA, Vice President since March 2022.
Vice
President and Head of Product Management of North America Product, BNY Mellon Investment Management since
January 2018; Director of Product Research and Analytics of North America Product, BNY Mellon Investment
Management from January 2010 to January 2018; and Senior Vice President of North America Product, BNY
Mellon Investment Management since 2010. He is an officer of 54 investment companies (comprised of 107
portfolios) managed by Adviser or an affiliate of Adviser. He is 46 years old and has been an employee
of the Distributor since 1999.
GAVIN C. REILLY, Assistant Treasurer since December 2005.
Tax
Manager–BNY Mellon Fund Administration. He is an officer of 55 investment companies (comprised of 127
portfolios) managed by Adviser or an affiliate of Adviser. He is 54 years old and has been an employee
of Adviser since April 1991.
ROBERT SALVIOLO, Assistant Treasurer since May 2007.
Senior
Accounting Manager–BNY Mellon Fund Administration. He is an officer of 55 investment companies (comprised
of 127 portfolios) managed by Adviser or an affiliate of Adviser. He is 55 years old and has been an
employee of Adviser since June 1989.
ROBERT SVAGNA, Assistant Treasurer since August 2005.
Senior Accounting Manager–BNY Mellon Fund Administration. He is an officer of
55 investment companies (comprised of 127 portfolios) managed by Adviser or an affiliate of Adviser.
He is 55 years old and has been an employee of Adviser since November 1990.
JOSEPH W. CONNOLLY, Chief
Compliance Officer since October 2004.
Chief Compliance Officer
of the BNY Mellon Family of Funds and BNY Mellon Funds Trust since 2004; and Chief Compliance Officer
of Adviser from 2004 until June 2021. He is the Chief Compliance Officer of 54 investment companies (comprised
of 112 portfolios) managed by Adviser. He is 65 years old.
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