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-investment 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
32
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.
33
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
Changes in valuation techniques may result in transfers in or out of an assigned
level within the disclosure hierarchy. Valuation techniques used to value the fund’s investments are
as follows:
Investments in securities, 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). Debt
investments (which constitute a majority of the portfolio securities) are carried at fair value as determined
by the Service, based on methods which include consideration of the following: yields or prices of municipal
securities of comparable quality, coupon, maturity and type; indications as to values from dealers; and
general market conditions. All of the preceding securities are generally categorized within Level 2 of
the fair value hierarchy.
The Service is engaged under the general oversight of the
Board.
When market quotations or official closing prices are not readily available, or
are determined not to accurately reflect fair value, such as when the value of a security has been significantly
affected by events after the close of the exchange or market on which the security is principally traded,
but before the fund calculates its net asset value, the fund may value these investments at fair value
as determined in accordance with the procedures approved by the Board. Certain factors may be considered
when fair valuing investments such as: fundamental analytical data, the nature and duration of restrictions
on disposition, an evaluation of the forces that influence the market in which the securities are purchased
and sold, and public trading in similar securities of the issuer or comparable issuers. These securities
are either categorized within Level 2 or 3 of the fair value hierarchy depending on the relevant inputs
used.
For securities where observable inputs are limited, assumptions about market activity
and risk are used and such securities are generally categorized within Level 3 of the fair value hierarchy.
The
following is a summary of the inputs used as of March 31, 2022 in valuing the fund’s
investments:
34
| | | | | | |
| 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 | - | 1,715,794 | | - | 1,715,794 | |
Municipal
Securities | - | 732,536,290 | | - | 732,536,290 | |
Liabilities
($) | | |
Other Financial Instruments: | | |
Floating Rate Notes†† | - | (184,605,737) | | - | (184,605,737) | |
† See
Statement of Investments for additional detailed categorizations, if any.
†† Certain of the fund’s liabilities are held at carrying amount,
which approximates fair value for financial reporting purposes.
(b) Securities transactions
and investment income: Securities transactions are recorded on a trade date basis. Realized gains and
losses from securities transactions are recorded on the identified cost basis. Interest income, adjusted
for accretion of discount and amortization of premium on investments, is earned from settlement date
and recognized on the accrual basis. Securities purchased or sold on a when-issued or delayed delivery
basis may be settled a month or more after the trade date.
(c) Risk: The value of the securities
in which the fund invests may be affected by political, regulatory, economic and social developments,
and developments that impact specific economic sectors, industries or segments of the market. In addition,
turbulence in financial markets and reduced liquidity in equity, credit and/or fixed income markets may
negatively affect many issuers, which could adversely affect the fund. Global economies and financial
markets are becoming increasingly interconnected, and conditions and events in one country, region or
financial market may adversely impact issuers in a different country, region or financial market. These
risks may be magnified if certain events or developments adversely interrupt the global supply chain;
in these and other circumstances, such risks might affect companies world-wide. Recent examples include
pandemic risks related to COVID-19 and aggressive measures taken world-wide in response by governments,
including closing borders, restricting international and domestic travel, and the imposition of prolonged
quarantines of large populations, and by businesses, including changes to operations and reducing staff.
The effects of COVID-19 have contributed to increased volatility in global markets and will likely affect
35
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
certain countries, companies, industries and market sectors more dramatically
than others. The COVID-19 pandemic has had, and any other outbreak of an infectious disease or other
serious public health concern could have, a significant negative impact on economic and market conditions
and could trigger a prolonged period of global economic slowdown. To the extent the fund may overweight
its investments in certain countries, companies, industries or market sectors, such positions will increase
the fund’s exposure to risk of loss from adverse developments affecting those countries, companies,
industries or sectors.
(d) Dividends and distributions to Common Shareholders: Dividends and distributions
are recorded on the ex-dividend date. Dividends from net investment income are normally declared and
paid monthly. Dividends from net realized capital gains, if any, are normally declared and paid annually,
but the fund may make distributions on a more frequent basis to comply with the distribution requirements
of the Internal Revenue Code of 1986, as amended (the “Code”). To the extent that net realized capital
gains can be offset by capital loss carryovers, it is the policy of the fund not to distribute such gains.
Income and capital gain distributions are determined in accordance with income tax regulations, which
may differ from GAAP.
Common Shareholders will have their distributions reinvested
in additional shares of the fund, unless such Common Shareholders elect to receive cash, at the lower
of the market price or net asset value per share (but not less than 95% of the market price). If market
price is equal to or exceeds net asset value, shares will be issued at net asset value. If net asset
value exceeds market price, Computershare Inc., the transfer agent for the fund’s Common Stock, will
buy fund shares in the open market and reinvest those shares accordingly.
On
March 30, 2022, the Board declared a cash dividend of $.030 per share from net investment income, payable
on April 29, 2022 to Common Shareholders of record as of the close of business on April 14, 2022. The
ex-dividend date was April 13, 2022.
(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, 2022, for each
series of APS were as follows: Series M-.785%, Series T-.785%, Series W-.785%, Series TH-.785% and Series
F-.707%. 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, 2022 for each series of APS were as follows: Series
36
M-.183%, Series T-.180%, Series W-.175%, Series TH-.170% and Series F-.178%.
(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, 2022, 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, 2022, the fund did not incur any interest
or penalties.
Each tax year in the three-year period ended September 30,
2021 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 $25,136,171 available for federal
income tax purposes to be applied against future net realized capital gains, if any, realized subsequent
to September 30, 2021. The fund has $14,595,822 of short-term capital losses and $10,540,349 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, 2021 was as follows: tax-exempt
income $25,993,448 and ordinary income $233,521. The tax character of current year distributions will
be determined at the end of the current fiscal year.
(g) New accounting pronouncements:
In March 2020, the FASB issued Accounting Standards Update 2020-04, Reference Rate Reform (Topic 848):
Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), and
in January 2021, the FASB issued Accounting Standards Update 2021-01, Reference Rate Reform (Topic 848):
Scope (“ASU 2021-01”), which provides optional, temporary relief with respect to the financial reporting
of contracts subject to certain types of modifications due to the planned discontinuation of the LIBOR
and other interbank offered rates as of the end of 2021. The temporary relief provided by ASU 2020-04
and ASU 2021-01 is effective for certain reference rate-related contract modifications that occur during
the period from March 12, 2020 through December 31, 2022. Management is
37
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
evaluating
the impact of ASU 2020-04 and ASU 2021-01 on the fund’s investments, derivatives,
debt and other contracts that will undergo reference rate-related modifications as a result of the reference
rate reform. Management is also currently actively working with other financial institutions and counterparties
to modify contracts as required by applicable regulation and within the regulatory deadlines.
NOTE
2—Management Fee, Sub-Investment 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, 2022, there
was no expense reimbursement pursuant to the Agreement.
The Adviser has currently undertaken, from
October 1, 2021 through November 30, 2022, 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 $303,189 during
the period ended March 31, 2022.
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 compensates
The Bank of New York Mellon, a subsidiary of BNY Mellon and an affiliate of the Adviser, under a custody
agreement, for providing custodial services for the fund. These fees are determined based on net assets
and transaction activity. During the period ended March 31, 2022, the fund was charged
$5,324 pursuant to the custody agreement.
The fund has an arrangement
with the custodian whereby the fund may receive earnings credits when positive cash balances are maintained,
which are used to offset custody fees. For financial reporting purposes, the fund
38
includes net earnings credits, if any, as an expense offset in the Statement of
Operations.
During the period ended March 31, 2022, the fund was charged
$4,731 for services performed by the Chief Compliance Officer and his staff. These fees are included
in Chief Compliance Officer fees in the Statement of Operations.
The components of “Due
to BNY Mellon Investment Adviser, Inc. and affiliates” in the Statement of Assets and Liabilities consist
of: management fees of $367,087, custodian fees of $2,580 and Chief Compliance Officer fees of $2,351,
which are offset against an expense reimbursement currently in effect in the amount of $48,864.
(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, 2022, amounted
to $66,140,560 and $70,405,674, 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 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
39
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
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, 2022 was approximately $190,756,149 with a related weighted average annualized interest rate
of .70%.
At March 31, 2022, accumulated net unrealized appreciation on investments was
$16,972,803, consisting of $29,045,464 gross unrealized appreciation and $12,072,661 gross unrealized
depreciation.
At March 31, 2022, 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).
40
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 November 1-2, 2021, 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, 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, 2021, 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 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 description of the methodology
41
INFORMATION ABOUT THE RENEWAL OF THE FUND’S MANAGEMENT AND
SUB-INVESTMENT ADVISORY AGREEMENTS (Unaudited) (continued)
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
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 and Performance Universe medians for all periods, and the fund’s total return performance,
on a market price basis, was below the Performance Group and Performance Universe medians for all periods,
except for the three- and ten-year periods when it was above the Performance Group and Performance Universe
medians. The Board also considered that the fund’s yield performance, on a net asset value basis, was
at or above the Performance Group medians for nine of the ten one-year periods ended September 30th
and above the Performance Universe medians for all ten of the one-year periods and, on a market price
basis, the fund’s yield performance was above the Performance Group medians for seven of the ten one-year
periods ended September 30th and above the Performance Universe medians
for all ten one-year periods ended September 30th. 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 and 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.
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 the Expense Universe median actual management fee and the fund’s
total expenses were lower than the Expense Group median and the 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 the Expense Universe median actual management fee and
the fund’s total expenses were lower than the Expense Group and the Expense Universe median total expenses.
42
Representatives of the Adviser stated that the Adviser has contractually agreed,
until May 31, 2022, 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 auction preferred
stock outstanding).
Representatives of the Adviser reviewed with the Board the
management or investment advisory fees paid by funds advised or administered 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.
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. Since the Adviser, and not the fund, pays the
Sub-adviser pursuant to the Sub-Investment Advisory Agreement, the Board did not consider the Sub-adviser’s
profitability to be relevant to its deliberations. 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
43
INFORMATION ABOUT THE RENEWAL OF THE FUND’S MANAGEMENT AND
SUB-INVESTMENT ADVISORY AGREEMENTS (Unaudited) (continued)
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 was satisfied with the fund’s 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 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 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
Management Agreement 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
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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.
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